Mary Williams Walsh, asleep in Rhode Island
In her 2,500 word feature on the pension reform process in Rhode Island, New York Times reporter Mary Williams Walsh seems to have found more color than facts. The piece reads more like a campaign profile of Treasurer Gina Raimondo than an assessment of the gritty fight over public pensions in the nation’s sixth smallest state:
Ms. Raimondo also learned early on about economic forces at work in her state. When she was in sixth grade, the Bulova watch factory, where her father worked, shut its doors. He was forced to retire early, on a sharply reduced pension; he then juggled part-time jobs.
“You can’t let people think that something’s going to be there if it’s not,” Ms. Raimondo said in an interview in her office in the pillared Statehouse, atop a hill in Providence. No one should be blindsided, she said. If pensions are in trouble, it’s better to deliver the news and give people time to make other plans.
Treasurer Raimondo did not initiate Rhode Island’s pension reform fight. We can give her credit for being a politician who is doing her job to rein in a plan that, for structural reasons, will consume a growing portion of state general fund revenues. But this fight began under the administration that preceded Raimondo and Governor Lincoln Chafee. Walsh buries this deep in the article when she says:
Rhode Island has been trying to fix its pension system for years; it has announced four “reform” plans since 2005, each of which has claimed to reduce costs for the state and cities.
Moreover, the numbers reported in the article seem inflated and poorly sourced. The article says that pension costs will grow very rapidly to consume 20 cents of every tax dollar. Moody’s, however, published a report yesterday showing that pension payments would not consume 20 percent of the budget until 2021, and even that assumes that general revenues remain at the 2011 level. This fiscal hysteria is overblown.
A bigger discrepancy pops up when Walsh reports on the state’s $9 billion pension shortfall:
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 problem here is that the Treasurer’s report says that the $9 billion is a result of different accounting standards (page 2):
Rhode Island’s unfunded liability has been estimated at $6.8 billion under public accounting rules. When applying the private sector pension accounting rules, the unfunded liability grows to approximately $9 billion.
This is just sloppy reporting. Differences in accounting rules between the public and private sector are well-known and never used interchangably. The unions are more likely pointing to the jump in projected pension liabilities from Governor Chafee’s $4.7 billion figure in March (page 38) to Raimondo’s $7 billion shortfall in June. These differences really matter because retirees will have their benefits cut to help reduce the unfunded portion of the pension plan.
Throughout the piece Raimondo is portrayed as a barnstormer battling Rhode Island’s entitled union members and the only hope for correcting the state’s fiscal path. But the real action centers on the rulings of the state’s highest court over actions taken by the prior administration (see video at top). Former Gov. Donald Carcieri’s efforts to reform pension benefits were overturned in a lower state court in September. The court ruling found an implicit contractual relationship between the state and its workers. If this is upheld by the Rhode Island Supreme Court, the administration and legislature’s efforts will be much harder to implement.
Several facts must be mentioned for fairness’s sake. The first is that the public employees of Rhode Island contribute to their retirement. From Truth in Numbers, (page 7):
[S]tate employees contribute at an annual rate of 8.75 percent of salary and teachers at a rate of 9.5 percent.
This is important to know because the story casts the taxpayers as the ones who have been carrying the entire burden. A large part of the pension problems in Rhode Island is due to a one-time massive wave of retirements that happened in the 2000s. This has left the state with a bulge of retirees that will diminish over time, and this is what is causing the big drawdown on benefits.
Lastly the carelessness with which Walsh glosses over a recently passed state law which pays municipal bondholders 100 cents on the dollar while leaving pensioners at risk for cuts is, frankly, astounding. Bond investors know there is risk in purchasing a security and they weigh that risk against return. This is the essence of investing in free markets.
In Rhode Island now, everyone, except bondholders, has the risk of losing benefits. Bondholders have been made a privileged class. If pain must be shared, bondholders must share too. In the growing climate of discontent, priviliging bondholders will not be a popular political position.