Rhode Island: A Fiscal Mess Few Care About

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Tucked in between Massachusetts and Connecticut and overshadowed in Northeastern political discussions by states like New Jersey and New York, Rhode Island is barely noticed these days.

Still, the Ocean State bears watching. Its fiscal problems are, relative to its size, among the worst in the country. And the reform agenda (if you can even call it that) of its new governor, Lincoln Chafee, elected with union support and with only a plurality of the vote, is among the tamest in the nation. In Rhode Island we may get to see how the union version of fixing a state's problems via tax increases and the barest of reforms of government spending and employee entitlements works.

Though smaller than its neighbors, Rhode Island very much bears the stamp of Northeastern politics and governing. It has the third highest level of public employee unionization in the country, 64 percent, behind New York and Connecticut. Its government is among the top 10 in the nation in per capita spending and in the tax burden it imposes on residents, plus the state has one of the least attractive business environments, according to the Tax Foundation.

Rhode Island's long-term obligations compare unfavorably with just about any other state, and that's saying a lot. An evaluation of state finances by the Daily Beast recently ranked Rhode Island the state most likely to go bust because of the combination of its budget deficit, outstanding debt and unfunded pension liabilities relative to economic capacity. Moody's, which recently issued a report on combined municipal debt and outstanding pension obligations for the states, ranked Rhode Island among the most troubled states on a variety of metrics, including combined liabilities as a percent of GDP and as a percent of state revenues.

The state's spendthrift political culture infects its local governments. A recent audit revealed that Rhode Island's biggest city, Providence, has been spending more than it budgets throughout the recession and depleting its reserve funds in the process, to the point where the city is almost out of cash. Last year alone the city overspent its budget by $13.9 million, bringing its reserve down to just $3.5 million, barely one-tenth of where it should be. The city council has approved borrowing some $48 million this year to cover its deficit.

Meanwhile, another city, Central Falls, is insolvent thanks to $32 million in promised post-retirement health-insurance costs for its employees plus $48 million in pension obligations that the city can't meet on its own. The city has been taken over by the state as an alternative to a bankruptcy filing, for the time being at least.

The burden this spending places on the private sector is significant. Rhode Island is not a state where businesses are investing in the future. An analysis of private sector investment several years ago by the Rhode Island Public Expenditure Council found investment per employee was among the lowest of any state, 30 percent below the national average. And while the state ranks only 20th in average private sector wage per worker, it ranks 4th in public sector pay.

If you listened to Chafee's inaugural address last month you didn't get much of a sense of these manifold and urgent problems, including a $300 million deficit on a $7.8 billion budget and an 11.5 percent unemployment rate. Vaguely referring to challenging times the state faced, the governor mentioned prominently only two specific initiatives, his rescinding through executive order of a program requiring employers to check whether new hires are eligible to work in the United States, and a bill to allow gay marriage in the state. Chafee touted these moves as part of his prescription for reviving the Rhode Island economy by creating a ‘civil state' of diverse interests. That, he said, would "do more for economic growth in our state than any economic development loan."

A member of the Providence Journal editorial board observed that the governor did not use the words ‘jobs' or ‘deficit' once in his inaugural speech and "did not spend much time expressing concern for the middle class struggling to get by."

Perhaps this is the inevitable result of the unusual 7-way election last November. A former liberal Republican U.S. Senator from Rhode Island, Chafee lost his seat in 2006. Counting his father's tenure before him, a Chafee had represented Rhode Island in the Senate since 1976.

Chafee proceeded to leave the GOP and run for governor last November as an independent. He battled with the Democratic candidate, Frank Caprio, for union endorsements and picked up key support from the state's teachers' unions after promising to limit changes to the state's pension system to new hires and voicing opposition to charter schools and other school choice proposals.

Chafee won with only 36 percent of the vote against 34 percent for the Republican, John Robitaille, and 23 percent for Caprio. It's no exaggeration to say that the victory was the result of the crowded field. In a poll just before the election, 50 percent of the electorate viewed Chafee unfavorably, a higher level of unfavorables than either of the two major party candidates.

Chafee has asked for extra time to suggest budget solutions, but he's already proposed a significant sales tax hike projected at $123 million to close more than a third of the state's budget. Other than that, his "100-day plan" includes focusing government development efforts on the state's ‘key growth centers,' offering health care to independent workers, holding a budget summit, and making state government more transparent.

This doesn't sound like much of an agenda to address the problems of a state which, as the Pew Center noted in November of 2009, ‘was one of the first states to fall into a recession because of the housing crisis, and...may be one of the last to emerge, hampered by high tax rates, persistent budget deficits and a lack of high tech jobs," to say nothing of a political culture with "a poor record of managing its finances."

The Ocean State is under water and is depending on old Linc Chafee to throw it a life preserver.


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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