Top Raimondo aide floats a full review of RI pension portfolio

Treasurer Gina Raimondo wasn’t a big fan of Matt Taibbi’s headline-grabbing Rolling Stone article about Rhode Island and other states that have reduced pension benefits while investing assets in hedge funds. But that doesn’t mean her office disagrees with everything the crusading journalist had to say.

Taibbi “makes some salient points, with which the treasurer agrees,” Anne-Marie Fink, the state’s chief investment officer, wrote last week in an email to members of the State Investment Commission.

“Specifically, public employees are not to blame and should not shoulder a disproportionate share of the economic burden required to fix the problem,” she wrote. “And he has every right to take issue with overly generous Wall Street compensation, manipulation of the financial markets and corporate greed. The economic collapse in 2008 hurt many people.”

Notably, Fink floated the possibility that Raimondo and the commissioners may want to revisit the controversial new portfolio they put in place after Raimondo took office, which involved moving more than $1 billion into hedge funds. The new portfolio’s returns underperformed the median large public plan last year.

“We constantly monitor our investment strategy, and make changes when necessary,” Fink wrote. “Our portfolio has been in place for almost two years now and it may make sense to take a holistic look at the portfolio and its asset allocation.”

“Any changes will be made on the basis of sound financial judgment and what strategy is in the best long-term interest of our members, not the views of out-of-town reporters,” she added.

Separately, the Rhode Island Progressive Democrats’ state coordinator, Samuel Bell, argued in a Rhode Island’s Future post Sunday that, by focusing so much on Raimondo, Taibbi “is still missing the real story in Rhode Island,” which Bell suggested is “the conservatism of General Assembly Democrats.”

Fink’s full email to the State Investment Commission’s members is posted after the jump.

• Related: Rhode Island pension fund again lags its peers with return of 11.1% (Aug. 27)

Dear Mike, Tom, Paula, Bob, Tom, Marcia, and Drew,

As the Treasurer previewed at last week’s board meeting, Rolling Stone has published a story by Matt Taibbi on public pensions with a focus on their alternative investments portfolios. Rhode Island’s portfolio was featured, and as expected, the article was critical of our work. The Treasurer was interviewed for the story by telephone, and Treasury’s spokesperson spent time speaking with Mr. Taibbi to provide context and background. Attached is a copy of the story.

As the statement from Treasury noted last week (also attached), this political propaganda piece was driven by the critics of pension reform, including those who are paid by local labor leaders to discredit the state’s reforms and its investment policies. Mr. Taibbi does not appear to have a clear understanding of the 2011 pension process and its goals, and omits many important facts.

He certainly has the right to express his views and to use the sources he prefers. In fact, he makes some salient points, with which the Treasurer agrees. Specifically, public employees are not to blame and should not shoulder a disproportionate share of the economic burden required to fix the problem. And he has every right to take issue with overly generous Wall Street compensation, manipulation of the financial markets and corporate greed. The economic collapse in 2008 hurt many people. Another part of the reason why Rhode Island faced a pension crisis is due to past politicians refusing to make difficult choices. Whatever the reasons, Rhode Island did face a pension crisis and took action to solve the problem. Anyone who lives here knows how much we are struggling.

In 2011, Rhode Island had a choice. We could have done nothing and been dishonest about the problem. Instead, leaders across the state came together and made the tough decisions necessary to protect the retirements of hard working public employees and retirees. The General Assembly overwhelming passed reform, with 92 out of 109 members voting for it.

Should you receive questions, here are a few clarifications related to the article’s claims about our portfolio:

· The article implies our pension is underfunded due to the state not paying the Annual Required Contribution (ARC). Rhode Island has paid the full amount of its ARC each year for at least the last twenty years. Additionally, last year the state contributed the $13 million budget surplus to the pension fund, over and above the ARC payment, in large part at the Treasurer’s insistence. Despite these faithful payments, our pension system is 62 percent funded (based on the most recent 6/30/2012 actuarial calculation of liabilities and 8/31/2013 asset valuation).

· Nationally, Rhode Island is one of only a handful of states that releases comprehensive data on investment management and performance fees. Please see the pension investment page of the Treasury website for fiscal year 2012 fee data. At last Wednesday’s meeting, I shared an estimate for fiscal year 2013 fees, and we have committed to releasing further details once we have confirmed numbers from our managers. Additionally, staff and our consultants continue to work, at your direction, to improve the alignment and effectiveness of our fee expenditures. (Below is an email from Marcia related to this story and her participation.)

· The SIC’s due diligence focuses on investment strategies and performance, not the personal views of managers. You, my staff and our consultants are always evaluating our investments, holding managers accountable for performance, and making changes when needed. This work is never an endorsement of personal views. To further support our effort, we together are developing the SIC’s first Corporate Governance Policy.

· Currently, the low yield offered by fixed income has created a particularly difficult environment for investing. If we implemented the bonds-only suggestion of Dean Baker, our expected rate of return would drop from 7.5 percent to 3 percent, dramatically lowering our funded ratio. The portfolio’s returns for FY13 would have been flat, rather than the actual +11.1 percent return the portfolio generated. Instead of relying on low-yielding fixed income to limit the portfolio’s risk, you decided to diversify our alternative investment allocation. In FY13, the new funds produced a +11.2 percent return, net of all fees, well outperforming the bond index (which fell 0.7 percent) and a basic 60 percent equity and 40 percent bonds portfolio, which generated a +9.7 percent return.

· Strong returns from our investments, including alternative investments, help move the pension fund closer to the 80 percent funded level, where the Cost-of-Living Adjustments (COLA) come back. If our alternative investments perform as strongly as the critics imply, the COLA could resume sooner than expected. Additionally, it is always important to remember more than $3.6 billion is invested exactly the way some critics would like – in low-cost stock indexes.

· While the reforms have significantly strengthened the system, the fund still pays out more every month than it receives. The fund has an obligation to pay around $500 million, or six percent, net every year to cover distributions in excess of contributions. This reality means we have to employ techniques to dampen volatility, even more so than other pension funds. We have to balance long-term obligations and shorter-term cash flow requirements when building the portfolio.

· As you know, we do not work with placement agents (outsourced marketers who are paid by investment managers, not plan sponsors). In fact, all funds that we have committed to during this administration have signed a pledge that placement agents are not paid on Rhode Island investments. It was a priority of the Treasurer to institute this investor pledge.

· As is well known within the state, the SIC had nothing to do with 38 Studios, and the Treasurer opposed the deal from the beginning.

· Unfortunately the story glosses over what actually happens to people when pension systems are left unreformed. The retirees of the City of Central Falls saw their pensions cut in half; similar cuts are expected for the pensioners of Detroit and San Bernardino, California. I know you and other Rhode Island leaders do not want this to happen to public employees and retirees in Rhode Island. We also don’t want state services cut to the bone. Without pension reform the cost to taxpayers at the state level would have been about $400 million, crowding out spending on schools, road repair, libraries, and other essentials. Thanks to reform, the payment was $242 million, allowing the state to preserve other services. Cities and towns also saved about $100 million in the last fiscal year. Providence saved around $13 million. Cranston saved about $11 million and Warwick saved approximately $8.8 million.

The fact is that the state-administered pension system is much healthier now than in 2011. We constantly monitor our investment strategy, and make changes when necessary. Our portfolio has been in place for almost two years now and it may make sense to take a holistic look at the portfolio and its asset allocation.

Any changes will be made on the basis of sound financial judgment and what strategy is in the best long term interest of our members, not the views of out-of-town reporters.

I deeply appreciate your continued work and the time you volunteer to help the state achieve strong, after-fee returns at reduced risk. With the changes you, the Retirement Board and the General Assembly have made, you can be confident that we will be able to deliver pensions to the hard-working public employees and retirees of Rhode Island.

If you have any other questions or concerns related to the article, or anything else associated with our investment program, please let me know. Thanks again for your service on the SIC,

Anne-Marie

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