The canary and the phoenix

A few days ago I asked this question around the dinner table: Which state is in the most desperate financial trouble right now? Answers were immediate: New York. Illinois. California. In volume, few states could match the buckets of red ink those three produce. But when it comes to balancing payment demands with available resources, Rhode Island is the most precarious.

Even The New York Times took notice last week: "The Little State With a Big Mess: For Rhode Island, the Pension Crisis Is Now." Gina M. Raimondo, Rhode Island's general treasurer, has been touring the state telling retirees that they will have to face some cutbacks. Naturally, she's not the most popular Rhode Islander at the moment. "You're going after retirees!" a former firefighter shouted at her. "In this economic time, how could you possibly take a pension away?" Others chime in that the state is reneging on promises.

Well, yes. Rhode Island made a lot of promises-literally too many to count. Besides the state pension system, almost every city and municipality has one. The Providence Journal counted up 155, but admits it probably missed a few. Ten cents of every state tax dollar goes to retired public workers, and that ratio is climbing fast: toward 20 percent or even higher. A state that spends one-fifth of its revenues on retirees isn't going to have much left for roads, schools, public buildings, law enforcement-"I ask you, is it morally right to do nothing, and not provide services to the state's most vulnerable citizens?" replied Raimondo.

That's a good question. Walter Russell Mead, at the American Interest blog, is very blunt: "To tell a 50-year-old pretty lies about the soundness of a pension plan is one of the most wicked and irresponsible things you can do without actually shedding blood; people who believe these phony promises will not make the extra savings, work the extra years or otherwise take steps to protect themselves until it is too late." He blames legislators, union bosses, journalists, and governors nationwide for feeding the illusion machine.

Rhode Island's small size makes it a petri dish of statism gone awry. Lacking a large, diverse economy like California's or a respectable industrial or agricultural base like New York or Illinois, it has little revenue to draw on. State government made the classic mistake of overestimating the return on investment of pension-fund moneys. Promises were made on the expectation of an annual return of 8.25 percent, but the actual number has been closer to 2.4 percent. That's for the last decade, not just the last few years. Rhode Island had plenty of time to assess the situation and make adjustments. But it hasn't, until now-when its cities are threatening bankruptcy and one town, Central Falls, has already filed.

It's a grim picture, but this glowing National Review profile of Bobby Jindal shows that states can recover from natural disaster piled on years of corruption. Jindal, who is coasted to another term as governor of Louisiana with almost no competition, has provided whirlwind leadership to a lethargic mess, reducing the state budget by 26 percent, reforming public health services, and setting a disastrous education system on a path to recovery. From a ranking of 44th (sixth from the bottom) in ethics and legislative discloser, Louisiana is now number one. Honesty is the best policy for business: Assured that they won't be slapped with new regulations or old taxes, entrepreneurs are flocking to Louisiana. This has nothing directly to do with pensions, except that growth is the best source of revenue. With sensible planning, there can actually be enough to go around.

If Rhode Island is the canary in the coalmine of impending disaster, Louisiana looks like a phoenix rising from the ashes. Neither is getting much attention right now, but in the coming election it would be great to see concrete examples of how to run a state, as well as how not to.