Is Rhode Island the "Canary in the Coal Mine"?

The problem of state and municipal pensions is something that has been building for decades. Years of over-promising and under-funding created the problem. But the burst of the housing bubble, the financial crisis of 2008 and the subsequent three years of little to no growth and high unemployment have brought the problem into sharp focus. When the economic tide was rising, many of the problems could be hidden and politicians and the public could engage in the ever popular game of denial called "kicking the can down the road." Now that the tide has gone out, it is becoming clear who was swimming without any pants. This crisis will lead many municipalities to declare bankruptcy in order to get out from under the crushing burden of their pensions. States will face a similar crisis, but since they currently can not declare bankruptcy, they will deal with the problem in other ways. Rhode Island seems to be further along in the process than some other states. However, many other states, including Illinois will face similar problems (to understand the scope of the problem, click here). Illinois has already enagaged in one round of pension reform. It is likely many other rounds will follow.

What does this have to do with schools you may ask? Plenty. You see, many states, such as Illinois, will be forced with the choice of cutting back on its pension promises or cutting back on funding for current services such as education. The reason is simple. The state legislature will realize (hopefully soon) that raising taxes is not the answer, since it will lead to capital and human flight from the state to "greener pastures." The most recent Illinois state income tax increase has already contributed to this process. Such capital and human flight reduces the tax base in Illinois thereby leading to lower tax revenues than anticipated (indeed it is possible that such rate increases could lead to lower tax revenues than previously collected under the lower rate). Further tax rate increases have a similar effect, leading into a self-reinforcing cycle of economic destruction. Many states and municipalities have already learned this lesson the hard way (see here and here). (Economics teaches that human beings respond more or less rationally to incentives and change their behavior in response. Even journalists understand it.)

How will this affect Minooka 201 taxpayers? Well, I expect that more of the burden of funding education will be shifted from the state to the local taxpayer. Currently, the state of Illinois provides 15% of our education fund revenue (approximately $4 million) and 67% of our transportation fund revenue (approximately $1.7 million). If the state decreases its contribution, then we will be faced with the following dilemma: the school board with either have to increase the tax levy on local taxpayers or cut expenditures to offset the decreased state funding (or some combination of the two). Bear in mind that if the school board seeks to raise the levy on the local taxpayers, a similar process to the one described at the state level is likely to occur at the local level. As the levy is raised, this will tend to induce capital and human flight out of the school district (businesses and people, after all, have a choice in terms of where to locate, and some will not be able to afford the increased taxes). In essence, the state will have kicked some of their problem "downstairs" to the school district. (They may, of course, kick some of their problem to the municipalities as well.) Another option, and the one that I recommend, will be to do what many private businesses have done in this economic crisis . . . find ways to deliver the same quality product or service at lower cost. This, of course, is easier to say than to implement.

These budget problems at the state and local (and federal) level are not going away any time soon. These issues are going to be with us for many years to come. The game of "kicking the can down the road" is no longer an option.