Riley: Warren Buffett, Jorge Elorza and Jack Bogle
Tuesday, December 01, 2015
Each of these men is a fiduciary and is responsible for the proper funding of their employees’ pension plan. Each has used their own experience and expertise to determine the expected rate of return on investments under their control.
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.
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.
Related Articles
- Riley: Simple Questions in Need of an Answer by Providence Officials
- Riley: California Municipal Bondholder Law Follows Rhode Island
- Riley: Providence, Ken Lay and the Securities Exchange Commission
- Riley: Providence’s Cash Flow Problem
- Riley: Why is Governor Raimondo Misleading Bond Investors?
- Riley: Providence Rhode Island Defaulted June 30, 2015…So What
- Riley: Comparing Providence to Greece
- Riley: Countdown to Default in Providence
- Riley: Default in Providence. Where is our Governor?
- Riley: A Corrupt Providence Approaches Default
- Providence Pension Watchdog Riley Releases Report, Calls for More Answers
- Riley: The Yates Doctrine
- Riley: Rhode Island Pension Fund Meltdown in Full Force
- Riley: Wild Week Exposes Risks in Rhode Island and Providence Portfolios
- Riley: Amateur Hour in Providence Pensions
- Riley: AFSCME, Ted Siedle and Marcia Reback Hurt Rhode Island Retirees
- Riley: I Reject the Findings of 38 Studios Hearings - Part 2
- Forbes Columnist Siedle Responds to MINDSETTER™ Riley’s Charges
- Riley: Kushner and the “Hot Air Ball”
- Riley: MacBeth Has the Scent and Should Not Back Down
- Riley: RI Investment Adviser “Sell Providence RI Bonds”
- Riley: What Happened to Rhode Island’s Municipal Pension Crisis?
- Riley: Raimondo Strikes Out
- Riley: Effect of Insider Politics on RI’s Pension Fund Under-Performance
- Riley: GASB 68 is Here and Reports are Due