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In Tiny Rhode Island, a Massive Public Pension Crisis Looms

February 24, 2011 at 6:25 PM EST
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As part of his continuing coverage of Making Sen$e of economic news, Paul Solman examines how Rhode Island is one of many states looking to cut pensions for public employees in the face of massive budget deficits.
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JIM LEHRER: Next tonight, the battle between states and unions over pensions.

The biggest fight in Wisconsin and Ohio remains over new bills to curb or end collective bargaining. In Wisconsin, state police searched for Senate Democrats, who are refusing to return for a vote, even as the Assembly moved closer to passing a bill.

But in many states, there are debates as well over demands to change pensions.

NewsHour economics correspondent Paul Solman has our story from Rhode Island. It’s part of his ongoing reporting on Making Sense of financial news.

GINA RAIMONDO, Rhode Island general treasurer: The fundamental financials underpinning our state and our economy don’t — don’t present a very strong picture.

PAUL SOLMAN: Diplomatic understatement from former venture capitalist Gina Raimondo, a Rhodes Scholar who became Rhode Island treasurer last month to tackle its massive fiscal challenge.

The nation’s smallest state, barely a million strong, has a $300 million deficit, mainly due to its pension system, in worse shape per taxpayer than California, Illinois, New Jersey and certainly Wisconsin.

GINA RAIMONDO: Today, Rhode Island has a $5 billion unfunded liability, which is the highest unfunded liability per capita of any state in the country.

In 1998, our budget was paying $145 million into the pension. This year, we will be $335 million. And five years from now, it will double again.

PROTESTERS: Kill the bill! Kill the bill!

PAUL SOLMAN: Unionized, Democratic Rhode Island is flying under the radar right now, as Wisconsin and other states openly attack public sector benefits. But it’s a case study of a national crisis: unfunded pension promises to retiring government workers, some $3 trillion worth nationwide.

In Rhode Island, as elsewhere, the root cause is plain and simple: Governments gave workers benefits instead of raises, salting away a pittance to pay for them.

GINA RAIMONDO: So, I could promise you today, in 25 years, when you retire, you will have a very rich benefit. And by the time you come to collect, I’m no — you know, I’m long gone. I’m no longer in office.

And I believe the time has come to fundamentally, structurally fix the system.

PAUL SOLMAN: So, what’s the hit that the average pensioner of Rhode Island is going to take? What’s the haircut, as it’s called?

GINA RAIMONDO: I think it could be a significant hit.

PAUL SOLMAN: Twenty percent, 30 percent hit, it could be?

GINA RAIMONDO: It could be. It could be.

You know, in Rhode Island, we have 105 pension systems. So, for certain sections, the haircut will be significant, you know, 30, 40-plus percent. For other, you know, systems, it will be less.

PAUL SOLMAN: But at the union local for state workers, employees say they’ve helped build the pension fund.

MARY RILEY, clerk: And a lot of people don’t realize that we pay into it, that we have paid since I have gone to work every pay period — and I have never skipped, because it gets taken out — 8.75 percent of my salary.

PAUL SOLMAN: Mary Riley, a clerk at a state college, says the retirement age has already been raised, benefits reduced. She no longer knows what her pension will be.

MARY RILEY: You know, it could be anywhere from maybe $12,000 to, I don’t — I don’t know.

PAUL SOLMAN: What did you think you were going to have?

MARY RILEY: You know, I was hoping to have maybe — maybe $20,000, $22,000, you know?

PAUL SOLMAN: A year.

MARY RILEY: A year.

PAUL SOLMAN: And now it could be as low as $12,000, you think?

MARY RILEY: Yes. I really don’t know.

PAUL SOLMAN: Do you understand the feeling out there among a lot of people that is: I’m a taxpayer. You’re a state worker. I’m paying for you. I’m having a hard time. Maybe I have lost my job. You should share the pain?

MARY RILEY: We have made concessions, and we have shared the pain. It’s not that we’re greedy. We have shared the pain.

JOANN TEIXEIRA, state worker: You keep downsizing your life, downsizing your life, and, eventually, you have downsized it so much, that you just can’t give.

PAUL SOLMAN: JoAnn Teixeira left the private sector to work for the state as a cook, taking a pay cut to $17 an hour.

JOANN TEIXEIRA: I wanted to have a scheduled paycheck every month and know that I was going to be able to retire someday from that.

PAUL SOLMAN: So, a safe, solid pension was crucial to your decision?

JOANN TEIXEIRA: The pension and the health coverage was crucial — was crucial, yes.

PAUL SOLMAN: Local union president Michael Downey joined the University of Rhode Island as a plumber 31 years ago.

J. MICHAEL DOWNEY, Rhode Island Council 94, AFSCME: You told me, come to work. I made a decision to come. That was my choice. No one forced me.

And it wasn’t because I thought there was some great job. I was looking for stability and a pension. And I was paying into a pension. And at the end of the day, or towards the end of their career, they say, no, you’re not at the finish line yet. We’re making one more adjustment.

And it’s pitiful. We have litigation as we speak about those changes. And the argument is that we feel as though vested and people that were told a certain promise, the promise should be kept.

PAUL SOLMAN: But without dramatic changes to the pension system, Rhode Islanders face dramatically higher taxes and/or austerity.

In the rotunda of the statehouse, the lofty ambitions of Rhode Island: a just legal system, higher and higher education, fine arts, but says the treasurer:

GINA RAIMONDO: There’s only so many resources. And to fund these unfunded pension liabilities, the money has to come from somewhere. And where it’s coming from, it’s siphoning off capital from public schools, public buses, public parks, public libraries and higher education.

MARGARET HOLLAND MCDUFF, Family Service of Rhode Island: So, this is the home that was for eight boys that came from abused and neglected families. And upstairs here was the bedrooms where they used to sleep at night.

PAUL SOLMAN: This house was set up for kids in state custody. Adopted by the Boston Red Sox, on Rhode Island Day, the kids went to Fenway Park. Budget cuts shut the home in 2009.

MARGARET HOLLAND MCDUFF: As you can see, the beds have been dismantled, now that the boys are gone. And I just have so many memories of this place and the boys that lived here. And I remember a young boy, Jeffrey, who was in this room, who was just — came to us so broken and so hurt and vulnerable and left us just a thriving young man.

PAUL SOLMAN: The boys were all placed elsewhere. But down in the kitchen, Margaret Holland McDuff of Family Service of Rhode Island agonized, what’s next?

MARGARET HOLLAND MCDUFF: The soup kitchen will be closed. The case management and the financial literacy programs for those families will be closed. The employment placement services will be closed. It’s critical moral decisions that our leaders have to make. Are they going to continue to fund systems like pension systems that we already know are unsustainable and cut services to the vulnerable?

PAUL SOLMAN: But when people say to us, look, I took the job with the state of Rhode Island because there was going to be a stable and dependable pension, isn’t that fair?

MARGARET HOLLAND MCDUFF: The game has changed. People’s salaries have changed. People’s stability has changed. People’s idea that they’re going to work at the same company for 30 years has changed, as they have gotten that pink slip that they never expected.

These children are the most vulnerable in our community. I mean, in any other community around the world, this is — these are the kind of children that a village gets behind. And I want to know that Rhode Island is going to be that kind of village for these children.

PAUL SOLMAN: But if Rhode Island and states like it can’t solve the pension problem, can’t raise taxes, can’t cut more, their only other source of funding could dry up: borrowing in exchange for their IOUs, their municipal bonds.

Northwestern University finance Professor Josh Rauh:

JOSH RAUH, Northwestern University: I think my most likely scenario is that there would be one or two major municipalities, potentially even a state, that runs into a — into a crisis, where they can’t roll over their short term debt. So I think that’s the direction that we’re heading in, and it’s a very serious situation.

PAUL SOLMAN: In short, a municipal bond default, in which bondholders get paid less, maybe far less, over a longer period of time. No wonder interest rates on muni bonds are up.

Treasurer Raimondo says there’s no chance of default, but that means a pension overhaul.

GINA RAIMONDO: This problem of the pension, Rhode Island faces it; every state in the country faces it.

The unfunded pension liability nationwide is a $3 trillion problem. TARP, we were prepared as a country to put aside $700 billion. The bailout of Fannie and Freddie was $400 billion. They all pale in comparison to the enormity of this financial challenge.

And marginal change won’t fix it. Tinkering won’t fix it. Pretending we don’t have a problem won’t fix it. Looking in the eye of this enormous financial problem honestly and recommending fundamental changes to a system, I believe, is the solution.

PAUL SOLMAN: Fundamental changes that, even if the problem isn’t as dire as Raimondo claims, no one in Rhode Island is yet willing to make.