The Coming Collapse
Thursday, February 10, 2011
I guess it’s fitting that a public conversation about gambling in the state has consumed some attention this week. As the new Administration and other state leaders frantically search for some kind of solution to our mounting debt and unemployment problems, risky game playing seems an adequate analogy.
Rhode Island now finds itself caught in a vicious circle of debt, swirling between not one but two major insolvent funds. In recent weeks it’s been reported that the state’s unemployment trust fund, which pays out unemployment benefits to the state’s 60,000-plus jobless Rhode Islanders, has racked up hundreds of millions in borrowing from the federal government because the fund is depleted. Payback time has now come for those loans—despite the state continuing to borrow more—including a very recent $55 million dollar loan request at the close out of last year, which added to the already $225 million borrowed. The Department of Labor and Training (DLT) recently advised that the first $10 million payment to cover interest is due by end of the summer. Here’s a basic demonstration of the circular problem: as the unemployment fund was overwhelmed and then depleted—and then the borrowing started—the state levied new monthly unemployment insurance taxes ($57 more per worker for 2011) on companies to try and use those new revenues to cover the costs of the borrowing and replenish the fund. But the problem is magnified as the increased unemployment insurance taxes are all but certain to guarantee that the few healthy businesses will have NO INCENTIVE to hire any of the jobless—which won’t help curb the unemployment problem—and so the jobless claims pressure on the fund will only continue—and so the borrowing will only deepen. Hence goes the viciousness of the circle.
Meanwhile, new state Treasurer Gina Raimondo has sounded her own warnings of alarm recently about our other, very troubling unfunded account, the state pension fund. Raimondo rose above the fray and told Rhode Islanders the plain, hard truth they are not hearing from their Governor: the insolvency of Rhode Island’s pension fund has now crossed into dangerous thresholds. She emphasized in order to pay out retiree benefit payments; the state is eating into the principal every month, noting that last year the pension fund paid out $331 million more than it took in—and that dangerous gap is increasing. On the heels of that news, came word that we are facing an SEC investigation into how the state represents its bond offerings with respect to disclosing the extent of the state’s pension liabilities. Though we are not the only state presently under SEC scrutiny for pension debt disclosures, the SEC probe should serve as a Wall Street wake-up call to all our elected officials that our unfunded pension liabilities, now tabbed at close to $5 billion, not only threaten to devour all other spending needs, but now could be jeopardizing our struggling cities and towns’ ability to borrow money. What will Rhode Island towns do if they cannot access bonds for school building upgrades, utility construction projects and all the rest?
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTIn fact, insolvent town managed pension funds are triggering a more immediate peril and we can expect to see a parade of stories like the one coming out of the City of Cranston in recent days. Cranston was once a well-funded, proudly maintained middle-class stronghold with highly regarded schools and a regionally recognized competitive sports program. But now the pension obligation debt towering over Cranston is a painful but important one to watch. The pension tab has now topped a quarter of a billion dollars—$245 million plus $50 million in health care costs—for police and fire retirees and their families. More than Central Falls, which was already partly under state jurisdiction before its bankruptcy, Cranston’s pension debt mountain, coupled with its present struggle to meet basic budget needs—is the foreshadow of the coming collapse of several core, middle class Rhode Island cities and towns.
Rhode Island is spinning in a treacherous twirl of its own design. If state leadership does not step in with substantial pension reforms this legislative session, we will find that now, caught in the circle, we have no way out.
Donna Perry is a Communications Consultant to the RI Statewide Coalition (RISC) www.statewidecoalition.com
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