PROVIDENCE, R.I. — Rhode Island Gov. Lincoln Chafee, sitting at a small table in his State House office, couldn't stress enough the importance of a special legislative session late in 2011 during which lawmakers passed a landmark pension overhaul bill.
"The General Assembly convened a special session on pensions. I can't remember — ever — a special session on one topic," Chafee said in an interview. "Sometimes they come back to confirm judges. But they returned in the fall just to tackle this one issue. Tunnel vision, no trading of votes."
Chafee and General Treasurer Gina Raimondo had worked together to sell the pension overhaul to lawmakers and to citizens at town hall meetings. The legislature passed the bill in November.
"I didn't need a Pew report to tell me some alarming news," said Chafee. "These problems are icebergs. When I ran for governor, pensions came up in all 38 debates and public forums. Our pension system was broken. We had to be honest about it, no matter how painful that might be."
While Chafee talked, Illinois lawmakers halfway across the country met in a one-day-only session on the same problem — actually a half-day, since they didn't gather until 1 p.m. — and abruptly ended it, solving nothing. Illinois has the country's lowest pension funding level at 45%, according to Pew, while Rhode Island's is just ahead at 49%.
"We're all idiots," said Illinois State Rep. Daniel Bliss, D-Evanston.
By contrast, capital markets experts praise Rhode Island for its willingness to tackle its myriad financial problems. "The state has devoted a lot of attention to municipalities," said William Fazioli, a senior management consultant in the Providence office of Philadelphia consulting firm PFM Group Inc.
According to Chafee, that special session, and the state retirement board's lowering of the assumed rate of return for the pension fund in a narrow vote that year to 7.5% from 8.25%, largely enabled Rhode Island to pass the Retirement Security Act. Measures include suspending retirees' cost-of-living adjustments until the pension system is 80% funded and moving most current employees into a hybrid plan that combines traditional defined-benefit plans with 401(k)-style plans. The Pew Center on the States considers 80% an acceptable threshold.
The pension bill faces a court challenge from unions, and Chafee admitted a defeat could cost Rhode Island "hundreds of millions" of dollars. Officials say the bill will enable the state to trim its $7 billion unfunded pension liability by $3 billion.
Once a tool-and-die stronghold, Rhode Island has lost much of its factory base. Its 37% drop in manufacturing jobs from 2001 to 2011 marked the biggest decline among states, according to federal Bureau of Labor statistics. Rhode Island's 10.8% unemployment rate in July was second only to Nevada's. Tax bases are stagnant and a property tax cap limits municipal revenue streams.
Moody's Investors Service rates Rhode Island's GO bonds Aa2, while Standard & Poor's and Fitch Ratings each assign an equivalent AA.
"The crash of '08 hit many states and many municipalities across the country. We're not totally unique," Chafee said. "I've been in politics since 1986 and these are the toughest times, for sure. Not just here, but nationally and even the implosion in Europe."
For all their problems, though, Ocean State communities have state and private-sector help at their disposal.
"Rhode Island, in a way, is the poster child for trying to resolve distress, whether it involves getting a community out of bankruptcy or pooling resources to save money," said Natalie Cohen, managing director and head of municipal research for Wells Fargo Securities in New York.
PFM, which opened its Providence office last December, works with 18 Rhode Island communities, including Cranston, Westerly, Johnston, Smithfield, Bristol, North Kingstown and Portsmouth. It advises on bond financing, budget forecasting, labor relations and local pension changes — skill sets, Fazioli said, that can help avert a slide toward insolvency.
"Because of the weaker communities, investors are staying away from even the stronger credits," said Fazioli, a former East Providence city manager. "The interest rate is higher, even for the more highly rated communities."
"There is still a great deal of credit stress," said Naomi Richman, a managing director at Moody's, which last December issued a special report on municipal struggles in Rhode Island. "Most of the factors that were discussed in December are still evident to a certain degree."
Financial troubles at the local level have consumed much of Chafee's time since he took office. Central Falls filed for bankruptcy on Aug. 1, 2011, and could exit Chapter 9 bankruptcy protection in early September. Moody's last year downgraded eight communities, including Central Falls and capital city Providence. East Providence and Woonsocket are under budget review committees, each one step short of receivership under Rhode Island's three-tiered intervention system.
And on Tuesday, Moody's lowered Johnston to A3 from A2, citing police and fire pension funding ratios at 30% and 34%, respectively.
On a brighter note, Central Falls is possibly two weeks away from exiting bankruptcy and Moody's has placed its Caa1 general obligation rating on review for upgrade.
"Through pension reform we saved Central Falls and fixed the system for future generations and future administrations," Chafee said.
Chafee, a Republican-turned-independent and the son of the late former governor John Chafee, was elected governor in November 2010. He plans to attend the Democratic National Convention in Charlotte, N.C.
He cut his political teeth in local politics. "Having been a former city councilman and mayor [of Warwick], I understand local issues," the governor said. "People tell me, 'Linc, you're a broken record,' when I talk frequently about the state being a partner."
Analysts and government observers alike say few governors if any have spent as many hours on municipal matters.
"He seems to be paying attention to his knitting, that's for sure," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. "Rhode Island, of course, has some economic issues. But everyone there seems to be pulling the oars in the same direction."
"We don't have Wisconsin here," Chafee said, citing the acrimony between Gov. Scott Walker and unions in that Midwest state over pay and benefit cuts.
Rhode Island's smallness can serve as a both strength and weakness. "There are pros and cons to being a 40-mile by 60-mile state," Chafee said.
"It's easier to get people together," PFM's Fazioli said. "The communities are within a 25-to-30 minute drive. You can get people in a single room and that lends itself to problem-solving."
Chafee has also had to troubleshoot the fiasco surrounding the bankrupt 38 Studios video-game company, the failure of which could have Rhode Island taxpayers on the hook for $75 million. Chafee, while running for governor in 2010, spoke out against the Rhode Island Economic Development Corp.'s loan guarantee for that amount, which lured the company from Massachusetts, but as governor he has had to deal with the fallout.
Former Boston Red Sox pitcher Curt Schilling owns the company.
Chafee, while not discussing 38 Studios in the interview, spoke generally about the need to attract businesses with staying power.
"What businesses want are predictability, stability and certainty. That's my job to provide that — a solid foundation," he said, circling back on pensions. "If a company is going to invest in Rhode Island, it wants to know that four to six years from now, the pension system in this state is not going to implode."