S&P Negative Outlook: The Beginning of the End

OK, so Standard & Poor’s has slapped a negative outlook on the U.S. government. Too bad we can’t eat our debt. All I can say is thankfully they haven’t lumped state and local municipal finances into the outlook. Who’s going to bail us out of this mess? France? Please.

The nonpartisan Pew Foundation just released its study on state pension and retiree health-care costs. It’s aptly titled “The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs.” The gap, or unfunded liabilities or promises that should never have been made with your tax dollars, grew to at least $1.26 trillion in fiscal 2009, a 26% increase in one year.

Rhode Island, among others, stands out on a list you don’t want to stand out on. Its public-sector pension liability is $11,500,425,000—yes, that’s billion—and only 59% of that is already in the portfolio to cover the promises. Thanks to missed contributions and a mismanaged investment approach dependent on investment gains that never came, taxpayers funded a $320-million contribution in fiscal 2009, and the state’s a long way from catching up.

Rhode Island’s retiree health and benefits liability or promises are $788 million. They are 0% funded and dealt with on a pay-as-you-go basis. The state made a $46-million contribution in fiscal 2009, which was still only 62% of the required contribution. To say it’s a long way from catching up would be a waste of space. Sorry.

On a local level in Rhode Island, it’s even worse. In a July 2007 report on the status of pensions administered by Rhode Island municipalities, 21 pension plans administered by 15 Rhode Island municipalities were considered at risk. Each of the 37 total plans are self-administered rather than consolidated. The City of Cranston made promises it couldn’t pay for and had the largest gap in unfunded pension liabilities after Providence. Check out these numbers: Cranston’s Police and Fire Employees Retirement System was so badly underfunded that $21.7 million or 20.7% of the total property tax levy for fiscal 2006 went to just one year’s catch-up contribution. The plan covers 505 individuals, with an estimated unfunded liability for future benefits of $217 million or an estimated $430,779 per member.

Governor Chafee still doesn’t get it and will bully Rhode Islanders with a sales tax increase rather than take an honest look at cuts. After all, he’s got the unions to support. As a percentage of state and local government employment represented by unions, Rhode Island tops every other New England state with 71%, compared to only 8%, for example, in right-to-work North Carolina, which prohibits collective bargaining for public-sector unions.

Of course, little Rhody isn’t a right-to-work state, so you can be forced to join a union as a condition of employment, and Governor Chafee doesn’t want to disturb the cash cow of union dues. After all, union leaders back big-labor guys like him 93% of the time (according to OpenSecrets.org).

Here’s what Robert J. Haynes, president of the Massachusetts AFL-CIO, had to say about his state’s Democrat-led House vote to restrict unions: “We are going to fight this to the bitter end. Massachusetts is not the place that takes collective bargaining away from public employees.” Is that right?

What would you expect Mr. Haynes to say? His job is to run the union and get as much as he can for its members. But at some point don’t you think some union members would step up and say “You know, if these numbers are as bad as they seem to be, and they are, shouldn’t we be pushing for public pension reform so the promises made to me will be kept?” It’s time Rhode Island, like Massachusetts, New Hampshire, and Maine, got serious about reform, because even though France gave us the Statue of Liberty, it’s not about to bail us out anytime soon—it has its own union riots to deal with.

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E.J. Smith - Your Survival Guy

Preparing your investments and family for when disaster strikes.

E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.