October 14, 2007

Rhode Island Crossword Clue: Common Knowledge, Perhaps. Answer: Our Demise.

Justin Katz

Knowledge of the approaching precipice in Rhode Island — or rather, the precipice that Rhode Island is approaching — has moved off the commentary pages in the Providence Journal. Here's Lifebeat section columnist Mark Patinkin today:

"Fascinating, Spock. It seems this planet has organized itself into the perfectly self-destructive organism."

"Indeed, sir. As one example, the normal life forms here — taxpayers, they’re called — spent $350 million this year on the state pension system. Next year, it will be $400 million, meaning taxpayers have gone from footing 10 percent of government pension costs in 1999 to 25 percent today. Not to mention that the unfunded pension liability has risen to a preposterous $4.9 billion. But even whisper the words 'pension reform' and you'll be lynched."

"Madness, Mr. Spock. Pure madness. There must be a solution. Can't this planet attract new businesses to expand the tax base?"

"Not likely, Captain. Just last week, an objective tax-research group in Washington ranked Planet Rhode Island dead last in the whole galaxy of 50 planets for business climate."

... "There's got to be a solution. Can't this planet attract more high-net-worth taxpayers?"

"Indeed, the 2 percent of Rhode Islanders who make over $200,000 pay 44 percent of all taxes, but oddly, Captain, they are being chased away. If you start to make a high income here, the state will tax you an unheard of 9.9 percent, not to mention that property taxes are almost the highest in the galaxy. All high-income life forms here are fleeing to planets like Florida, which have lower taxes. And ironically — is that the word, Captain? — such low-tax states have budget surpluses."

"Why doesn't Planet Rhode Island try the same system?"

"Like I said, Captain, it's a strangely illogical place."

And here's Business section columnist Neil Downing:

Higher-income people aren't stupid. They know how much they pay overall in taxes — often 50 percent or more of their individual incomes, especially when federal and state income tax and self-employment taxes are counted.

They typically don't hold jobs in government or in nonprofits; they run businesses, creating wealth and jobs and money for charities — and they pay lots and lots of taxes.

That's why we need to keep them here, not in Florida.

Still want to raise taxes even more? Fine. If you're employed in the government or nonprofit sector, maybe it won't matter, at least not right away. But it will in the long run.

And if you're employed in the private sector, you may feel the impact far more quickly.

So while you're reading the usual blather from the usual commentators about taxing the rich, remember that seminar that's coming up in Warwick, and others like it.

Keep an eye on the airport, as well. Flights to Florida are leaving daily. Raise Rhode Island taxes even more, and maybe the owner of your business will be onboard, leaving Rhode Island.

Maybe your job will be leaving Rhode Island, too.

The disheartening, even frightening, question to ponder is how deep the state will have to sink before this knowledge makes the leap to a medium with which even those who don't read the paper are familiar — say, their layoff letters and notifications that their public assistance is being cut.

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Love that column by Patinkin! And as you said, Justin, an unexpected topic for him to cover.

Posted by: Monique at October 15, 2007 12:07 AM


The State of Indiana Legislative Services Agency Office of Fiscal and Management Analysis completed “A Comparison Study of State Employee Pension Programs” across 50 states and reported back to Indiana Pension Management Oversight Commission on October 25, 2006 the results.

50 state retirement system information was also utilized from the “2006 State Employee Benefits Survey: Benefits in Effect January 1, 2006” authored by Workplace Economics, Inc., Washington D.C., 2006

Report link: http://www.in.gov/legislative/publications/PensionStudyReport.pdf

Quotes from report:

“On the other hand, Rhode Island has the lowest state effort of the states with a defined benefit program, with a present value of $16,168. Rhode Island employees are required to contribute the 3rd highest rate of 8.75% of salary, resulting in a present value of employee contributions of $32,903, in order t receive a $5,001 annual benefit (with a present value of $49,071 and a ranking of 32nd).”

“Rhode Island requires the highest employee contribution level with a present value of $61,670. However, coupled with the 43rd highest state effort, the annual benefit is only 30th in the nation at $12,093, a present value of benefits of $118,665.”

Which means State of RI has one of the lowest state efforts for pensions (defined benefits) ranking 43rd out of 50 and has the 3rd highest % of required employee salary contribution in the nation and ranks 30th out of 50 nationally for value of the benefit.

After reading this report, and hearing how the unfunded liability will cost RI taxpayer millions, one has to wonder if there have been extra hands in the pension fund cookie jar or the State of RI just has not been paying their share. I heard of other states raiding the retirement fund and being subjected to law suits forcing funds to be returned under court order.

State of RI employees and municipal teachers retirement contributions are automatically deducted from their pay and sent to the State of RI Retirement System

Posted by: Ken at October 15, 2007 12:19 AM


One of the considerations with defined benefit programs that such folks as Bob Walsh like to elide is that they are prone to being raided (and that the sort or politicians whom unions like for creating laws favorable to them are conceivably more likely to do such raiding).

At any rate, I've heard of the potential for the lawsuits that you ponder, and I've put them among the looming possibilities that will sink this state in the near future. Indeed, if I've reservations about public school teachers now, I guess I have to imagine forward to a time when their pensions start disappearing if I'm to make a wise decision about whether to go with private school for my children.

Posted by: Justin Katz at October 15, 2007 6:12 AM


That's a shell-game argument. Whether you're talking about the "employee contribution" or the "state contribution", all them money originates from the same source: taxpayers. The only numbers that really matters, both for the purpose of determining the contribution to the system AND for determining employee compensation, is the sum of the two.

In whatever combination you'd prefer, you can't increase the contribution into the pension system without increasing the costs to the taxpayers.

Posted by: Andrew at October 15, 2007 8:54 AM


You cannot have it both ways. If you want to state that "it all comes from the taxpayer", then, to the extent that the employee contribution to pensions exceeds national averages, then the average salary figures should be adjusted downward to reflect that fact.

Posted by: Bob Walsh at October 15, 2007 11:55 AM

It's all academic unless one takes all the pertinent information and formulates an "apples to apples" comparison.

For example, beyond the "higher than average" employee pension contribution in RI, consider that our "benefits" may well be higher yet ... much higher.

In RI pension benefits are a high percentage (70-80%) not of lifetime earnings, but of the highest consecutive three years' earnings! Likely this is a considerably more generous formula than that of other states (and it is far, far better than private sector pension benefit formulas, and far, far better than the Social Security formula).

Speaking of Social Security, many (and I believe most) state employees and teachers are exempt from Social Security, so they don't have that FICA tax to pay (other than Medicare).

So while their contribution to the pension plan is actually comparable to the Social Security "contribution" that the rest of us are forced to make (their rate falls between the Social Security employee / self-employed "contribution" rates), their pension benefit is multiples of the Social Security benefit.

Also consider that for most current RI state employees and teachers there is NO minimum retirement age to begin collecting their pension (i.e., no minimum retirement age for those hired before 1995). Odds are pretty good that this is more generous than other states' pension plans, which likely have minimum retirement ages across the board.

No waiting until 63-67 like us Social Security schmucks, uh uh. Our state employees / teachers stop "contributing" to the state pension system years (if not decades) before we stop "contributing" to Social Security, because they stop working years (if not decades) before the rest of us, and start collecting years (if not decades) before the rest of us.

Posted by: Tom W at October 15, 2007 1:35 PM


Trust me, I only want it one way. I want to count everything that goes to the employee, whether in the public or private sector, towards employee compensation.

Let me ask you this. We've discussed in these comments before and even agreed, I think, on how defined-benefit and defined-contribution plans can be pretty similar under ideal conditions, i.e. when they're both "fully funded" over their lifetimes and when they grow at reasonably-projected rates, allowing everyone to get out what they need at the back-end.

For a private-sector, 401(k)-style plan, I would say, therefore, that total compensation received by an employee [for these two components of compensation] would equal salary + any company match.

If a similar statement can't be made about defined benefit plans, i.e. that total compensation equals salary + state contribution to the pension fund, how can it be claimed that both types of plans involve about equivalent costs?

Posted by: Andrew at October 16, 2007 9:33 AM


In the long run, a DB plan offers a better benefit at a lower cost to the state than a DC plan, and provides several additional advantages in attracting and retaining employees and giving greater predictability to retirement patterns and stability to retirees, all good outcomes from a public policy perspective.

Posted by: Bob Walsh at October 16, 2007 3:58 PM
a DB plan offers a better benefit at a lower cost to the state than a DC plan

But only if government folks can keep their hands off that huge stash of money. Unfortunately, the politicians most likely to hold the line on spending retirement money are probably also likely to hold the line when it comes to public sector unions (one would think). What a dilemma!

Posted by: Justin Katz at October 16, 2007 6:37 PM

>>In the long run, a DB plan offers a better benefit at a lower cost to the state than a DC plan, and provides several additional advantages in attracting and retaining employees and giving greater predictability to retirement patterns and stability to retirees, all good outcomes from a public policy perspective.

The mere fact that a DB plan fosters the "job for life" mentality and creates a set of "golden handcuffs" encouraging slackers to hang in there until they max out their vesting means that DB plans are bad from a public policy perspective.

Posted by: Tom W at October 16, 2007 8:49 PM

A DB plan offers a better benefit at a lower cost to the state than a DC plan
How exactly does a defined benefit plan create more money to pay out than any other type of plan does?

Posted by: Andrew at October 16, 2007 11:14 PM
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