Rhode Island: Little State In a Big Mess

Back in December Time magazine published a story detailing Rhode Island's successful effort to reform its state pension system, one of the worst funded relative to its size in the nation. Entitled "The Little State That Could," the Time article focused on the efforts of state treasurer Gina Raimondo, a Democrat, to build a coalition for reform within her own party amidst heavy opposition from government unions. The payoff: Reform enabled the state to cut its long-term unfunded pension liabilities by half.

But since then Rhode Island's state government and its cities have turned back to their many other problems. The state faces yet another budget deficit next fiscal year, amounting to nearly five percent of its budget. Its governor has proposed $88 million in new taxes in the teeth of a grim economy that's trending in the opposite direction as the nation's, with unemployment at 10 percent and job growth having skidded to a halt.

The state's fiscal woes make it tough for it to help out its municipalities, where even bigger problems lie. The mayor of the state's biggest city, Providence, recently said it may have no choice but to seek bankruptcy because it's in danger of running out of money in a few months. Another city, Central Falls, is already in bankruptcy, while a local publication recently listed a handful of others that could possibly go bust in the coming year.

The state's problems, in short, are so deep that it's possible political exhaustion may set in, a sense that what it takes to fix the state's multiple problems are just too enervating. Even at its best, Rhode Island faces a sustained era of managed decline in which it continues to lose population and jobs to the rest of the country and to drift lethargically, bereft of opportunity and optimism.

Rhode Island's problems are hardly of recent vintage, but of course they have developed into a full-fledged crisis since the financial meltdown of 2008. The state's business climate and economic performance have been deteriorating for years. A recent review of five different studies that measure the policies that impact business investment and decision found that the state ranked among the 10 worst in the country in areas like property tax burden, corporate tax policy, unemployment taxes, and regulatory burden.

Job dynamics studies show that businesses aren't pouring investment into the state. Rhode Island ranks just 36th in the nation in jobs added through relocations, expansions and creation of new businesses, from 1998 through 2008 (the latest year data are available), according to the National Establishment Times-Series Database. The state ranks especially poorly, 44th in the country, on net jobs created by new businesses vs. jobs lost from firms going out of business.

In an era of reduced investment by business, Rhode Island can't compete any longer with other American states, especially for bread-and-butter industrial jobs. A study by the California Manufacturing and Technology Association of investments in U.S. manufacturing plants from 2007 through 2009, for instance, found that Rhode Island ranked 42nd among the states in attracting investment in industrial facilities, measured on a per capita basis.

These numbers reflect a long-developing decline. Yet the state and its cities continued to spend heavily on unsustainable programs and ignored the long-term trends until they became impossible to ignore. Providence, the state's biggest city and its capital, is a case in point. When the fiscal crisis hit, the city employed an array of gimmicks to balance its budget, including borrowing some $48 million to close its operating deficit by using its fire stations and headquarters as collateral.

Providence is suffering form 20 years of extraordinary promises made to public employees that cannot be funded, including annual cost-of-living adjustments for pensions of 6 percent that can double a worker's pension in a little more than a dozen years. Today, the city's pension system is just one-third funded, and the city owes millions more in retiree health benefits it hasn't financed. The new mayor, Angel Taveras, is desperately trying to save the city from insolvency by cutting employee costs, but the unions are resisting.

"Let me be clear, we will reduce retiree benefits," he said recently. "Either the retirees will accept a suspension of their guaranteed yearly raises and changes in health care or they will follow the path of Central Falls retirees who have had their full pensions slashed drastically in bankruptcy court."

The state's governor, Lincoln Chafee, has offered to help, but he's in a bind himself, having been elected with strong support from unions. Chafee is a former Republican turned independent who won election with only a plurality of the vote. During his campaign he engaged in a battle with the Democratic nominee to win crucial endorsements from public sector unions, which were enough to give him the election with only 36 percent of the vote. That has hardly made him an agent for change in a state where he has no caucus in the legislature he can rely on. Meanwhile the chief reformer so far in the state, Raimondo, has limited control over fiscal and tax policy in her role as state treasurer.

Time evoked the image of the little engine that could in its Rhode Island piece. That's an inspiring story, but in the end, just a children's tale. It will take more work by grown-ups to fix the Ocean State.