Riley: Pension Returns Lag

Michael G. Riley, GoLocalProv MINDSETTER™

Riley: Pension Returns Lag

Last summer just prior to the 2014 elections there was an awful lot of posturing by candidates about their money management skills. The Treasurer’s race included claims by Seth Magaziner that were imaginary, Seth, a junior equity analyst, never managed money but now he is our Treasurer and we wish him well.

Democratic Primary Politics

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In the Governor’s race there was a lot of focus on the relative returns of both deeply underfunded pension systems. Angel Taveras and Providence touted the returns of their investment adviser Wainwright Investment Counsel LLC. It’s not clear whether Taveras was very active in decision making but he was certainly willing to highlight it when the City had outperformed the State and Ms. Raimondo. Providence clearly outperformed the State  last year and both badly lagged the S&P 500 for fiscal year ended June 30, 2014. But that was old news, useful for campaigns. Nevertheless it was  a great year for the pension funds. Alas, even with those performances,neither plan has improved  their funded ratios. Not improving after the strongest 4 years of equity returns in 50 years is shocking. The State is currently funded at 58% and considered in critical status. Providence is far worse. Additionally the funded ratio for both plans will dramatically worsen if State pension reform is overturned. On the municipal side, the crisis  cities, lead by Providence, did not improve at all even after high teens returns on assets in 2014. Even more alarming, is the performance this calendar year and  thus far in the the 2015 fiscal year. Both plans returns are badly lagging the markets and each investment commissions discount rate assumptions. 

Discount Rates too high

Governor(then Treasurer) Raimondo lowered the discount rate to 7.5% in 2011 as she simultaneously re-amortized the liabilities. The 7.5% was still  somewhat high then but it was  much more realistic than Providence outrageously high  8.25%. Providence  stands as among the highest discount rates in the country. Had the rates been properly lowered Providence would have had to come up with millions more annually to pay of the enormous pension obligations. Mayor Taveras decided to kick the can to the next guy. Mayor elect Elorza will almost certainly get hit with a billion or so in previously understated liabilities and in addition to than plan Assets will fall due to correcting for Taveras and Mancini improper accounting of assets. That violation will drain $57 million from the pension plans.

How is the performance in 2014 and fiscal year 2015?

2014 is over and the city of Providence edged out the State pension plan in calendar year performance gaining 6.51% compared to Raimondos 5.52%. That’s January 1, 2014 until today December 29, 2014. The fiscal year ends annually on June 30 th. So fiscal 2015 is half over now, and after 6 months both pension plans have struggled badly. Fiscal year 2015 shows the State gaining 0.56% and the city of Providence 1.13% versus the S&P500 return over the same period of nearly 6%. More importantly both the State and Providence performed well below the discount rate.

So now the elections are over and Governor Raimondo now has a chance to focus on Providence and the pension problems. Providence faces a drain of roughly $7 million dollars a month and has assets of $ 297 million. If the next 6 months go like the last 6 months Providence will have about $260 million in assets or $160 million less than Taveras reported in 2011. In addition, Liabilities are understated and the city will be forced to recognize real debt on the balance sheet due to GASB 68. The discount rate used will be less than 6%. 

               Here is the Pension Scoreboard

Pension Plan Return Comparison          2014 Calender Year To Date

City of Providence                                   6.51%

State of RI                                              5.52%

S&P 500                                                 12.65%

                  Fiscal 2015 Returns

Providence fiscal 2015    1.13%   Discount rate 8.25%

S $P 500 fiscal 2015       5.96%

State of RI fiscal 2015     0.56%    Discount rate 7.5%

Both plans are lagging and not well positioned for a rise in interest rates. Providence is taking more risk but the state is overly complex. The State and city could achieve S$P 500 returns with less risk than the S & P 500 and the current portfolio using fewer than 5 managers. This can be easily done with lower cost, superior liquidity and complete transparency. The city currently has about 2 dozen allocations and the state has approximately 125 managers receiving fees.

 

Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC news, Yahoo TV, and CNBC.

Raimondo Policy Summit Suggestions


"Immediately make a strong and clear statement addressing the avalanche of police killings, systemic injustice and misconduct." -- Richard Wayne Garganta
 

"Start with firing Gist. Hire someone from RI. There are plenty that are qualified. Every governor elect promises jobs. Fair taxes. Fair car tax in particular!" -- Tom Aquino

"Please refuse to repeal voter ID. There is NO reason you shouldn't need to prove who you are to vote, given that you need an ID for a library card, to buy liquor or to return items at a store without a receipt." - Karen Hogan.

"Tourism. tourism. tourism. work with what assets that are in place." -- John Paul Gauvin

"I wish you would hire people in Rhode Island." -- Jill Beth Forman

 "The heart of the economy will come from self employment before we establish industry. Cut the sales tax, cut red tape for start-ups and invest in small self employed / small business." -- Mark McLinden

 "I've worked in the Rail Road industry for 30 yrs, I have tried to bring rail jobs to the state for years. The MBTA and its contractor Keolis need a place in RI to repair and maintain a large amount of equipment in the Quonset Point Industrial park. so far only a small amount of work is being done there. I had a plan that involved using the skill trades training program to create high paying jobs and bring the rail industry to RI utilizing the North East corridor from Boston to Washington." -- David Pina

"Repeal the car excise taxes. Abolish them at the State level and throughout all individual municipalities. Refuse to implement any portion of Rhode Map RI as it strips sovereignty from towns, encroaches on personal property rights, and was committed by unelected quasi-official bureaucrats.  Examine Detroit. Repeat in Providence. Don't touch voter ID laws. Examine Colorado and Washington. Repeat in Rhode Island." -- Kyle Fitzsimons

 "We continue to see viable manufacturing and mill space turned into apartments and lofts. This temporarily stimulates the economy with construction but does nothing for long term growth. More people and housing does not equate to more jobs. Our states current unemployment and jobless numbers can easily provide evidence of this. We need to work with our cities and towns to reinvest in areas that can be viable for commercial and industrial use. Apartments are fine and dandy, but they shouldn't be the first choice of a vacant building with the utility structure of a 24hr production facility for 800 skilled workers. We are squandering our industrial resources. Work with national grid, water authority, transit and others to determine what sites are suitable to even handle bringing jobs back to RI." -- Adam Scott

"Get that riverfront built...have Buddy at the meetings...use his ideas!!!! It is about tourism and families....we don't need manufacturing on the waterfront....we need a soccer field, restaurants, the nursing college, let's use the water....clean that area up!!!! Buddy has the ideas!!" -- Shirley Richard Grande
 

"As a retired hospital administrator and current foster parent a through review of DCYF and the foster care system is urgently needed." -- Mary Dowd Stuck

"Can't stand the term "thought leader" - this term gets thrown around like it really means something - hoping one or two of these "thought leaders" might also be a real leader with bright/practical ideas." -- Chuck Taylor

"Legalize MJ. It's a win/win. Save money, collect taxes and most importantly, stop criminalizing people for choosing a substance safer than what the [government] allows." -- Mike Parent

"Infrastructure and schools! Both need fixing. I would support raising taxes on people who make $125k and up for this. I am in that bracket so I don't need haters." -- Carl MacNeal

"Remember 60% of Rhode Island voted against you." -- Joseph D'Amico

"Tax all the property Brown University owns. Abolish all the "sweetheart" deals." -- Robert Lawrence

"I would recommend that rather than trying to 'build stuff up', she should concentrate on breaking down some of the obstacles that stand in the way of business startups... The government is not supposed to create the jobs. The government is supposed to set the policy to attract free market jobs." -- Timothy Falardo
 

"Focus on what we can do to maintain gambling and gaming in RI once the casinos in Mass go live. A large percentage of people come from Mass to play at Twin River. Check out revising the law about only serving free alcohol with food, so patrons at Twin River don't need to pay for drinks while gambling. It sounds silly but most casinos are allowed to comp alcoholic beverages. The lottery and gambling is the 3rd biggest revenue producer in RI, like it or not we need to try to maintain the income from this." -- Bretty Curry

"Ken Block can save our state 1 billion. He should be involved!" -- Dennis Lurgio

"Open the rest areas. Look at quasi public agencies and run them the same as other agencies. Tax structure, fees, streamline processes to make it easier for businesses. Don't need 39 superintendents, school committees etc. Statewide curriculum, regionalize." -- Clair Newall

"Go supervise what your friend Anastasia Williams is doing to the John Hope Settlement House and stop turning a blind eye because she's your friend!!!!!" -- Sandra Sanchez

"Increase compassion with funding for our mentally ill. For the children in South County there are very few, child psychiatrists. Families cannot work if they do not have affordable child care...Yet the plan is to cut another 10 million." -- Laura Lehrman

 "I could not help be struck recently driving though Warwick at all the "For Sale" signs on the homes.  Meanwhile, I keep hearing about silicon valley/San Francisco's housing shortage.  We need business as well as population here in Rhode Island.  Maybe Gina could make a pitch to some of the West Coast tech giants to start an East Coast campus?  We're costal, we have so much potential, affordable housing, and top notch universities.  Maybe then we could retain some of the graduates once they are done with their schooling, if they have an industry to go into." -- Lyndsay Drew

"In other states they have rest areas that provide fuel, food ( McDonalds,Burger King, Dunkin' Donuts and convenience stores. We have the land ( closed rest stops on 95 and 295) . This would provide jobs in the construction industry and service industry also. The taxes gleaned from this would be a benefit to the state. We should also look into using prisoners from the ACI to do road maintenance and clean up." -- Ed Bates

"She and the state definitely should be thinking about what the presence Rhode Island's first National Historical Park in the Blackstone Valley will bring to the economy in tourism dollars." -- Comfort Inn Providence / Pawtucket

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