5/19/11

This Just In....

Thanks to General Treasurer Gina Raimondo, the pension problem has now reached critical mass and our political leaders have awakened from their long stupor to the pressing need for action. It now appears likely that a commission will meet over this summer to get a full handle on the problem and arrive at a set of permanent fixes that will then be legislated in a special session this fall. This is the first encouraging news on the pension situation in a long time, and it comes at the end of the 11th hour to midnight. There is consensus at last that the issue needs to be tackled in a comprehensive manner, with everything on the table. As always, we have to be careful and remain wary that the labor-dominance on Smith Hill doesn't attempt to limit the reform process, lest we end up with a series of half-baked measures that don't remove the enemy at the heart of the state's structural financial problem: the unfunded liability. But for now, the news is most welcome.

Our Politicians Have Failed Us

The news on the pension front just keeps getting worse, with a new price tag of $9.4 billion owed. The bizarre number of plans that exist in this little state, the deep liabilities owed at the state and municipal levels, the staggering amount of money that taxpayers will somehow have to cough up in the next few years…it’s all astounding and exceedingly depressing, especially when one remembers that warnings about the pension system have been made for years now (prominently by Ernest Almonte, the past Auditor General and via this blog, too). Our politicians have failed us miserably, and now, just as was predicted, we’ve hit the proverbial brick wall when the bills come due.

In the next two years Rhode Island will have to put just shy of a billion dollars in the state pension plan alone to meet the pension costs of 51,000 current and retired state workers and teachers. Municipal plans that are part of the state system will also have to increase contributions significantly, which will strangle already struggling local governments. Some of those cities and towns also have plans that are not part of the state system, and they are in even worse shape, hopelessly behind on their contributions.

If I was a state or municipal employee, or an employee of a city or town, I would be very nervous now. And I would be a bit nervous even if I was retired, as there is already talk surfacing about reducing pension payments to retirees, despite the inevitable legal challenges that would arise in reaction to any notion of cutting retirement payments to those already collecting them.

I’ve said this before and I want to say it again: state and municipal employees and teachers are not to blame for this situation. They made their assigned contributions, as required. The blame should be on the heads of the politicians and the union leaders who negotiated and granted overly generous benefits and automatic increases without considering how to pay for them down the road. That type of short-term thinking has led us to this long-term problem.

The shame in all of this is that action should have been taken years ago. At least the state should have had a better handle on just what the aggregate liability would amount to, but that didn’t happen, and the former General Treasurer, Frank Caprio, shares some responsibility for this. Like Angel Taveras of Providence, the current General Treasurer Gina Raimondo took office not knowing the full extent of the problem and now has to deal with it.

Governor Chafee, for his part, has proposed additional tweaks to the system, asking for contribution increases, which might be the only action taken this year on the pension problem. No one seems to have their hands on what to do or when, which in politics means delay. But the amount we all owe is not going to go away and is increasing in dollars and cents, like the national debt, every second.

Where will the politicians get the money needed to plug the gap – almost a billion dollars over the next two fiscal years? Sales tax increases won’t solve the problem – they will only serve to depress the economy. No one likes to say “insolvency” in discussing the pension problem, but insolvency is the very real threat we face. It’s not going to happen today or tomorrow, but it’s out there, at the end of the road.