Riley: RI Pensions - No Management Fees, No Politics
Tuesday, May 16, 2017
Michael G. Riley, GoLocalProv MINDSETTER™
The Sunday New York Times business section featured another article on public pensions penned by Gretchen Morgenson, but this article came close to hitting the subject of abuse of public pension dollars out of the park.
Had the article simply whined about how retirees were made a promise and then referred to an AFSCME diatribe by some paid for pundit, it would have been useless. But, Ms. Morgenson’s article actually mentioned the abuse of taxpayers' money as well as retiree money. That’s a first!
We all know that the promise to fund public retirements came from self-centered sleazy politicians who had no intention of being around to pay when the s--t hit the fan. Elected officials across the nation abused the honeypot. Rhode Island was no exception. Taxpayers easily paid enough taxes to fund pensions, but those funds were diverted and recycled into inefficient wasteful agencies often through higher wages and benefits. Just enough raises to buy the next election. Providence, Rhode Island is a perfect example of this behavior borrowing from the pension fund since 2002. Starting with Mayors Cianci and Cicilline and extending to Taveras and Elorza.
At the state level in Rhode Island, not happy enough with ripping off the taxpayers and defending their own pitiful record of funding, budgeting and asset management, the politicians use the assets as a political platform for pet causes. The State of Rhode Island under Treasurer Seth Magaziner has unabashedly pushed his progressive creds. Now after 18 months of no decisions and poor performance, the Treasurer is slowly and finally backing out of Governor Gina Raimondo’s high-fee investments.
GoLocal readers have heard from pension boards and pundits alike as they politicize fund manager allocations and even specific holdings. The first wave of attacks was on the Arnold Foundation and their efforts in supporting Rhode Island Pension reform. Teachers were predictably against any manner of reform because they were made promises. Fair enough.
But why target only hedge funds or some hedge fund managers? There are 75 other well-paid Wall Street managers in Rhode Island and Arnold isn’t one of them. AFSCME has been most identified with the politics of pensions by putting out a hitlist on hedge fund managers who favor pension reform.
Fees are too High!!
Fees are too high and they are actually collapsing as we speak. The infamous “two and twenty” compensation scheme for hedge funds is a rarity today. I agree a two percent management fee and 20% profit participation is excessive and only makes sense for individual investors who have strong faith in particular managers and their strategies. Strangely Raimondo and then Magaziner made heavy use of these inappropriate investments. This ironically riled the unions and unions have been the biggest voice drawing attention to those costs.
They are right -- Mayors and public treasurers have no business committing taxpayer funds to such an arrangement, whether they are hedge funds, private equity funds or real estate partnerships. Boards and/or consultants certainly have no business choosing portfolio managers based on a political litmus test or size of the fund. “Pay to play” has been an awfully big temptation at every level of public pension management. Maybe it’s time to get rid of the temptation.
Pensions should be about retires
In fiscal year 2016, $69.7 million dollars was spent on investment related fees and expenses according to Treasurer Magaziner.
The list of those who owe favors to a politician like Seth Magaziner is lengthy and filled with potential donors. There is absolutely no fiduciary or economic need for this enormous list of managers paid for by Rhode Island taxpayers.
If I were Treasurer I would rid the office of politics - I would manage the plan for the benefit of retirees and taxpayers, period. I would fire all the managers currently managing the pension plan. I would fire the consultants and save an additional $1.5 million and I would let go of much of the staff, especially those jobs it is who promote a political agenda. I would expertly manage the fund to better outcomes and, eliminate conflicts and reduce the overall fees by 60% to 90%. There would be no more than 5 investments after 4 years. Then I would retire and go back to managing my hedge fund.
Ms. Morgenson is right about exorbitant management fees in public retirement plans. She just doesn’t go far enough.
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.
2005-2010In 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)
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.
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)
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.
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.
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.
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.
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
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.
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 http://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">here.
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.
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.
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.
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.
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.