PROVIDENCE, R.I. (WPRI) – Rhode Island’s state pension fund earned a paltry 1.4% return on its investment portfolio last year, far below its target of a 7.5% annual return, WPRI.com has confirmed.
Treasurer Gina Raimondo’s office disclosed the figure for 2011, which is after expenses, in response to an inquiry on Thursday. The pension fund earned 12.5% in 2010, according to the House Fiscal Office.
“It’s really hard to manage money right now,” Raimondo told WPRI.com in an interview. She cited ongoing volatility in the stock market and the impact of the Federal Reserve’s low interest-rate policy on the state’s domestic fixed-income portfolio, which made up about 22% of the pension fund’s assets in 2010.
Rhode Island’s 1.4% return in 2011 beat the 1.1% return earned by the nation’s largest public pension fund, the California Public Employees’ Retirement System. California’s teachers pension fund grew 2.3%.
The Rhode Island pension fund’s assets totaled $7.5 billion on June 30, 2011, according to the state’s annual audit. The money is saved to pay pension benefits to state employees, teachers, judges, troopers and municipal workers whose communities are in the state-run system.
Rhode Island’s pension system was 62% funded with a total liability of $10.62 billion as of June 30, 2010, following passage of the overhaul signed by Governor Chafee in November. That figure excludes municipal workers.
The Rhode Island pension fund’s investment return averaged nearly 15% a year between 1984 and 1997 but fell to 2.4% over the last decade, which was significantly below the national median of 3.4%.
“The main problem with Rhode Island’s pension system is that it has very poor investment returns,” Cate Long, a municipal bond analyst at Reuters, wrote last month. “These returns are in the lowest tier of state pension plans, and this chronic underperformance is causing a substantial shortage of assets to pay retirees.”
Last year, Raimondo persuaded the state Retirement Board to lower its forecast of the pension fund’s average return from 8.25% to 7.5% a year, which increased the size of the state’s long-term pension shortfall significantly.
Earning 7.5% a year “is a tall order – I’ll just leave it at that,” Raimondo said. “I’m going to work as hard as I can to achieve it. It’s very tough.” The state’s new hybrid pension plan and a formula that will only increase pension payments in good investment years will reduce the risk taxpayers face from subpar returns, she said.
The probability of the pension fund earning a compound return of 7.5% over the next 10 years is less than half based on its current mix of investments, Allan Emkin of Pension Consulting Alliance, a consultant hired by the treasurer’s office, told the House and Senate finance committees in October.
(The 7.5% return forecast is the combination of a 4.75% real return after expenses plus 2.75% inflation annually.)
Raimondo, who chairs the State Investment Commission, said she is “very, very focused on reducing the risk in our portfolio. … When you’re running a pension fund the way we are – which is 60% funded, negative cash flow – you have to keep your eye on risk.”
Asked if the state will lose out on higher returns by reducing risk, Raimondo said: “If you do it right, I don’t think you do. You do give up some returns, but the way you want to run a portfolio is, if the market is up 10%, maybe you’re up 7%%. But when the market’s down 10%, you’re down 2%. That’s where I’m trying to get this portfolio.”
• Related: Investment expert: ‘Getting 7.5% … is going to be a challenge’ (Oct. 28)
(chart: House Fiscal Office)