RI Pension Fund Left $455 Million on Table Over 5 Year Period
Russell J. Moore, GoLocalProv Contributor
RI Pension Fund Left $455 Million on Table Over 5 Year Period
The fact that the fund's under-performance occurs after the state enacted pension reform in 2011 raises questions about the state's current investment strategy.
"Rhode Island has had terrible pension fund performance, regardless of what index you measure it by," said Edward "Ted" Siedle. Siedle is a former SEC lawyer and a Forbes columnist who is also a staunch critic of the RI pension fund's management strategy.
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A spokesman for Rhode Island Treasurer Seth Magaziner disagreed. He said that the state isn't in a position to be as aggressive as other pension plans.
"Rhode Island has to invest more conservatively than most other pension plans because most other pension plans are not as underfunded as we are," said David Ortiz, the Treasury spokesman, in an email.
The Wilshire Trust Universe Comparison Service (Wilshire TUCS) is considered the most widely accepted benchmark for the performance and allocation of pension funds in North America. The Wilshire TUCS index measures institutional pension funds, like the Rhode Island pension fund, against one another.
Measuring Up
The median number that Wilshire TUCS refers to is the number that falls directly in the middle of the data of all the plans. (It's not an average. That would be all the returns added together then divided by the number of plans in the universe.) The median return means that half the plans performed better, and half the plans performed worse than the median number.
Unlike previous comparisons of the Rhode Island pension fund, which have relied on S&P 500 data, the Wilshire TUCS is comprised solely of other pension plans.
Over the last 1, 3, 5, and 10 fiscal year periods, the Rhode Island plan fell below the Wilshire TUCS median. The data reflects the state's fiscal years, which run from July 1 until June 30.
Always Below The Median
For instance, from June 30 of 2015, going back 5 years, the state of Rhode Island had an annualized pension fund return of 9.8 percent. Over that same time, the median return for a pension fund in the Wilshire TUCS index was 11.1 percent. (That number includes only funds with assets worth more than $5 billion.)
At first blush, that might not look like a massive difference. It's just a 1.3 percentage point difference. But that does not mean the fund performed 1.3 percent lower than the Wilshire TUCS median pension plan. It means the Rhode Island pension fund performed 13 percent lower.
(Think of it this way. If the Rhode Island pension fund got a 1 percent return on investment and the Wilshire TUCS median plan got a 2 percent return, we wouldn't say that the RI pension fund was 1 percent lower than the Wilshire TUCS median. We would say it was 100 percent lower. In the same respect, an 11.3 percent return is 1.3 percent higher than 9.8. That 1.3 percent divided by 9.8 equals 13.2. That means the difference is 13.2 percent.)
Is a 1 Percent Difference a Big Deal?
A similar dynamic to that hypothetical was in play at last fiscal year's end. The last fiscal year began on July 1, 2014 and ended June 30, 2015. Over that year, the Rhode Island pension got a return of 2.2 percent. The Median Wilshire TUCS plan with assets worth more than $5 billion returned 3.33 percent. That's 1.13 percentage points lower. It means the return is almost exactly 50 percent lower than the Wilshire TUCS Median return.
And those single percentage points mean tens of millions of dollars.
The Rhode Island pension fund had $7.26 billion dollars as of January 31 of this year. The fund had a similar amount when Governor Gina Raimondo became General Treasurer back in 2011. In the last fiscal year, the state failed to realize roughly $80,000,000 in gains it would have gotten if it met the median.
To make things simple and use round numbers, think of it this way. Every 1 percent that the fund gains is worth $70 million (assuming the fund is worth $7 billion). That means every single percentage point that the pension fund has fewer than the Wilshire TUCS median represents about $70 million, on a yearly basis.
Serious Money
Siedle, however, said that comparing the Rhode Island pension fund against the Wilshire TUCS index is not a good comparison.
"Almost all public pensions have migrated into alternative investments. So even that comparison is a generous standard, since they're all under-performing," said Siedle.
Is Wilshire Standard "Generous"?
"That's why I believe it's more appropriate to compare pension fund performance to the S&P 500," said Siedle.
The S&P 500 returned 14.1 percent over that same 5-year period.
Detractors, however, say that the plan cannot withstand the volatility to which the world famous index is subject.
Ortiz explained the fund's performance as a cautionary approach to the fund's management.
"The pension system has to pay out roughly $1 billion in benefits annually regardless of market conditions, and if the pension fund were to lose significant value in the event of a market collapse it would be nearly impossible for the fund to recover. Therefore, pension funds are invested with the goal of earning a positive return in years when the market rises, while avoiding significant losses when the market falls," said Ortiz.
A Cautionary Approach
Ortiz also pointed to the fact that the fund hasn't performed as poorly as the S&P 500 as of late.
"The strategy has saved the pension fund millions of dollars in recent months. For example, in January when the S&P 500 fell by 5%, the pension system fell less than 3% -- a difference of more than $100 million," said Ortiz.
"This is a volatile period in the financial markets, but Treasury is committed to delivering stability in this uncertain time through a balanced and diversified investment strategy," Ortiz added.
Timeline - Rhode Island Pension Reform
2005-2010
January 2009
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
2009
Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions.
Read the NCSL report here
(Photo: FutUndBeidl, Flickr)
2010
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
November 2010
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
April 2011
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
May 2011
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
October 2011
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
October 2011
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
January 2012
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
December 5, 2012
Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package. In response, Chafee issues a statement supporting the negotiations.
Read more about Raimondo's opposition here.
Read about Chafee's statement here.
March 2013
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
April 2013
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
June 2013
Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.
Read GoLocalProv's investigation into the rising pension costs here.
September 2013
Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform.
Read Taibbi's article in Rolling Stone.
Read GoLocalProv's response to Taibbi here.
October 2013
As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.
Read more from GoLocalProv about the players in the pension battle here.
