Riley: Why Aren't Rhode Island Pension Plans Working?
Michael G. Riley, GoLocalProv MINDSETTER™
Riley: Why Aren't Rhode Island Pension Plans Working?
Why do they do this?
The reasoning behind both the CIO Ms. Fink and Treasurer Magaziner lies in a strict belief in modern portfolio theory and the capital asset pricing model. As a result of this belief ,the bet we are all making is the State Investment Board can allocate investments in such a way to produce returns above the 7.5% discount rate that they themselves chose. Unfortunately, the State has underperformed the conventional 60/40 model (prudent allocation) represented by the Vanguard Balanced Index in the chart below. The chart shows that from 2000-2014 Vanguard balanced fund earned 5.41% annually, which was significantly below the State of Rhode Island assumed rate of return of 7.5%. This strongly suggests that the State’s pension discount rate should go significantly lower than 7.5%, perhaps as low as of below 6% as suggested by both Moodys and Warren Buffet.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTIf the State were to lower the discount rate as indicated it would add billions to recognized unfunded liabilities and cost the state and cities tens of millions more annually in higher ARC’s. The State should explain why we underperform a simple 4 or 5 investment model without improving the risk profile. They should explain the costs of as much as $50 million in annual expenses for consultants and money managers. Surely we can underperform without all those managers and consultants. A look at the Chart below shows the State cannot achieve 7.5% over a long period of time and accept all the expenses associated with managing a huge complex portfolio.
What about Providence Pension Fund?
I suspect Providence has the same issues, if not worse. Wainwright Counsel LLC is Providence Investment Adviser and has on several occasions proclaimed to be outperforming the State return on assets. This occurred several times as Taveras claimed expertise in the pension fund. In reality, it has been very difficult if not impossible to get annualized figures from either the City of Providence or Wainwright. Wainwright Counsel LLC has been the investment advisor since Buddy Cianci hired them in 1995. Apparently the City or the Invest board does not put out an “RFP” for the investment advisor to the pension plan. It remains a mystery exactly who or how the investment adviser is hired or whether it is a competitive process. The murky nature of the investment adviser process has now existed for 20 years. You would think the Projo or Nesi would have asked this obvious question. So much for the 4th estate I guess. It would indeed be a pleasant surprise if Elorza decided to be more transparent about the process and facts and figures.
Why is the data missing in Chart for Providence?
Hopefully someone in the Elorza Administration will treat the pension plan and the retirees with respect by clarifying the question we have raised here. What were the audited returns for Providence Pension asset portfolio and were the $58 million dollars borrowed from the pension fund included? Does any other city in America borrow from its pension fund annually? If so why not? Why is Providence continuing the accounting policy even though the Auditor Segal warned they should not last year? Who hires the investment adviser, describe the process?
Once Wainright or Providence returns the data needed for the Chart we can then suggest changes. Clearly the apparatus that exists for managing State and City employee retirement plans is a mess that does not exist in any other State in America. It should be the goal of the City and State to not waste retirees and Taxpayer assets. The People in charge are Jorge Elorza and Seth Magazine and the citizenry deserves explanation.
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.
