Rhode Island State Debt Among Highest in US
Saturday, January 11, 2014
The amount of outstanding debt in the state — a reflection of bonds, leases, and other government-issued debts not inclusive of unfunded public pension and other post employment benefit liabilities — totals $2.89 billion and places the state 16th in the nation on a per capita basis according to the national public policy group State Budget Solutions.
The figures don't include municipal or federal debt.
Varying concerns about the future of Rhode Island debt
“You look at those numbers, everything (appears relatively) fine,” said Leonard Lardaro, an economics professor at the University of Rhode Island. “My problem is that's the past.”
Framing the burden of debt against Rhode Island's gross state product and predictable future growth, “We're going to have a tough time ... bringing the debt down,” Lardaro said, pointing to a foreseeable “train wreck” in the form of legalized gambling in Massachusetts.
“That will be a major, major hit to our state tax revenues,” Lardaro contends. “We're going to have a hole to fill and that's going to be difficult.”
Edward Mazze, another URI professor in the college of business administration, said the state's debt level was relatively high but would be projected to decrease over the next three years if there was no issuance of new tax-supported debt other than that included in the capital budget.
“With two major current uncertainties, namely, the outcome of the court-requested negotiations on the pension system and the controversy surrounding the payment of 38Studios moral obligation bonds, the state's debt level can rise higher,” Mazze continued.
Lardaro said a default on the 38Studios loan could prompt a downgrade in the state's credit rating.
SBS claims states have much larger unfunded liabilities
“One of the best ways to look at it, beyond the per capita figures, is how our figure compares to what states traditionally treat as debt,” said Cory Eucalitto, an editor and author of the SBS' fourth annual state debt report.
Most state governments focus exclusively on the “outstanding debt” figure, he said, which doesn't include unfunded pension liabilities that make up $3.9 trillion of the nation's $5.1 trillion total state debt by SBS estimates.
When state officials do count unfunded pensions, Eucalitto said they do so assuming overly optimistic future investment returns.
“We use a market-valued discount rate which, if adopted, would give states the best guarantee of being able to meet their pension promises,” he said. “For example, we calculate a $15 billion unfunded pension liability for Rhode Island. Using the same plans and valuations, the state itself only calculates a $4.8 billion unfunded liability.”
State actuaries contested that assessment by the SBS with GoLocal.
In a year end report this month from the Rhode Island auditor general's office, the state pegged unfunded liabilities (pension costs for state employees including teachers, judges, and state troopers) at $4.5 billion as of June 30, 2013 — an improvement from the prior year's number cited by the SBS.
Why the discrepancy? Rhode Island Auditor General Dennis Hoyle reports the system's actuarial investment return assumption is 7.5 percent for all plans, except for a small portion covering judicial retirement.
The SBS assumes a more conservative, lower rate of future return on those retirement system investments.
The National Association of State Budget Officers Executive Director Scott Pattison said the SBS based their unfunded pension calculations on market value. Because of that, “the figures will look higher than what other organizations might report.”
Because of a data lag, the state's recent pension reforms are not reflected in the SBS report.
Future return predictions at odds
“Funding a pension benefit requires the use of projections, known as actuarial assumptions, about future events,” namely, market returns, writes the National Association of State Retirement Administrators in a report last month.
“An investment return assumption that is set too low will overstate liabilities and costs.” On the other hand, “a rate set too high will understate liabilities.”
According to the national association, actual median public pension fund returns over a 25-year period ending June 30, 2013, were pegged at 8.6 percent — nearly a full percentage above the average national assumption of 7.72 percent made over that time.
Rhode Island's investment performance in fiscal year 2013 was above plan expectations.
Rhode Island's total debt figure ranks in the middle of states in New England, where Connecticut leads on a per capita basis with a total debt of $112.37 billion — $31,298 for every resident in the Constitution State — according to the SBS findings.
Massachusetts' gross amount of debt is higher than Connecticut's, but lower based on population, at a total $129.55 billion or $19,493 for each resident.
New Hampshire follows behind Rhode Island, with $18.46 billion total and a per capita figure of $13,951, while Maine is next with $16,717,250 ($12,577 per capita).
Vermont has the lowest debt level in New England, at $7.87 billion: a per capita amount of $12,566.
Across the nation, Alaska leads in debt per capita, owing $40,714 for each resident.
So what can be done?
Eucalitto, the SBS report's author, said pension reforms should help to improve the situation in Rhode Island, “if leaders are able to stay dedicated to meeting their funding requirements.” But he said converting plans fully to defined contribution systems would go even further.
“The state's debt position can be improved if we pay more attention to budgeting and revenue forecasting and the state's established credit guidelines,” Mazze said.
“The problem with Rhode Island is we tend to be too static,” according to Lardaro.
“Our debt isn't a nightmare,” he said. But looking narrowly at those figures “misses the point.”
“We need growth more rapidly than debt accumulation.”
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