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.