Riley: Warren Buffett, Jorge Elorza and Jack Bogle
Michael G. Riley, GoLocalProv MINDSETTER™
Riley: Warren Buffett, Jorge Elorza and Jack Bogle
Warren Buffett uses two different estimates, the expected long-term rate of return on plan assets of $13.3 billion is 6.7% and separately the discount rate used to determine the present value of liabilities to Berkshire plan recipients in 2014 is 3.8% or $15.8 billion.
Jack Bogle of Vanguard fame has written recently that his outlook for investment returns has worsened from a year ago. In that 2014 article he was asked about private and public retirement systems and their discount rates of 8%. Here is what he said :
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST“There is no way under the sun that they’re going to earn 8 percent. It’s just impossible. No matter what they do, they’re stuck in a bind given the kind of markets we expect in stocks and bonds. The best they can really hope for is a 5 percent return unless some wonderful, attractive scenario for the future unfolds, which is really unimaginable. If anything, it’s going to be worse.”
And now:
On pensions, Bogle said, "Let's start with the facts: public pensions are $4 trillion underfunded and private pensions are $800-$900 billion short." Bogle said that pensions are not going to get the 8% return they assume they are going to get, but 5% is a more reasonable assumption. And this 5% also excludes fees.
Our third fiduciary is Providence Mayor Jorge Elorza. Mr. Elorza has not publicly commented on his decision to use 8.25% as the expected return on investments and the discount rate used to calculate the present value of liabilities still unpaid and already earned. Providence's expected returns are on only $300 million in assets as Elorza was forced to write down $63 million in falsely claimed assets last spring by Angel Taveras. Taveras claimed assets were $357 million and included an item called “other” of $63,058,000 subsequently written down by the auditor Segal Company in April of this year.
Why do phony assets and unrealistic discount rate matter?
The combination of phony assets and an egregious return assumption of 8.25% understates the health of the Providence Pension Plan and therefore understates the “ARC “calculation.
Providence's FY2016 budget appropriates approximately $71 million for “ARC” in 2016 but that was calculated using false assets and an 8.25% discount rate. So what would be the “ARC” calculation if the assets were adjusted to reality and a discount rate of 5% that Bogle suggests or the 3.8% Warren Buffett uses?
A March 2015 report by NASRA studied retirement plans from 2001-2013 stated that the higher discount rates understate the ARC:
“As an illustration, the Colorado Public Employees’ Retirement Association (PERA) publishes in its annual financial report a sensitivity analysis showing the effect minor changes in the investment return assumption would have on the ARC of PERA’s five pension plans. At the time of this study, PERA’s investment return assumption is 7.5 percent. According to its FY 13 annual financial report, a reduction in the investment return assumption to 7.0 percent would result in an increase to the plans’ ARC ranging from 11 percent for one PERA plan to more than 25 percent for another.”
If the Providence plan was adjusted from 8.25% to 5% and assets were accounted for legally then ARC could double to $140 million dollars in 2016 or 42% of the total tax revenue of the city. This is an extraordinarily large number. All these numbers are available to the Mayor and City Council. They have a complete understanding of the city finances and near bankruptcy yet hide it. My contention is that the Mayor and Council are violating securities laws by misleading bondholders as to the financial condition of the city. The SEC should investigate as I have asked. The State Police and Attorney General should also investigate.
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.
