See more of the story

Billions of dollars of disaster aid flowing into Puerto Rico since fall’s devastating hurricane have boosted the bankrupt island’s finances, but the island’s federal overseers said this week that it would take still more austerity to translate those temporary gains into a lasting recovery.

At a meeting in San Juan of the territory’s federal oversight board Thursday, members called on Puerto Rico to reform its labor laws and fix its insolvent government pension system quickly, while it still had the benefit of both the disaster money and court protection from creditors under a special new bankruptcy law for U.S. territories.

Retired government workers would see their pensions, already less than $25,000 a year for many workers, cut by an average of 10 percent; current government workers would be shifted into a 401(k) plan; and workers in Puerto Rico’s private sector would lose mandatory perks such as a holiday bonus, usually $300 to $600 a year.

The top Puerto Rican financial official at the meeting, Gerardo Portela, called the oversight board’s insistence on more cutbacks “inhumane,” coming so soon after a catastrophic natural disaster.

And Gov. Ricardo Rosselló, who has sought to avoid painful cuts to pensions and compensation, accused the board of overstepping the limits of its legal authority and said he did not intend to do its bidding.

“Our position has always been clear,” he said in a statement Thursday. “Issues that are not in line with my government’s public policy will not be carried out. Period.”

Even before Puerto Rico was raked by Hurricane Maria in September, its finances were in disarray. For many years, it had borrowed money to plug holes in its budget and to repay previous loans, building up a debt of more than $70 billion that it could not repay. Today its debt and unfunded pension obligations total more than $120 billion, or twice the size of its economy. And the economy has been shrinking, as residents leave for better prospects on the U.S. mainland.

However, the hurricane has led to a big influx of disaster relief and private insurance payments, a bonanza that led Rosselló to project that the island could end the next five years with a cumulative surplus of $6.3 billion.

But the oversight board warned that without significant fiscal and economic reforms, Puerto Rico would be left, after the current flurry of storm-related activity, back where it started — with an unproductive economy and too much debt.

The board meeting was called to certify Puerto Rico’s new fiscal plan, a document intended to chart the way forward. Six of the seven voting members voted in favor of an amended plan that includes the new austerity measures.

Since 2016 the island has been functioning under a federal law called Promesa, which gives it legal powers that are normally found only in bankruptcy — in particular, protection from creditors. That means that for the time being, Puerto Rico does not have to make payments on its bond debt, for a savings of about $3 billion to $3.5 billion a year.

In exchange for those extraordinary powers, Congress required the island to submit to a federal oversight board. The law gives the governor of Puerto Rico the right to develop the all-important fiscal plan, but the board must certify it. If it does not find the governor’s fiscal plan credible, it has the authority to impose its own version.

But Rosselló has clashed repeatedly with the board, saying that as Puerto Rico’s elected leader, he has the final say over economic policy.

Puerto Rico has already been through the process once, certifying a fiscal plan in March 2017. But it soon became clear that the governor was not carrying out the parts he disagreed with, and the oversight board took him to court. Before the lawsuit could be adjudicated, hurricanes Irma and Maria struck, leaving all financial planning in a shambles.

The two biggest flash points over the new plan now under review appeared to be labor law reform and the cost of the pensions due to Puerto Rico’s retired government workers. On many other elements of the fiscal plan — reducing health care spending and subsidies to cities; lowering tax rates while improving collections; and cutting red tape for businesses — the oversight board and the governor appear to be in agreement.

But board members said none of that would be enough unless Puerto Rico also softened labor laws that make it harder than anywhere else in the United States to lay off workers, which in turn makes employers on the island reluctant to hire people. Employers are also required to provide extensive paid vacations and annual holiday bonuses.

“Obviously this is an extremely difficult issue politically,” said one board member, Andrew Biggs, an economist with the conservative American Enterprise Institute. “But there’s a risk of doing too little to increase Puerto Rico’s labor force participation rate, which is one of the lowest in the world.”

Other board members noted that since the hurricane, young Puerto Ricans have been fleeing the island to look for work in the 50 states, even those with much less protective labor laws.

But the board does not have direct authority over the island’s labor laws, only its fiscal policies. Amending the labor laws would require an act of the Puerto Rican legislature, and Rosselló said he would “not propose any bill that reduces vacation and/or sick leave, nor will we eliminate the Christmas bonus.”

By contrast, fixing the government’s insolvent pension system is a matter of fiscal policy. Retired government workers are counting on future monthly payments worth more than $50 billion in today’s dollars — and the pension funds already are essentially penniless. The money appears to have been spent on other things.

Puerto Rico is planning to revert to a pay-as-you-go pension plan, in which the government will pay retirees their monthly benefits directly from its general fund. That will severely strain the general fund, so the oversight board is calling for 10 percent average cuts in the pensions — people with the biggest pensions would get the biggest cuts.

“The board wants to make sure they’ll get their pensions, even though there’s no money,” Natalie Jaresko, executive director of the oversight board, said at Thursday’s meeting. But the pain of bankruptcy, she said, had to be fairly shared with all other government creditors, along with younger residents who rely on government services.

Portela, the chairman of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, disagreed with that, calling governmental retirees “the most vulnerable of Puerto Rican society.”