Rhode Island Mortgages Education, Public Safety and Transportation to Wall Street to Pay for Public Employee Pensions

Wall Street Will Get Paid, Even if Teachers and Fire Fighters Will Not

The small state of Rhode Island, like the large states of, well everybody else, has a problem with the promise made to retired government employees.  The promise consisted of a fixed pension, Now Rhode Island finds it cannot fulfill that promise, that it cannot pay retirees what it owes them and at the same time provide public services.  First of all Rhode Island doesn’t even know what the number is.

After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents. But the scary thing is that no one really knows. The Providence Journal recently tried to count all the municipal pension plans outside the state system and stopped at 155, conceding that it might have missed some. Even the Securities and Exchange Commission is asking questions, including the big one: Are these numbers for real?

What is happening is that

in each of the last 10 years, the state pension fund paid more money to retirees than the fund collected from state employees and taxpayers combined. The fund is shrinking, even though the benefits coming due are growing.

So how did the state get into this problem.  Easy

1. Public employees were promised a defined benefit pension by politicians eager to gain the support of public employees and not have to raise taxes.  So they promised payments in the future, when it would be someone else’s problem.

2. In putting aside money for pension, the assumption was made that the pension funds would earn 8.25%

Everything rested on hitting that target, but the state’s actuary said there was less than a 30 percent chance that would happen over the next 20 years. The board voted to lower the assumption to 7.5 percent. (Given the recent run in the financial markets, even that figure may seem optimistic.)

As a result of that change, the state’s pension shortfall instantly rose to $9 billion from $7 billion. The unions said Ms. Raimondo had manufactured a crisis.

The Ms. Raimondo is the state’s treasurer

 in 2009, with zero political experience, she ran for the state office of treasurer. Although she is a Democrat in a heavily Democratic state, she stood out because she refused to promise that state jobs and pension benefits would be protected no matter what. She won by a landslide, receiving more votes than any other candidate for any state office. 

Naturally there is opposition.  And it has a point

Several retired teachers said they had played by the rules and sent a part of every paycheck to the pension fund, as required by law. One man demanded pension cuts for state troopers and judges. A woman said her aged father would be unable to buy medicine if the state stopped adjusting his pension for inflation.

But the rules of the game were fixed, they were fixed by politicians who exploited an electorate that was financially unsophisticated and that put their faith in elected officials whom they hoped would do the right things.

The right thing has turned out to be borrowing, to avoid paying taxes fund the promises made to retirees, and in order to borrow Rhode Island did this.

For all the pain here, one important constituency — Wall Street — seems satisfied enough. To reassure its bond investors, Rhode Island passed a special law this year giving them first dibs on tax revenue. In other words, bondholders will be paid, whatever happens.

In stark English, if there is only enough money to pay bondholders or public safety officers, the bond holders will get paid.  Rhode Island, meet Greece, you have a lot in common and will have even more in common in the future.