Riley: Magaziner & Elorza Pension Assumptions Ridiculed by Special Master Feinberg
Tuesday, May 10, 2016
Given the sorry state of our state pension investments in Rhode Island under the Raimondo (now Magaziner) plan, I have had plenty to write about and criticize. One week ago Seth Magaziner after nearly 18 months of consistently losing money for retirees in the pension plan, said he was sticking with his estimate of 7.5% compound returns for the next 25 years.
Amazingly, he does not anticipate even addressing lowering the 7.5% discount rate until mid-2017, even though the list of U.S. economists and investment professionals who think 7.5% is ridiculous reads like a who’s who.
Magaziner is firmly at 7.5% and Elorza at 8.25% as they stubbornly stick to misleading municipal bond investors about pension returns. Joe McNamara Chair of RI Democratic party also chimed in a few weeks ago with his expert opinion that 7.5% was “fine” adding that we “all need to understand that there are good years and bad years." Chair McNamara apparently went to the Fox/Gallison School of finance along with Mayor Elorza. Meanwhile outside chronically lying Rhode Island, the Teamsters central states pension fund is in trouble and its very big news.
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In Washington, nearly five months before national elections, more than 100 members of Congress lined up in opposition to a proposal that would have reduced pensioners’ monthly benefits by 22%, on average—all the way up to 70%.
You see this plan isn’t guaranteed by the constitution -- it is insured by the Pension Benefit Guarantee Corporation. The Central States officials have known for years of the pending insolvency as they prayed for a bailout. But the losses are even bigger than the insurance fund. Just like Rhode Islanders watched the Central Coventry Fire District refuse to negotiate while they went under and demanded higher taxes, we are now witnessing inevitable taxpayer abuse at the hand of the Teamsters.
Elizabeth Warren stood on the White House lawn predictably demagogueing the plight of the worker. The truth, however, is very different and Kenneth Feinberg of 911 and GM bankruptcy fame attacked the plan submitted by Central States and their 400,000 teamsters. Special Master Feinberg could not likely have guessed that the Teamster plan would be as half-baked as the Rhode Island CCFD plan, but it was.
Special Master Feinberg ripped into the plan for its short sightedness, unrealistic assumptions and its lack of clarity. He was agitated with regard to plan assumptions, and he went on.
Pay Attention Mr. Magaziner and Mayor Elorza!!!
In Feinberg’s 10 page rejection of the plan, he said, “the request itself was arrogant in conception, having been developed with almost no direct input by the pensioners, and devoid of responsibility-taking. It ascribes all of the plan’s financial problems to demographic and macro-economic considerations rather than to the fiduciaries’ sometimes-inept management of pensioners’ savings.”
Don’t Magaziner and Elorza realize that they are plan fiduciaries? Maybe they should read below Feinberg’s opinion of the 7.66% plan assumption chosen by the Teamsters as according to Author Elliott Blair Smith at Market Watch.
“Feinberg characterized as unrealistic the plan’s investment earnings expectations under the application, noting that the administrators expect to produce above-average returns in every single asset class over the next decade. That is to say the pension—which should be concerned with capital preservation—somehow was going to substantially outperform the market by returning a 7.66% average annual rate of return, compared to 6.43% predicted in the broad-based Horizon Survey of investment forecasts. Feinberg calls Central States’ expectations “significantly optimistic” and “not reasonable.” I’ve previously reported how the fund substantially underperformed during the financial markets crisis."
In summary Mr. Magaziner is overstating the discount rate of 7.5% to save him from contributing the proper amount annually to the pension plan. That’s plain wrong. It’s wrong because it unfairly shifts the burden of benefits that have already been earned to be paid for by the next generations of Rhode Islanders. That is sooooo Rhode Island. Our elected officials deliberately sweep reality under the rug in order to get elected to their next office. Elorza is pulling the same scam only he is even worse, predicting 8.25% AND lying about Pension Assets.
This is soooooo Rhode Island!!! I guess Governor Raimondo and Speaker Mattiello want us to just move on. Nothing to see here.
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.
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