Raimondo Issues Detailed Rebuttal to Rolling Stone Article
Saturday, October 05, 2013
"Should you receive questions, here are a few clarifications related to the article’s claims about our portfolio," the office told commission members.
See List of Clarifications Issued by the General Treasurer's Office BELOW
The following was sent from the General Treasurer's office in response to Taibbi's article:
* 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.
* 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.
Taibbi Responds to Renn
"I did want to ask one thing about this passage," said Taibbi, referring to the following portion of Renn's piece.
I agree with Taibbi that having pensions invest in hedge funds is a dubious practice, though I could quibble with his method of using simply fees paid as reason why it’s bad. But that misses the much bigger issue, which is that cutting pension liabilities actually reduces, not increases, the justification for investing in hedge funds.
Taibbi rightly shows how governments systematically underfunded pensions for years and then attempted to deal with the resulting deficits through high risk investment strategies like hedge funds. But if you reduce the liability, you reduce the incentive to gamble with the funds. So it’s absolutely anti-sensical to suggest anyone acting at the behest of peddlers of such risky plans would take action to reduce the very liability that gives any sort of a fig leaf to investing in them. His central thesis is a complete non-sequitur.
"I literally got a contact high staring at those two paragraphs this morning," said Taibbi. "Is Renn saying that nobody acting at the behest of a hedge fund would ever hire a hedge fund? Because it sure reads like that."
Taibbi continued, "Another way to read that passage is, "Rhode Island just paid $70 million in fees to managers of alternative investments, but not because it was in the interests of the people receiving those fees."
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