Riley: Magaziner & Elorza Pension Assumptions Ridiculed by Special Master Feinberg

Tuesday, May 10, 2016

 

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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.

Central States Plan 

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.

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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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2005-2010

In the five years before Raimondo was elected, pension changes included a decrease in established retirement age from 65 to 62, increased eligibility to retire, and modified COLA adjustments.
 
Read the Senate Fiscal Office's Brief here.
 
(Photo: 401(k) 2013, Flickr)
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January 2009

Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:

1. An established minimum retirment age of 59 for all state and municipal employees.

2. Elimination of cost-of-living increases.

3. Conversion of new hires into a 401(k) style plan.

 

See WPRI's coverage of Carcieri's proposal here.

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2009

Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions. 

 

Read the NCSL report here

(Photo: FutUndBeidl, Flickr)

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2010

Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.

"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo

 

Check out Wall Street Journal's coverage here.

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November 2010

Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot. 

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April 2011

Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.

Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.

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May 2011

Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.

"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)

 

Read GoLocalProv's analysis of the report here.

Read the Truth in Numbers report here

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October 2011

Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.

“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee

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October 2011

Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.

“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)

Read more from the firefighters' battle with Raimondo here.

Check out the New York Times' take on RI's  pension crisis here.

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November 17, 2011

The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.

 

Read more from GoLocalProv here.

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November 18, 2011

Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.

 

Read about how Rhode Islanders react to RIRSA here.

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January 2012

Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms.  The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.

 

Read about the pension workshop here.

Read Raimondo's feature in Institutional Investor here

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March - April 2012

Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.

“The present law is sound fiscal policy and should remain unchanged.” -George Nee (Rhode Island AFL-CIO President)
 
 
See WPRI's coverage of Chafee's attempt to cut pension fund deposits here.
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December 5, 2012

Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package.  In response, Chafee issues a statement supporting the negotiations.

 

Read more about Raimondo's opposition here.

Read about Chafee's statement https://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">here

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March 2013

Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.

 

Read about Raimondo's discussion of distressed municipalities here

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April 2013

The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.

"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)

 

Read GoLocalProv's coverage of the State Pension Fund's losses here

Read Ted Seidle's criticism of Raimondo in Forbes.

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June 2013

Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.

 

Read GoLocalProv's investigation into the rising pension costs here.

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September 2013

Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform. 

Read Taibbi's article in Rolling Stone.

Read GoLocalProv's response to Taibbi here.

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October 2013

As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.

 

Read more from GoLocalProv about the players in the pension battle here.

 
 

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