What others are saying about our “Closing The Gap” Educational study

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Visit the Closing The Gap home page here …

Our Closing The Gap study has struck a cord with parents and students, as well as organizations either supporting or resisting comprehensive educational reform in Rhode Island.  Below is a sampling:

SUPPORTERS

Rhode Island Statewide Coaltion (RISC) commends our think tank for bringing forth a significant education study

The RI Statewide Coalition (RISC) is commending the RI Center for Freedom and Prosperity, a locally run reform-oriented think tank, for bringing forth the results of a wide ranging education study of Florida public schools which shows significant education gains can be made by non-English speaking, lower income urban students if the right curriculum reforms are enacted. RISC is also citing the study as evidence that the proposal to site two charter run Mayoral Academy schools in Providence deserves the chance to go forward.

“This study reveals that low income and minority students in our own state attending low performing schools in certain urban areas have a true chance at improving if aggressive reforms are supported and alternative options are allowed to grow,” states RISC Executive Director Harriet Lloyd. “If the jumps in test scores and overall performance improvements in key areas can occur for the most disadvantaged students in Florida’s public schools, why can’t they occur here? Improvements are slowly taking hold here under Commissioner Gist but she needs continued support and alternative school options need to be expanded.”

The study, called “Closing the Gap”, traced the gains made by overall low income students and by specific groups of Hispanic students in Florida public schools over the period of a decade starting in the year 2000. A wide ranging series of reforms which brought results included improved teacher performance and accountability; a transparent A to F grading system for individual public schools for better parental awareness; strong support for charter school options; and a ban on social promotion; among other policies. Test scores in core subjects like reading and math improved over the decade by up to 25%. By contrast, according to the study, overall test scores for Rhode Island students improved just 5% during the same time period.

Among other findings, the study’s authors say the gains made by the low income and minority students serve to debunk the conventional view that the socioeconomic backgrounds of students is the central factor in chronically low performing urban schools.

 Rhode Island Tea Party

Our children are our future–are we valuing them properly?

If the essential goal of educating our young children is to help them think more clearly and logically at a young age, to give them a strong foundation in reading, writing and math–and more, to help them attain a love of learning, then why are we failing so many in RI? Why are their reading scores so low, especially when we are pouring money into educating them? Is it because of poverty, or the inability of some students to learn, or lack of parent involvement, or lack of “resources”, or language barriers? Or is there something more insidious and fundamental at play? Is our system based on protecting special interests (e.g., tenured teachers, union bosses, legislators) at the cost of a stellar education?

By contrasting Florida’s free market oriented reforms with RI’s entrenched statist system, “Closing the Gap” offers striking evidence that that RI has failed. And more importantly, it offers specific solutions: a move toward freer markets in education (e.g., school choice), justice and transparency (grading schools and school districts from A-F, rewarding better teachers–merit pay, not seniority, i.e., incentivizing success), a ban on faking success (no social promotion, no automatic tenure), cutting bureaucratic red-tape in teacher credentialing, exploring virtual education, raising academic expectations by setting more rigorous standards.

In the future, we have the opportunity to read newspaper stories about more and more of our children succeeding in school. We can make that happen if parents and concerned citizens and politicians are willing to challenge the current system, which fails so many young children, and learn from the Florida situation. The facts tell an encouraging story.

OPPONENTS

 National Education Association of Rhode Island (Larry Purtell, President)

“We do need to continue in Rhode Island to diligently work to reach out and make sure all children are educated to the highest level possible, but this is nothing more than the same rhetoric from the same people with the same agenda.”

 Examiner.com; Alexander M. Sidorkin, Education Reform Examiner

 http://www.examiner.com/education-reform-in-national/the-florida-miracle-review

 

 

CLOSING THE GAP Education Study Released

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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.

***

Income Inequality should not “Occupy” our Public Policy Planning

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

***

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.

 

Task Force Report used to create Municipal Pension & Debt Map

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Based in-part on the work of the Mercatus Center, which published a detailed report on the true scope of the unfunded pension liabilities facing Rhode Island municipalities as part of the national pension Task Force that our RI Center for Freedom formed, a local organization created an online, interactive map that allows you to click on each of Rhode Island’s cities and town to view information about their finances, people, government, and taxes.

Thanks to Richard C Young and EJ Smith for this compelling tool.

Government Edges into Preschool… Expensively

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As part of government’s effort to edge its way into the preschool market, and the federal government’s slow usurpation of education more generally, Rhode Island will be receiving $12.5 million annually over the next four years.  As it typically goes with government, proponents begin with the positive objective that they seek to pursue and give the impression that the money simply appears for the purpose.  Not surprisingly, though, much of the money won’t go toward services actually provided to children.  According to the Providence Journal:

The grant requires that states adopt an ambitious plan to expand access for disadvantaged students and to develop high-quality standards across the fragmented early childhood education landscape. A significant portion of the grant will be used to train early childhood educators in these more rigorous standards.

That is, taxpayer dollars will be funding bureaucrats’ plans for how government can claim ownership of preschool and adult-education providers’ services for to teachers (for which, one can speculate, the latter will be compensated, as well).  Never mentioned in such stories is any sort of cost-benefit analysis.

Journalist Jennifer Jordan provides some context for government spending on preschool in a subsequent description of a program already existing in Rhode Island:

This year, 108 students are being served. The state’s education-financing formula calls for $1 million to be added each year for 10 years. Next year, the Board of Regents has re quested $1.45 million for six classrooms of 18 students.

A little bit of math shows that to be $242,000 per classroom and $13,426 per student.  For a “pre-kindergarten program for 4-year-olds.”  Speaking from experience, that’s roughly double the cost to parents of excellent programs available from private providers.  One can drape all variety of good intentions around specific programs, but from an economic-theory perspective, inexplicably high costs are about what one would expect when an organization is able to pay itself for services using money confiscated under force of law.

Little State, Big Spending

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In yet more news to file under thank-god-for-pension-reform-but, the Providence Business News reports that while Rhode Island public sector spending is surprisingly lower than the U.S. average, medicare costs are significantly above national averages.

Medicaid-related vendor payments accounted for more than 20 percent of state and local government spending in Rhode Island from 1999 to 2009, significantly more than the rest of the country, according to a new report from the Rhode Island Public Expenditure Council.

“The report from the budget watchdog group found public-sector spending – by both state and municipal government – in the Ocean State rose 68.9 percent over the 10-year period to $8.9 billion per year, a smaller increase than the 77 percent jump nationally.”

While the somewhat slower growth than the national average is welcome, it’s hardly good news. It goes without saying that there aren’t 68.9 percent more Rhode Islanders today compared to ten years ago, and it’s probably fair to say that the Ocean State isn’t 68.9 percent — or half of that? — better or more efficient than it was in 2001. So what justifies the public sector explosion?

And the faster-than-national-average expansion of Medicaid-related payments is definitely a worrying sign. Controlling Medicare and Medicaid cost growth is a major issue nationally anyway, so for Rhode Island to be spending a significantly greater proportion of public funding than the rest of the country – especially in light of the flexibility that was supposed to come with the first in the nation Medicaid global waiver and block grant – indicates that the system here is particularly broken.

Pension reform was a major and necessary step, but it’s becoming clearer day by day that there’s still so much more to be done. Rhode Island may have averted one major crisis in the making, but it doesn’t mean that we’re anywhere out of the woods. Beyond Pensions, Rhode Island still must grapple with its systemic uncompetitiveness.

 

RI’s Problem Remains: Attracting Jobs (Sunday ProJo Op Ed)

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by MIKE STENHOUSE
 
In passing historic pension reforms in November, Rhode Island took a significant step in dealing with one threat to our state’s economic well-being. However, as if on cue, new issues are now coming to light. A waiting list of critical new challenges is quickly forming: municipal pension reform, unfunded health-insurance and benefit costs, Massachusetts casinos, T.F. Green airport expansion, rising Medicaid costs, and structural state budget deficits for as far as the eye can see.How we deal with these issues will impact the future prosperity of all Rhode Islanders. However, dealing with these issues on a one-off basis will not help our state improve its standing, but can only help not worsen it.  

Currently, the Ocean State ranks at or near the bottom in a number of important national and regional indexes: last in America in overall business climate; highest unemployment rate, by far, in New England; highest corporate tax rate in New England; lowest population growth in the nation (behind only Michigan, which lost population); the list goes on.

Even if we do the yeoman’s work of addressing each of the issues above, Rhode Island will still be left in the same place: last. For example, even if we balance our forever-increasing state budget by somehow finding new revenue sources, how will that make Rhode Island more competitive ? It will not; it will only keep us where we are. We must do better.

It is time for a dose of reality. What is missing from any serious debate is the more substantial issue: How does Rhode Island regain its competitive status in New England and across the nation? Multiple studies and reports have documented how our state is losing both capital and human resources to other, more tax-friendly and business-friendly states. We cannot expect to have a vibrant economy, good jobs for our citizens, and the resources to help those in need if we do not reverse this trend.

Consider the casino issue. Recent actions by Massachusetts will put greater competitive pressure on the Ocean State, reducing tax revenues that fund core government functions. Dealing with this in a typical myopic fashion, as a one-off issue, would require us to react in-kind, by responding with some form of expanded gambling in Rhode Island, where the debate has been, and will be, fierce.

Such a solution would be reactive and would promise a magic bullet, typically resulting in a rushed plan that generally benefits the corporate special interests that drive the process.

Imagine, instead, that we consider a more comprehensive, pro-active approach, such as simplifying and reducing taxes that will spur broader economic growth by attracting human and financial capital to Rhode Island and away from Massachusetts and Connecticut. If the Yankees sign a star left-handed pitcher, must the Red Sox do the same? Or might they choose to better compete by signing a right-handed hitter, or by improving their bullpen or team speed?

To put the Ocean State on a proven path to prosperity will require a massive departure from the current culture of dependency on government and a return to taxpayer- and business-friendly policies. Special deals and one-off solutions are not the answer.

The reality is that we have spent too much, taxed too much, regulated too much, promised too much, and borrowed too much. The wreckage from this failed special-interest culture is now painfully obvious to all Rhode Islanders.

The Rhode Island Center for Freedom and Prosperity, in early 2012, will present a vision of renewal for our state. We’ll do our best to present a different path — a better path — and to stimulate debate. We’ll do so because many of us believe that Rhode Island can once again be great, and that our citizens can have hope of prospering.

But one small think tank can’t go it alone. Unexpected leadership emerged in 2011 to drive the crucial pension debate. Who will acknowledge the true realities we face as a state, and choose to step forward to lead this even more vital discussion in 2012?

Mike Stenhouse is chief executive of the Rhode Island Center for  Freedom and Prosperity, a conservative think tank.

See the actual ProJo piece here …

How Easily the Hybrid Pension Reform Can Be Undone

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In his Sunday Providence Journal column, Assistant Managing Editor for business, commerce, and consumer issues John Kostrzewa describes the business community’s enthusiasm for the just-passed pension reform:

There was a lot to celebrate because many of the 700 businessmen and women who attended the [Providence Chamber of Commerce] dinner had contributed their money, influence and support to back the reform effort that had been heavily opposed by the labor unions.  It showed that when the business lobby is committed, organized and focused, it can be a potent force in setting public policy.

Myself, I continue to be skeptical that the field broke so cleanly into opposing sides.  That is, I’m not so sure Business faced Union and won a battle, with pension reform.

A few years ago, during teacher contract negotiations in Tiverton, National Education Association Rhode Island Assistant Executive Director Patrick Crowley put forward a proposal for health savings accounts — which are typically seen as key components of serious conservative healthcare reform plans.  A close look revealed that the union’s plan was constructed in such a way that the reform would hardly have saved money, yet it enabled negotiators to proclaim savings with the health benefit so as to argue for other increases, as in salary.  The lesson that stuck with me is that unions are willing to seize on the trappings of reform, but they’ll, first, force reformers to negotiate something, like raises, in order to insert their favored concepts into a contract and, second, work to dilute the effect of the reform of itself.

General Treasurer Gina Raimondo has successfully brought the notion of a defined-benefit/defined-contribution hybrid to the Rhode Island public-sector pension system, but reformers arguably didn’t do enough to ensure that it would be a strong win, and it’s beginning to look like other concessions made in the process may very well outweigh the improvements.  The new 5.5% privatization tax that the General Assembly imposed on state (and perhaps municipal) government was likely a mere first taste, especially if NEA-RI President Larry Purtill’s exhortations are any indication.

The quantitative question that naturally follows such predictions is:  Just how much would it take to undo the benefit of a reform like the hybrid system?  Well, for starters, I’ve already pointed out that the hybrid benefit is more costly than the defined-benefit system alone, if the actuaries’ investment assumptions hold.  Regardless of investment returns, however, it won’t take much at all for the unions to negate the “hit” that they’ve taken with the hybrid through advantageous policies in other areas.  If legislators and other government officials seek to mitigate the backlash from the unions by offering such juicy concession prizes as the privatization tax and binding arbitration, the reform could easily turn into a recidivistic windfall for public employees.

For example, if we assume that the average teacher will work for 25 years and retire for 20, the unions will only have to increase the average annual raise by 2.76% to leave their members retiring with exactly the same defined-benefit pension.  In other words, if teachers’ typical annual raise is 4% (which is the state actuaries’ assumption) and the unions bring that up to 6.76%, a 25-year teacher will see no change in defined-benefit pension whatsoever.

For state workers, the necessary delta is 2.73%.  For teachers and state workers who stay on the job for 30 years, which will be much more common, given increases in minimum retirement age, the delta to erase the effects of the hybrid reform is 2.5%.

That doesn’t tell the whole story, obviously.  Most important, if the unions manage to procure higher salaries for members, then the reward far exceeds the increased pensions, as employees bring home more money each year of work.  The hybrid plan also lowered the amount that employees contribute to defined-benefit portion of their retirements, which provides 5% or more in annual savings for them, and added a 1%-of-payroll employer payment into the defined-contribution portion, which amounts to a 1% raise deposited into a high-yield savings account for future use.  On the other end of the scale, one has to factor in variations in cost of living adjustments (COLAs) based on the size of base pensions.

Taking all of those variables into account, a teacher who works for 25 years and retires for 20 only needs his or her annual raise to be 0.89% higher than it otherwise would have been in order to completely eliminate the adverse effects of the hybrid reform over the course of his or her career and retirement.  If he or she works for 30 years and retires for 15, that delta drops to 0.68%.  For state workers, the parallel numbers are 0.92% and 0.71%.

That is, if the expected 4% annual increase in teacher pay becomes 4.68% based on concessions to the unions, the combined compensation from salary and pension will exactly equal what it would have been had the hybrid reform and the concessions never occurred.  Keep in mind that this doesn’t include the five percent of salary that employees will be putting in their defined-contribution plans or the investment yields from those plans, from both employee and employer contributions.

Of course, it will be all but impossible to tell whether this effect was actually obtained.  The economy might force the average annual raise for state workers down to 3%, but if, for example, the privatization tax prevents the pressure of competition from driving it down to 2%, then public workers would have ultimately benefited from wave of reform.  (And, yes, it’s tautological to note that taxpayers would have lost out.)

If the business community really does have pull at the State House, then it ought to apply its strength to resist any additional giveaways that legislators are planning to offer unions to buy forgiveness of their pension votes.  Next it ought to strive to repeal the privatization tax as well as the provision of the pension reform that puts future adjustments in the hands of the union-heavy Retirement Board.  Otherwise, any celebrations over the General Assembly’s 2011 special session on pensions will soon prove unjustified.

Pension Reform Bait-and-Switch to Block Broader Reform

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An observer of Rhode Island’s political scene needn’t be excessively cynical to be a bit disconcerted by the unity of purpose displayed toward the end of the General Assembly’s special session on pension reform.  Leading Democrats, including some who double as labor union leaders, were onboard.  The union-backed Independent governor, Lincoln Chafee, was onboard.  From the opposing camp, various good government groups were onboard, almost in unity.

Even the ostensibly neutral media joined the parade.  After an overwhelming vote passed the legislation, the Providence Journal editorial board dubbed the achievement as “Rhode Island rescued.”  An analysis by WPRI’s Ted Nesi called the bill, “an extraordinary — and unlikely — achievement for the three leaders most responsible for shepherding it through.”

Two questions arise from this sea of consensus:  Is it really plausible that the combination of budgetary crisis and strong leadership changed the legislature’s stripes so dramatically as to make it a national example of forward-thinking government?  And should we worry that the issue’s momentum carried forward catches and promises that will ultimately harm the state?

An initial answer comes in the form of the last-minute amendment creating a 5.5% “assessment” (aka “tax”) on privatized workers.

A Long-Running Union/Assembly Goal

Back in 2007, as June 15 turned into June 16, Rep. Charlene Lima (D, Cranston) slipped a midnight amendment into the budget bill that would pass before the sun came up.  The amendment created RI General Law 42-148, “Privatization of State Services,” which requires an elaborate review and appeals process before the state can use private contractors for services previously performed by unionized public employees.

The legislation made its appearance in the midst of efforts by Governor Donald Carcieri to address the state’s structural deficits through such privatization, and within a week, his efforts ended.  As Carcieri spokesman Jeff Neal put it, “Bringing competition to the delivery of state services is one of the key ways Rhode Island will be able to fix its budget problems.  Unfortunately, it appears that solution is off the table now.”  The final nail came a year later, when the state Supreme Court declined to review the constitutionality of the law.

In essence, the legislation required a cost-comparison analysis that would pit the private contractor’s bid (plus all remaining inside and transition costs) against an optimistic “new cost estimate” from union workers, “reflecting any innovations that they could incorporate into the work performance standards.”  (Not that the law required them ever to implement the innovations.)  In order to win the contest, the outside vendor would have to offer “substantial” savings; in her initial legislation, Lima used the margin of 10%.  State workers and their unions could then use an appeals process to delay the contract award for months.

Fast forward to November 2011.  As the pension reform legislation moved toward stunningly smooth passage, the following language slipped into the mix, amidst a variety of “technical amendments”:

42-149-3.1. Assessment on state expenditures for non-state employee services. – Whenever a department, commission, board, council, agency or public corporation incurs expenditures through contracts or agreements by which a nongovernmental person or entity agrees to provide services which are substantially similar to and in lieu of services hereto fore provided, in whole or in part, by regular employees of the department, commission, board, council, agency or public corporation covered by chapter 36-8, those expenditures shall be subject to an assessment equal to five and one-half percent (5.5%) of the cost of the service. That assessment shall be paid to the retirement system on a quarterly basis in accordance with subsection 36-10-2(e).

Government leaders are quite open about the intention behind the new statute.  House Speaker Gordon Fox (D, Providence) has acknowledged it as an effort to prevent future governors from returning to Carcieri’s methods.  Richard Licht, director of the Department of Administration for the current governor, told WRNI’s Ian Donnis that “the purpose of it” is to “curb the state’s use of outside employees.”

Whatever “substantial savings” might have meant under Lima’s legislation, they now must overcome an additional 5.5% handicap, and as the state’s structural deficits continue, government officials will be nudged even more strongly toward tax increases and/or service reductions.

A Tax for the Pension System

The secondary effect of the 5.5% provision is, obviously, to introduce another taxpayer stream of revenue for the pension system.  The amount that state entities spend on contract employees is not readily available, but Licht puts the annual revenue to the pension system at a projected $2 million (though he admits that no thorough analysis has been performed).

In the context of the pension reform, however, dollar amounts have typically been described in terms of the amortization period.  That is, in the 25 years that it is supposed to take for the pension system to be sufficiently funded, this last-minute money grab will amount to around $50 million paid from the state’s general revenue.

Or Something More Insidious?

Whatever the dollar amounts, a key difference between this latest scheme and the Lima amendment should not be overlooked.  The definitions section of the 2007 law defines “in-house” services as those involving “in-house state programs and employees.”  Section 3 of the law explicitly begins the review process “prior to the closure, consolidation or privatization of any state facility, function or program.”

The new law is not so carefully limited.  It describes the included services as those provided by employees covered by RI General Law 36-8, which establishes the state pension system.  That system is not limited to state workers.  Indeed, subsection 36-10-2(e), which the new law cites for the process of payment, refers to state contributions to teachers’ pensions, as well as state workers’ pensions.  Depending how enthusiastically the various parties wish to press their advantage, it may turn out that the 5.5% assessment applies to contractors hired to perform any service “similar to or in lieu of” any employee in the pension system, whether employed by the state, a school district, or a municipality.

The most financially and politically significant example that comes to mind is that of charter schools.  In general, teachers in such schools are required by state law to participate in the retirement system, but mayoral academies can opt out.  If they do so, will their budgets be subjected to the 5.5% assessment?  Given the fact that the last-minute amendment was not thoroughly vetted before submittal nor thoroughly debated before being voted into law, that may very well be the case.

Pension Reform as a Barrier to Broader Reform

I’ve been arguing against General Treasurer Gina Raimondo’s pension reform on the grounds that it (1) is insufficient by several orders of magnitude to solve the entire problem, and (2) puts future adjustments and reforms fully in the hands of the state Retirement Board, with seven of 15 members appointed directly by unions.  Even when agreeing, supporters of the legislation have proclaimed it as a huge step in the right direction.

The privatization tax may be an early indication that crisis and leadership only yielded a quarter step forward, soon to be followed by four steps back.  At the very least, the state has one less tool to rein in its structural deficits, and the restriction may apply to any other government entity in Rhode Island that participates in the pension system but wishes to explore privatization.

The scope may broaden even more (and more definitively) if reform of municipal pensions brings additional public employees within reach of General Law 36-8.  And reformers would do well also to ponder the relevance of this latest General Assembly bait-and-switch while advocating for another of their favorite notions:  consolidation.  Bringing local services under the purview of state employees will virtually ensure that they remain forever “in house.”

Beyond all of this speculation is the likelihood that the amendment was just the first surprise that helped buy such broad assent and smooth passage for the bill.  It isn’t cynical at all to observe that, whatever else it might be, Rhode Island’s entrenched establishment is sufficiently savvy to see when basic math threatens the application of reality to unrealistic benefits and to make the best of reforms… and with a vengeance.

Task Force ProJo OpEd: Alarming Outlook for Municipalities, even w/ Pension Reform

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As part of our Center’s special pension Task Force, Eileen Norcross from the Mercatus Center, followed up on her recent report by publising an OpEd that appeared in the Nov. 17 Providence Journal, and co-authored by Benjamin VanMetre.

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Even with reform, R.I. outlook alarming

by EILEEN NORCROSS and BENJAMIN VanMETRE

FALLS CHURCH, Va. – The heated debate over how to fix Rhode Island’s pension system — with votes in the General Assembly scheduled for today — begins with a basic question: Just how big are public-sector pension promises?

According to the state’s numbers, Rhode Island is facing a daunting $9.3 billion in unfunded liabilities, and there is no money set aside to pay for them. Unfortunately, like all public-sector plans in the country, the picture is actually much worse. Rhode Island’s unfunded pension liabilities are nearly twice that size, closer to $18 billion — and that’s on the lower end of estimates.

Rhode Island, like many other state and local governments, misses the mark on calculating its pension liabilities because they are being valued as though they are risky bets instead of a government-guaranteed benefit.

This miscalculation comes from poor government accounting rules …

Read the entire ProJo OpEd here