Last week on the Helen Glover Show, I laid out three steps to get Rhode Island back on track: 1) reduce the 7.5% expected rate of return on the state’s pension plan, 2) become a right-to-work state to protect Rhode Islanders from being forced to pay expensive union dues, and 3) eliminate the state’s income tax.
In the past, regarding Rhode Island’s pension problems, I’ve been a pretty harsh critic of General Treasurer Gina Raimondo’s reform plans. Since then, she’s received national attention and a nice write-up by Time. She has put more time on the clock for Rhode Island to sort out its pension mess, and she deserves the credit she’s receiving. But my focus is on the pension numbers, not politics. The treasurer has made as much progress as she could politically, and that’s good. But a 7.5% expected rate of return on pension fund assets will cause the state’s unfunded liability to continue to expand each year that assumption is not met. Taxpayers will be on the hook to bridge the gap—states can’t print the money. But with taxpayers tapped out, benefits will have to be cut, most likely on a means-based scale.
Pensions invest as a balanced mutual fund does—in stocks and bonds. Today, the dividend yield on the Dow is 2.5%, and the five-year Treasury bond yield is 0.72%. A 50-50 split would yield 1.62%. That’s what I would consider a reasonable “assumed” rate of return. Some will cry that I’m forgetting about price appreciation. Well, I’d point out that prices over the last 10 years have been pretty much flat. And I’m also not interested in selling stock to some sucker for a higher price. If—and that’s a big if—there’s appreciation, I’d save it for a rainy day.
I’m even more conservative than the Mercatus Center, which crunched the numbers with long-term Treasuries yielding around 3%. Before Raimondo’s reform, Mercatus blew the unfunded liability out of the water. My numbers would almost double theirs. So Gina Raimondo, though she deserves credit, needs to keep the reform going, because this issue has certainly not left the state.
Rhode Islanders’ Right to Work
Rhode Island should be focused on becoming a right-to-work state. Instead, politicians are worrying about losing casino revenue to Massachusetts. You can see the rust falling off of Indiana, which is now the 23rd right-to-work state and first in the rust belt. The right to work is the WD-40. Rhode Island would be a job hub if it became right-to-work. Imagine how it would compare to the region—all forced-union states: New York, Connecticut, Massachusetts, Vermont, New Hampshire, and Maine? Where do you think local manufacturers would invest in new business? Rhode Island could be the Hong Kong of New England.
Eliminate the Income Tax
Oklahoma is a state that has seen the benefits of being right-to-work and is moving towards becoming tax free. As Phil Kerpen at National Review Online writes in “Oklahoma Leads on Income-Tax Repeal”:
The record is clear. Over the past decade, non-income-tax states have seen 59 percent economic growth, versus just 38 percent for high-income-tax states. Job growth has been 4.7 percent in the non-income-tax states, while high-income-tax states actually lost 2.9 percent of their jobs. Population growth is the same story, up 12.3 percent in the non-income-tax states and just 3.8 percent in the high-income-tax states. Perhaps most interestingly, non-income-tax states are seeing more rapid growth in state and local tax revenue, as the high-income-tax states are undermining economic performance and, as a consequence, depressing revenues.
This would be a shot in the arm to small business owners who pay taxes at their individual rate as a Subchapter S corporation.
A Barbell Solution
Another workable solution for Rhode Island’s economy is what I refer to as a barbell strategy. On one end of the barbell are the children and young adults, and on the other end are the retirees. Both of these demographics are fleeing Rhode Island, taking their money and their potential with them. Parents of young children want a good education for their kids, and young graduates want employment. What is Rhode Island offering them that they can’t get more of somewhere else? Retirees worry about outliving their money and will move to keep more of it in their pockets. Why settle down for your golden years in a state that sees you simply as a revenue stream?
There’s no reason why Rhode Island can’t follow New Orleans on reforming education. After Katrina, New Orleans became the number one charter-school zone in the country, with 80% of its students enrolled, and the city is pushing for 100% by next year. Louisiana Governor Bobby Jindal wants the entire state to follow New Orleans’s lead. Rather than waste its money on ineffective and bureaucratic public schools, Rhode Island could help towns fund charter schools that do a better job and leave no pension debt behind for taxpayers to clean up. And teacher tenure would be merit based, eliminating the current bureaucratic bloat that rewards teachers based on seniority, not proficiency.
To keep retirees in the state, Rhode Island lawmakers ought to get rid of the estate tax. Who wants to pay to die in Rhode Island when they can do it for free in Florida? Also, get rid of the tax on social security and pension income so retirees don’t move away the minute they stop working. Retirees have access to disposable income they have been saving all their lives to spend on fun after retirement. The state needs that type of spending to support galleries in Providence, restaurants in Newport, and charter fishing trips along the coast. This barbell strategy could help right away and would give a significant boost to Rhode Island’s economy.
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