May 07, 2013 12:27 PM UTC

Rhode Island Gov. Chafee: "I'll Have to Think About" Why a State Government Can Take a Contracted Pension COLA Benefit, but Can't Default on its Moral Obligation Bonds.

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• by: PolDancer

GOVERNOR CHAFEE: "WE WERE TOO AGGRESSIVE," IN OUR 2011 PENSION REFORM.  I WAS AFRAID THEY WOULD OVERRIDE MY VETO.

BLOOMBERG COLUMNIST BARRO: IF RHODE ISLAND CAN'T HONOR ITS PENSION COLA DEBT TO PUBLIC PENSIONERS, WHY IS IT HONORING ITS PRIVATE SECTOR MORAL OBLIGATION BONDS ISSUED FOR A BANKRUPT PRIVATE COMPANY?

RHODE ISLAND'S TAKING OF CONTRACTED PENSION COLA BENEFITS COST THE STATE'S PENSIONERS ONE-THIRD OF THEIR ACCRUED PENSION BENEFITS.

Josh Barro of Bloomberg writes on May 1, 2013:

"Under Chafee, Rhode Island has drawn national attention for two major fiscal events.  First, the state legislature passed (and Chafee signed) the country’s most sweeping public employee pension reform.  The measure included a provision discharging about $1 billion in existing pension liabilities by freezing retirees’ cost of living adjustments (COLAs) for 15 years. This wasn’t a small cut; by the time the freeze is over, many retirees’ payments will be one-third smaller than initially promised."

https://www.bloomberg.com/news/2013-05-01/chafee-s-confusion-about-moral-obligation.html

https://www.bloomberg.com/view/bios/josh-barro/

"Second was the implosion of 38 Studios, former Red Sox pitcher Curt Schilling’s video game enterprise.  Rhode Island offered the company a loan guarantee to relocate from Massachusetts. Now, the venture is bankrupt, and the state is on the hook to bondholders for $112 million."

Columnist Josh Barro:

"That raises a question that many state residents — especially retired employees — would like to see answered: If Rhode Island can’t afford to keep its promises to retirees, how can it afford to keep its promise to the 38 Studios bondholders? Chafee isn’t prepared to answer."

How is it that RI can afford to honor its obligations to a bankrupt video game company, but cannot afford to honor its contractual obligations to its retired public workers?  How can the State of Colorado afford to pay $700 million for local government pension obligations that ARE NOT the state's contractual obligation (Old Hire Fire and Police pensions,) and (this session) provide $104 million in discretionary property tax relief, but the State of Colorado cannot afford to honor its contractual obligations to its retired public workers?

How is it that Colorado, the 15th wealthiest state in the nation, a state with an extra billion dollars for the next fiscal year, can't afford to honor its pension contracts?  Why does the State of Colorado propose to break public pension contracts, but honors its other bonded moral obligations?

Governor Chaffee dismisses the idea of defaulting on the 38 studios moral obligation bonds.

Chaffee: “The words moral obligation speak for themselves.”

Columnist Josh Barro:

"But aren’t the pensions a moral obligation, too? After all, people spent their careers working for state and local governments in exchange for specific pension benefits.  I asked Chafee, why it was acceptable to freeze the COLAs and unacceptable to break the moral obligation on the bonds."

"He responded: 'Good question. A lot of discussion about that and, in fact, we’re in court on that issue with the unions.'  But he never got around to explaining why his position is right and the unions’ is wrong."  "Instead, he sought to disclaim ownership of the COLA freeze, which was part of the 2011 pension reform law and the key issue the unions are suing over."

Chaffee: I took the COLA because the Legislature would have overridden my veto:

"Asked why he signed, he responded that he had to weigh costs and benefits, and that a key concern was that a veto would have been overridden by the large legislative majority that had passed the bill."

Yet, in 2011, Governor Chaffee supported the proposed pension COLA taking:

"Chafee urged the legislature to pass pension reform, and helped build the veto-proof majorities that got the bill to his desk. I witnessed this: In October 2011, I spoke on a panel after a joint presentation by Chafee and state Treasurer Gina Raimondo in which they advocated the pension reform plan that eventually became law.  At the time, Chafee also called for additional reforms that would have drawn more litigation by cutting benefits in locally run pension plans that were left untouched by his joint reform with Raimondo."

Columnist Josh Barro:

"Now, Chafee says he was the voice of caution: 'We got a little too aggressive. The treasurer was very aggressive, I was more, ‘we need buy-in, avoid litigation.’”

"This would repeat a pattern that we’ve often seen in state level pension reforms — a law that looks like it will produce big cost savings gets unwound years later for political or legal reasons."

"As the interview ended, Chafee remarked, 'I’ll have to think a little more about Josh’s question' — the one about why you can freeze COLAs but can’t default on 38 Studios."

https://www.bloomberg.com/news/2013-05-01/chafee-s-confusion-about-moral-obligation.html

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