National School Choice Week

Scholarship Program Recommended for Special-Needs RI Students

Senators Ciccone and Walaska are called upon to take action to back up their own “School Choice Week” Resolution. Read the full Policy Brief here … with charts and end notes.

Stephen Hopkins Center supports our Center’s call for the Bright Today Scholarship Program

MEDIA RELEASE:

Bright Today Scholarship Program

Empowering Rhode Island’s Most Vulnerable Children with a Quality Education

Senators Ciccone and Walaska are called upon to take action to back up their own “School Choice Week” Resolution

January 26, 2012, Providence, RI — In recognition of National School Choice Week, the Rhode Island Center for Freedom and Prosperity urges policymakers to adopt a school choice scholarship program for special-needs students. In light of the recent resolution co-sponsored by state Senators Ciccone and Walaska recognizing School Choice Week, the RI Center for Freedom calls upon the senators to follow up their welcome recognition with firm action, and respectfully requests that they provide the leadership necessary to see that legislation is adopted that provides a school choice scholarship program for disabled students in Rhode Island.

As follow up to its recently published education report, Closing The Gap, which demonstrated how recent Florida-style school reforms could aid disadvantaged students in the Ocean State, the Rhode Island Center for Freedom today issued a Policy Brief detailing how adoption of one, particular Florida reform – the McKay Scholarship Program – could empower Rhode Island’s most vulnerable and under-achieving students with new choices to receive a quality education.

As part of its “Bright Today” set of recommended school policy reforms, the RI Center for Freedom recommends that the Ocean State develop a scholarship program of its own, which would allow families with special-needs children to utilize public funding, in the form of a voucher – based cost of education in the school district they are leaving – to attend a private school of their choice. This recommendation is consistent with RI Department of Education’s (RIDE) strategic recommendations and can be implemented into law by the Rhode Island General Assembly.

The Policy Brief entitled the Bright Today Scholarship Program cites details from Closing The Gap that shows how Rhode Island students with disabilities are declining in achievement and have lost approximately (5) grade levels of learning to their peers in Florida since the Sunshine State implemented its school voucher system for such students, the McKay Scholarship Program, over 12 years ago. The Brief provides information about this program, including national perspectives, implementation details, and fiscal and academic impacts, as well as a summary of how other states have followed Florida’s lead in this area.

Earlier this month the Rhode Island Senate passed a resolution (#2064) recognizing National School Choice Week, citing that ” … Citizens across Rhode Island agree that improving the quality of education and expanding access to highly effective schools should be an issue of importance to our state’s leaders …”. The RI Center for Freedom calls upon the sponsors of this resolution, and all those who supported it, to take active and concrete steps to back-up their own resolution by developing and passing a Bright Today Scholarship Program bill for the Ocean State.

“The freedom to choose is a staple of almost every component of life in America except perhaps the most important area – education. With all the talk about providing for our state’s neediest residents, we challenge our public officials to actually do something about it”, said Mike Stenhouse, CEO for the RI Center for Freedom. “How can we not act to provide a ‘bright today’ for these families who have been left behind by our educational system? With public demand and leadership, by next fall, hundreds or thousands of our most disadvantaged students could be attending a better school”, added Stenhouse.

The non-partisan Rhode Island Center for Freedom and Prosperity is the state’s leading free-enterprise public policy think tank. Firm in its belief that freedom is indispensable to citizens’ well-being and prosperity, the Center for Freedom’s mission is to restore competitiveness to Rhode Island through the advancement of market-based reform solutions.

Read the full Policy Brief here … with charts and end notes.

 

Unemployment Up

Governor’s Sales Tax Hike will Hike Unemployment

Download the complete Policy Brief here; includes comparative table and reference end notes.

View or Download the Media Release here; includes quotes and additional information about Scott Moody and STAMP.

Lesson in Capitalism – “Dynamic Effects of Tax Policies”

Balancing the Budget via Sales Tax Increases would Cost Jobs for Rhode Island

January 23, 2012; by J. Scott Moody – adjunct scholar

Consider which of two tax-policy scenarios may be more beneficial for Rhode Island:

A) a policy that increases state revenues to sustain current spending, but which reduces the state’s economic output and where jobs are lost; where municipal revenues go down and where investment in our state is reduced.

B) a policy that reduces state revenues forcing cuts to current spending, but which increases our state’s economic output and where jobs are gained; where municipal revenues go up and where investments in our state rises.

This is the vital debate that must take place in the Ocean State during the 2012 legislative session.

2012 will predictably bring a vigorous debate about how to balance our state budget and how to pay for most of the current spending items in the budget – by some combination of increasing taxes and making cosmetic cuts to existing programs. This is the wrong debate and the wrong objective for the Ocean State!

Instead, debate should focus on how to make Rhode Island more competitive with our neighbors and how to grow our economy so as to add more good jobs for our citizens. Increased tax revenues will naturally follow from the expansion of economic activity.

Dynamic vs Static Tax Modeling

There is a common and fundamental miscalculation when it comes to projecting the effects of tax policy on state revenues. Too often, the more short-sighted and simplistic static calculation is utilized, when in reality is the more complex dynamic effect should be evaluated. The downstream effects of tax policy on various aspects of the economy are rarely discussed or quantified, either at the state or municipal level.

Take the state “sales tax” as an example. Rhode Island is expected to derive about $989.5 million from this tax, currently at 7%. In 2011, to balance the budget, the Governor proposed over $150 million in tax increases through an expansion of the state sales tax: reducing the sales tax on some items and charging new sales taxes on other items. For modeling purposes, assuming a overall target of $175 million in new revenues, this would have effectively raised the existing state sales tax rate to about 8.2%. While not an exact apples-apples comparison with the Governor’s 2011 plan, an analysis of the higher 8.2% sales tax, utilizing RI-STAMP, a state tax and analysis modeling program customized specifically for Rhode Island, shows the kind of negative consequences that can be expected to occur when any state sales tax hike is considered.

Tragically, this sales tax increase would not raise nearly the amount of revenues statically calculated because it would cause serious harm to our already deteriorating state and municipal economies. In summary, a sales tax hike of $175 million is projected to produce severe unintended consequences for theOceanState:

  • Only a $55 million gain in net state revenues (vs the $175 million gain anticipated)
  • A loss in Gross State Product o $932 million
  • A loss of $22 million in municipal revenues
  • A loss of $64 million in investment in our state
  • A loss of 2,224 jobs

 Because a sales tax increase would make Rhode Island even less competitive with its regional neighbors and nationally overall, consumer and entrepreneurial behavior would be significantly altered, resulting in lower economic activity and actually worsening the state’s economic plight. Municipalities, all too often overlooked, will also suffer from this unintended consequence.

Balancing the budget is the wrong goal; and tax increases are precisely the wrong solution!

Conversely, if the Ocean State was to cut its sales tax to 5%, a very different scenario is projected to occur, because our state would suddenly become a more attractive place to purchase goods and services, meaning economic activity would increase.

The static projection of a 2% sales tax cut would put the loss in state revenues, at 2/7 of the current revenue, or about $282.75 million in lower revenues to the state. But again, this static calculation ignores the true dynamic economic impact of tax reductions. RI-STAMP projects the following positive consequences from this tax decrease:

  • Only a $74 million loss in net state revenues (vs the $283 million loss anticipated)
  • A gain in Gross State Product o $1.9 Billion
  • A gain of $44 million in municipal revenues
  • A gain of $121 million in investment in our state
  • A gain of 4,327 jobs

Just from this single tax reform, economic forces, which have been restrained by a burdensome tax structure, will be unleashed in the Ocean State. If the state can find $56 million in cuts, the Rhode Island economy will be vastly enhanced, resulting in more jobs and more local revenues … and we will balance a lower budget!

The Governor’s office recently stated that it plans to address the upcoming budget deficit by cutting spending and raising taxes. As demonstrated above, this path produces negative consequences.

If instead, we look to address the larger economic picture and look to produce more jobs and a brighter economic future for our citizens …

… cutting taxes and cutting spending will produce a more vigorous economy!

Additionally, from a regional and psychological perspective, instead of suffering the ignominy of charging highest sales tax in New England, Rhode Island would benefit by boasting the second lowest sales tax.

Reality Supports Theory

Some may argue that an economic modeling program is just theory and that the actual world may present a very different reality. However, right here in our own New England back-yard, there is specific empirical evidence that fully supports the core premise of the RI-STAMP projections regarding the effects of sales tax policy.

It is well-known that cross-border shopping exists to the great benefit of the zero sales tax state of New Hampshire, with many Rhode Islanders frequently putting in ‘orders’ with family members and friends crossing through the Granite State to pick up liquor and other items for them … duty free!

In Vermont, a recent study showed that its border counties are losing up to $540 Million in retail sales per year to New Hampshire . In Maine, a similar study showed that its border counties are likewise losing $2.2 Billion, in addition to thousands of retail jobs .

With the close proximity of Rhode Island to many Massachusetts and Connecticut residents, it is clear that Rhode Island can win the southern New England sales tax competition; that our economy can benefit from cross-border shopping and see a pronounced increase in economic activity and jobs for our state and our cities & towns.

WHAT IS RI-STAMP?

Developed by the Beacon Hill Institute at Suffolk University, RI-STAMP is a customized, comprehensive model of the RI state economy, designed to capture the principal effects of city tax changes on that economy. In general STAMP is a five-year dynamic computable general equilibrium (CGE) tax model. As such, it provides a mathematical description of the economic relationships among producers, households, government and the rest of the world. It is general in the sense that it takes all the important markets and flows into account. It is an equilibrium model because it assumes that demand equals supply in every market (goods and services, labor and capital); this is achieved by allowing prices to adjust within the model (i.e., prices are endogenous). The model is computable because it can be used to generate numeric solutions to concrete policy and tax changes, with the help of a computer. And it is a tax model because it pays particular attention to identifying the role played by different taxes.

Download the complete Policy Brief here; includes comparative table and reference end notes.

Media Coverage:

1/30/2012: Americans For Tax Reform , ATR: Opposed to Rhode Island Sales Tax Increase

1/23/2012: GoLocalProv.org, NEW: Conservative Think Tank Rips Chafee on Taxes

Closing The Gap

CLOSING THE GAP Education Study Released

Go to: CLOSING THE GAP Home Page

Testimony of Giovanni D. Cicione, Esq., Senor Policy Advisor, to The Board of Regents of Elementary and Secondary Education. Preview of CLOSING THE GAP education study released on January 9. The RI Center for Freedom & Prosperity submitted written testimony to the Board of Regents at their January 5 meeting regarding elementary and secondary eduacation. Giovanni Cicione, senior policy advisor to the Center, expects to be able to testify verbally at the next meeting of the Regents on Janauary 19.

The full testimony (below), also served as a preview of a major study the Center for Freedom, entitled, Closing The Gap. Visit the Closing The Gap home page here.

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Testimony of Giovanni D. Cicione, Esq., Senor Policy Advisor, Rhode Island Center for Freedom & Prosperity

To The Board of Regents of Elementary and Secondary Education (submitted January 5, 2012)

Good Afternoon. My name is Giovanni Cicione and I am the Senior Policy Advisor for the Rhode Island Center for Freedom & Prosperity. The Center is a nonprofit, nonpartisan organization, dedicated to providing concerned citizens, the media, and public officials with policy research and data, and advancing free-market solutions to public policy issues in the state.

Or intent in coming before you today was not specifically to weigh in on the debate regarding Achievement First. Rather, we intended to preview and share a study we will be releasing next week entitled “Closing the Gap.” This study, which I will reference n more detail in a moment, looks at reforms made in the state of Florida over 10 years ago that led to dramatic gains in educational achievement for some of the most challenged student populations in that state.

What is interesting from the perspective of today’s debate, is that much of the success in Florida over the last decade can be directly tied to the type of approaches advocated by Achievement First and similar organizations. And while I’m sure you will hear many criticisms of the mayoral academy model from the special interests who oppose these reforms, what our study demonstrates is that when these and other related reforms are put in place not only do you see overall gains, but that those gains are strongest amongst those students who are the most disadvantaged.

Non-English speakers, students who rely on free or reduced lunch support, and students with disabilities saw the most dramatic gains under the Florida reform model.

Our study will provide more detail and specific data when it’s released next week, but I’d like to highlight the key findings and recommendations.

Closing the Gap shows, for example, that Florida’s fourth-grade Hispanic students have improved so dramatically that they now perform at the same achievement as the average for all Rhode Island fourth-graders. Both states started out equally far behind, but Rhode Island students’ average score has improved by only (5) points since 1998, while Florida’s Hispanic students have improved by (25) points; equivalent to two-and-a-half grade levels’ of progress.

Imagine the impact if we had taken the same route ten years ago, when our own Hispanic children now preparing to graduate were just starting their grade school careers. Hispanics are the largest minority group in Rhode Island and represent 11 percent of the total population and 19 percent of the public school population. Unfortunately, Rhode Island Hispanic students have among the lowest (NAEP) scores in the nation in both math and reading. Closing the Gap shows the way to improve this ranking.

Closing the Gap cites reforms in evaluations and accountability for teachers and schools in the areas of transparency and parental choice. The study documents how the latest NAEP results strengthen the argument that Florida-style reforms should be considered for Rhode Island.

Closing the Gap explains in some detail why Florida’s reforms, while benefiting all students, have been especially beneficial to disadvantaged students. The study details the key components of Florida’s K-12 education reform strategy and makes specific policy recommendations that will provide more young Rhode Islanders with an opportunity to succeed in school and enhance their chance of pursuing and achieving their dreams.

Florida’s reform model includes:

• Public-school choice for students in low-performing public schools.

• Private-school choice for students with special-needs.

• An open door for new charter schools.

• Selective and effective se of virtual education.

• Performance pay to reward teachers who achieve student gains.

• Alternative teacher certification.

• A through F grading of all public schools; and

• A ban on social promotion.

These reforms were passed by a bi-partisan group of political leaders who faced many of the same criticisms you will hear today. They did it without empirical evidence that it would work, but they also new that to do nothing would be to condemn students to failure.

Your choice is a much easier one. I’d like to ask you to consider something – think for a moment about what you will say to a first grade student today who comes back here in a dozen years if you don’t adopt these types of reforms? What will you tell that student who asks why she is graduating with a 9th grade education after twelve years of instruction? Today you could perhaps claim that you didn’t’ know if the reforms would work, but Florida has shown us that they do – we cannot plead ignorance or even uncertainty when that child stands before you.

Why does Rhode Island suffer from the largest achievement gap among Hispanic students and other with unique challenges? Is it failing schools, a lack of funding, or is it something much worse … the soft bigotry of low expectations?

The Rhode Island Center for Freedom & Prosperity believes that every student can succeed, and that the only true disadvantage or disability is a rigid and moribund system that stacks the deck against them.

Thank you for the opportunity to be here today.

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Income Inequality should not “Occupy” our Public Policy Planning

Republished as an OpEd in Providence Business News (January 2, 2012 edition) under the title “Public policy shouldn’t worry about ‘solving’ inequality.”

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As we observe the “Occupy” phenomenon, and as our local chapter prepares to hibernate for the winter, the issue of income inequality has become a national debate. Even as our President talks about fairness we need only look to the very recent past to understand what government should not do in reaction.

Other than alienating some progressive notion of fairness, I have not heard a cogent argument as to how the condition of income inequality negatively affects our economy. Yet many believe that, by addressing the symptom, we will solve the underlying economic malady. This thinking is naively upside down. Free-market theory would instead suggest that income inequality is the result of economic bust periods and not the cause of downturns, which are an expected part of the normal boom-bust cycle.

During difficult economic times the rich will disproportionately be able to protect their wealth because they have the means and because they steer the wheels of industry. To keep profits high they can down-size, reduce wages, and eliminate capital purchases or investments in new technologies. As uncomfortable as this might be to some, this is just “business” … a natural reaction; not evil. Profits are why they risked their wealth in the first place.

Conversely, during boom times, as competition for labor intensifies, the wealthy, via their companies, will offer higher wages and equity positions to more people and will also invest in growth via myriad other purchases. During these periods the lower and middle classes will gain more proportionately from the fruits of industry.

If not income inequality, what then was the cause of the recent recession? While the Occupiers claim that it was the failure of capitalism, I would contend that the real problem was the monkey-wrench of big-government within the gears of capitalism, motivated by the false notion that the government should legislate fair outcomes.

Think about it … what were the three major industries that failed? Housing, Banking/Finance, and Auto: three of the most heavily regulated industries in America. These industries have become anything but true examples of capitalism or free markets.

As for the “1%”, or millionaires, a recent CATO survey found that 80% of them are first-generation rich, meaning they earned their wealth on their own and didn’t have it handed down from their families. Today, that same 1% pays about 37% of all federal income taxes, while earning just 16% of all income. Isn’t this inequality?

Interestingly, it may not even be true that there are more rich people. The non-partisan Tax Foundation found that since 2007, there has been a 39 percent decline in the number of millionaires, and that the top 1% earned 20% of all income just a few years ago.

But, either way, so what? If we are to prosper as a nation, there necessarily must be prosperous people … get over it! Who else is going to invest capital in new growth ventures, in expanding businesses, in hiring people, and in spurring innovation?

Our nation was originally formed with the principle that citizens are equal in the eyes of the law; later we justly added equality with regard to freedom and voting; inalienable rights. Absolutely nothing in our constitution about equal outcomes.

In the 1990s, concerns were raised about inequalities in the housing market. So, for politically created ‘fairness’ reasons, the government intervened, requiring mortgages be granted to individuals who had not yet earned the privilege of being able to pay for a house. The resulting housing bubble and the current wreckage in the housing market is a predictable outcome of government interference in the free-market system.

This self-induced housing wound bled into the financial markets in the form of mortgage derivatives, a futile and destructive attempt to make profits from the non-profitable mortgage practices the government mandated upon the market. Making matters even worse, because of their connections to government, the banks and financial institutions knew that they would be bailed out by the taxpayers; so they took even more reckless risks. This is a point the Occupiers also make, if not for different reasons.

Taxpayer funded bailouts are yet another form of government interference and are not part of the capitalist system. The ‘risk-reward’ and the ‘never too big to fail’ principles were violated … and we are paying for it today.

This unintended chain-reaction of harmful events in the housing market was caused by well-intended, yet imprudent, government intervention in the name of fairness.

The Occupiers now seem to suggest that public policy should be crafted to mete out incomes. If interference in the housing market was bad for America, imagine what the unintended consequences will be to the business sector if government intervenes with the basic incentives of our nation’s entire economic system!

Capitalism is not a dirty word. In fact, we need more of it … via less government intervention. This is what will naturally reduce income inequalities and lead to growth in our economy. Attempting to solve income inequality through government intervention should not occupy any measure of our public policy planning.

Mike Stenhouse is CEO of the Rhode Island Center for Freedom and Prosperity, a public policy think tank, and earned an Economics Degree from Harvard University.

 

LawBooks-full

Legal Authority to Adjust State Pension Plans

To read the full version, with citations, click here for PDF …

Exorbitant retirement benefits are threatening the ability of Rhode Island and its municipalities to deliver essential government services and, in one of the most extreme cases in the nation, one of Rhode Island’s municipalities has been driven into bankruptcy because of an inability to resolve pension debt issues through negotiation.

A recent decision by Rhode Island Superior Court Justice Taft-Carter has called into question whether the state and its municipalities have the flexibility to unilaterally adjust pension benefits. Our Center believes that Rhode Island does have broad legal flexibility to adjust existing pension benefits in order to stave off bankruptcy or avoid dramatic reductions in essential services. This policy brief considers the legal background of that question and suggests proactive steps which the legislature can take in order to guide future courts as they consider the constitutionality of proposed reforms.

Most estimates place Rhode Island’s state level unfunded liability at approximately $6,800,000,000 ; a figure on scale with the state annual budget and roughly twice what the state collects in revenues in a year. Of great concern is that such estimates assume investment returns in the pension funds of 7.5 percent while many states are considering using estimates pegged to the money they pay for bond issues – potentially closer to 5 percent. If Rhode Island was to follow that more prudent approach, the unfunded liability would likely exceed twice the current estimates.

More importantly, a practical discount rate would more accurately reflect the expectations of beneficiaries as to the risk of their retirement plans. State and municipal retirees have long been led to believe that pensions were guaranteed by the government. In fact, pensions have always been some combination of promise and ‘gratuity,’ with payouts left to the discretion of politicians and future taxpayers.

And while a lower discount rate would expand the unfunded liability on paper, perhaps it is better to recognize that, for retirees, a conservative estimate of returns is more properly in line with their tolerance for risk.

Unfortunately, for current pensioners, those less conservative estimates of 7.5% returns or higher have been used for decades in Rhode Island and, while we can take the more prudent approach going forward, we must accept that for current participants in our retirement system, the money they were promised is simply not there.

Like the state, municipalities suffer under the burdens of their own liabilities and, with well over one-hundred separate plans, Rhode Island fails to realize savings related to economies of scale and more experienced oversight: Already some of our pensioners are suffering the consequences.

With the City of Central Falls in bankruptcy, its retirees are facing potential cuts to their pension checks of more than half what they had been receiving; a dramatic reduction to a fixed income that many cannot reasonably expect to afford. Poor planning, non-existent oversight, and bad political choices will, in a very real sense, be driving some of these pensioners into poverty.

As the Wall Street Journal’s David Wessel says, “Bankruptcy is a last resort. To avoid it, state and local governments need an alternative that is less unappealing. They don’t have one yet.” With 38 other cities and towns in Rhode Island facing the impacts of the same crisis, Governor Chafee recently called for alternate suggestions to the futility of trying to tax our way out of this deep hole.

There is growing bi-partisan recognition that exorbitant retirement benefits granted to civil service unions are threatening the ability of states and cities to provide essential services without implementing job-destroying tax increases. Indeed, even former San Francisco Mayor and California State Assembly Speaker Willie Brown (D), a staunch public union supporter, recognizes that lucrative defined benefit pension plans are unsustainable. John Fund of the Wall Street Journal writes about a column Willie Brown authored for the San Francisco Chronicle in which Brown lamented that civil service was out of control.

“The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians – pushed by our friends in labor – gradually expanded pay and benefits … while keeping the job protections and layering on incredibly generous retirement packages.”

Brown later told Fund, “When I was Speaker I was in charge of passing spending. When I became mayor I was in charge of paying for that spending. It was a wake-up call.”

Fortunately, despite the concerns raised by a recent Rhode Island Superior Court decision in the matter of Council 94 v. Carcieri , a more appealing remedy than bankruptcy exists. It is contained in two U.S. Supreme Court cases, Energy Reserves Group v. Kansas Power & Light and United States Trust Company of New York v. New Jersey .

States and (with state authority) municipalities, can unilaterally reduce excess retirement benefits under circumstances now widely prevailing. There is a widespread misunderstanding in many states that the U.S. Constitution prohibits these adjustments but there is no such prohibition. The Council 94 v. Carcieri decision has been misinterpreted as suggesting that Rhode Island has some unique version of that prohibition but that is not what the decision says.

In short, the Council 94 v. Carcieri decision simply states that some Rhode Island pensioners have certain contract rights. That is far from saying that those contract rights cannot be revoked when the state faces a pressing need.

A report published earlier this year by The Pew Center on the States confirmed that legislators’ belief that retirement benefits cannot be modified is only an assumption. “It is uncertain in many states what the constitutional protections are because they haven’t been tested or at least thoroughly tested in the courts,” says Ron Snell, director of state services at the National Conference of State Legislatures. “But state legislators have assumed the protections to be quite strong.”

This assumption that there is constitutional prohibition against benefit modification is a misunderstanding. Case precedent is clear that, under circumstances currently prevailing in many places, retirement benefits may be reduced. The U.S. Supreme Court’s interpretation of the U.S. Constitution lays out the rules by which states may modify their contractual obligations.

The facts required by the clear language of the governing cases are directly applicable to the situation in RI. These cases give us clear guidance.

There are scores of state and lower federal court cases holding against attempts to modify vested pension benefits. Upon examination, few, if any, of these cases were brought on the grounds set forth as applicable by the U.S. Supreme Court. Accordingly, these state and lower court cases are irrelevant to the current circumstances. They were special, very narrow cases that did not spring from legislative action to remedy a broad and general social or economic problem. The governing law may be summarized as follows:

• A state may impair a contractual right if it has a significant and legitimate public purpose such as remedying a broad and general social or economic problem, such as elimination of unforeseen windfall profits.

• A state may do so as an exercise of its police power.

• A contractual impairment may be constitutional if it is reasonable and necessary to serve an important public purpose.

When a state reduces an obligation, the courts will inquire as to whether the adjustment of “the rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation’s adoption. Courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.”

When a state impairs its own contractual obligations (as is the case with retirement benefits promises) the courts and certain other material factors come into play. The courts will hold the state to a somewhat higher standard of scrutiny as to the policy’s necessity and reasonableness. Therefore, a prospering state with a well-funded retirement plan could not arbitrarily cut promised benefits. But a state struggling to the point of eliminating essential services or a municipality facing insolvency certainly may, under the law, modify existing retirement benefits. Furthermore, it is entirely settled law that one legislature may not abridge the powers of a succeeding legislature and cannot bargain away the police power of a state.

So, in addition to the realistic reading of the contracts clause itself, and as recognized by the Supreme Court, an independent doctrine holds that the Constitution’s contract clause does not require a state to adhere to a contract that surrenders an essential attribute of sovereignty. The classic doctrine that one legislature can neither abridge the powers of a succeeding legislature nor bargain away its police power permits states to reduce their public employee pension obligations under the circumstances now besetting many states.

The law does not permit a state to impair its contractual obligations arbitrarily or with impunity. The courts will look into whether a proposed impairment is reasonable and necessary to “serve an important public purpose”. Modifying existing pension benefits because the cost of providing them threatens a state or municipality’s ability to provide essential services or precipitating insolvency certainly rises to the standard of “remedying a broad and general social or economic problem.”

According to several well accepted doctrines and the clear holdings of the United States Supreme Court, if a state or, with a state’s authority, a municipality finds itself confronting a severe fiscal challenge based on exorbitant retirement pension obligations it is well within its inherent police powers to reduce its obligations to a reasonable level.

The courts will not rubber-stamp an arbitrary decision. Yet it is difficult to imagine a court finding that a reduction of such benefits to private sector levels for retirees of comparable circumstances to be ‘unreasonable,’ especially when the cost of providing those benefits threatens the ability to provide essential services.

Current evidence of reasonableness and necessity of such reductions includes:

1. extensive studies by respected nonpartisan institutes;

2. reports from respected media sources from across the political spectrum;

3. critiques by elected officials nationwide, both liberal and conservative, Democrat and Republican, of unjustifiably extravagant retirement benefits;

4. the documented growing inability of states and municipalities burdened by the cost of these retirement benefits to provide essential government services or maintain solvency.

Taken together, these factors are highly persuasive that it is reasonable and necessary to adjust certain states’ and municipalities’ pension obligations to the median level of private sector comparable positions. The power to unilaterally, though reasonably, reduce benefits provides a great deal more latitude for officials than many knew they had.

By taking this power into account, the Governor, the Treasurer, and the Rhode Island legislators who are considering solutions for addressing our pension crisis will find themselves positioned with many new options that they may not have realized were available.

Recognizing that, public officials simply may choose to reduce benefits of public workers to demonstrably reasonable levels. A good faith demonstration is all a state needs to reduce retirement benefits. This is simply done by showing they are implementing a remedy to a general economic problem and that such reductions are necessary and reasonable.

One approach, and one that has the added benefit of giving future courts a well-defined outline of legislative intent, would be to introduce and pass legislation laying out clearly and without hesitation the dramatic economic crisis now faced by the state. Such an Act would describe the need to assess the liabilities of the state and municipal pension funds with reference to rates of return reasonably in line with pensioners’ expectations of risk, would describe the limitation on additional sources of revenue to find the massive deficit, and would reference the dramatic reductions in essential services that are unavoidable if we fail to address the unfunded pension liability.

Therefore, the Rhode Island Center for Freedom and Prosperity recommends that the Rhode Island legislature acknowledge, through amendments to the laws governing Rhode Island’s state and local pension systems, that:

a. Pension benefits are promises limited by the ability of the system to pay, and are not binding contracts with pensioners;

b. A reasonable rate of return for pension investments should be equivalent to that of high-quality corporate bonds, as this is more in line with pensioner’s expectations as to the security of their retirement funds;

c. The unfunded liability of the state should be calculated using these more conservative rates and should be reduced to zero over a clearly defined period of time by modifications to existing pension plans that fairly reflect the economic circumstances we face as a state today and the detrimental impact on essential state services that this liability creates.

We further recommend that an extensive public record of such findings be established and preserved in order to leave no questions as to legislative intent and the factual basis for any proposed reforms. By taking this added step the executive branch and the general assembly will have made the job of the courts in ratifying such reforms all the easier, hopefully avoiding further costly legal battles, and providing pensioners with the clarity and predictability that they deserve.

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About The Author

Giovanni D. Cicione Esq. is the Senor Policy Advisor to the Rhode Island Center for Freedom and Prosperity, a non-partisan and non-profit public policy group that advocates for free enterprise solutions to societal problems and for the protection of personal freedom. He received his Juris Doctor from Boston University Law School, a bachelors degree in Philosophy from George Mason University, and is a member of the Bar of the State of Rhode Island and of the Commonwealth of Massachusetts.

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To read the full version, with citations, click here for PDF …