June 9, 2008

Thomas C. Wigand: Bob Walsh's Risky Scheme

Engaged Citizen

According to the Providence Journal, Bob Walsh of NEARI has been prowling the halls of the General Assembly peddling a "plan" to solve this year's budget deficit. His protégé Pat Crowley has posted a version of it on the left-leaning RI Future blog. Though his proposal is coated in sugary language, should the General Assembly swallow it, it will indeed be a bitter pill for Rhode Island ... perhaps even economically fatal.

We all remember the "tobacco money." What Walsh proposes resembles that, in that he wants to divest the State of a future revenue stream in return for some quick cash, but his version is far worse, and will cause irreparable damage to Rhode Island.

The tobacco money is essentially "found money," indeed a windfall, and is going to be paid out for decades to come. But Rhode Island isn't going to get a penny. Why? Because the General Assembly went to Wall Street and sold Rhode Island's future income stream at a discount in return for some quick cash. Essentially this was a humungous, public sector "payday loan." So the tobacco money — "the profit" — is now all going to Wall Street investors. As we also know, within a few short years the General Assembly peed away that cash infusion. As shortsighted and irresponsible as that transaction was, it at least infused some new cash into Rhode Island's coffers. Walsh's scheme doesn't even do that — quite the opposite.

Euphemistically using the term "contribute equity" as a proxy for "transferring ownership," Walsh portrays his game as, in essence, placing a fallow state asset into productive use. In reality, what he is proposing is the piecemeal transfer of ownership of the Lottery to the state's pension system (and so, by extension, to the unions). He claims that this will only be a temporary measure, "contributing" only small percentages of "equity" (i.e., ownership) to the state pension system for a few years. If you believe that, I have a bridge I'd like to sell you (and I'm not talking the Pell Bridge). Exhibit 1: the tobacco money. Once the precedent is set, this "camel's nose" will continue sliding under our fiscal tent until the pension system (and thus the unions) own a major portion of the Lottery, if not all of it.

While these "equity contributions" are being presented as a temporary measure to get us through the "budget crisis" until the economy recovers, the transfer is permanent — the pension system (and thus the unions) will be getting those Lottery revenues forever. The tobacco money now being paid to the Wall Street investors has an eventual end date, while under Walsh's scheme to direct revenues to the pension/unions continues in perpetuity — a clever gambit on Mr. Walsh's part, eh?

Each percentage of "equity contributed" to the pension system means that an equal percentage of Lottery revenue will now go into the pension system, meaning that taxpayers will have to make up the shortfall in the general budget. Given that Lottery revenues constitute something like a third of total State revenues, this could eventually mean a 30% tax hike foisted upon the taxpayers of Rhode Island - merely to maintain the status quo in the state pension system. In other words, Walsh's scheme is a backdoor way of enacting a huge tax increase to force taxpayers to fund a bailout the State pension system.

Mr. Walsh is executive director of NEARI, and his job is to forcefully represent the narrow special interests of that organization (and, to the detriment of taxpayers and public-school students, he seems to perform his duties quite ably). So in promoting this scheme, "he's just doing his job." But ultimately it is unreasonable, indeed unconscionable, for public-sector employees to demand that taxpayers incur massive additional taxes just to maintain the status quo of the pension system, the benefits of which exceed by orders of magnitude the retirement benefits available to taxpayers (the vast majority of whom will get no pension whatsoever).

One would assume that Governor Carcieri will likewise "do his job," representing all of the people Rhode Island, and refuse to be party to such a scheme. It is likewise time for the General Assembly to begin "doing its job," representing the best interests of all the citizens of Rhode Island, not just placating narrow special interests.

We are at a watershed time in Rhode Island. In recent decades the General Assembly has become addicted to a tax-and-spend and pander lifestyle, a habit maintained in recent years through "fixes" such as the tobacco money. The consequences become ever clearer: a state economy whose performance lags both its neighbors and national averages, to the detriment of each and every citizen ... a downward spiral that will continue unless major structural changes occur to state government and the pay and benefit packages of all public sector employees.

The General Assembly has a decision to make. Either it can start "rehab" and set Rhode Island on a path for fiscal and economic rehabilitation ... or it can accept the new even more destructive "high" being pushed by dealer Bob Walsh.

Will the cessation of tobacco money signal the start of rehab, or will it prove that the tobacco money was just a "gateway drug" for even more destructive fiscal behavior on the part of the General Assembly? We shall soon see. The economic fate of Rhode Island hangs in the balance.

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The NEA proposal is going nowhere. But the sale of the lottery is inevitable. Next year or 2010 at the latest.
The only alternative in an era of Peak Taxes is to completely gut welfare and state/municipal compensation and that is NOT going to happen.

Posted by: Mike at June 9, 2008 8:55 AM

Excellent work, Tom!

Despite the tremendous clout of the NEARI, I think the stuff has finally hit the fan financially for the state. The General Assembly would not be able to justify the sell-off of state assets in order to fund grossly overpriced pensions, at the same time that it is looking to cut everywhere possible. If they try it, trust me, we're going to use it like an old rag as a campaign issue. What are they going to say... "we're going to cut your program further and raise your taxes in order to make sure that these well-connected public employees with the cushy lifetime pensions are made comfortable, so they can enjoy their retirement in Florida." I don't think that will be realistic.

PS I am cautiously optimistic that the next level of "pension reform" will be to end granting them. Of course, we need to meet any prior contractual obligations, but there is really nothing to prevent us from freezing the existing pension system, and to fund it only to the extent necessary to meet old obligations, and switching all new hires to a 401(k) type plan. I don't think it will happen this session, but 2009 is looking awfully promising. It's promising because our financial situation is going to get far worse much sooner than was thought.

PS Just wait until after the elections in November. ;)

Posted by: Will at June 9, 2008 5:50 PM

"Of course, we need to meet any prior contractual obligations"

Does this include all the judges and state troopers, some still working, who have never contributed a nickel towards their pensions because they were hired prior to the law change in 1988? Why wasn't the retirement statute changed gradually, so over a period of a few years their contributions would increase, say 25% a year for 4 years until it reached 100% contribution, instead of just giving them a free ride? Note to partisans, with republican governors for most of our recent history (DiPrete, Almond, Carcieri)lots of republicans in this favored group, not just dems.

Posted by: observer at June 9, 2008 6:46 PM

It's promising because our financial situation is going to get far worse much sooner than was thought.

PS Just wait until after the elections in November. ;)

Posted by Will at June 9, 2008 5:50 PM

That's great. Let's have people suffer so that Will's political goals can be advanced. Thank you for reminding me why the unions should give no quarter to you and the people who run your party

Posted by: Phil at June 10, 2008 1:39 PM

You will realize soon Phil that elections no longer matter. The state is BROKE. Taxes are all at "top 5" in the country (sales, income, property) and while the rates can be raised capital will (and has) fled like rats deserting the proverbial sinking ship.
In short, you have won almost every election but still lost the games as the Golden Goose has been cooked, eaten and digested. all that's left is what's in the commode.

Posted by: Mike at June 10, 2008 7:55 PM

Great idea, Phil. Give no quarter. I think you (whether you are a public sector union or poverty industry or progressive ideologue type) should have the courage of your convictions and really stick it to the people who you believe have been sticking it to you. Raise taxes on the rich! Expand the sales tax base to cover "luxury" items! Raise taxes on corporations! Restore the evil governor's cuts to welfare programs! Reverse the pension reforms! Do it all Phil. Show some cojones.

And let's see where it gets you.

Posted by: John at June 10, 2008 11:43 PM

"That's great. Let's have people suffer so that Will's political goals can be advanced. Thank you for reminding me why the unions should give no quarter to you and the people who run your party"

We should give no quarter to public sector unions. They, at minimum, should be ignored, if not outlawed. My goal isn't political; it is fiscal. We are on an unsustainable financial course, and people like you are largely to blame. Frankly, if I had my way, all state workers would be terminated, outsourced or privatized. Fortunately for you, the governor is a little more compassionate. Taxpayers have been the ones suffering to overpay you and your ilk for far too long. Remember, you are net tax consumers, not tax contributors.

The free ride has to end, and if that means blowing up the railroad tracks do to it, and sending the labor train over the cliff, then so be it. Remember, there is no greater oppressor than the formerly oppressed. Let the oppressing begin!

PS When I said, "wait until after the elections in November", I was alluding to the fact that the updated state revenue forecast will be released then for FY 2009. We've only yet begun to cut!

Posted by: Will at June 11, 2008 1:05 AM
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