Small is Beautiful?

Could Little Rhody show the way?

Up until now Rhode Island has been a bit player in the financial crisis. The State suffered tremendously during the recession: unemployment is currently 10.5%; almost double New Hampshire’s 5.4% and the worst level in New England. In addition to cyclical issues, Rhode Island’s economy has been beset by structural challenges for some time.

When the headline bankruptcy of Central Falls hit the tape, many municipal investors decided to avoid the State entirely. Their yields rose, exacerbating fiscal challenges. A death-spiral seemed possible. But a funny thing happened on the way to Armageddon: legislators decided to get serious.

One of the major issues facing Rhode Island (along with many other States) is their retirement system. By current accounting standards, the Rhode Island has funded less than 58% of its projected pension cost—8th worst in the country. But late last week the Rhode Island State Legislature enacted a pension reform bill that raised the retirement age, reduced cost-of-living adjustments, and enacted a hybrid 401(k)-like structure along with the traditional pension.

Many of these changes affect current retirees as well as future ones, so the courts will have to weigh in. But with the stroke of a pen the bill improves the funding level by 14%, and wipes out $3 billion in projected costs. The fiscal savings amount to 5% of the State’s General Fund.

I’ve said before that pensions are promises, and if the money isn’t there, those promises will have to be changed. By enacting the most sweeping pension reform of any state in recent years, Rhode Island may be able to show a way forward.

Douglas R. Tengdin, CFA
Chief Investment Officer
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