November 22, 2011

The Horse Looked Desirable; That's Why It Was Deadly

Justin Katz

In a post illustrating why he's risen so quickly to the status of "must read" and why it's so crucial to have intellectually curious people making their full-time livings investigating state-level politics and government, Ted Nesi responds to my incredulity at everybody's willingness to accept the pension reform narrative. This is the most important paragraph of Ted's post:

All of them had different opinions on the best approach to shore up a significantly underfunded pension system like Rhode Island's. But I never talked to anyone who dismissed the changes enacted here — the nation's highest public-sector retirement age; a years-long COLA freeze; a limited reamortization; a hybrid plan for most workers — as fig leaves. These are significant, consequential policy changes. And with big increases in pension contributions looming next year, is that really any surprise?

Much of the difference between Ted and me can be traversed with the reminder that I didn't use the image of fig leaves, but of a Trojan horse. A Trojan horse is dangerous, in the first instance, because on its surface it's desirable enough to lure defenders to bring it within the city walls. A hybrid plan, later retirement, COLA suspensions, changes in the formulas for calculating base pensions... these are all desirable reforms, but the "how much" and "what else" are what matters.

Even by the admission of enthusiastic supporters of the bill, the actual reforms covered less than half of the total liability problem. If one considers that reamortization cost nearly two billion dollars, it's reasonable to suggest that the amount of the problem only shrunk about a sixth or seventh. If one expects the 7.5% assumed return to prove much too optimistic, then this reform will look like a bare minimum to get by in the present.

And then comes the invading army hiding in the belly of the reforms, which Ted neglects to cite in his response: The Retirement Board (7 of 15 members labor appointed) will now dictate legislation for future changes that address the other 5/8, 6/7, 17/18, or whatever of the liability that remains to be solved.. The 5.5% privatization tax and any other post facto concessions from the legislature (such as binding arbitration) are additional legions. Meanwhile, the unions will endeavor to scale back the hit that they've taken, on one front through the courts, and on a second front by whittling in the legislature. (Take note that the NEARI president has "fix this law" first on his agenda for the next session.)

As to whether a reform more to my liking — the main criterion of which would be actually solving the problem — would have passed, I don't know. If it had not come this year, it would have come next, or the one after, and it would have been more likely to come without all of the deadly catches. As I've suggested before, a step in the right direction isn't worth taking if it leads into a fatal trap. I'm increasingly confident that this reform, beyond making the larger pension problem more difficult to solve in the future will wind up thwarting a number of other reforms having nothing to do with pensions and without which Rhode Island will continue to slide toward insolvency.