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Russell Moore: Viva Detroit, Or, It Could Happen In Rhode Island

Monday, July 22, 2013

 

The cautionary tale of Detroit's bankruptcy should not be lost on Rhode Island. Photo: Jason Paris

Motown really should have listened to one of its famous sons. Detroit native Herbert Stein once wrote that “if something cannot go on forever, it will stop.”

Stein, who died in 1999, was an economic adviser to Presidents Richard Nixon and Gerald Ford and a Wall Street Journal contributor and professor of economics. It’s interesting that it takes someone with those types of credentials to make a point the town drunk should understand, yet everyone still seems to ignore.

That truth has been being ignored in Detroit long after it was plainly obvious that the city failed and was failing to adapt to the loss of its car manufacturing glory days, yet kept, even increased, its governmental cost structure. It’s Rust Belt decay.

RI/Detroit: Too close for comfort

Rhode Island is nowhere near the Rust Belt, but we have more than a few scary similarities—most glaringly, our transition from a manufacturing economy to…something else. Fortunately, Rhode Island has more options to capitalize on tourism and the service industry, but the economic similarities are still too close for comfort. In a scary way Rhode Island continues to ignore hard the economic truths the same way Detroit did.

We’ve really already been there and done the bankruptcy thing. Before there was Detroit, there was the Central Falls’ bankruptcy—an event, like Detroit, that some never saw coming. For some reason, it’s unfathomable that a city, like any other entity, can go bust.

The news hit the state’s media like some kind of shock waves. Yet the fundamentals were always troubling and the truth was that CF was on a crash course with bankruptcy for decades.

The Central Falls turnaround?

Central Falls has apparently turned a corner and even received a bond upgrade last week, but the turnaround was performed on the backs of creditors—mostly city retirees who will be paid roughly half of what they expected to receive in pensions. Detroit will be no different. But none of the creditors are without blame either. The bondholders shouldn’t have bought risky investments, and the city employees who made up Detroit’s political machine shouldn’t have voted for people who were going to put their retirements in jeopardy.

Here at home, Central Falls has been since dismissed by special interest groups as some isolated case, but the economic circumstances there, and in Detroit are vastly similar to other Rhode Island urban communities. Huge liabilities, and high unemployment coupled with decreasing population are always a recipe for trouble. Unfortunately, those factors plague Providence, and the rest of the state’s urban core.

Where Detroit outperforms RI

Detroit’s population has decreased a whopping 26 percent since 2000—a comparison of the two latest censuses. Rhode Island has lost population every single year since 2004. According to WPRI’s Ted Nesi, the state’s prime age working population—those between the ages of 25-54, plummeted by 10 percent from 2006-2012. That loss was offset by an increase in senior citizens. Rhode Island is graying That leaves us with few to pay the bills.

Unemployment in Detroit is a ghastly 18.6 percent. Rhode Island’s unemployment rate is a much lower, but still too high 8.9 percent. And the state’s total workforce is actually lower than it was a decade ago. And in Providence the unemployment rate still registers in the double digits.

And then there are the liabilities. Detroit is facing roughly $18.5 billion in liabilities, which will be slashed by simply welching on them—there’s no other potential way. Rhode Island, and its cities and towns, are also facing devastating liabilities—particularly in retiree health care costs.

The city of Cranston’s pension plan for its police and firefighters contains a liability of roughly $260 million, which means it’s just 17 percent funded. Mayor Allan Fung recently agreed to pension concessions from the city’s retirees and workers, but the agreement merely suspends cost-of-living adjustments temporarily.

Providence’s agreement wasn't much different. It slowed the bleeding, but the city will struggle with massive liabilities well into the future. Even after agreeing to suspend pension COLA's, the Providence pension plan still only had $423 million in assets set aside to cover liabilities of $1.32 billion.

Who sees the danger? 

Fortunately, there are some Rhode Island politicians who understand the magnitude of Rhode Island’s liabilities.

Thanks to the forward thinking by Rhode Island’s two most recent General Treasurers, the state government isn't facing the insurmountable financial pressure it once was from the underfunded pension system.

Former Treasurer Frank Caprio (who will run for the office again next year), became the first Rhode Island public official to propose creating a two-tiered pension plan for Rhode Island state employees and teachers, which relies on a small defined benefit plan and a 401(k)-style retirement plan. The plan mirrored the federal government's retiree plan for its workers. For his efforts, Caprio drew the ire of the state workers and teachers unions who campaigned relentlessly against him.

But current Treasurer Gina Raimondo, who is eyeing her own gubernatorial bid, picked up the ball and ran with it. Thanks largely to her force of will, reliance on data, and a relentless public relations campaign, the reforms became law.

It takes a reformer...

If Rhode Island is going to avoid the same fate as Detroit, it’s going to take reformers like the two previously mentioned to continue leading the charge in slashing the state’s liabilities.

Contrary to what many seem to believe, these bankruptcy filings aren’t something that come out of nowhere. Instead, they build up over years due to poor economic trends that are ignored by politicians and missed by the media. It doesn’t take a Herb Stein to know that Rhode Island’s economic trends are not promising and our liabilities are too high.

The truth is, Rhode Island can’t continue raising taxes and fees in order to pay for its expensive government. People will continue to leave Rhode Island, and in the next decade, we’ll see a wave of bankruptcies hit our municipalities. Unfortunately, like Detroit, we can no longer have the big government we want, but we’ll have to settle for the government we can afford. That means we need to continue to aggressively cut costs.

That’s the problem with hard truths—people dislike hearing them. Special interest groups can effectively shoot the messenger by throwing him or her out of office, but the liabilities remain.

Like a person with a chronic illness, the longer you ignore the problem, the more severe it gets. Unlike Detroit, we’d be wise to heed the wisdom of Herb Stein.  

A native Rhode Islander, Russell J. Moore is a graduate of Providence College and St. Raphael Academy. He worked as a news reporter for 7 years (2004-2010), 5 of which with The Warwick Beacon, focusing on government. He continues to keep a close eye on the inner workings of Rhode Islands state and local governments.

 

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