Monday, October 24, 2011

As Rhode Island follows the Greek model, what states will be next?

Rhode Island may well be the first U.S. state to give Americans a taste of what it is like to be Greece.
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 [the state treasurer] 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?
The pension fund can't keep up and cities will have to declare bankruptcy. And don't take comfort that this is just Rhode Island, a small state that doesn't say anything about the rest of the country.
Illinois, California, Connecticut, Oklahoma, Michigan — the list of stretched states runs on. In Pennsylvania, the capital city, Harrisburg, filed for bankruptcy earlier this month to avoid having to use prized assets to pay off Wall Street creditors. In New Jersey, Gov. Chris Christie wants to roll back benefits, too.
For years and years, state and local governments have promised generous benefits to their workers without real regard for where the money would come from in the future to fulfill those promises. If these governments pay all that they've committed to pay for retired workers, they soon will be in the position that they will be spending all their money on workers who aren't working and have nothing left over for schools or prisons or roads or any of the other functions for which people look to their state and local governments.
But unlike, say, California, with its large, diverse economy, Rhode Island is so small that there is little margin for error. Leaving the state, to escape its taxes, is almost as easy as moving to the other side of town. Efforts to balance the state budget by shrinking the public work force have left Rhode Island with a problem like the one that plagues General Motors: the state has more public-sector retirees than public-sector workers.

More ominous still, 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.
Now that the moment of reality is starting to sink in with Rhode Islanders, there is a lot of anger. Retirees feel that their promised benefits are being threatened. Public employee workers vow to block any reform. They don't seem to care about the ultimate health of the state's finances. As Walter Russell Mead writes,
The union leadership in Rhode Island, as in the majority of US public and private workplaces, failed in the first task of the stakeholder: they failed to undertake and support changes that would ensure the health of the enterprise down the road. This is partly about wages, pensions and work rules: making unrealistic demands only stores up trouble down the road. But more profoundly it is about not thinking seriously about the future of the company or, in Rhode Island’s case, of the state.
And nothing that the liberals who have been running Rhode Island have been supporting the same sort of answers that the Obama administration is advocating.
What economic development options did Rhode Island have to build a sustainable new economy as the old one withered away? Locked into the assumptions of the blue social model, Rhode Island planners, like their counterparts across the country, fell for white elephant concepts like convention centers, those cliched “new urbanism” pedestrian malls and downtown redevelopments that never seem to work, Solyndra style industrial policy and all the other failed nostrums that strike upper middle class social engineers as cool but that rarely make anything as vulgar and utilitarian as money.

There was a lot of expensive churn, many consultants deposited checks, but the underlying economy never turned around. The serial failure of one plan after another to regenerate solid growth, turn around the population trend, put Medicare on a sustainable path, and reverse the decline of the cities never led to a questioning of basic assumptions — and it never led the Ostrich Party to think through the implications of economic stagnation and decline for the state’s pension system and its future budgeting.
Sound familiar?

The answer is for honest, transparent information on the debts that politicians have promised to future retirees. And then politicians have to cease the demagoguing and start dealing with that reality.

Otherwise, as Rhode Island goes, so goes the nation.