The Third Rail by Jim Leech and Jacquie McNish reveals how Gina Raimondo dared to touch the politically dangerous pension issue to save the state from financial meltdown.
Rhode Island is a generous employer, with so many pension plans that at times it seems they compete to outdo one another in benefit improvements. Which is why, in 2011, it became the epicentre for a dramatic showdown over pension reform.
Years of governments solving budgetary headaches by suspending pension contributions, while continuing to spend lavishly on benefits had created one of the worst funding records in the United States. By the time the financial crisis hit in 2008, Rhode Island’s state pension fund only had two-thirds of the assets required to meet pension promises, a funding gap repeated in many of Rhode Island’s numerous municipalities.
In 2009 and 2010, whiplashed by shrinking revenues and expanding pension debts, Rhode Island started slashing. Bus routes were cut, library hours reduced or eliminated altogether, and government jobs were sharply trimmed. Still, the state’s political leaders were not going anywhere near the third rail. It was more expedient politically to cut services and jobs in a state coping with an 11 per cent unemployment rate than to cut pension benefits.
One businesswoman was paying close attention to all the financial horror stories. Born and raised in Providence, Gina Raimondo is the granddaughter of Italian immigrants who moved to Rhode Island to pursue the American Dream. She personified that dream, winning scholarships to Harvard, Yale, Oxford before taking a job running a local venture capital firm. As she read the stories about service cutbacks in Rhode Island, Raimondo grew incensed. Buses and libraries had helped her family succeed for generations.
“I wouldn’t be where I am without good government services,” she said in an interview from her Providence office. “It’s the American Dream. People can grow up working class and wind up at Harvard and Yale and Oxford. If we don’t make this government work that kind of story just won’t happen any more.”
A lifelong Democrat who entertained political ambitions, Raimondo believed she had the financial skills to fix the crisis. “I literally put the paper down and said, ‘I have to fix this, I have to run,’ ” she would later tell Bloomberg. In 2010, Raimondo, then 39, campaigned for Rhode Island treasurer. Her core platform was fiscal and pension reform. The stand lost her the support of the powerful teachers union, but her message resonated with taxpayers. In November 2010, the political novice won by a landslide, garnering more votes than any other candidate for state office.
For much of early 2011, the state’s new treasurer closeted herself with a consultant accustomed to being ignored by politicians. Joe Newton is an actuary who advises a variety of state governments about their pension systems. After days of struggling to understand the financial condition of the retirement system for state employees and teachers, she came to realize that the system no longer made sense. Years of mismanagement and underfunding had allowed money to be drained that was needed to pay promised pensions. The crisis was much worse than Raimondo had expected.
“This is really bad, what am I going to do?” she remembers thinking at the time. “The actuary was telling us that under a reasonable set of assumptions, this pension fund would pretty much be out of money in 20 to 25 years.” To the trained economist, the math was horrifying: the state’s retirement funds had only 56 per cent of the assets needed to pay more than $14-billion (U.S.) of pension liabilities.
The money that was left was flying out the window because the state’s pension members had not contributed enough to pay for lucrative pension benefits for the growing ranks of retirees, who almost outnumbered workers. Pension bills were costing Rhode Island 10 per cent of its annual payroll, a number Newton warned would double in a year.
It was an unaffordable burden for a state that was facing a $300-million budget deficit in fiscal 2012. If pensions were going to be saved, the math had to change. To accomplish that, state lawmakers had to overhaul pension laws to reduce pension benefits. She would need voter support and she would need the backing of enough members from the Senate and House of Representatives to pass new legislation. This meant shifting Rhode Island’s political mindset.
To win support for her ambitious plan, she had to enlist Governor Lincoln Chafee, a one-time Republican who was voted into office after he ran as an independent. Chafee, 58 at the time, agreed the pension crisis was strangling the state, but he had opposed cutting the benefits on the campaign trail. His solution was to delay the crisis by stretching out or amortizing payments on the $7-billion funding shortfall over thirty years.
To Raimondo, the Governor’s stand exemplified the type of political stalling tactic that had allowed the pension contagion to spread. If Chafee didn’t back away from his plan, Raimondo, a rugby player, warned she was prepared to go to war. “I said, ‘Governor, I understand you’re going to advocate for amortization and I just want you to know if you do that, I’ll be vocally opposed,’ ” Raimondo recalled in an interview. To his credit, she says, Chafee listened.
The next step was to convince Rhode Island’s voters. This meant telling working and retired state employees their pensions had to shrink – bad news that no politician wants to share with his or her constituency. If she was going to win support from her state, the treasurer decided, she had to strip away the emotions by focusing on the math. Explain the numbers and reasonable people could not disagree that the state was being strangled by its pension debts. Mathematically, she would tell local reporters, it was “impossible” to fix the traditional pension regime. Redesigning Rhode Island’s retirement system, she said, “was an everybody issue.” Everyone – taxpayers, workers, and retirees – were all in the same boat: they would suffer income cuts or tax increases if the system was not redesigned.
In May 2011, four months after she took office, Raimondo issued a startlingly frank pension manifesto. Titled Truth in Numbers, the 16-page report was a bleak chronicle of how pension mismanagement had bequeathed taxpayers a pension mortgage that could no longer be paid, while leaving retirees with a shaky retirement home that was on the verge of collapsing. The report did not flinch from the sacrifices that Raimondo believed were necessary to salvage what was left of the state’s pension savings.
She wanted Rhode Island to borrow from the Dutch pension model and suspend cost-of-living allowances paid to 21,000 retired state employees until the underfunded plan was largely replenished. Future pension benefits should be calculated from a salary base that was drawn from workers’ average career income rather than the more costly base of their final income years. State employees would no longer be able to retire in their 40s and 50s; the retirement age needed to be shifted to 67.
The report explained the advantages of creating a new hybrid pension model that would roll workers’ accrued defined pension benefits together with a new defined contribution plan. The state would honour the defined benefits that workers had already accumulated during their career, but going forward it would only commit to paying fixed contributions to a hybrid pension that combined old defined benefit savings with the new defined contribution plan. The days of fully guaranteed pension benefits in Rhode Island were coming to an end.
Raimondo’s pension solution ranks as the most radical in recent North American history. “Sugar coating only hurts people,” Raimondo said. “This problem won’t go away until you fix it. The longer you wait, the harder it will be to fix.”
Faced with union opposition, Raimondo took her reform pitch on the road, visiting more than 100 community centres, town halls, immigrant clubs, and schools during the summer and fall of 2011 to tell crowds of disgruntled workers and retirees why they had to accept smaller pension benefits.
At most meetings, retirees, workers and labour leaders angrily denounced the state for breaking pension contracts employees had faithfully honoured with regular pension contributions. When workers shouted her reform was “immoral,” she retorted it was immoral to cut vital school and transportation services. She had so thoroughly researched local property tax rates in Rhode Island municipalities that she was able to tell any retiree who opposed pension cuts how much their taxes would increase in the next year if the benefits were not scaled back. Few could dispute her math, and even union opponents such as Robert Walsh, executive director of the National Education Association, the state teachers union, marvelled to reporters that she was “fearless.”
Raimondo had three things going for her in the uphill pension battle. Under Rhode Island law, state pension benefits are approved by the legislature. They are not part of a collective bargaining process, which means the government could argue, if legally challenged, that cutting pension benefits did not violate labour contracts. Another advantage was a tactical legal move by the state to restrict potentially unruly local governments from damaging Rhode Island’s credit rating. In July 2011, Rhode Island’s legislature passed a unique new law retroactively guaranteeing that all investors in state or municipal bonds would be fully repaid first in the event of a government bankruptcy. While some municipalities complained the state was putting Wall Street ahead of Main Street, the move ensured that Rhode Island and other local governments could continue raising badly needed funds by selling bonds. If one municipality declared bankruptcy, it would not be able to dig out of the hole by reneging on bond payments.
Although most of her colleagues in the Democratic Party were confident that they had enough support to pass the reforms, Raimondo wasn’t taking anything for granted. It was a good bet that some representatives would seek to mollify angry labour groups with last-minute amendments. These reforms would be watered down if state politicians, seeking to mollify labour groups, passed amendments that rolled back some of the pension cuts. The state was on the eve of such an historic pension overhaul that reporters from national television and print outlets, including Time Magazine, The New York Times, and The Wall Street Journal, had flown in to witness the vote. All of them wanted to interview Raimondo. She had to be prepared if the vote went the wrong way.
A lot had happened in the 10 months since Raimondo was sworn into office in January. Her Truth in Numbers report and local town hall meetings had touched a chord with the state’s weary taxpayers. Voters had run out of patience with high local taxes and deteriorating government services. The town of Central Falls had been forced into bankruptcy under the burden of a $40-million pension obligation, and some retirees saw their pensions cut by as much as 50 per cent. This was no longer a Tea Party or Republican issue; Democrats were facing a backlash if they continued to avoid fixing a broken retirement system.
Just as Raimondo had predicted, Rhode Island’s House of Representatives was busy with floor amendments when the new pension legislation was tabled shortly after 2:30 p.m., Nov. 17, 2011. During the next several hours, more than 30 amendments were introduced, many of them attempts to shield various pension members from the changes. Watching the political theatre from a second-floor gallery were more than 200 spectators, most of them union officials. As the procession of amendments were voted down, a chorus of jeers and catcalls from the gallery grew so loud that the House speaker warned them to be silent.
House Majority Leader Nicholas Mattiello stood to soothe the crowd: “Nobody woke up one morning and said, ‘We’re going to take something from folks.’ Most of the folks up in the gallery are our friends.” He was drowned out by booing. Near the end of the session he stood again. “We have a $7.3-billion pension liability. ... Whether you are sitting in this room or voting, you are one of the employees who is going to be impacted. It has to be done. We had no choice.” At 7:40 p.m., more than five hours after the legislation was introduced, the vote was called. It was a landslide: 57 representatives voted in favour and 15 opposed. A few minutes later, the Senate delivered a bigger sweep, with 32 in favour and two opposed.
Raimondo, who had been tensely watching the debate from her office television, was suddenly the most sought-after politician in the United States. Reporters lined up outside her suite of offices to interview the political novice who had accomplished the seemingly impossible in a discouraging era of American political gridlock. She had convinced politicians to risk their political careers to secure a financially sound, long-term future for the state and its retirees.
“Government worked tonight,” she told reporters. “On one of the toughest, most financially complicated, politically charged issues we face, we did something right.”
This book excerpt has been condensed and edited.