Pension Storm Clouds Threaten Ocean State's Future

Storm clouds are circling above the Ocean State. Our financial troubles, long in the making, have now reached epic storm proportions. Of particular danger is the pension situation, which has gathered strength over years of neglect and missed expectations to the point where it now threatens to bring down the house on our heads. The pension problem is a mortal threat to the state’s financial health, and is a big part of our structural budget deficit from year to year. In 2010, for example, the state had to pay out over $330 million in benefits to retirees than the fund took in, and the General Treasurer’s office was forced to take monies from long-term investments to meet its cash flow demands. New State Treasurer Gina Raimondo, a financial expert, is still trying to understand the depth and severity of the “hole” the state is in. In fact, it’s likely to be worse than what we understand it to be today.

Not only is the state drowning in pension and healthcare obligations to retirees, so are many local communities which have opted out of the state pension system and fund their own. As we’ve just been reminded, Central Falls, West Warwick, Providence, Cranston and North Providence are way behind in funding their pension plans and will have to make drastic cuts in services to meet current obligations never mind future ones, which last for the next twenty years.

This is clearly not a sustainable situation and the governor and the legislature, to date, appear clueless on what to do about it. The state fund wasn’t even realistic in its investment growth expectations, banking on an annual market return of over eight percent when returns for the past decade have averaged little more than four percent a year. Legislators knew this day was coming but spurned most of what then-Governor Carcieri asked for in terms of pension reform, tweaking the plan around its edges. The steps they did take – lengthening retirement eligibility and scaling back on COLA payments – certainly help the situation long-term, but limited as they are don’t attack the heart of the problem, which is that in its present form as a defined benefit plan the pension system is hopelessly stuck in a rut of its own making.

It should be obvious to everyone that the situation is upside down when so much state revenue in the form of all the taxes we pay has to go not to providing services in the present but is dedicated to making pension payments for past services rendered by now retired employees, many of whom no longer reside in our state! This is lost revenue, of no benefit to addressing current needs or helping the state economy, and is simply paying for obligations that were essentially IOU promises made years ago. Because these promises were forged by collective bargaining labor contracts, they carry the force of law. Unions won these rights and they’re not going to give them up without a fight, and in fairness to the thousands of public sector employees who have faithfully paid into the pension system in regular paycheck contributions, who has the right to tell them that, sorry, we’re not giving you your money back?

The pension/healthcare obligation situation is crushing a number of states nationwide. That’s why there’s actually some talk going around about allowing states to default on their pension obligations by declaring bankruptcy. State bankruptcy is not allowed by law but that could change. If it did, a state like Rhode Island could reorganize its finances and walk away from its pension obligations much like United Airlines did a decade ago to its employees. Pensioners would be switched to the federal pension program, which is where companies dump their obligations and which pays out but a fraction of what pensioners should have received.

This would be bitter medicine indeed and a fundamental betrayal of trust, with profound consequences. While it’s hard to imagine that happening, we’re in a very difficult position regarding the totality of pension obligations, and if one state goes for it we can expect other states to follow. California has a whopping multi-billion dollar pension obligation. The Golden State is also a bellwether, as in what happens in California more often than not goes national. Other big states like New York and Illinois are in similar bad shape, so the bankruptcy option – even as radical as it would be - can’t be dismissed out of hand.

Governor Chafee expressed some support during the campaign for the idea of refinancing the pension system by extending present obligations out another twenty years. The downside of this scheme, however, is a projected $2 billion cost to do so, which would only appear to magnify the problem enormously. His sales tax plan, which appears to involve extending the reach of the sales tax while dropping the rate down a point or two, is no magic bullet to slaying a $300 million deficit. State agencies are having trouble coming up with 15 percent cuts in their budgets for next year. State employees and entitlement programs have already been cut. So what is the solution? As the Governor admitted last weekend in a TV interview, “Nothing is going to be easy.”

And that’s not the half of it.