4/20/11

Here's An Alternative to Sales Tax Bite

Governor Chafee took so much heat over his ill-considered sales tax plan, especially from the business community, that he was left asking for someone, anyone, to come up with an alternative to hiking taxes. Now that House Speaker Gordon Fox has indicated the House will not support the plan in its present form, let me offer an alternative - one that, if adopted, would demonstrate the type of leadership that has so far been lacking on Smith Hill.

Imposing taxes to boost revenue to deal with the deficit is focusing on the wrong side of the equation to start with, as most people realize. The real problem the state faces is not revenue generation but state spending, especially on pensions (and healthcare) for state retirees. This has been obvious for some time now but it’s received added emphasis and urgency of late by the admission from the new General Treasurer, Gina Raimondo, that the true pension obligation the state faces, which is at the heart of our year-to-year structural deficit, is a lot more than previously thought – to the tune of an extra $1.4 billion – as a result of an independent audit.

For the past decade, despite two recessions ( the second of which we’re still living with), the state has assumed an annual rate of return (8.25 percent) on its pension investments that was way off the mark in five of the ten years from 2001 through 2010. Overall, despite some good years, the rate of return for the past decade came in at only 2.470 percent. That has left the $7.4 billion pension fund with an increasing unfunded liability, which is the difference between the fund’s assets and its obligations to some 50,000 retired and active state workers and teachers. Now the state – meaning us taxpayers of course – will have to put in an additional $260 million to cover pension costs, based on a lowering of the assumed rate of return to 7.5 percent a year, which is considered more “realistic.” Doing that thereby raises the state’s contributions to an estimated $622 million in the fiscal year that starts a year from this July, up from $359 million for the 2011 fiscal year.

Those are staggering numbers for a small state still mired in a post-recession environment, with diminishing revenue lifelines from an all-but-broke federal government. The pension situation, along with lifetime healthcare obligations for state retirees and teachers, is the 800 lb. gorilla in the room. Not surprisingly, neither Chafee nor the legislators are speaking out much about it, for fear of the unions who don’t want the focus on pension reform. Union honcho George Nee has stated that taking a look at the pension problem can wait until next year. But clearly, the situation is unsustainable and is going to sink our state, and there’s nothing to gain and everything to lose by further delay in tackling it. The only roadblock, of course, is political.

So here’s my recommendation for an alternative to the sales tax plan (which, by the way, still requires vigilance on the part of the public because, while it may be wounded, it’s not yet dead and buried): Focus on reducing state spending by reforming the pension system, which is sucking the life out of state finances. How can our state ever recover and grow again, dedicating taxpayer revenues to vital matters of government responsibility like healthcare, education, infrastructure and the like, when so much money has to be devoted, year after year, to paying for services already rendered?

As a report just issued by The Boston Foundation and the Massachusetts Taxpayers Foundation - Gilded Benefits from a Bygone Era (www.tbf.org/Home.aspx) - which deals with the costs of municipal health plans but is just as applicable to pension costs in the Bay State and elsewhere - points out, “…outdated benefit packages to public employee unions have moved our Commonwealth, and our nation, from being an investment society to solely a maintenance society. We are no longer able to invest in local aid or higher education or public safety or the environment, as the resources necessary for these investments are being consumed by the cost of maintaining benefits.”

Governor Chafee could show real leadership by getting all relevant parties to the table without delay to begin the process of reforming the pension system. Nothing is more important to the future of our state – in fact, if we don’t accomplish this, we might not be a state in a few years’ time, having at last fallen victim to consequences stemming directly from a profound lack of political courage.