April 29, 2008

Number One, in a Bad Way

Justin Katz

This gave at least a brief reprieve in a feeling of having company:

WHATEVER YOU TAX — and excessive regulation may also be viewed as a tax, since it forces companies to shell out money that might better be spent elsewhere — disappears, including, in the long run, revenues collected by the tax.

This is what is happening in Connecticut. The current budget is about $16 billion, slouching towards $18 billion; that's more than twice the bottom-line figure of the last pre-income-tax budget. Taxpayers and taxed companies are disappearing.

But then, the next day brought this:

Rhode Island stands alone as the only Northeastern state "in recession," according to economists who reported today that the state's economy hasn't been this bad in nearly two decades.

The Ocean State's employment figures, its foreclosure rates, and personal income growth are worse than its neighbors and national averages.

Rhode Island is one of just nine states in recession -- the next closest is Ohio -- while Massachusetts, New Hampshire and Connecticut have growing economies, according to Steve Cochrane, senior managing director for Economy.com, which is owned by Moody's Investors Service.

"Clearly, in the northeast, Rhode Island is a picture of weakness," Cochrane said. ...

Why did Rhode Island fare so poorly, given that most of the country has been hurt by the subprime mortgage crisis and subsequent credit crunch?

Cochrane cited these primary factors:

Rhode Island is losing population at a rate that he likened to the exodus in Silicon Valley after the dot-com bust. People returned to Silicon Valley, he said. But there's no evidence to suggest that Rhode Island will soon increase its pool of potential taxpayers and consumers.

Cochrane notes that our size — as, essentially, a one-metropolitan-area state — means that we don't have the opportunity for balance, but that could just as easily be a positive on the upswing. To ensure that upswing, step one would be a voter-driven startlingly high turnover rate in the General Assembly. As the guy said, though, "there's no evidence to suggest that Rhode Island will soon" find its way out of this mess.

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We've got a legislature that runs the state, which in turn is jointly controlled by unions and welfare pandering liberals. Add in its pervasive political corruption.

Result: punitive taxes; lousy public schools; billions in unfunded pension liabilities; we are a welfare magnet and have a national reputation as being one of the bottom five states for employers.

As a result RI's economy is going into the toilet far more than other states.

So why should anyone be surprised? Entirely predictable; indeed the inevitable result of RI's public policy as enacted by the General Assembly.

What else would anyone expect after 70 years of Democrat rule? The only surprise is that it took this long for this house of cards of a State to start collapsing in on itself.

Posted by: Ragin' Rhode Islander at April 29, 2008 11:41 AM

The situation for RI is actually worse than the story suggests.

Five of the states "in recession" are experiencing a natural leveling off after recent years of tremendous (in some cases, double digit) growth: Arizona, California, Florida, Nevada and Tennessee.

Also, Arizona, Nevada and Wisconsin all have "rainy day funds" that were funded over the past few years in case they experienced a future recession. All four state have announced that they're tapping the reserves to ease the effects of recession. Wisconsin also has one of the lowest foreclosure rates in the country and hasn't been affected by the credit/subprime crisis. Ohio had money in other funds that it is shifting to its general fund.

RI has no other funds to tap and didn't experience the growth of other states during the past few years.

RI may be the nation's ground zero.

Posted by: Anthony at April 29, 2008 11:44 AM

Meanwhile, the Democratic "leaders" continue to dither on Smith Hill...I'm just not sure whether Nero or a deer frozen in the headlights is the best analogy.

Posted by: John at April 29, 2008 12:59 PM

--Meanwhile, the Democratic "leaders" continue to dither on Smith Hill...I'm just not sure whether Nero or a deer frozen in the headlights is the best analogy.

Probably Nero. I imagine that (unlike the deer appreciating the brightness of the headlights) that Nero survived the fire though the populace suffered greatly.

Also, the warnings of fiscal unsustainability and collapse absent major changes have been coming for years - and the Nero's on Smith Hill have kept on fiddling.

They Democrat leadership will too - indeed the dingbats of this state will reelect them (Please sir, can I have some more!").

Posted by: Ragin' Rhode Islander at April 29, 2008 1:14 PM

Let me point out that everyone on Smith Hill both Republican and Democrat are to blame for the fiscal mess Rhode Island is in. This fiscal mess did not happen overnight so there are a couple of administrations both Democratic and Republican to lay the blame.

Also taxpayers and voters have to also be held accountable because it’s their silent voices that allowed business as usual on Smith Hill. Remember, Smith Hill salaries are paid for by the voters. Smith Hill works directly for the voting population of the State of Rhode Island.

Typical Rhode Island fashion of mud slinging does not accomplish consensus in approaching agreement to solving problems. Rhode Island now has a major fiscal problem that if not properly addressed will approach a structural budget deficit of over $1 billion by 2010.

All of the states of the state economic health number have right out in front of everyone’s eyes. This blog has discussed many times the numbers and implications. The numbers have been public so for any state official to say they didn’t see this coming is a stretch of the imagination.

From The Pew Chartable Trust “Subprime Lending: Defaulting on the Dream” April 16, 2008 report. http://www.pewcenteronthestates.org/

“RHODE ISLAND IS A SMALL STATE WITH A BIG PROBLEM—one in 31 homeowners is projected to face foreclosure, primarily over the next two years, exceeding the U.S. average of one in 33 homeowners. Rhode Island is among the states with the highest projected rates of foreclosure due to subprime loans. Compounding that problem, more than half of the state’s homeowners could lose more than $7,000 on average in property values because of neighboring foreclosures.

Total estimated Rhode Island foreclosures December 2007 numbered: 5,530

Projected Foreclosures and Ripple Effect (Primarily 2008-2009)
• Estimated foreclosures from subprime loans 2005-2006: 8,170
• Number of neighboring homes experiencing devaluation: 244,424
• Decrease in house/value tax base from foreclosure effect $1,713 million.

Projected Foreclosures per Homeowner (Primarily 2008-2009)
• Owner occupied housing units 2006: 255,495
• 1 in 31 homeowners is projected to experience foreclosure on their home as a result of their high-cost loan

• 28 percent of all loans made in 2005-2006 were subprime
• 56 percent of all homeowners will likely feel the ripple effects of foreclosures from subprime loans
• Affected homeowners are expected to lose $7,008 on average in property values
• $1.7 billion is projected to be lost from the combined state and local tax base.”

Rhode Island has lost over 30,000 plus tax payers over the last 5 years and more are packing up and leaving the state. That is 30,000 less tax receipts into the state and city and town coffers. Couple that with the projected $1.7 billion lost of combined state and local tax base from the projected 2008-2009 subprime defaults, will definitely impact an increase in the budget deficit which is currently estimated at $384 million.

Let’s all be reasonable, the Governor vowed he would not raise taxes but reduce size of government and the GA indicated they would not raise taxed so via cut backs and lower funding to cities and towns the state is forcing the cities and towns to raise taxes.

But don’t forget there is a projected $1.7 billion lost of combined state and local tax base from the projected 2008-2009 subprime defaults. With less funding from state, less property tax income and a tax cap on cities and towns tax rates, 39 cities and towns are just treading water.

Currently according to http://ri.foreclosure.com/ there are 1,992 properties in Rhode Island in various stages of foreclosure or bankruptcies and a new wave of loan percentage resets will be accruing soon (2008-2009, 2009-2010, 2010-2011 and 2011-2012). When local tax reevaluation comes around, property owners will be surprised to find out how much less their property is worth due to subprime foreclosures! There will be continued loss of property tax valuations which will not sustain current 39 cities/towns plus state governmental goods/services and personnel costs.

Rhode Island is not expected to see light at the end of the tunnel till at least 2013 and that is if all the stars are in alignment. However, there is already talk of gasoline reaching $10 a gallon by then which is not to far off from what people in town of Hana on island of Maui, Hawaii are paying which is $4.65 per gallon of regular unleaded. Not to mention $3 for a regular loaf of bread and $5.60 for a gallon of milk.

If Rhode Island taxpayers and voters can put aside differences and take back control of Smith Hill, then you only have yourselves to blame for your Rhode Island fiscal downfall.

There will be no easy fixes to current state budget deficit. The problem should have been addressed years back. Freeze of all state hiring especially $100,000 and over jobs would help. Freeze of all department spending. Freeze on all tax credits would help. The budget deficit will not be erased during the current recession which should last at least next 5 years if lucky so budget deficit should be erased in small increments if possible.

Posted by: Ken at April 29, 2008 8:09 PM

Those Ohio voters who decided the '04 election really got a great return on their investment, eh?

Posted by: rhody at April 29, 2008 10:18 PM

Actually, the Democrats are completely to blame. They are the ones who control spending and overrode gubernatorial vetos of irresponsible budgets. Trying to hold Republican gubernatorial administrations for something out of their control just diverts attention from the real problem.

Democrats have begun to say "we're all in it together" but back when they were giving away the store, they were taking all the credit for "providing" services to people. Back then, they made it quite clear that Republicans had nothing to do with it.

If the GOP has any hope of advancing, it must publicly and aggressively place the blame where it belong. On Democrat incumbents.

Posted by: Anthony at April 29, 2008 10:53 PM


As I said, the State of Rhode Island will continue to sink into a hole due to continued mud slinging and blaming the other party.

I moved out of Rhode Island but still pay state taxes here and now live in a state where the GA controlled by Democratic Party is reigning in the Republican Governor and executive branch that wants to spend down to zero excessive funds due to economic forecasts of limited state growth. GEE is that interesting, Democrats controlling Republican over spending!

If you feel mud slinging and blaming the other party is the approach the RI GOP should continue to take then you reap what you sow. Just remember that last three out of four Governors of the State of Rhode Island were all Republican covering 16 years to date. As Governor and Commander and Chief of the militia you are the leader of the state and provide direction and chart the course the state will take for the betterment of the population but you also work together with the GA and all department and divisions to reach consensus for that betterment.

If you can’t, at least be man enough to stand up and say you screwed up instead of blaming others. That is the problem today; nobody man or women, will admit responsibility for their actions. It’s always the other person’s fault. I’ve heard the budget deficit was the union’s fault, then the teacher’s salary and benefits fault, then the retirement system fault, the state employee’s fault, the city and town’s fault, the city and town’s retirement system fault, the historic commercial tax credit fault (which for every $1million in documented tax credit provided $5 million in economic state-wide output), the movie tax credit, the social program’s fault now the illegal immigrant’s fault. How many are going to be blamed for the budget deficit and indecision and non-direction from the front office????????

At the same time, multiple $100,000 a year jobs were being dolled out by the executive branch and people were being slotted around gaining up to $40K pay raises.

As a taxpayer, I’m sick and tired of being told the State of Rhode Island (public break even entity) doesn’t understand how to operate and should operate under a business model (for profit entity) by a person that help lead a state bank into bankruptcy.

Anthony if this is the direction you want to go, then you are well on your way with the rest of Rhode Island.

Posted by: Ken at April 30, 2008 12:07 AM

Ken's flawed reasoning on "Blame the Republican" is EXACTLY why we have the growing movement on this forum for "Don't Run A Candidate". Just let the Dems have all the power in a clear fashion instead of being able to set up the Republican straw man just so they can knock him down.

Posted by: Greg at April 30, 2008 7:29 AM

Ken. Again, we need to refer you to the Rhode Island Constitution. Virtually all power vests with the General Assembly. The Governor could propose all manner of laws, spending cuts, tax increases and mandate that every resident must wear a purple hat and keep a minimum of one domesticated sheep in his/her back yard. If the G.A. doesn't concur, it won't happen. Period.

And yes, our deficit and the fact that Rhode Island has the fourth highest taxes is due to all of the things that you list in your fourth paragraph. And yes, it was a Democrat controlled General Assembly who signed into law all of that spending without completely thinking it through and h'mm, you know? maybe the revenue stream doesn't support all that.

When there is a problem, Ken, it's very important to correctly identify the responsible party so that they can be approached and asked to change what they are doing. Lots and lots of people have been asking the General Assembly for decades to stop spending so much on social programs, to not be so generous with the benefits of public employees (an additional 88% of salary vs. 33% in the real world), stop the defined pension system, etc. They haven't listened. So now we need to move on to step two.

Posted by: Monique at April 30, 2008 8:14 AM

I don't view assigning blame to the individuals responsible for RI's fiscal mess as "mudslinging". I view it as a reasonable, even obligatory, step to improving the state's economic condition. Otherwise, the same people who got the state into the mess will continue to do the same.

I'd be more likely to blame the Governor if he had signed every budget passed by the General Assembly. But I can't blame him when he has vetoed budgets and had those vetos overridden by the General Assembly.

As for the fault issue, all but one of the the items (the exeception being the historic tax credi) you list can be grouped into the same category: overly generous entitlements and benefits.

Look, I'd love to see state and city workers be able to retire with a full pension after 20 years and not have to pay a healthcare co-pay. I'd love my kids to to have the same thing.

I'd also think it would be really great if everyone could get a free college education and a free house with a couple of cars. But neither is a realistic expectation in today's world.

You can't expect taxpayers to foot the bill for pension and healthcare entitlements when those same taxpayers know they will never receive such benefits, because they have to deal with 401(k)'s and co-pays.

RI had a golden opportunity last year to avoid some of the pain being felt today, but the General Assembly chose the irresponsible route. So no, I won't blame Republicans. Carcieri may not be the best at governing and Almond may not have been the hardest worker, but they bear minimal responsibility for the financial mess.

For the past few years, the Projo has run several articles on how Republicans have no influence in RI. Prominent Democrats were quoted as saying it was a vindication of their policies.

Well, you can't have it both ways.

Posted by: Anthony at April 30, 2008 4:44 PM

I hear what all of you are saying but as I have said, before, I believe all of us taxpayers, voters both Republican and Democrat share the blame for the state budget deficit by our individual inactions of not making our voices know and felt up on Smith Hill.

Now is not the time for continued finger pointing and posturing but to put aside differences; roll up sleeves and try to work out solutions to get the state out of the death spiral it is in. That also includes Justin’s voting suggestions If enough people start exercising their right to vote and letting those who are in elected office know that hey you are not listening so you will be voted out, just maybe you’ll start seeing a change!

I know that is the tack used here and the elected tread very lightly. The public holds all elected officials accountable for their individual actions here. The state I have moved to has a wonderful Republican Governor who is highly respected. She and her executive staff embrace the public voters and hold town hall meetings to get a feeling for what the voters want and are comfortable with also updating public on current state initiatives. The Democratic controlled General Assembly member also do the same on an individual bases. There are newspaper sections devoted to ongoing political activity by all. This is a very government to voter interactive information minded state-wide society I’ve mover into. Very very different from Rhode Island way of doing things!

The governor meets regularly with the General Assembly to find consensus on conflicting issues. As a matter of fact the current state budget was approved for $10.7 billion minus additional $44 million the Governor had proposed for welfare programs because the General Assembly felt those funds should stay in reserve in case needed or till the current economic conditions improve. The state is expected to show lowered growth for this coming year but still economic growth how little is growth.

Unfortunately Rhode Island will be in a downward spiral for at least the next 5 years. Over 30,000 plus residents (and still counting) have left taking with them tax funds and job expertise. The subprime housing foreclosures will remove an estimated $1.7 billion from the property roll. Already investors are shutting down Historic revitalization projects due to new freeze on commercial tax credit (more jobs lost; affordable housing, low cost small business spaces and buildings not put back on tax rolls). Unemployment is climbing to new heights in Rhode Island. The next rounds of subprime adjustments are getting ready to reset on loans thus adding to more possible foreclosures.

If all these negative variables are not calculated and taken into account then the Rhode Island state budget deficit will increase and the downward spiral will speed up. It’s hard to imagine how many job layoffs, program cuts and benefit cuts would make up $1.7 billion in lost property revenues state-wide still leaving the current budget deficit of estimated $384 million. Rhode Island fall from grace will make Michigan look like Walt Disneyland.

Posted by: Ken at April 30, 2008 7:45 PM
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