The Alexander Hamilton solution to RI’s local pension crisis

August 18th, 2011 at 1:43 pm by under Nesi's Notes

The Wall Street Journal’s David Wessel has a fascinating column today about the lessons Europe can learn from how the U.S. and Brazil dealt with “tensions between sharing a currency and a central bank while pursuing largely independent fiscal policies” – basically, the Greece vs. Germany problem:

For months, Europe has been hamstrung by what one seasoned observer of the global economy describes as three “No’s:”

• No devaluations, meaning neither Greece nor Portugal can leave the euro to depreciate their currencies to regain competitiveness.

• No defaults, meaning holders of government debts must be paid in full.

• No transfers, meaning taxpayers in rich countries like Germany and France won’t bail out southern European spendthrifts.

Wessel’s solution: the European Union should use “the restructuring of state government debts to impose a measure of fiscal discipline and to bolster the power of the central government.” He points to two examples: Alexander Hamilton’s decision in 1790 to have the United States assume the states’ $25 million in Revolutionary War debts, and Brazilian President Fernando Henrique Cardoso’s similar move in that country a decade ago.

Reading this led my thoughts back to Rhode Island. Could something like that be part of the solution to the crisis in many of the state’s locally-run pension plans?

There are 23 plans run by 18 municipalities – about half the 39 cities and towns – that “are considered at-risk” because of underfunding, former Auditor General Ernest Almonte told the pension advisory group Wednesday. They include Providence, Warwick, Cranston, Pawtucket and East Providence – the state’s five largest communities and key parts of its economic engine.

This fall’s special legislative session on pensions is unlikely to do anything to address those local plans, focusing instead on the ones run by the state. But Almonte and Cranston Mayor Allan Fung warned of dire consequences if the independent plans’ problems aren’t addressed soon, and Governor Chafee proposed the MAST Fund partly due to those concerns.

Almonte and Fung suggested the plans could be moved into the state system “on a go-forward basis,” meaning just for new workers. But you have to wonder whether the day will come when the state government is forced to assume some responsibility for the local pension liabilities, as a way to avoid more situations like Central Falls. Most of the locally run plans are more poorly funded than the state one.

Almonte and Fung offered other suggestions, as well: requiring benefit cuts until a local plan’s funding level improves; establishing permanent limits on the generosity of benefits that mirror the state rules; abolishing double-dipping, the purchase of service credits, and benefit enhancers; auditing each independent plan; and exploring the possibility of buying out pensioners in troubled plans with a lump sum payment.

Forcing Barrington taxpayers to bail out Pawtucket retirees would be an unpopular move, to say the least – tough measures, including benefit reductions, would probably have to be a part of any deal. Yet it’s hard to see how Providence, for example, will ever be able to cover the retirement promises it’s made without assistance.

(photo: Wikipedia)

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3 Responses to “The Alexander Hamilton solution to RI’s local pension crisis”

  1. “the state’s five largest communities and key parts of its economic engine.”

    That is the key point. Is it fair for taxpayers in towns that don’t have a pension problem to “bail out” communities that do? Perhaps not. But do the people in those towns want to live in a failed state? If the urban core withers, there is no Rhode Island.

    We can talk about fairness all day. Is it fair that Providence hosts tens of thousands of workers and students and visitors in its role as the engine of the state economy, while needing to maintain infrastructure and services for those people who contribute almost nothing in the way of taxes to the city itself? For example.

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