Even more broadly, it reveals a bigger story about the dereliction of duty by state and local politicians generally, including the financial fate that awaits many states and localities.
The single biggest issue is public pension plan funding. Rhode Island, along with many other states, has made so many promises to its workers and retirees that it can't keep all of them. It doesn't have the money.
Thus, many public employees and retirees won't get all the benefits that have been promised to them, unless of course, the state raises taxes enough to do so. And those tax increases would be whoppers indeed.
That dilemma triggers an even bigger issue for states and municipalities. If we can't keep all of our promises, which ones will be kept and which will be broken? And how and when will we decide what we will do?
In other words, when will our states and cities come to terms with this rather ugly reality? Ignoring the financial shortfall won't make it go away and the longer we wait, the worse things will get. It calls for priorities to be established and communicated clearly, so people can try to react to the changes from what they believed would happen.
To put it bluntly, there isn't enough money to fulfill the promised retiree benefits or staffing, compensation and service levels for public-sector state and local workers. Accordingly, something has to give sometime soon. While for Rhode Island that sometime is now, for other states and cities, that sometime will come soon enough.
A fundamental tenet of economics is the connecting link between scarcity and choice. Since we can't have everything we want whenever we want it, we have to make choices and establish priorities. That's a fact of economic life.
So in the public sector, if we choose to continue to pay current retirees all they've been promised, current and future workers will have to take less or taxpayers will have to pay more. Or we'll have to provide fewer services, employ fewer teachers or whatever else will make the books balance.
We have choices about what specifically we want our state and local government to do, but we have no choice about matching inflows with outgoes.
So will it be more or fewer teachers and first-responders, city workers and the like, and/or reduced compensation, health care benefits, lower pensions and so forth? And what level of state and local taxation will we choose?
The sickening part of the whole public-sector underfunding and out-of-money story is the apparent total neglect by politicians concerning the long term ramifications of the short term decisions they've made. So the chickens have now come home to roost. It's time to choose our future.
Here are a few excerpts from the referenced article concerning the enormity of various financial problems facing many states and cities:
"The smallest state in the union, it turns out, has a very big debt problem. After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo (state treasurer) has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents. But the scary thing is that no one really knows."
Later the broader public employee pension problem and its effects on public sector spending is described this way:
"But the nightmare scenario is that Ms. Raimondo has seen the future of America, and it is Rhode Island. As Wall Street fixates on the financial disaster in Greece, a fiscal wreck is playing out right here. And the odds are that it won’t be the last. Before this is over, many Americans may be forced to rethink what government means at the state and local level.
Economists have talked endlessly about a financial reckoning for the United States, of a moment in the not-so-far-away when the nation’s profligate ways catch up with it. But for Rhode Island, that moment is now. The state has moved to safeguard its bond investors, to avoid being locked out of the credit markets. Last week, the General Assembly went into special session and proposed rolling back benefits for public employees, including those who have already retired. Whether the plan will succeed is anyone’s guess.
Central Falls, a small city north of Providence, didn’t wait for news from the Statehouse. In August, the city filed for bankruptcy rather than keep its pension promises to its retired firefighters and police officers.
Illinois, California, Connecticut, Oklahoma, Michigan — the list of stretched states runs on. In Pennsylvania, the capital city, Harrisburg, filed for bankruptcy earlier this month to avoid having to use prized assets to pay off Wall Street creditors. In New Jersey, Gov. Chris Christie wants to roll back benefits, too.
In most places, as in Rhode Island, the big issue is pensions. By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less."Whatever the true state of affairs, the most shameful aspect of our financial crisis is that states and municipalities have no comprehensive plan or even proposal that is being pursued, successfully or even unsuccessfully.
It's as if the longer term financial catastrophe is not their problem to address or help to solve, but of course it is just that. Alongside citizen taxpayers and public employees, both current and retired, choices will have to be made about how to apply limited resources to the many competing choices available for the overpromises that have been made.
Meanwhile, public employee union leaders take a very narrow view of the situation and insist that elected officials live up to all contractual obligations contained in existing public employee benefit plans.
While these union officials don't offer any suggestions as to who should suffer or take less while their members are kept whole, they only argue that their members are entitled to everything that's been promised to them. Their position is that where the money comes from is somebody else's problem, aka taxpayers or other public sector workers not represented by their union.
Consider this exchange between state treasurer Raimondo and the head of a local firefighters union:
"That evening in September, Ms. Raimondo walked into the Cranston Portuguese Club to face yet another angry audience. People like Paul L. Valletta Jr., the head of Local 1363 of the firefighters union.
“I want to get the biggest travesty out of the way here,” Mr. Valletta boomed from the back of the hall. “You’re going after the retirees! In this economic time, how could you possibly take a pension away?”
Someone else in the audience said Rhode Island was reneging on a moral obligation.
Ms. Raimondo, 40, stood her ground. Rhode Island, she said, had a choice: it could pay for schoolbooks, roadwork, care for the elderly and so on, or it could keep every promise to its retirees.
“I would ask you, is it morally right to do nothing, and not provide services to the state’s most vulnerable citizens?” she asked the crowd. “Yes, sir, I think this is moral.”"
So what's the fair or moral thing to do? Well, it brings to mind the expression that where you stand depends on where you sit. Stated another way, we tend to skew our own beliefs to those which will further or otherwise accommodate our self interest. That's our very human view of fairness and morality.
Thus, fairness is in the eye of the beholder.
The biggest shame of all this failure of public funding to match public sector promises is the complete failure of the entire public sector budgeting and financial planning process. The political choices are focused on the next election and ignore the effects those decisions will have over the next thirty years.
And union leaders simply are out to get all the money they can from the taxpayers. Since nobody is looking out for future taxpayers, they get the bill. That's unfair but true.
In the end, we will only raise so much money from the citizens to pay for the goods and services provided by the public sector.
And the state and local government financial books will have to balance. We can't continue to spend and commit to spend more money than we have.
Thanks. Bob.
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