RI pension fund earned 1.4% in 2011; Raimondo avoiding risk

By Ted Nesi

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.”

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

Related: Investment expert: ‘Getting 7.5% … is going to be a challenge’ (Oct. 28)

(chart: House Fiscal Office)

10 thoughts on “RI pension fund earned 1.4% in 2011; Raimondo avoiding risk

    • State St Bank-the same group that manages the CA fund and is being investigated by the Ca AG for churning to generate fees.

      1.4% -I parked my money in a “balanced fund” and earned 6% and the overal stock mkt earned much more.

      • Sue, that is not a bad of return in a balanced fund. The reason I say that is because, a balanced fund is usually 60% stocks and 40% bonds. Bonds right now have very low coupons since the interest rates are very low. You need to look at what your goals and how soon you are going to need the money. You may want research to see if it is wise to reallocate some money into a little more aggressive portfolio. Do you have any international and small cap?

  1. The S&P 500 plodded along in 2011 starting the year at 1257 and ending at 1277.

    The pension trust fund has a chunk of international equities as well and also what is called “alternate investments” being mostly real estate. The equities and alternate investments the last time I looked were about 75% of the total assets of the plan.

    I’m waiting for those “alternate investments” to be remarked to see what that does to the finances.

    • Real Eastate is dead. I wonder how many malls does the pension fund own? The reason I am saying it that way, is in 1998 Barron’s estimated in that 20% of the strip malls, nationwide would be dead malls. Just look at Garden City, Three of the Anchor stores went bankrupt. Warwick mall is on shaking ground. Rhode Island mall is doing best because Stop and Shop is paying the rent to stop Walmart from building a superstore. Providence Place mall if you start really looking at though the facade is a discount mall.

  2. The fiscal year return, conspicuously absent from the discussion, was 20.4%.

    As for the Alternative Investments, they are, in most cases, marked-to-market quarterly, in compliance with FAS 157. And they are not, as stated above, “mostly real-estate”. Nor has commercial real estate experienced a overall decline in the last quarter thereby necessitating any need to be “remarked” downward.

    • Phrankie,

      You may know more about this, but I was under the impression that FAS 157 does not apply to a government pension plan, and the newer GASB standards are only now being implemented.

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