By Tom Sgouros

A friend of mine has a child in kindergarten this year. He’s begun saving for her education, as a parent should. But is our town as financially responsible as his family? We will pay around $14,000 next year to educate this little girl and each of her companion first graders. And here’s a scandal: my town has not put aside nearly enough money to pay for that cost out of investment income.

You see, once that child arrives at kindergarten, the town has assumed responsibility for her education. An accountant might say that the town has incurred a liability for educating her through 12th grade. So it stands to reason that since all that future expense has been incurred by admitting her to kindergarten, the town should have already put aside the money it will spend on her education. Fiscal responsibility demands that the current assets equal the present value of that future liability. In other words, we should have around $150,000 in the bank now for her – but instead we have not a dime.

Counting all the kids in her grade, that’s over $50 million we don’t have saved. When you add in the same terrible situation for the other grades, it appears that my town, North Kingstown, has an unfunded liability of more than $400 million for education costs. Providence is more than $2 billion in the hole by this calculation, and statewide, the deficit is almost $16 billion dollars.

And what about roads? Building a road also incurs a future liability – for the maintenance it will require each year in the future until it has to be rebuilt. Right? Assuming a 20-year lifetime for most road features, our state has a more than $26 billion unfunded liability for road maintenance. Staggering, isn’t it?

Well, yes, but it’s stupid, too. We don’t pay for education or road maintenance out of investment funds, so we don’t account for these costs like that. But why don’t we? Wouldn’t it be cheaper to run our state off this kind of investment income? Answer: only if the capital can be made to appear by magic. If you can’t make it appear magically, then creating an endowment to fund expenses is actually a fairly expensive way to pay for stuff. It seems cheap only when you ignore all the stuff you give up while you’re saving up to create that wonderful endowment that’s going to make everything so cheap. Not to mention the investment expenses, the risk of investment losses, inflation and so on.

So what about public employee pensions? It’s not normal to pay for education costs or road maintenance out of investment income, but it is normal to pay for public pension systems that way. It’s a decent idea, too, but it’s not essential, like bringing a hat to the beach. This is a point that many people resist understanding: the goal is not full funding of the system; our goal should be simply making sure the checks don’t bounce, at the lowest cost to the taxpayers, employees, students in the schools and drivers on our streets. Full funding is a means to that end – under certain conditions. It is not an end in itself, and widespread confusion on the point has demonstrably made the situation worse.

The argument about what is the “right” way to fund a pension system is somewhat besides the point. In the past, people in charge of our system made mistakes. Some of them were well-meaning and some were not, and reasonable people can even differ about which decisions were which. It’s true that some unreasonable promises were made, and some unpleasant and expensive details got swept under the rug. (And I think it’s worth asking how many of those details could have been swept under the rug if the pension benefits were intended to be paid out of the current budget rather than from investment proceeds.) The question before us is not what is the best way to fund a pension system; it is what is the best way to proceed given the condition of the system we’ve got.

The people who say we can’t re-amortize our pension obligations because it would make it more expensive would have you believe that we are going to pay off the liability by 2029, as called for under the current schedule. In truth, it’s an absurd argument because neither option is going to happen. The cost of paying off the unfunded liability is what’s breaking our backs, not the cost of servicing current obligations. Both options involve making escalating annual payments that are not within the bounds of either fiscal or political reality.

It’s as if I was arguing for using a Gulfstream 150 instead of a Learjet 60 the next time I visit my brother in Seattle because it’s more economical (192 gallons per hour instead of 203). The reality is that I’m going to fly coach on a discounted ticket if I can find one.

Does that mean that I don’t think it matters which jet is more efficient? Of course not. It simply means that I’m going to travel as cheaply as possible because there are a lot of other things I’d rather do with my money.

Just so with our pension liability. We have to honor the obligations to retirees for the same reasons we have to honor all the rest of the state’s obligations. But let’s do it at the lowest cost possible and not fret that because we can’t afford the expensive way to do it, we can’t do it at all.

This coming year, your state will pay about $800 million in pension benefits to its retirees. This is a big number, but let’s notice part of the reason why it’s so big. In 2008, Governor Carcieri and the General Assembly leadership abruptly changed the rules about medical benefits, and provoked twice as many state employees to retire that year as usually do. The annual payments shot up and the number of employees paying into the system plunged, and suddenly the system was in far worse shape than it had been just months before.

In other words, shortsighted and hasty changes enacted by people who did not really understand the situation have made the system’s problems much worse. Do we really want to do that again? •

Tom Sgouros is the author of “Ten Things You Don’t Know About Rhode Island” and a former Democratic candidate for general treasurer.

Ted Nesi will return on Friday.