That's in keeping with what members of the GA have been saying. Generically: "Oh, we're definitely not considering a tax increase. In fact, we may lower the sales tax rate, but just apply it to more things, which will result in more revenue."
What they hope Rhode Islanders are too stupid to figure out is that, in this case especially, revenue = taxes.
I don't believe, based on my sources, that the rate will even be lowered. The "broadening" that is being considered-hairdressers, dance classes, movie tickets, etc. wont add up to more than $20 million. A drop in the bucket. What I am hearing rumblings about is more disturbing. Selling the lottery (not the VLT's) for $400 million to keep the SS Union/Welfare afloat to FY 2010.
Happy New Year! The more things change the more they stay the same.
I already do as much of my shopping out of state as is humanly possible. Don't make me drive to Attleboro to shop for groceries, haircuts and accountants, too. Because I will.
My New Year's resolution this year is to keep as much of my money out of the hands of the General Assembly as I can.
When push comes to shove, Rhode Island’s Democrats have always protected their union bosses and welfare industry beneficiaries at the expense of citizens, taxpayers and the State economy.
This isn’t going to magically change this session (though there will be some superficial “cuts” that will allow them to make the PR claim that they made “tough choices” and that “everyone is sharing the pain”).
Think along the lines of the model that teachers unions and school committees use to pull the wool over the eyes of the public; they’ll announce with great fanfare that the teachers now have a “co-share” in health care premiums, but neglect to mention that the new contract is padded in other areas so that on a net basis teachers aren’t paying a thing, and indeed still getting a net raise in compensation.
“Our” Democrat General Assembly WILL follow the lead of that other State that is losing population, Michigan, which enacted massive tax increases last Fall (see quote at the end of this post).
Therefore Rhode Island’s economic decline WILL continue (as it has for decades). Therefore middle class people WILL continue to leave Rhode Island, by economic compulsion if for no other reason.
Governor Carcieri is a good man and is waging a valiant fight; but he's a general with only a few troops. So long as Rhode Island keeps Democrats in control Rhode Island's decline will continue (e.g., did the Democrat Party change any after RISDIC? Nope. Now we have Operation Dollar Bill. Same crooks. Same union - welfare industry control).
Democrats raise taxes; not just here in RI but everywhere. That’s their mission in life. That is also why the Rustbelt and Northeast are both declining – both regions are dominated by Democrats and their public sector union bosses, and so both regions suffer from the inevitably high tax burden that accompanies a Democrat / public sector union regime. Note the following from The Wall Street Journal on December 10th: “The Tax War Between the States”
http://online.wsj.com/article/SB119724619828518802.html
Also note this from The Weekly Standard on December 17th:
Through the Roof!
Democrats fall in love with taxes again.
http://www.weeklystandard.com/Content/Public/Articles/000/000/014/457jcxov.asp
“O'Malley is among a group of rising star Democrats in state capitals that seem to relish the opportunity to raise taxes--and not just on the rich.”
“Then there is the glamorous Michigan governor, Jennifer Granholm--who raised business and income taxes this year despite polls showing intense opposition. Granholm fought doggedly for the tax package, even telling a statewide television audience that she would shut the government down in Lansing if she didn't get her infusion of cash from taxpayers. Michigan was the only state in the nation last year suffering a recession, and the state's unemployment rate is highest in the nation, so new taxes couldn't have come at a more inopportune time. But Granholm is convinced that raising business taxes in Michigan is an "investment" and that the higher costs for doing business will somehow lure more companies to her state. A darling of liberals, Granholm would be high on the Democrats' vice presidential list if only she hadn't been born in Canada.”
The link I provided above to the Wall Street Journal piece doesn't allow non-subscribers to read the whole piece. So here it is. (BTW - RI is ranked in the bottom-10 states in this study):
The (Tax) War Between the States
By ARTHUR LAFFER AND STEPHEN MOORE
December 10, 2007; Page A19
December 10, 2007
A record eight million Americans moved from one state to another last year. Where is everyone going, and why? The answer has little to do with climate: California has arguably the nicest climate of any state in the nation -- yet in this decade more Americans have left the Golden State than entered it.
Migration patterns instead reveal which states have the most dynamic and desirable economies, and which are "has-been" states. The winners in this contest for the most valuable resource on the globe -- human capital -- are generally the states with the lowest tax, spending and regulatory burdens. The biggest losers are almost all congregated in the Northeast and Midwest. Liberals contend that tax rates, regulations, forced union laws and runaway government spending don't matter when it comes to creating jobs, high incomes and a higher quality of life. People tell us otherwise by voting with their feet.
The American Legislative Exchange Council has just released a study we've done that presents a 2007 Economic Competitiveness Rating of the 50 states, based on 16 economic policy variables, including taxes, regulation, right to work, the legal system, educational freedom and government debt. Over the past decade, the 10 states with the highest taxes and spending, and the most intrusive regulations, have half the population and job growth, and one-third slower growth in incomes, than the 10 most economically free states. In 2006 alone 1,500 people each day moved to the states with the highest economic competitiveness from the states with the lowest competitiveness.
Of all the policy variables we examined, two stand out as perhaps the most important in attracting jobs and capital. The first is the income tax rate. States with the highest income tax rates -- California and New York, for example -- are significantly outperformed by the nine states with no income tax, such as Texas and Florida. As a study from the Atlanta Federal Reserve Board put it: "Relative marginal tax rates have a statistically significant negative relationship with relative state growth."
The other factor for attracting jobs and capital is right-to-work laws. States that permit workers to be compelled to join unions have much lower rates of employment growth than states that don't. Many companies say they will not even consider locating a factory in a state that does not have a right-to-work law.
Our study also finds that states with antigrowth tax and spending policies don't just lose people. Noncompetitive states like New York, Michigan, Pennsylvania, Illinois and New Jersey are plagued by falling housing values, a shrinking tax base, business outmigration, capital flight and high unemployment rates, and less money for schools, roads and aging infrastructure. These factors of decline hurt the poor the most.
The Northeast is the classic case of a region suffering from self-inflicted wounds. In the year 2006, it was home to a smaller share of the U.S. population, and produced a smaller percentage of America's total value-added, than at any time in the nation's history. Why?
One big reason is that governments in the Northeast are about one-fifth more expensive than in the rest of America ($6,000 versus $5,000 of state spending per resident). An average-income family of four still saves $4,000 in lower income, property, sales taxes and fees by moving to just an average-tax state, and more like $6,000 a year by moving to, say, Florida. Since the Northeastern states tend to have highly progressive tax systems, the incentive to flee is even greater for higher-income earners.
Northeasterners complain disdainfully of the "war between the states" for jobs and businesses, and for good reason: They can't win. Southern and Western states are cherry-picking companies from the North Atlantic states. One Southern governor (who didn't want to be identified) recently told us his state had closed its economic development offices in Europe. "Why search for factories overseas when we can plunder high tax areas like Connecticut and New York?" he said.
Auto and other manufacturing jobs are still being created in America -- but in Alabama, North Carolina and even Mississippi. It has to be infuriating to Northeasterners to learn that people and businesses are "trading up" by moving out of their region to the likes of Georgia and Alabama. But they are.
The states losing population are in effect suffering from a slow-motion version of the economic sclerosis that paralyzed much of Europe in the 1980s and '90s, particularly France and Germany with their massive welfare systems. At least the European socialist nations are finally starting to change their taxing and spending ways to win back jobs.
No such luck in this country. Five of the states near the bottom of our competitiveness ratings -- Illinois, Maryland, Michigan, New Jersey and Wisconsin -- have enacted major tax increases in the last two years. Maryland and Michigan just raised business and income taxes on upper-income earners, while arguing that raising the cost of doing business will attract more businesses. More likely it will induce companies to stay away, and people to move out.
Mr. Laffer is president of Laffer Associates. Mr. Moore is senior economics writer for The Wall Street Journal editorial board.
It will be interesting to read this report, to see what assumptions are used re: the elasticity of the sales tax base with respect to the sales tax rate. Unfortunately, history is a poor guide, as the rapid changes in online shopping habits, not to mention the non-linear nature of both absolute spending (especially as housing values collapse) and willingness to cross state borders to reduce sales tax payments.
In short, at best whatever they model they come up with will have a lot of uncertainty built into its estimates. Gary Sasse knows this; so too do the House and Senate Fiscal Advisors. The question is whether they can find small and simple enough words to explain that to a majority of the Reps and Senators. Starting with a root cause analysis of just where this $150 million and counting deficit came from in this year's budget would be a good start. Part of it is unrealistic (both knowingly and unknowingly) estimates of this year's fiscal revenue (hey, it's one way to give the appearance of balancing the budget...).
So, having blown through the tobacco money, we can (a) sell the lottery and bridges to infrastructure funds for a one time fix to get us through this year and (b) expand the range of items subject to sales tax -- while assuming no reduction in the taxable sales base -- to cover any holes that remain.
In November, we go back to "our people" and claim credit for another year of providing the goodies, and get reelected in November. And hey, maybe we even bet that because of the absolutely terrible RI housing market, the marks (er, taxpayers, er, rich taxpayers)are now trapped and can't make things worse by leaving.
The real trick now is how to quickly fully fund all those state and teacher pensions (and, ideally, post retirement health care benefits) before the whole system blows up (by which time "our people" will be enjoying their tax free fully funded RI pensions in sunny Flahridah).
Just keep your eye on the emerging end game, because that is where the really interesting story is developing.
And who knows, maybe someday the U.S. Attorney will release wiretap evidence that tells the rest of us how the sordid tale now unfolding really went down.
>>The real trick now is how to quickly fully fund all those state and teacher pensions (and, ideally, post retirement health care benefits) before the whole system blows up (by which time "our people" will be enjoying their tax free fully funded RI pensions in sunny Flahridah). Just keep your eye on the emerging end game, because that is where the really interesting story is developing.
Agreed. In particular we have to be wary of schemes to float bonds in order to take the proceeds and "contribute" them to the pension system in order to plug the unfunded liability. Cicilline already floated a trial balloon re: doing this for the unfunded liability of Providence.
Once the money is in the pension system presumably it's insulated from bankruptcy or from any reversal of the funds back out, while the taxpayers will be on the hook for the principal amount of the donation AND interest.
Ditto floating bonds to create a trust or investment pol to cover OPEB (Other Post Employment Benefits). Up until now the state has put nothing aside to help cover that liability.
The unions would like nothing more than to get those unfunded liabilities fully plugged ASAP so that there will be a fait accompli preventing reductions in pension benefits or OPEB.
Don't be surprised to see their Democrat lackeys push pension obligation bonds and spinit as the "tradeoff" for, e.g., transferring future hires into a 401(k) plan. Of course this will do absolutely nothing about the real problem - those on the payroll today and their unconscionable benefit package.
The answer should be to FREEZE the pension system now. Whatever people are vested in now (i.e., the benefit based on years of service to date) they keep, but no more accruals / increases / vesting for years of service going forward. Rather, a 401K with a match comparable to private sector matches.
AS THE NEW GENERAL ASSEMBLY SESSION PROCEEDS, DON'T LOSE SIGHT OF THE FACT THAT ANY PENSION REFORM PROPOSAL THAT DOESN'T INCLUDE A FREEZE AND/OR HAS "REDUCTIONS" THAT ARE LIMITED TO NEW HIRES IS A SHAM; A MERE PR GIMMICK!
TomW,
Here is the link to the full 114 page PDF report “2007 Economic Competitiveness Rating of the 50 states” you quoted:
http://www.bespacific.com/mt/archives/016835.html
Very interesting information
Thanks Ken.
Why am I not surprised to see that RI ranked 48th out of the 50 states?
Two other groups last Fall ranked RI down in the forties for business climate and taxes.
Nobody can say that Rhode Island isn't consistent ... consistently bad, that is.
And obviously many have realized it - the reader comments on the ProJo site in response to the Census / RI losing population story are quite telling.
TomW,
The unfunded pension liability is not going to go away even if the state changes to a 401K.
Actually by splitting the pension system into 2 different systems, it will probably cost RI more money to operate in added paperwork, vesting accounts, financial controls, added employees, added computer systems and added office space
Gov. Sunderland under funded the pension system during last state fiscal problems during his tenure. The stock market also produced some bad earning years for the pension funds.
The payback of the unfunded liability is based over 30 years. To my knowledge RI was on track paying back the unfunded liability till it was made a major issue. If there is a problem, the 30 year payback calendar can be reset with the stroke of a pen.
Don’t forget, when you talk about the Employees Retirement System of Rhode Island there are close to 10 different pension funds in operation not just state employees and teachers. That is a big can of worms to open!
My New Year's resolution this year is to keep as much of my money out of the hands of the General Assembly as I can.
Posted by Greg at January 1, 2008 11:13 AM
XXX
An excellent resolution for all of us to follow-most of us already are.
There is an absolutely painless way we can take millions annually out of the hands of Smith Hill. Real easy-buy your car in Massachusetts. There are plenty of great dealerships just over the border. It wont save you a dime but it WILL take 5% out of the pockets of the crooks. $1000 on a $20,000 car. $3000 on a $60,000 car. When you drive the car over the border think of Pat Crowley, raise your middle finger....and SMILE!
Won't work, Mike. On big ticket items, the seller will charge you Rhode Island taxes if you live in Rhode Island.
The real way to give the finger to Rhode Island's leading vampires is to buy a house in another state.
Ken,
I'm no actuary, but I dare say that freezing the pension system would save billions.
Don't forget that the current unfunded liability is calculated based on current benefit rates and projected benefit accruals.
Since the system is based on highest consecutive three year earnings (rather than career long average) freezing it now would keep thousands of teachers and state employees from goosing their "final" three years with overtime (as routinely occurs now) and will fix the vested pension of younger employees at their earnings of the past three years, not their presumably much higher "consecutive three years" ten or twenty years hence.
TomW,
How are you going to freeze 10 pensions systems and hire personel and start a new 401K pension system in less than 1 year with no operating funds?
Laffey's plan for the pension system makes a lot more sense than a freeze and creation of a new system. I'm sure we'll hear a lot about it when he runs for Governor.
>>How are you going to freeze 10 pensions systems and hire personel and start a new 401K pension system in less than 1 year with no operating funds?
Companies freeze pensions all the time.
Similarly, companies add 401K's all the time, and suppliers like Fidelity walk the companies and employees through the process all the time.
The problem is not being able to do it, the problem is the lack of interest by the Democrat General Assembly in doing what is right for the people of this State rather than pandering to the public sector unions (and incurring the wrath of their relatives that they've inserted into "state jobs").
An acquaintance used to work for the CBO providing Congress with revenue estimates based on various tax scenarios. He developed and used software like the sales tax model software solicited at the link.
The biggest weakness in any such predictions is predicting how people will respond to tax changes. Static based budgeting, which assumes no changes in people's behavior, is just about a worthless exercise, aside from selling a tax you want. Trying to determine the probability and magnitude of the changes in people's behavior and its impact on projected tax revenue is inexact to say the least.
So the confederacy of dunces in the State House will go through the motions to justify what they want to do. Then they'll be surprised when it doesn't work out the way they planned......
TomW,
Problem you are not working with a private company. You are working with state, city, towns, fire, police, National Guard and public laws.
The current over one half billion dollar and growing deficit is more important to attack and close than stirring up a hornets nest by trying to change the retirement system that has a 30 year unfunded liability..
The Employee Retirement System of RI (ERSRI) pension fund covers State, City or Township Government, education and benefits may be different for people in high risk public service jobs, such as Police and Firemen, or may have unique provisions for counting service credit. ERSRI administrates about 21 different benefit structures, which may include Cost of Living Adjustments (COLA's) over time, health insurance, or unique retirement eligibility conditions. For this reason, some public employees are entitled to different benefits than others.
The pension fund has already been changed by law to limit early retirement and maximum retirement amount of state, municipal and teacher employees.
Don’t forget the ERSRI retirement system has gained nationally attention and written up in reports as a pension fund that requires one of the highest employee contributions in the nation providing the least return to the retiree and above average underfunded liability.
Employee in other states have gone to court to force states to fund the unfunded liability and won their case.
I think attention should be directed towards the solving the deficit problem and getting a handle on spending at this time.
RI Historic Tax credit gives the investor 30% back of investor’s money after completing the project and has directly created over $2 billon in economic activity or $5 billion in overall and spin off economic activity in RI. Investors have indicated they will leave RI if the tax credit is altered.
The RI Economic Development Corporation just handed out $600 million in tax credits (with no track record) which RI tax payers will have to make up on top of budget deficit.
Ken,
Gee, could you be worried that your retirement in Hawaii courtesy of the RI taxpayer could be derailed in a bankruptcy court?
John,
My retirement in Hawaii does not depend on the RI retirement system.
I receive 3 retirement checks now and will start receiving 2 more in the future for a total of 5 a month. I did my retirement investment planning way back.
It’s my father back in RI I’m worried about.
Addendum:
John,
There is really no retirement problem per say with my father because he is long time vested in the RI retirement system. His appointment caused him to serve under 7 governors being reappointed by both Republican and Democrat governors.
It’s the new additional taxes that RI will impose on him with this deficit. I’m trying to get him to move out of RI to save his fixed income.
And oh by the way, State of RI will not declare bankruptcy!
Ken,
>>Problem you are not working with a private company. You are working with state, city, towns, fire, police, National Guard and public laws.
So what? The General Assembly has near unlimited power – it is actually easier for it than for a private company since it isn’t subject to ERISA or PBGC - it can change the laws and the pension scheme at will.
To the extent that an employee has 10 or 15 or whatever years of service in, and are already vested in a certain level of benefits based on those years of past service, they have a property right to that. But they have no property right to anything going forward – the General Assembly could with a proverbial snap of its fingers change the law freezing pension benefit accruals as of June 1, 2008.
>>The current over one half billion dollar and growing deficit is more important to attack and close than stirring up a hornets nest by trying to change the retirement system that has a 30 year unfunded liability..
The pensions and OPEB (Other Post Employment Benefits) such as retiree health care ARE a big part of the deficit.
Now that GASB 43 & 45 are requiring the calculation of, and disclosure of, the unfunded pension and OPEB liabilities on the part of states and municipalities, the bond issuers AND baby boomer demographics are going force “contributions” to cover these.
>>The Employee Retirement System of RI (ERSRI) pension fund covers State, City or Township Government, education and benefits may be different for people in high risk public service jobs, such as Police and Firemen, or may have unique provisions for counting service credit. ERSRI administrates about 21 different benefit structures, which may include Cost of Living Adjustments (COLA's) over time, health insurance, or unique retirement eligibility conditions. For this reason, some public employees are entitled to different benefits than others.
Why? I can see making some allowances for the physically dangerous occupations of police and fire, but other than that, why are public employees “ENTITLED” to anything?
>>The pension fund has already been changed by law to limit early retirement and maximum retirement amount of state, municipal and teacher employees.
So what? It’s still unjustifiably “generous.” And it didn't impact the bulk of state workers / teachers, only those who at the time had less than ten years of service (weren't vested) and subsequent new hires.
>>Don’t forget the ERSRI retirement system has gained nationally attention and written up in reports as a pension fund that requires one of the highest employee contributions in the nation providing the least return to the retiree and above average underfunded liability.
Won’t be an issue once we convert to a 401K regime.
Moreover, the comparison to other public sector benefits is a red herring. The relevant comparison is to private sector compensation - pay and benefits - for jobs of similar duties and skill levels.
>>Employee in other states have gone to court to force states to fund the unfunded liability and won their case.
Yes, which will contribute even more to the deficit. If we freeze the system the unfunded liability is greatly reduced, if not eliminated.
BTW, some states like NY have pension obligations written into their state constitution. The citizens of those states are really screwed.
>>I think attention should be directed towards the solving the deficit problem and getting a handle on spending at this time.
Pensions and OPEB ARE “spending” and ARE part of the deficit.
America's Second Civil War: The Public Employment Complex vs. Taxpayers
http://www.yankeeinstitute.org/main/article.php?article_id=111
Ken,
RI has second worst underfunded public pension liabilities in USA. Also substantial unfunded OPEB. Both have real cash flow impact: (a) cash contribution to pension plans; and (b) paygo payments to cover retiree health care costs and/or begin to fund the liabiulity.
Now, what happens with (a) more people retiring (I recall that RI had the oldest or second oldest average age of any public sector workforce in the nation); (b) weaker investment earnings in retirement funds; and (c) rising health care costs? If you want to avoid even worse underfunding of liabilities, and need to keep making those paygo OPEB payments and/or start to fund the liability, the only answer is an even greater draw on scarce state revenues.
Of course, there is an alternative -- sell the lottery and bridges to infrastrtucture funds, and issue some pension funding bonds to fully fund the pension plans, in exchange for some minor concessions (e.g., say, 401ks for all new employees). That takes care of funding "our people's" retirements in Flahridah. Who really cares what happens after that to the welfare recipients, or the whole state for that matter? The people for whom the system has really been set up to work for over the past fifty years or so will be living large in the sunny south.
Like it or not, that's what the end game is about. And it is playing out right now on Smith Hill.
That the state of RI (and people who aren't smart enough or otherwise able to leave) will suffer enormously in the future is a foregone conclusion. The really interesting part of this story (which I have no doubt Mike Stanton is following with great interest) is whether the cabal at the heart of the system is able to dodge the federal and fiscal risks now facing them and end up living happily ever after with all their buddies in Flahridah.
The other component of fixing the problem is to grow out of it. The state has been slowly and doggedly upgrading infrastructure at Quonset Point. I think there's a real possibility that after a few more years of desperate measures to try and raise revenue, the idea of a limited feeder port will look very attractive. But it would take more years to create and longer still for companies to develop local operations leveraging the port for more jobs and therefore more tax revenue. Of course the NIMBYs will go crazy.
>>The other component of fixing the problem is to grow out of it. The state has been slowly and doggedly upgrading infrastructure at Quonset Point. I think there's a real possibility that after a few more years of desperate measures to try and raise revenue, the idea of a limited feeder port will look very attractive. But it would take more years to create and longer still for companies to develop local operations leveraging the port for more jobs and therefore more tax revenue. Of course the NIMBYs will go crazy.
Yeah, they'll really be rushing to come to Quonset after they hear the story about the Longshoreman Union official threatening the local businessman, rigt after that businessman was patted down by General Assembly / Democrat leadership member Paul "I'm Looking For A Wire" Moira of LIUNA!
It is sad, but I have concluded that most political leaders in RI are truly clueless about how bad RI's reputation is among private sector business leaders around the US and around the world. Nice place to visit in the summer, but nobody in their right mind would think of moving a business there. Unfortunately, RI's legendary inbreeding and insularity have blinded most of our leaders to this brutal reality. My bet is that even the rating agencies (never accused of being at the leading edge of insight) will catch on before they do on Smith Hill.
And with respect to the proposed Quonset feeder port, private business investment is exactly what is needed, as there is no public sector money available to build a port in the hope that somebody will eventually come to use it...
ragin' - how do the local LIUNA and Longshoreman officals' hi-jinks differ from the similar officials' actions elsewhere?
With the upgrade to the rail tracks and roadbed and highway overpass heights, NORAD can now ship 3 times as many cars out of the Davisville port area. Question for the NIMBYs - please tell me how often the car carriers stand in and out of Davisville? How often will they if that rosy 3X increase is realized?
(Answer - over the past year, about every 5 days; if projections are met, a little under every other day)
TomW,
For the sake of the discussion, RI freezes all retirements in the current pension system (state, municipal, city, towns, police, firemen, teachers and National Guard).
It is ESTIMATED (no hard facts) that it will cost over $151 million to start a new state 401K plan.
Of that reported $151 million does it include matching state funds which the state “MUST” deposit into the new 401K accounts. If the state is not going to match employee funds, then why even let the state run the 401K plan? Individuals should not be free forced to invest in the state 401K plan.
It was also ESTINATED that the second year of operating the state 401K plan there would be additional costs exceeding over $151 million. It was ESTIMATED the state would not see a cost savings till after almost 5 years or more.
The state still has the current unfunded liability for all persons that are in the current pension system with “LESS” being contributed because of the switchover to the 401K plan. You are talking about thousands upon thousands of public service employees that have funds invested into the old state of RI pension fund.
The state has an escalating budget deficit, where are you going to get the funds to start and support the new 401K plan realizing that if it is matching funds those funds must be deposited into the new 401K plan accounts.
With funds now being deposited in the 401K plan, where are you going to get the funds to continue paying down the 30 year unfunded liability of the old retirement system that the state short changed payments to?
Because the pension change reaches into state, municipal, city, towns, police, firemen, teachers and National Guard which political party is going to hang their suicidal hat on that change.
You have 39 cities and towns plus the state employees. Don’t you think someone out of all the entities will force a legal challenge costing the state more money and adding to the current budget deficit?
Ken:
Even assuming your numbers and no savings for realized for five years or more, given that we're talking about the next 30+ years, I'll take the subsequent 25 years of savings, thank you very much.
Besides, the estimate you cite was not based on a freeze of the current pension system. The only thing that has been proposed so far is new hires going into a 401K.
Nobody has run the numbers on a freeze. There are invested assets in the current pension system, and if there is a freeze additional liabilities would no longer be accruing - e.g., for a current 10 year employee their pension benefit in the coming years will only be for 10 years of service, so we knock off 10-20 years of pension benefit accrual. So the calculations would be based on current assets, investment returns and projected payouts over the coming decades - and those payouts would be dramatically reduced.
The current unfunded liabilities have to assume that this ten year employee is going to remain in the system for another 10-20 years, and that the person will have a correspondingly higher benefit (and its reciprocal liability to the system).
This is true even if the active employees stop "contributing" the 10% or so of their pay into the system. After all, the 10% is based on career long earnings, so they contribute relatively little in their lower paid early years, but the "benefit" is calculated at 75-80% of their highest consecutive three years' earnings.
Changing the minimum pension collection age to align with Social Security would also dramatically reduce the pension liability. While some accommodation might be warranted for police and fire personnel, it is obscene that teachers and registry employees are "retiring" at 50 and collecting a pension for the rest of their lives. They should wait until 65-70 like the rest of us.
Finally, companies like Fidelity and Vanguard would bid to operate the state 401k plan (e.g., MA has ING running theirs). These companies would handle enrollment, recordkeeping, etc., at a very low cost (no high paid state employees running it!). Add in a state match of up to 4-5%, and the expenses overall would be reasonable.
>>You are talking about thousands upon thousands of public service employees that have funds invested into the old state of RI pension fund.
Give them a choice - leave your money in the old system and collect whatever benefit your currently vested in, or waive your vested pension benefits and transfer all of your contributions to the 401K.
>>You have 39 cities and towns plus the state employees. Don’t you think someone out of all the entities will force a legal challenge costing the state more money and adding to the current budget deficit?
There will be legal challenges no matter what - but they wouldn't get far.
The employees only have standing to sue to the extent they have a property interest, and since that isn't being impacted they have no standing, so "case dismissed."
The municipalities will be glad to have relief from their current system, so they won't sue.
And the unions? The General Assembly has power to change the pension system - as we've already seen them exercise. The pension system isn't subject to collective bargaining - so the unions, like employees, would be SOL in a legal challenge as well.
I think somebody in the Gov.'s office should send Tom W an email. Freezing the pensions is the one thing that would work.
I have to point out again, in reference to my post above that buying a car in Mass. WILL result in 5% of the purchase price going to Mass. intead of the Smith Hill Boyz, who would grab only 2% (the difference in sales tax between the states). No it wont save you a dime but it is a painless way to snatch some money out of the hands of our local crooks.
TomW,
All sounds nice but "Add in a state match of up to 4-5%, and the expenses overall would be reasonable."
Where is the state going to get the 4-5% matching funds which has to be real monies because it going outside of the current pension fund?
A person in the old system collecting $40K a year after 30 years service is not going to change pension systems and start over.
>>All sounds nice but "Add in a state match of up to 4-5%, and the expenses overall would be reasonable." Where is the state going to get the 4-5% matching funds which has to be real monies because it going outside of the current pension fund?
And where is the state going to get the $5 billion and climbing if we don’t change the present system?
The current system is essentially based on paying out 80% of payroll every year (pension = 80% of highest consecutive three years average). With about 10% contributed by employees, in rough terms that leaves 70% to be made by a combination of investment earnings and taxpayer “contributions.”
Since the investment earnings are probably only 8-10% a year, then that leaves a taxpayer “contribution” of 60+ percent.
If we freeze the current system the state will have to put in much less to the pension system, on a net basis we save, even with a 4-5% match.
>>A person in the old system collecting $40K a year after 30 years service is not going to change pension systems and start over.
I don’t expect them to – someone who has 30 years vested would be nuts to switch over. For someone with 10 years in, it might make sense – their earnings in a 401k may well generate more at retirement than whatever pension they get with ten years service credit.
But in the end your statement illustrates why we need to freeze the system now so that there won’t be thousands more state employees / teachers accruing a pension benefit of $40k (or more) a year.
I don’t care if anyone currently in the system doesn’t withdraw funds and transfer to the 401k. What I want to stop is, e.g,, a current 15 year person from accruing that 30 years vested. Whatever the current system provides for a 15 year pension, they’re vested and let them keep it. But we freeze the system – they’ll never get more than 15 years credited service toward a pension under the current formula, and going forward they’ll be in a 401k with a match. If they contribute that 10% that is now going to the pension, and get the match, they’ll have one hell of a nest egg when they retire.
As “rich” to them as the current system? No. But the current system is unsustainable.
But a pension freeze and 401k? Fair to them. Fair to the taxpayers.
TomW
I looked up on the ERSRI site and there is no longer an 80% payout under the new law; it’s down to 75% for state and teachers. They can retire age 50 with 29 years or 10 years age 65 with reduced benefits age 55. For municipal employees it’s any age with 30 years and 19 years age 58. It’s different for police, firemen and National Guard.
Also here is the newspaper report about 401K plans.
“01:00 AM EST on Sunday, December 23, 2007
BY STEVE PEOPLES
Journal State House Bureau
The state’s actuary recently found that moving to a 401(k)-style system would cost Rhode Island taxpayers $151.5 million next year and more than $520 million over the next seven years before the state sees any savings”.
My feelings are this would be on top of the current expanding ESTIMATED $450 million budget deficit, $600 million tax credit RIEDC just handed to 6 companies and ESTIMATED $4.7 billion 30 year pension fund unfunded liability (RI was only contributing 56% of it’s share where employees were funding 100%).
NOTE: I just found out today employees in the Hawaii pension fund a couple of years ago went to court over the unfunded liability and won a court order requiring the state to fully fund the unfunded pension libility.
Other factors affecting the RI budget are continued exodus of population which lends to lower tax revenues and might cause RI to lose a representative seat in Washington, DC; subprime loan scandal is reported now to continue into 2010 with RI leading New England states with foreclosures and bankruptcies thus leading to lower property tax revenues and lowering of community evaluations for property taxes. With lower property tax revenues to cities/towns and state cap on city/town local taxes plus level or lowered state school support, school system support will suffer also local public works services will suffer.
RI companies and state government have started to lay employees off. Today Oil prices reached $100 per barrel and the stock market fell plus the housing market is in freefall as it did during the 1980s recession.
If the above are any indicators, RI should be starting into a state-wide recession. 2008 through 2011 are not going to be good years for RI.
With the total cast and crew currently residing on Smith Hill, I can only see the budget deficit growing to over $1 billion and some real pain in RI.
I got to get my father out of RI.
TomW
Typo fix!
"I looked up on the ERSRI site and there is no longer an 80% payout under the new law; it’s down to 75% for state and teachers. They can retire age 50 with 29 years"
Should be: I looked up on the ERSRI site and there is no longer an 80% payout under the new law; it’s down to 75% for state and teachers. They can retire age 59 with 29 years
>>Should be: I looked up on the ERSRI site and there is no longer an 80% payout under the new law; it’s down to 75% for state and teachers. They can retire age 59 with 29 years
Ken,
I believe that those new figures only apply to employees who had less than ten years in when the changes were made - those hired in 1995 or later.
So the vast majority of teachers / state workers so far have been untouched. They need to take "pay their fair share" of reductions too.
As to the $520 million in cost before savings are realized, well, given the $5 billion in unfunded pension liabilities and $600-700 current estimate for unfunded OPEB liabilities, incurring $520 million in the short term to save multiples of that in the long term seems prudent to me.
TomW
You still have the municipal employees (cites and Towns) in the RI pension system that out number the state employees and teacher.
For municipal employees it's any age with 30 years and 19 years age 58.
Police, firemen and National Guard are also in the system.
>>You still have the municipal employees (cites and Towns) in the RI pension system that out number the state employees and teacher. For municipal employees it's any age with 30 years and 19 years age 58. police, firemen and National Guard are also in the system.
So let the municipalities freeze and convert to a 401K as well ... or declare bankruptcy (which is probably inevitable for Providence / Cranston / Woonsocket in any case).
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That's in keeping with what members of the GA have been saying. Generically: "Oh, we're definitely not considering a tax increase. In fact, we may lower the sales tax rate, but just apply it to more things, which will result in more revenue."
What they hope Rhode Islanders are too stupid to figure out is that, in this case especially, revenue = taxes.
Posted by: Justin Katz at January 1, 2008 8:16 AMI don't believe, based on my sources, that the rate will even be lowered. The "broadening" that is being considered-hairdressers, dance classes, movie tickets, etc. wont add up to more than $20 million. A drop in the bucket. What I am hearing rumblings about is more disturbing. Selling the lottery (not the VLT's) for $400 million to keep the SS Union/Welfare afloat to FY 2010.
Posted by: Mike at January 1, 2008 10:02 AMHappy New Year! The more things change the more they stay the same.
I already do as much of my shopping out of state as is humanly possible. Don't make me drive to Attleboro to shop for groceries, haircuts and accountants, too. Because I will.
My New Year's resolution this year is to keep as much of my money out of the hands of the General Assembly as I can.
Posted by: Greg at January 1, 2008 11:13 AMWhen push comes to shove, Rhode Island’s Democrats have always protected their union bosses and welfare industry beneficiaries at the expense of citizens, taxpayers and the State economy.
This isn’t going to magically change this session (though there will be some superficial “cuts” that will allow them to make the PR claim that they made “tough choices” and that “everyone is sharing the pain”).
Think along the lines of the model that teachers unions and school committees use to pull the wool over the eyes of the public; they’ll announce with great fanfare that the teachers now have a “co-share” in health care premiums, but neglect to mention that the new contract is padded in other areas so that on a net basis teachers aren’t paying a thing, and indeed still getting a net raise in compensation.
“Our” Democrat General Assembly WILL follow the lead of that other State that is losing population, Michigan, which enacted massive tax increases last Fall (see quote at the end of this post).
Therefore Rhode Island’s economic decline WILL continue (as it has for decades). Therefore middle class people WILL continue to leave Rhode Island, by economic compulsion if for no other reason.
Governor Carcieri is a good man and is waging a valiant fight; but he's a general with only a few troops. So long as Rhode Island keeps Democrats in control Rhode Island's decline will continue (e.g., did the Democrat Party change any after RISDIC? Nope. Now we have Operation Dollar Bill. Same crooks. Same union - welfare industry control).
Democrats raise taxes; not just here in RI but everywhere. That’s their mission in life. That is also why the Rustbelt and Northeast are both declining – both regions are dominated by Democrats and their public sector union bosses, and so both regions suffer from the inevitably high tax burden that accompanies a Democrat / public sector union regime. Note the following from The Wall Street Journal on December 10th: “The Tax War Between the States”
http://online.wsj.com/article/SB119724619828518802.html
Also note this from The Weekly Standard on December 17th:
Through the Roof!
Democrats fall in love with taxes again.
http://www.weeklystandard.com/Content/Public/Articles/000/000/014/457jcxov.asp
“O'Malley is among a group of rising star Democrats in state capitals that seem to relish the opportunity to raise taxes--and not just on the rich.”
“Then there is the glamorous Michigan governor, Jennifer Granholm--who raised business and income taxes this year despite polls showing intense opposition. Granholm fought doggedly for the tax package, even telling a statewide television audience that she would shut the government down in Lansing if she didn't get her infusion of cash from taxpayers. Michigan was the only state in the nation last year suffering a recession, and the state's unemployment rate is highest in the nation, so new taxes couldn't have come at a more inopportune time. But Granholm is convinced that raising business taxes in Michigan is an "investment" and that the higher costs for doing business will somehow lure more companies to her state. A darling of liberals, Granholm would be high on the Democrats' vice presidential list if only she hadn't been born in Canada.”
Posted by: Tom W at January 1, 2008 11:20 AMThe link I provided above to the Wall Street Journal piece doesn't allow non-subscribers to read the whole piece. So here it is. (BTW - RI is ranked in the bottom-10 states in this study):
The (Tax) War Between the States
By ARTHUR LAFFER AND STEPHEN MOORE
December 10, 2007; Page A19
December 10, 2007
A record eight million Americans moved from one state to another last year. Where is everyone going, and why? The answer has little to do with climate: California has arguably the nicest climate of any state in the nation -- yet in this decade more Americans have left the Golden State than entered it.
Migration patterns instead reveal which states have the most dynamic and desirable economies, and which are "has-been" states. The winners in this contest for the most valuable resource on the globe -- human capital -- are generally the states with the lowest tax, spending and regulatory burdens. The biggest losers are almost all congregated in the Northeast and Midwest. Liberals contend that tax rates, regulations, forced union laws and runaway government spending don't matter when it comes to creating jobs, high incomes and a higher quality of life. People tell us otherwise by voting with their feet.
The American Legislative Exchange Council has just released a study we've done that presents a 2007 Economic Competitiveness Rating of the 50 states, based on 16 economic policy variables, including taxes, regulation, right to work, the legal system, educational freedom and government debt. Over the past decade, the 10 states with the highest taxes and spending, and the most intrusive regulations, have half the population and job growth, and one-third slower growth in incomes, than the 10 most economically free states. In 2006 alone 1,500 people each day moved to the states with the highest economic competitiveness from the states with the lowest competitiveness.
Of all the policy variables we examined, two stand out as perhaps the most important in attracting jobs and capital. The first is the income tax rate. States with the highest income tax rates -- California and New York, for example -- are significantly outperformed by the nine states with no income tax, such as Texas and Florida. As a study from the Atlanta Federal Reserve Board put it: "Relative marginal tax rates have a statistically significant negative relationship with relative state growth."
The other factor for attracting jobs and capital is right-to-work laws. States that permit workers to be compelled to join unions have much lower rates of employment growth than states that don't. Many companies say they will not even consider locating a factory in a state that does not have a right-to-work law.
Our study also finds that states with antigrowth tax and spending policies don't just lose people. Noncompetitive states like New York, Michigan, Pennsylvania, Illinois and New Jersey are plagued by falling housing values, a shrinking tax base, business outmigration, capital flight and high unemployment rates, and less money for schools, roads and aging infrastructure. These factors of decline hurt the poor the most.
The Northeast is the classic case of a region suffering from self-inflicted wounds. In the year 2006, it was home to a smaller share of the U.S. population, and produced a smaller percentage of America's total value-added, than at any time in the nation's history. Why?
One big reason is that governments in the Northeast are about one-fifth more expensive than in the rest of America ($6,000 versus $5,000 of state spending per resident). An average-income family of four still saves $4,000 in lower income, property, sales taxes and fees by moving to just an average-tax state, and more like $6,000 a year by moving to, say, Florida. Since the Northeastern states tend to have highly progressive tax systems, the incentive to flee is even greater for higher-income earners.
Northeasterners complain disdainfully of the "war between the states" for jobs and businesses, and for good reason: They can't win. Southern and Western states are cherry-picking companies from the North Atlantic states. One Southern governor (who didn't want to be identified) recently told us his state had closed its economic development offices in Europe. "Why search for factories overseas when we can plunder high tax areas like Connecticut and New York?" he said.
Auto and other manufacturing jobs are still being created in America -- but in Alabama, North Carolina and even Mississippi. It has to be infuriating to Northeasterners to learn that people and businesses are "trading up" by moving out of their region to the likes of Georgia and Alabama. But they are.
The states losing population are in effect suffering from a slow-motion version of the economic sclerosis that paralyzed much of Europe in the 1980s and '90s, particularly France and Germany with their massive welfare systems. At least the European socialist nations are finally starting to change their taxing and spending ways to win back jobs.
No such luck in this country. Five of the states near the bottom of our competitiveness ratings -- Illinois, Maryland, Michigan, New Jersey and Wisconsin -- have enacted major tax increases in the last two years. Maryland and Michigan just raised business and income taxes on upper-income earners, while arguing that raising the cost of doing business will attract more businesses. More likely it will induce companies to stay away, and people to move out.
Mr. Laffer is president of Laffer Associates. Mr. Moore is senior economics writer for The Wall Street Journal editorial board.
Posted by: Tom W at January 1, 2008 1:27 PMIt will be interesting to read this report, to see what assumptions are used re: the elasticity of the sales tax base with respect to the sales tax rate. Unfortunately, history is a poor guide, as the rapid changes in online shopping habits, not to mention the non-linear nature of both absolute spending (especially as housing values collapse) and willingness to cross state borders to reduce sales tax payments.
In short, at best whatever they model they come up with will have a lot of uncertainty built into its estimates. Gary Sasse knows this; so too do the House and Senate Fiscal Advisors. The question is whether they can find small and simple enough words to explain that to a majority of the Reps and Senators. Starting with a root cause analysis of just where this $150 million and counting deficit came from in this year's budget would be a good start. Part of it is unrealistic (both knowingly and unknowingly) estimates of this year's fiscal revenue (hey, it's one way to give the appearance of balancing the budget...).
So, having blown through the tobacco money, we can (a) sell the lottery and bridges to infrastructure funds for a one time fix to get us through this year and (b) expand the range of items subject to sales tax -- while assuming no reduction in the taxable sales base -- to cover any holes that remain.
In November, we go back to "our people" and claim credit for another year of providing the goodies, and get reelected in November. And hey, maybe we even bet that because of the absolutely terrible RI housing market, the marks (er, taxpayers, er, rich taxpayers)are now trapped and can't make things worse by leaving.
The real trick now is how to quickly fully fund all those state and teacher pensions (and, ideally, post retirement health care benefits) before the whole system blows up (by which time "our people" will be enjoying their tax free fully funded RI pensions in sunny Flahridah).
Just keep your eye on the emerging end game, because that is where the really interesting story is developing.
And who knows, maybe someday the U.S. Attorney will release wiretap evidence that tells the rest of us how the sordid tale now unfolding really went down.
Posted by: John at January 1, 2008 4:42 PM>>The real trick now is how to quickly fully fund all those state and teacher pensions (and, ideally, post retirement health care benefits) before the whole system blows up (by which time "our people" will be enjoying their tax free fully funded RI pensions in sunny Flahridah). Just keep your eye on the emerging end game, because that is where the really interesting story is developing.
Agreed. In particular we have to be wary of schemes to float bonds in order to take the proceeds and "contribute" them to the pension system in order to plug the unfunded liability. Cicilline already floated a trial balloon re: doing this for the unfunded liability of Providence.
Once the money is in the pension system presumably it's insulated from bankruptcy or from any reversal of the funds back out, while the taxpayers will be on the hook for the principal amount of the donation AND interest.
Ditto floating bonds to create a trust or investment pol to cover OPEB (Other Post Employment Benefits). Up until now the state has put nothing aside to help cover that liability.
The unions would like nothing more than to get those unfunded liabilities fully plugged ASAP so that there will be a fait accompli preventing reductions in pension benefits or OPEB.
Don't be surprised to see their Democrat lackeys push pension obligation bonds and spinit as the "tradeoff" for, e.g., transferring future hires into a 401(k) plan. Of course this will do absolutely nothing about the real problem - those on the payroll today and their unconscionable benefit package.
The answer should be to FREEZE the pension system now. Whatever people are vested in now (i.e., the benefit based on years of service to date) they keep, but no more accruals / increases / vesting for years of service going forward. Rather, a 401K with a match comparable to private sector matches.
AS THE NEW GENERAL ASSEMBLY SESSION PROCEEDS, DON'T LOSE SIGHT OF THE FACT THAT ANY PENSION REFORM PROPOSAL THAT DOESN'T INCLUDE A FREEZE AND/OR HAS "REDUCTIONS" THAT ARE LIMITED TO NEW HIRES IS A SHAM; A MERE PR GIMMICK!
Posted by: Tom W at January 1, 2008 6:28 PMTomW,
Here is the link to the full 114 page PDF report “2007 Economic Competitiveness Rating of the 50 states” you quoted:
http://www.bespacific.com/mt/archives/016835.html
Very interesting information
Posted by: Ken at January 1, 2008 7:16 PMThanks Ken.
Why am I not surprised to see that RI ranked 48th out of the 50 states?
Two other groups last Fall ranked RI down in the forties for business climate and taxes.
Nobody can say that Rhode Island isn't consistent ... consistently bad, that is.
And obviously many have realized it - the reader comments on the ProJo site in response to the Census / RI losing population story are quite telling.
Posted by: Tom W at January 1, 2008 7:39 PMTomW,
The unfunded pension liability is not going to go away even if the state changes to a 401K.
Actually by splitting the pension system into 2 different systems, it will probably cost RI more money to operate in added paperwork, vesting accounts, financial controls, added employees, added computer systems and added office space
Gov. Sunderland under funded the pension system during last state fiscal problems during his tenure. The stock market also produced some bad earning years for the pension funds.
The payback of the unfunded liability is based over 30 years. To my knowledge RI was on track paying back the unfunded liability till it was made a major issue. If there is a problem, the 30 year payback calendar can be reset with the stroke of a pen.
Don’t forget, when you talk about the Employees Retirement System of Rhode Island there are close to 10 different pension funds in operation not just state employees and teachers. That is a big can of worms to open!
Posted by: Ken at January 1, 2008 7:49 PMMy New Year's resolution this year is to keep as much of my money out of the hands of the General Assembly as I can.
Posted by: Mike at January 1, 2008 7:53 PMPosted by Greg at January 1, 2008 11:13 AM
XXX
An excellent resolution for all of us to follow-most of us already are.
There is an absolutely painless way we can take millions annually out of the hands of Smith Hill. Real easy-buy your car in Massachusetts. There are plenty of great dealerships just over the border. It wont save you a dime but it WILL take 5% out of the pockets of the crooks. $1000 on a $20,000 car. $3000 on a $60,000 car. When you drive the car over the border think of Pat Crowley, raise your middle finger....and SMILE!
Won't work, Mike. On big ticket items, the seller will charge you Rhode Island taxes if you live in Rhode Island.
The real way to give the finger to Rhode Island's leading vampires is to buy a house in another state.
Posted by: Justin Katz at January 1, 2008 8:17 PMKen,
I'm no actuary, but I dare say that freezing the pension system would save billions.
Don't forget that the current unfunded liability is calculated based on current benefit rates and projected benefit accruals.
Since the system is based on highest consecutive three year earnings (rather than career long average) freezing it now would keep thousands of teachers and state employees from goosing their "final" three years with overtime (as routinely occurs now) and will fix the vested pension of younger employees at their earnings of the past three years, not their presumably much higher "consecutive three years" ten or twenty years hence.
Posted by: Tom W at January 1, 2008 8:52 PMTomW,
How are you going to freeze 10 pensions systems and hire personel and start a new 401K pension system in less than 1 year with no operating funds?
Posted by: Ken at January 1, 2008 9:22 PMLaffey's plan for the pension system makes a lot more sense than a freeze and creation of a new system. I'm sure we'll hear a lot about it when he runs for Governor.
Posted by: Greg at January 1, 2008 9:30 PM>>How are you going to freeze 10 pensions systems and hire personel and start a new 401K pension system in less than 1 year with no operating funds?
Companies freeze pensions all the time.
Similarly, companies add 401K's all the time, and suppliers like Fidelity walk the companies and employees through the process all the time.
The problem is not being able to do it, the problem is the lack of interest by the Democrat General Assembly in doing what is right for the people of this State rather than pandering to the public sector unions (and incurring the wrath of their relatives that they've inserted into "state jobs").
Posted by: Tom W at January 1, 2008 10:04 PMAn acquaintance used to work for the CBO providing Congress with revenue estimates based on various tax scenarios. He developed and used software like the sales tax model software solicited at the link.
The biggest weakness in any such predictions is predicting how people will respond to tax changes. Static based budgeting, which assumes no changes in people's behavior, is just about a worthless exercise, aside from selling a tax you want. Trying to determine the probability and magnitude of the changes in people's behavior and its impact on projected tax revenue is inexact to say the least.
So the confederacy of dunces in the State House will go through the motions to justify what they want to do. Then they'll be surprised when it doesn't work out the way they planned......
Posted by: chuckR at January 1, 2008 10:08 PMTomW,
Problem you are not working with a private company. You are working with state, city, towns, fire, police, National Guard and public laws.
The current over one half billion dollar and growing deficit is more important to attack and close than stirring up a hornets nest by trying to change the retirement system that has a 30 year unfunded liability..
The Employee Retirement System of RI (ERSRI) pension fund covers State, City or Township Government, education and benefits may be different for people in high risk public service jobs, such as Police and Firemen, or may have unique provisions for counting service credit. ERSRI administrates about 21 different benefit structures, which may include Cost of Living Adjustments (COLA's) over time, health insurance, or unique retirement eligibility conditions. For this reason, some public employees are entitled to different benefits than others.
The pension fund has already been changed by law to limit early retirement and maximum retirement amount of state, municipal and teacher employees.
Don’t forget the ERSRI retirement system has gained nationally attention and written up in reports as a pension fund that requires one of the highest employee contributions in the nation providing the least return to the retiree and above average underfunded liability.
Employee in other states have gone to court to force states to fund the unfunded liability and won their case.
I think attention should be directed towards the solving the deficit problem and getting a handle on spending at this time.
RI Historic Tax credit gives the investor 30% back of investor’s money after completing the project and has directly created over $2 billon in economic activity or $5 billion in overall and spin off economic activity in RI. Investors have indicated they will leave RI if the tax credit is altered.
The RI Economic Development Corporation just handed out $600 million in tax credits (with no track record) which RI tax payers will have to make up on top of budget deficit.
Posted by: Ken at January 1, 2008 10:38 PMKen,
Gee, could you be worried that your retirement in Hawaii courtesy of the RI taxpayer could be derailed in a bankruptcy court?
Posted by: John at January 2, 2008 1:12 AMJohn,
My retirement in Hawaii does not depend on the RI retirement system.
I receive 3 retirement checks now and will start receiving 2 more in the future for a total of 5 a month. I did my retirement investment planning way back.
It’s my father back in RI I’m worried about.
Posted by: Ken at January 2, 2008 3:08 AMAddendum:
John,
There is really no retirement problem per say with my father because he is long time vested in the RI retirement system. His appointment caused him to serve under 7 governors being reappointed by both Republican and Democrat governors.
It’s the new additional taxes that RI will impose on him with this deficit. I’m trying to get him to move out of RI to save his fixed income.
And oh by the way, State of RI will not declare bankruptcy!
Posted by: Ken at January 2, 2008 3:33 AMKen,
>>Problem you are not working with a private company. You are working with state, city, towns, fire, police, National Guard and public laws.
So what? The General Assembly has near unlimited power – it is actually easier for it than for a private company since it isn’t subject to ERISA or PBGC - it can change the laws and the pension scheme at will.
To the extent that an employee has 10 or 15 or whatever years of service in, and are already vested in a certain level of benefits based on those years of past service, they have a property right to that. But they have no property right to anything going forward – the General Assembly could with a proverbial snap of its fingers change the law freezing pension benefit accruals as of June 1, 2008.
>>The current over one half billion dollar and growing deficit is more important to attack and close than stirring up a hornets nest by trying to change the retirement system that has a 30 year unfunded liability..
The pensions and OPEB (Other Post Employment Benefits) such as retiree health care ARE a big part of the deficit.
Now that GASB 43 & 45 are requiring the calculation of, and disclosure of, the unfunded pension and OPEB liabilities on the part of states and municipalities, the bond issuers AND baby boomer demographics are going force “contributions” to cover these.
>>The Employee Retirement System of RI (ERSRI) pension fund covers State, City or Township Government, education and benefits may be different for people in high risk public service jobs, such as Police and Firemen, or may have unique provisions for counting service credit. ERSRI administrates about 21 different benefit structures, which may include Cost of Living Adjustments (COLA's) over time, health insurance, or unique retirement eligibility conditions. For this reason, some public employees are entitled to different benefits than others.
Why? I can see making some allowances for the physically dangerous occupations of police and fire, but other than that, why are public employees “ENTITLED” to anything?
>>The pension fund has already been changed by law to limit early retirement and maximum retirement amount of state, municipal and teacher employees.
So what? It’s still unjustifiably “generous.” And it didn't impact the bulk of state workers / teachers, only those who at the time had less than ten years of service (weren't vested) and subsequent new hires.
>>Don’t forget the ERSRI retirement system has gained nationally attention and written up in reports as a pension fund that requires one of the highest employee contributions in the nation providing the least return to the retiree and above average underfunded liability.
Won’t be an issue once we convert to a 401K regime.
Moreover, the comparison to other public sector benefits is a red herring. The relevant comparison is to private sector compensation - pay and benefits - for jobs of similar duties and skill levels.
>>Employee in other states have gone to court to force states to fund the unfunded liability and won their case.
Yes, which will contribute even more to the deficit. If we freeze the system the unfunded liability is greatly reduced, if not eliminated.
BTW, some states like NY have pension obligations written into their state constitution. The citizens of those states are really screwed.
>>I think attention should be directed towards the solving the deficit problem and getting a handle on spending at this time.
Pensions and OPEB ARE “spending” and ARE part of the deficit.
Posted by: Tom W at January 2, 2008 12:02 PMAmerica's Second Civil War: The Public Employment Complex vs. Taxpayers
http://www.yankeeinstitute.org/main/article.php?article_id=111
Posted by: Tom W at January 2, 2008 12:23 PMKen,
RI has second worst underfunded public pension liabilities in USA. Also substantial unfunded OPEB. Both have real cash flow impact: (a) cash contribution to pension plans; and (b) paygo payments to cover retiree health care costs and/or begin to fund the liabiulity.
Now, what happens with (a) more people retiring (I recall that RI had the oldest or second oldest average age of any public sector workforce in the nation); (b) weaker investment earnings in retirement funds; and (c) rising health care costs? If you want to avoid even worse underfunding of liabilities, and need to keep making those paygo OPEB payments and/or start to fund the liability, the only answer is an even greater draw on scarce state revenues.
Of course, there is an alternative -- sell the lottery and bridges to infrastrtucture funds, and issue some pension funding bonds to fully fund the pension plans, in exchange for some minor concessions (e.g., say, 401ks for all new employees). That takes care of funding "our people's" retirements in Flahridah. Who really cares what happens after that to the welfare recipients, or the whole state for that matter? The people for whom the system has really been set up to work for over the past fifty years or so will be living large in the sunny south.
Like it or not, that's what the end game is about. And it is playing out right now on Smith Hill.
That the state of RI (and people who aren't smart enough or otherwise able to leave) will suffer enormously in the future is a foregone conclusion. The really interesting part of this story (which I have no doubt Mike Stanton is following with great interest) is whether the cabal at the heart of the system is able to dodge the federal and fiscal risks now facing them and end up living happily ever after with all their buddies in Flahridah.
Posted by: John at January 2, 2008 12:45 PMThe other component of fixing the problem is to grow out of it. The state has been slowly and doggedly upgrading infrastructure at Quonset Point. I think there's a real possibility that after a few more years of desperate measures to try and raise revenue, the idea of a limited feeder port will look very attractive. But it would take more years to create and longer still for companies to develop local operations leveraging the port for more jobs and therefore more tax revenue. Of course the NIMBYs will go crazy.
Posted by: chuckR at January 2, 2008 1:52 PM>>The other component of fixing the problem is to grow out of it. The state has been slowly and doggedly upgrading infrastructure at Quonset Point. I think there's a real possibility that after a few more years of desperate measures to try and raise revenue, the idea of a limited feeder port will look very attractive. But it would take more years to create and longer still for companies to develop local operations leveraging the port for more jobs and therefore more tax revenue. Of course the NIMBYs will go crazy.
Yeah, they'll really be rushing to come to Quonset after they hear the story about the Longshoreman Union official threatening the local businessman, rigt after that businessman was patted down by General Assembly / Democrat leadership member Paul "I'm Looking For A Wire" Moira of LIUNA!
Posted by: Ragin' Rhode Islander at January 2, 2008 2:01 PMIt is sad, but I have concluded that most political leaders in RI are truly clueless about how bad RI's reputation is among private sector business leaders around the US and around the world. Nice place to visit in the summer, but nobody in their right mind would think of moving a business there. Unfortunately, RI's legendary inbreeding and insularity have blinded most of our leaders to this brutal reality. My bet is that even the rating agencies (never accused of being at the leading edge of insight) will catch on before they do on Smith Hill.
And with respect to the proposed Quonset feeder port, private business investment is exactly what is needed, as there is no public sector money available to build a port in the hope that somebody will eventually come to use it...
Posted by: John at January 2, 2008 3:50 PMragin' - how do the local LIUNA and Longshoreman officals' hi-jinks differ from the similar officials' actions elsewhere?
With the upgrade to the rail tracks and roadbed and highway overpass heights, NORAD can now ship 3 times as many cars out of the Davisville port area. Question for the NIMBYs - please tell me how often the car carriers stand in and out of Davisville? How often will they if that rosy 3X increase is realized?
(Answer - over the past year, about every 5 days; if projections are met, a little under every other day)
Posted by: chuckR at January 2, 2008 5:26 PMTomW,
For the sake of the discussion, RI freezes all retirements in the current pension system (state, municipal, city, towns, police, firemen, teachers and National Guard).
It is ESTIMATED (no hard facts) that it will cost over $151 million to start a new state 401K plan.
Of that reported $151 million does it include matching state funds which the state “MUST” deposit into the new 401K accounts. If the state is not going to match employee funds, then why even let the state run the 401K plan? Individuals should not be free forced to invest in the state 401K plan.
It was also ESTINATED that the second year of operating the state 401K plan there would be additional costs exceeding over $151 million. It was ESTIMATED the state would not see a cost savings till after almost 5 years or more.
The state still has the current unfunded liability for all persons that are in the current pension system with “LESS” being contributed because of the switchover to the 401K plan. You are talking about thousands upon thousands of public service employees that have funds invested into the old state of RI pension fund.
The state has an escalating budget deficit, where are you going to get the funds to start and support the new 401K plan realizing that if it is matching funds those funds must be deposited into the new 401K plan accounts.
With funds now being deposited in the 401K plan, where are you going to get the funds to continue paying down the 30 year unfunded liability of the old retirement system that the state short changed payments to?
Because the pension change reaches into state, municipal, city, towns, police, firemen, teachers and National Guard which political party is going to hang their suicidal hat on that change.
You have 39 cities and towns plus the state employees. Don’t you think someone out of all the entities will force a legal challenge costing the state more money and adding to the current budget deficit?
Posted by: Ken at January 2, 2008 5:35 PMKen:
Even assuming your numbers and no savings for realized for five years or more, given that we're talking about the next 30+ years, I'll take the subsequent 25 years of savings, thank you very much.
Besides, the estimate you cite was not based on a freeze of the current pension system. The only thing that has been proposed so far is new hires going into a 401K.
Nobody has run the numbers on a freeze. There are invested assets in the current pension system, and if there is a freeze additional liabilities would no longer be accruing - e.g., for a current 10 year employee their pension benefit in the coming years will only be for 10 years of service, so we knock off 10-20 years of pension benefit accrual. So the calculations would be based on current assets, investment returns and projected payouts over the coming decades - and those payouts would be dramatically reduced.
The current unfunded liabilities have to assume that this ten year employee is going to remain in the system for another 10-20 years, and that the person will have a correspondingly higher benefit (and its reciprocal liability to the system).
This is true even if the active employees stop "contributing" the 10% or so of their pay into the system. After all, the 10% is based on career long earnings, so they contribute relatively little in their lower paid early years, but the "benefit" is calculated at 75-80% of their highest consecutive three years' earnings.
Changing the minimum pension collection age to align with Social Security would also dramatically reduce the pension liability. While some accommodation might be warranted for police and fire personnel, it is obscene that teachers and registry employees are "retiring" at 50 and collecting a pension for the rest of their lives. They should wait until 65-70 like the rest of us.
Finally, companies like Fidelity and Vanguard would bid to operate the state 401k plan (e.g., MA has ING running theirs). These companies would handle enrollment, recordkeeping, etc., at a very low cost (no high paid state employees running it!). Add in a state match of up to 4-5%, and the expenses overall would be reasonable.
>>You are talking about thousands upon thousands of public service employees that have funds invested into the old state of RI pension fund.
Give them a choice - leave your money in the old system and collect whatever benefit your currently vested in, or waive your vested pension benefits and transfer all of your contributions to the 401K.
>>You have 39 cities and towns plus the state employees. Don’t you think someone out of all the entities will force a legal challenge costing the state more money and adding to the current budget deficit?
There will be legal challenges no matter what - but they wouldn't get far.
The employees only have standing to sue to the extent they have a property interest, and since that isn't being impacted they have no standing, so "case dismissed."
The municipalities will be glad to have relief from their current system, so they won't sue.
And the unions? The General Assembly has power to change the pension system - as we've already seen them exercise. The pension system isn't subject to collective bargaining - so the unions, like employees, would be SOL in a legal challenge as well.
Posted by: Tom W at January 2, 2008 6:47 PMI think somebody in the Gov.'s office should send Tom W an email. Freezing the pensions is the one thing that would work.
I have to point out again, in reference to my post above that buying a car in Mass. WILL result in 5% of the purchase price going to Mass. intead of the Smith Hill Boyz, who would grab only 2% (the difference in sales tax between the states). No it wont save you a dime but it is a painless way to snatch some money out of the hands of our local crooks.
Posted by: Mike at January 2, 2008 7:51 PMTomW,
All sounds nice but "Add in a state match of up to 4-5%, and the expenses overall would be reasonable."
Where is the state going to get the 4-5% matching funds which has to be real monies because it going outside of the current pension fund?
A person in the old system collecting $40K a year after 30 years service is not going to change pension systems and start over.
Posted by: Ken at January 2, 2008 9:47 PM>>All sounds nice but "Add in a state match of up to 4-5%, and the expenses overall would be reasonable." Where is the state going to get the 4-5% matching funds which has to be real monies because it going outside of the current pension fund?
And where is the state going to get the $5 billion and climbing if we don’t change the present system?
The current system is essentially based on paying out 80% of payroll every year (pension = 80% of highest consecutive three years average). With about 10% contributed by employees, in rough terms that leaves 70% to be made by a combination of investment earnings and taxpayer “contributions.”
Since the investment earnings are probably only 8-10% a year, then that leaves a taxpayer “contribution” of 60+ percent.
If we freeze the current system the state will have to put in much less to the pension system, on a net basis we save, even with a 4-5% match.
>>A person in the old system collecting $40K a year after 30 years service is not going to change pension systems and start over.
I don’t expect them to – someone who has 30 years vested would be nuts to switch over. For someone with 10 years in, it might make sense – their earnings in a 401k may well generate more at retirement than whatever pension they get with ten years service credit.
But in the end your statement illustrates why we need to freeze the system now so that there won’t be thousands more state employees / teachers accruing a pension benefit of $40k (or more) a year.
I don’t care if anyone currently in the system doesn’t withdraw funds and transfer to the 401k. What I want to stop is, e.g,, a current 15 year person from accruing that 30 years vested. Whatever the current system provides for a 15 year pension, they’re vested and let them keep it. But we freeze the system – they’ll never get more than 15 years credited service toward a pension under the current formula, and going forward they’ll be in a 401k with a match. If they contribute that 10% that is now going to the pension, and get the match, they’ll have one hell of a nest egg when they retire.
As “rich” to them as the current system? No. But the current system is unsustainable.
But a pension freeze and 401k? Fair to them. Fair to the taxpayers.
Posted by: Tom W at January 2, 2008 10:31 PMTomW
I looked up on the ERSRI site and there is no longer an 80% payout under the new law; it’s down to 75% for state and teachers. They can retire age 50 with 29 years or 10 years age 65 with reduced benefits age 55. For municipal employees it’s any age with 30 years and 19 years age 58. It’s different for police, firemen and National Guard.
Also here is the newspaper report about 401K plans.
“01:00 AM EST on Sunday, December 23, 2007
BY STEVE PEOPLES
Journal State House Bureau
The state’s actuary recently found that moving to a 401(k)-style system would cost Rhode Island taxpayers $151.5 million next year and more than $520 million over the next seven years before the state sees any savings”.
My feelings are this would be on top of the current expanding ESTIMATED $450 million budget deficit, $600 million tax credit RIEDC just handed to 6 companies and ESTIMATED $4.7 billion 30 year pension fund unfunded liability (RI was only contributing 56% of it’s share where employees were funding 100%).
NOTE: I just found out today employees in the Hawaii pension fund a couple of years ago went to court over the unfunded liability and won a court order requiring the state to fully fund the unfunded pension libility.
Other factors affecting the RI budget are continued exodus of population which lends to lower tax revenues and might cause RI to lose a representative seat in Washington, DC; subprime loan scandal is reported now to continue into 2010 with RI leading New England states with foreclosures and bankruptcies thus leading to lower property tax revenues and lowering of community evaluations for property taxes. With lower property tax revenues to cities/towns and state cap on city/town local taxes plus level or lowered state school support, school system support will suffer also local public works services will suffer.
RI companies and state government have started to lay employees off. Today Oil prices reached $100 per barrel and the stock market fell plus the housing market is in freefall as it did during the 1980s recession.
If the above are any indicators, RI should be starting into a state-wide recession. 2008 through 2011 are not going to be good years for RI.
With the total cast and crew currently residing on Smith Hill, I can only see the budget deficit growing to over $1 billion and some real pain in RI.
I got to get my father out of RI.
Posted by: Ken at January 3, 2008 12:19 AMTomW
Typo fix!
"I looked up on the ERSRI site and there is no longer an 80% payout under the new law; it’s down to 75% for state and teachers. They can retire age 50 with 29 years"
Should be: I looked up on the ERSRI site and there is no longer an 80% payout under the new law; it’s down to 75% for state and teachers. They can retire age 59 with 29 years
Posted by: Ken at January 3, 2008 12:25 AM>>Should be: I looked up on the ERSRI site and there is no longer an 80% payout under the new law; it’s down to 75% for state and teachers. They can retire age 59 with 29 years
Ken,
I believe that those new figures only apply to employees who had less than ten years in when the changes were made - those hired in 1995 or later.
So the vast majority of teachers / state workers so far have been untouched. They need to take "pay their fair share" of reductions too.
As to the $520 million in cost before savings are realized, well, given the $5 billion in unfunded pension liabilities and $600-700 current estimate for unfunded OPEB liabilities, incurring $520 million in the short term to save multiples of that in the long term seems prudent to me.
Posted by: Tom W at January 3, 2008 3:56 PMTomW
You still have the municipal employees (cites and Towns) in the RI pension system that out number the state employees and teacher.
For municipal employees it's any age with 30 years and 19 years age 58.
Police, firemen and National Guard are also in the system.
Posted by: Ken at January 4, 2008 12:11 AM>>You still have the municipal employees (cites and Towns) in the RI pension system that out number the state employees and teacher. For municipal employees it's any age with 30 years and 19 years age 58. police, firemen and National Guard are also in the system.
So let the municipalities freeze and convert to a 401K as well ... or declare bankruptcy (which is probably inevitable for Providence / Cranston / Woonsocket in any case).
Posted by: Tom W at January 4, 2008 10:33 AM