November 17, 2006

Rhode Island is in a 360 Million Dollar Hole Over the Next 2 Years

Carroll Andrew Morse

Scott Mayerowitz of the Projo provides some specific numbers on the projected state budget deficits, for this year and next...

But state government is also spending more than was budgeted, particularly in the Department of Corrections and the Department of Children, Youth and Families. Additionally, a reduction in the state's work force hasn't been fully implemented.

State lawmakers face not only the $104.8-million deficit this year, but an expected $254-million deficit for the fiscal year that begins on July 1.

Remember, this is what Rhode Island is facing during a national economic boom. What's going to happen to RI in the event of an economic downturn?

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why? why? why did you have to bring this up?

can't we all just live in ignorant bliss; continue to kneel at the altar of the unions; and have deaf, dumb, and blind belief that our unfunded pension system will somehow replenish itself?

i don't know about you, but personally i'm banking on the deficit fairy to solve our problems

Posted by: johnb at November 17, 2006 10:30 AM


Could there be any connection between offering the nation's most liberal welfare programs and rising DCYF and Corrections caseloads?

Of course not. All we have to do to solve these problems is spend more on our teachers, pass all the welfare program expansion bills that Liz Roberts introduced last year, give the correctional officers union everything they want, make no cuts in public sector pension and health benefits, make the sales tax apply to any transaction that takes place in RI (except legal fees, of course), and raise income taxes on the evil rich and greedy corporations -- or is that greedy rich and evil corporations (I'm never quite sure if I'm using the latest progressive lingo).

Can't you just wait for Bob Walsh, Frank Montanaro, Marti Rosenberg and pony tail man to start offering their "solutions" to our little $360 million dollar problem?

Can you spell T-R-A-I-N W-R-E-C-K?

Posted by: John at November 17, 2006 10:33 AM

There is a God.

Today I actually heard somebody mention, in all seriousness, the idea of floating a $5 billion pension funding bond to "solve" the underfunding crisis in our state employee pension plans.

Where to begin with this magnificent idea?

Let's see. First, let's be clear about how these transactions work. The bond proceeds are used for risk arbitrage -- that is, they are issued in risky equities, hedge funds, real estate and the like. If the return on those investments isn't sufficient to make the pension (and, one presumes, post retirement health care) payments that are due, the taxpayers get the bill. To put it differently, the issuance of the bonds doesn't extinguish the government's pension liability.

Second, because the bond proceeds would be used for risk arbitrage, the bonds would not be tax exempt. Given that issuing $5 billion in RI General Obligation bonds would radically change our risk profile, it would be a stretch to get a BBB rating. If that were possible, the yield on those bonds today would be about 6% per year. That means annual interest payments -- which would come out of the General Revenue budget -- of about $300 million.

Granted, some of that would be offset by reduced pension contributions. But consider the other impacts. First, for years RI has played a dangerous game of funding our transportation maintenance expenses -- and bond interest -- with the proceeds from new bond issues. With all the state's debt capacity used up, that game is over, and DOT's General Revenue budget must sharply increase -- or its maintenance be seriously cut back. It will also be much harder to issue new bonds for new roads, bridges and the like.

The radical increase in the state's indebtedness, on top of its weak economy and structural problems (poor educational and social welfare system efficiency, just for starters) will also sharply reduce cities and towns ability to tap the bond market. There will simply be too much risky Rhode Island paper in the market. If these issuers are able to come to market at all, it will only be after they have paid heavily for bond insurers to back their debt. So say good bye to new schools, purchase of open space, new dorms at URI, or even those affordable housing bonds so loved by the progressive community.

Now think about how the increased interest payments on these bonds (along with higher spending on teacher comp and on social welfare) will be funded --by making the sales tax applicable to all transactions in RI, except (naturally) legal fees. Oh, and probably by increasing the income tax on the evil rich and greedy corporations just for good measure.

But there is a bright side. All GO bond issues have to be approved by the voters at election time. Just picture the campaign: SOS 2: The Taxpayers Strike Back.

Think about how warm and fuzzy voters will feel about sacrificing their debt capacity and raising their taxes (forget about property tax reduction, and funding for health insurance subsidies for small business)all to fund the pensions of those delightful public sector employees who have provided them with such friendly, respectful, effective and efficient service over the years. Just look at how well our public school students perform. Or how well our social welfare programs perform. Or how much we spend on fire protection. Or teachers comp. Oh, and what is on the dinner menu tonight at the ACI?

Yes, folks, if this pension bond idea gets any traction at all (perhaps Bob "I used to be a banker" Walsh will lead the campaign for it)we will finally have a very public referendum on the corrupt, inefficient and ineffective morass that passes for government in Rhode Island.

Personally, I can't wait.

Posted by: John at November 17, 2006 7:56 PM


There's a typo in there. The bond proceeds are INVESTED in riskier assets...not issued.

Posted by: John at November 17, 2006 10:00 PM

Good analysis, John. The call to pay for public sector pensions with bonding is grotesque and a major red flag that the state's (Democrat) elected officials have gone way over the edge with the benefits it offers to public employees.

Posted by: SusanD at November 18, 2006 12:28 PM