Could RI Go Bankrupt?

Could RI Go Bankrupt?

With one of the highest pension liabilities and persistent deficits, could Rhode Island be one of the first states to go bankrupt?

It hasn’t happened since the Great Depression, but a New York Times article last Sunday suggested it is a serious possibility for fiscally troubled states like California and Illinois. The Times article did not mention Rhode Island, but other state studies—such as a Pew Center on the States report in 2009—have compared the Ocean State’s fiscal woes to those of California and Illinois.

Under one hypothetical scenario, Bryant University economist Edinaldo Tebaldi said Rhode Island could be considered insolvent. “The state would be insolvent today or in 2015 if it was required to ‘pay’ the unfunded pensions,” Tebaldi said, referring to the combined unfunded state and municipal pension liability, which tops $9 billion.

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'On a path to disaster'

By a number of measures, the state certainly has much to be concerned about:
■ Unfunded pension liability: Rhode Island's state retirement system has the fourth highest unfunded pension liability, at $5.2 billion, according to The Pew Center on the States. (The General Treasurer’s office insists it is currently closer to $4.3 billion.)
■ Money management: Rhode Island and California both got a D+ in this Pew Center on the States ranking, which looks at the balance between revenues and spending and also accounts for the effectiveness of state contracting, purchasing, and financial controls.
■ Size of debt relative to economy: If Rhode Island were a country, the fair value of its pension debt relative to the size of the state economy would exceed what is permitted by the euro zone, according to a Times report.
■ Future budget deficit: In 2012, the loss of federal stimulus funds will boost the deficit to about half a billion dollars, according to University of Rhode Island economist Leonard Lardaro. By 2015, the projected budget gap will be about 10 percent of general fund revenues, according to Tebaldi.

State Rep. Joe Trillo, for one, thinks the state could be headed for bankruptcy. “Rhode Island is probably going to be one of the first states to go down,” said Trillo, R-Warwick. “We’re on a path to disaster.”

Economists: ‘When do we realize this is a crisis?’

But neither Tebaldi nor Lardaro said Rhode Island could be facing outright bankruptcy—assuming that is even legally possible. (See below for more on that issue.) But they otherwise were at pains to emphasize how serious the state’s situation is in fiscal and economic terms.

“If the structural problems—pensions and increasing total spending—are not addressed in due time, then Rhode Island will face a critical budget situation in the near future, which will put the state in a difficult situation in terms of honoring its financial obligations and also force the government to cut or eliminate important public services (as seen in other states), causing major distress to its residents,” Tebaldi said in an e-mail.

He called on state leaders to “act promptly and steadfast” to avoid such a scenario. Everything, he said, should be on the table for discussion—including workers’ salaries, compensations, pensions, provision of public services, and the tax base.

Lardaro sounded a similar note of urgency. “When do we realize this is a crisis and we have to do something substantial and significant?” he said. “We’re just kicking the can down the road and ‘let’s hope when everything gets bad we have time to react.’ We’re not alone, but that doesn’t make it right.”

Instead of bankruptcy, Lardaro worries that credit agencies could downgrade Rhode Island’s bond rating, making it more expensive to sell debt and adding yet another burden to the state budget. He also warns that the budget problems of other larger states could slow down the national economy—having a ripple effect on Rhode Island. All things considered, Lardaro says there is a 50-50 chance the state could dip back into a recession in 2012.

Governor’s office: State not in danger of defaulting

Amy Kempe, a spokeswoman for Gov. Don Carcieri, offered a noticeably different picture of the state’s finances. “Has Rhode Island defaulted on any of its debt obligations? No,” Kempe said. “Is it in danger of doing so? No. Has the state issued IOUs to vendors or taxpayers? No. Is it in danger of doing so? No.”

She said Rhode Island has also taken “significant measures” to address the “structural issues” with the budget—unlike California and Illinois. Those measures, according to Kempe, include: pension reform, changes to the retiree healthcare system, personnel reforms, and Medicaid reforms. Also on the bright side, according to Kempe:

■ The state is operating with fewer employees—approximately 2,000 total—than before modern records were kept.
■ The state’s Rainy Day Fund is fully funded.
■ The state ended the past fiscal year with a surplus and “is on track” to end the current fiscal year with a surplus.

Is state bankruptcy even legally possible?

Not really. Former state Supreme Court Justice Bob Flanders tells GoLocalProv there is no clear legal or constitutional path to bankruptcy for a state government. “That could be a real problematic thing for states to try to go bankrupt,” Flanders said. “There are clearly potential constitutional issues that could be raised by this.”

If a state wanted to go bankrupt, Flanders said it would probably take special legislation at both the state and federal level to make it possible. Even then, he said releasing a state of its debt obligations could violate the U.S. constitutional provision that bars government from interfering with contracts.