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Riley: Effect of Insider Politics on RI’s Pension Fund Under-Performance

Tuesday, October 06, 2015

Michael G. Riley, GoLocalProv MINDSETTER™

Rhode Islanders have long known about the “know a guy” culture of insider corruption in Rhode Island. The Attorney General used to work with the speaker and the former speaker who is in jail. Thirty eight studios enriched many in the State yet all the Representatives who voted for it said they were duped. When asked, no one can identify who “duped” them. Mattiello who was Fox’s right hand guy refuses to investigate 38 Studios at all. Evidence of insider trading in 38 Studio bonds are rejected by the AG Kilmartin as “not his jurisdiction”. AG Kilmartin claims the same in mountains of evidence of public corruption in Providence again as “not his jurisdiction." These actions serve as a neon sign for the state that unless you want to get dirty, real dirty - don’t bother coming to Rhode Island.

A bigger stink

There is however a bigger stink emanating from Rhode Island and that is the effect of insider corruption that is invisible yet pervasive. Consider my experience with trying to help the State of Rhode Island Pension System by introducing them to an innovative new investment product that could eliminate all hedge fund investments and costs. The product in fact is so powerful it could easily eliminate 95% of the paid outside money managers and consultants that are currently paid by the State and whose performance has been very discouraging. Long story short after a few meetings we were rejected. We needed to have at least $1 billion in assets to be considered said Cliffwater, the consultant. Raimondo never met with us, only staff. The charts that appear in this article show the performance of Exceed Investments “buffered “ or “hedged” index versus the State and the S&P 500 as well as the city of Providence. The indices were listed in September 2014 and we now have 1 full year of investment performance to compare to Providence and the State of Rhode Island pension fund performance.

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I don’t “Know a Guy”

For the last 13 months, the Exceed Buffered index is ahead .2 % versus the State Pension Fund performance of minus 4.8%. This difference increased tax payer liability by $400 million dollars and that’s not counting tens of millions of savings that firing hedge fund managers would have produced. Similarly this “defined outcome” strategy outperformed Providence Investment Commission as well by nearly 300 basis points at significantly less risk. I did approach Providence but they refused to meet. I am the definition not only of an “outsider” in Rhode Island, I think I am blackballed due to my investigations and criticism of power abusers across the State. This attack on the insiders is exactly the opposite of how business gets done in Rhode Island. I know that and accept my results. However there is an important lesson to be considered here. I have shown how Rhode Island by not considering a change in investment Strategy flushed $400 million down the toilet. How many other good ideas or well-meaning people are blackballed or ignored by the “insiders” who don’t want to grease palms or tow the party line? How many honestly tried to borrow from Economic Development and were turned down? What is the toll on our collective psyche when we learn not to even bother because we don’t know a guy? There are those of us who don’t try to buy baseball teams and then get our friendly politician to pay for it with tax dollars. There are those of us who believe that every dealing with the Government should be open and honest and that no politician should ever abuse his power. With that as our reputation we wouldn’t need to pay $5 million on a campaign to encourage visitors. People would flood to an honest beautiful State. Unfortunately nearly everyone in elected office is tainted, Raimondo didn’t have to have $1 billion under management to get the State and City of Providence to Invest in her VC fund. Gordon Fox and husband ended up with a restaurant in the 38 studios building. Cicilline openly and purposely lied, misled bond investors and became Congressman. Former Speaker Murphy represents all of them and is the biggest lobbyist in the State.

Is there anything we can do?

Abuse of power and group think are always very dangerous and in Rhode Island both happen way too often. Let’s try something new. Let’s investigate and punish wrongdoing on our own. Let’s hold people accountable. We know the press is in bed with the insiders so we need to do this at the local level. Take direct aim at officials you know are lying and go after them legally and unrelentingly. Publicize your efforts on local media. Make a public record of your findings. It’s us against them now.

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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.

Related Slideshow: Timeline - Rhode Island Pension Reform

GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.

2005-2010

In the five years before Raimondo was elected, pension changes included a decrease in established retirement age from 65 to 62, increased eligibility to retire, and modified COLA adjustments.

Read the Senate Fiscal Office's Brief here.

(Photo: 401(k) 2013, Flickr)

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.

“The present law is sound fiscal policy and should remain unchanged.” -George Nee (Rhode Island AFL-CIO President)

See WPRI's coverage of Chafee's attempt to cut pension fund deposits here.

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 https://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">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.

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