Incredibly, an overwhelming bipartisan majority of Rhode Island state legislators have backed a sweeping pension reform proposal. Ted Nesi of WPRI has been covering this story in detail.
What I find interesting is the prospect that this legislative success will make Treasurer Gina Raimondo, the Democrat who spearheaded the effort, a political star. Nesi writes the following:
The lion’s share of the credit for the pension overhaul will go – justly – to the treasurer. The political newcomer and former financier is already winning glowing national media coverage, making her the darling of anti-pension warriors from coast to coast.
What that misses, though, is the nuance of her approach to the issue. Raimondo didn’t push to scrap defined-benefit pensions because like many experts, she thinks defined-contribution accounts alone don’t provide “retirement security.” She shined a bright spotlight on the funding shortfall and used her considerable speaking skills to push it to the top of the state’s agenda. She won over Chafee, lawmakers, the business community and many members of the public with her ideas for solving the problem. And she came up with a complicated plan that just may do the job.
There are other individuals, groups and events that played an important role in paving the way for tonight’s vote: the finance committee chairmen, Rep. Helio Melo and Sen. Dan DaPonte; The Providence Journal, whose coverage added to the sense of crisis; Engage Rhode Island and its mysterious financial backers; and, unfortunately, Rhode Island’s interminable economic malaise, which has made the once unthinkable suddenly thinkable.
Nothing played a bigger role, though, than the numbers themselves. Indeed, Raimondo’s master stroke happened many months ago, when she ordered new estimates of the state’s pension liability and then got the Retirement Board to approve them. The jump in the liability from $4.9 billion to $7.3 billion, and the impending budget consequences of that change, are what gave the issue its sudden urgency.
Once those numbers were set in stone, lawmakers didn’t face the choice between a comfortable – if unsustainable – status quo and a risky vote for change. Instead, they faced two options, both unpalatable: finding a lot more money for the pension fund or trimming retirees’ and workers’ benefits. On Thursday, the vast majority of them chose the latter. [Emphasis added]
The scale of the pension challenge is so great that “anti-pension warriors” need left-of-center allies. This reminds me of the first of Steven Hayward’s three dominant political facts of our age, which he mentions in his new essay in Breakthrough Journal, an excellent and astute compilation of ideas and themes raised by a number of conservative thinkers, William Voegeli among them:
There are three dominant political facts of our age that conservative thinkers (and also liberals) need to acknowledge. The first is the plain fact that neither ideological camp will ever defeat the other so decisively as to be able to govern without the consent of the other side. This is not merely my political judgment; it is sewn into the nature of America’s basic institutions and political culture.
Because total victory will never happen, conservatives need to achieve sustainable victories, not temporary victories. That is, we want taxes to be consistently low, not just low when we happen to be in office. The priority thus has to be reducing spending to sustainable levels through structural reform.
To return to Raimondo and Rhode Island, one of the key lessons of Raimondo’s experience is that the Public Employee Pension Transparency Act is far more important than is commonly understood, as Josh Barro has made clear:
As a general rule, the federal government should leave states alone to establish their own fiscal practices. However, two factors justify federal intervention to enforce pension transparency. One is that the foregoing measures are simply transparency measures—they do not force any state to adopt or to change any of its policies. Enhanced reporting is not cost-free but isn’t a heavy burden on administrators or taxpayers either.
The other factor is that the federal government, for better or worse, has significant interests in the continued solvency of the states. The federal government subsidizes state and municipal borrowing at significant expense—not just through the Build America Bonds program but also through the tax subsidy that it extends to traditional municipal bonds—and it has an interest in ensuring that the sums effectively borrowed are used responsibly.
There is also some risk that the federal government will one day be called in to shore up an ailing pension fund, should a state or large municipality default on its bonds and cause a panic in the financial markets. The political impetus for such a bailout is likely to be strong and come from corporate as well as union interests. It is not clear that the federal government can credibly promise not to bail out states or cities that fail.
PEPTA belongs to a larger family of legislative proposals that can help right the balance between the state and federal governments. In the past, we’ve discussed how federal policies, like the state and local tax deduction, encourage state and local governments to engage in unsustainably high spending levels and to rely on volatile tax bases that are incompatible with balanced budget requirements and the need for the consistent delivery of core public services. Passing PEPTA will encourage all states to take dangerous long-term pension shortfalls more seriously, which will will hopefully lead to a constructive rebalancing of priorities. But note that all the legislation is doing is calling for an accounting method that more closely resembles reality. That is a politically neutral mechanism in itself that will encourage progressive and conservative responses, and any number of technocratic responses in between. Naturally, those of us who advocate a shift away from deferred compensation believe that our approach will win out, but nothing is predetermined.