Anchor Rising: Spending Caps Won't Solve the Unfunded Public Sector Liability Problems Caused by the Tax-Eaters

April 19, 2006

Spending Caps Won't Solve the Unfunded Public Sector Liability Problems Caused by the Tax-Eaters

Ed Achorn's latest editorial A cap won't solve R.I.'s tax troubles states:

It is encouraging that Rhode Island politicians -- in an election year, anyway -- are awakening to the public's agonized cries over sky-high property taxes.
Senate President Joseph Montalbano (D.-North Providence), Majority Leader Teresa Paiva-Weed (D.-Newport), and Minority Leader Dennis Algiere (R.-Westerly) last week rolled out their proposal to lower the current ceiling on city and town spending increases to 4 percent, from 5.5 percent, of the tax levy, starting in fiscal 2008. Exceeding the new cap would require the majority of voters in a special election, instead of an act of the General Assembly...

That would be nice! But if a 5.5-percent cap served as the backdrop for today's rampaging property taxes, it's fair to wonder how much good a 4-percent cap would do...

...simply capping spending and calling that a break for taxpayers is not responsible government or courageous leadership. The question is how the money is being spent...

Leaders who were serious about restraining property taxes would act quickly to:

Limit inordinately generous pensions, early retirements and health-care benefits for public employees, which threaten to bankrupt local communities...

Restore management rights to local communities, so that they may spend money more carefully and demand accountability from employees.

Encourage the creation of a more robust economy, by drawing in wealthy taxpayers who could help pay for government, give to charity and create the jobs that generate tax revenues...

House Speaker William Murphy and his leadership team have done the risky work of addressing part of the problem, by proposing to bring Rhode Island's income taxes in line with those in Massachusetts. That is the only real hope of drawing in well-to-do enterpreneurs to boost the economy.

But the Senate's leaders, sadly, lack such courage.

None of this is theoretical anymore...

...Residents of other communities face enormous tax hikes to cover pension and health benefits, many of them going to retirees who have moved away to enjoy them in lower-tax locales.

As long as Rhode Island's political leaders ignore these well-documented trends -- and the voters let them do so -- the taxpayers will get pounded.

If towns and cities were simply forced to live with a lower cap, what would be squeezed? Road repairs, no doubt. Textbooks and school sports. Parks, libraries and other services that make communities pleasant. Communities would, essentially, be further hollowed out. Meanwhile, obligations to public employees, postponed year after year, would build up toward their inevitable explosion.

Unfortunately, there is no politically painless way out of this mess, which is why Ocean State property taxes continue to soar, despite politicians' bi-annual expressions of sympathy and concern. Making serious changes in Rhode Island would pit lawmakers against some very powerful and well-vested interests.

If they truly wanted to serve the public, politicians would have to say no to their "friends."...

It's certainly much easier to set a spending cap...

Achorn's view about the exploding public sector costs resulting from years of contractual giveaways is reinforced by a Standard & Poor's public pension study released in February, as discussed in a Wall Street Journal article (available for a fee) entitled S&P Study Notes Shortfall and Warns That Stresses Threaten Creditworthiness:

Underfunded public-employee pension plans are straining state budgets just as states face other rising expenses and steep debt levels, according to a Standard & Poor's Corp. analysis to be released today.
The report said state pension plans fell short by about $284 billion nationwide in 2004, the latest year for which data are available, leaving the plans in need of hefty contributions. The budgetary stress could ultimately hurt states' creditworthiness, leading to higher borrowing costs for some governments, which sell debt to finance all types of projects, such as roads and schools...

While state revenue growth is stronger than it has been in the past five years, states face a "double-whammy" of declining pension fund assets and rising liabilities, which means they must contribute more money, according to the report.

As of June 30, 2004, the value of public pension fund assets fell to 84% of projected liabilities from 100% or more in the late 1990s, according to the report. The drop stems from several factors, including the bursting of the stock-market bubble, the promise of enhanced benefits and weak financial contributions by state and local governments...

When the stock-market bubble burst early this decade, pension funds saw their funding levels sink, and state and local governments were on the hook to make up the difference. As a result, states have had to boost their contribution rates.

But many still have large holes to fill before their pension plans are fully funded. Among the most underfunded plans in fiscal 2004 were West Virginia, Oklahoma and Rhode Island.

The need to contribute more money comes as states face other budgetary pressures, including skyrocketing costs for Medicaid, the federal-state health-care program for the poor. Costs are rising at about 7% a year. State and local governments will also have to start setting aside money to pay for retiree health benefits as the result of a pending accounting change; for the first time, governments will be required to disclose these obligations. States are also carrying an enormous debt load of $288 billion, which they must finance in both the long and short term.

Because of the rising budget pressures, ratings firms such as S&P want to see pension asset-to-liability ratios reach 90% or more so that contribution rates can level off...

A late January ProJo article Bankrupt or not, pension boards rarely cap outside pay: Few communities enforce rules that limit how much outside money police and firefighters on disability pensions can earn before benefits are reduced provides yet another example of how public sector pensions are out-of-control:

Kevin Salvaggio is too disabled to work as a North Providence police lieutenant, but he's healthy enough to practice law.
The former North Providence police officer has a disability pension that provides more than $3,000 a month for life -- tax free.

The same type of disability benefit is available to the majority of firefighters and police officers who receive pension benefits through local plans, instead of through the state's retirement system.

A Journal investigation has found that 15 of the 22 communities with their own pension plans have not drafted rules that would allow them to cap supplemental income. Of the 7 pension authorities that have such rules, only 4 enforce them.

As a result, taxpayer-financed retirement programs are paying full disability pensions to former police officers or firefighters who retain plenty of earning potential, despite their disabilities...

Many communities have rules that allow them to cut or eliminate a pension if a former police officer or firefighter is doing the same job someplace else. In some communities, officials can order a medical examination if they suspect that someone is no longer disabled.

But pension cuts based strictly on outside earnings remain rare. Although there has been some movement in Rhode Island toward vigorous enforcement of income rules for disability pensions, the majority of communities with their own pension programs haven't even taken the first step -- adopting the regulations...

Providence has a pension system mired in a financial crisis. The system's unfunded liability -- the difference between the cost of the pension programs and the money the city has set aside to cover that cost -- jumped from $300 million in 2002 to more than $600 million last year.

Still, the city's pension ordinances do not describe any protocol for monitoring earnings and reducing disability pensions...

The rules for granting disability pensions, which are tax free, often reflect the special challenges faced by police officers and firefighters.

For example, state law says that any time a firefighter gets cancer, it is a job-related condition and the person qualifies for a disability pension. Some police officers, such as the ones in Cranston, have a provision in their contract that says that any police officer's heart attack or hypertension is "conclusively presumed" to be job-related.

Things are generally different in the private sector, and even in the federal government...