Riley: Mr. Achorn Do You Still Want Door Number 1?

Tuesday, March 29, 2016

 

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The answer to last week's “Monty Hall” quiz was, you should always switch doors.

The odds don’t change from the original one out-of-three because Monty knows and can always reveal a losing door. This is indisputable. However, even after being told that its proven that to switch human beings find it hard to do. The original fear of making a mistake by switching turns into something else. Before being shown the proof approximately 95% of participants said the odds were 50/50 yet 95% of those refused to switch. That in itself is amazing. Even when Monty would offer money to switch doors a vast majority stuck with their pick. 

This very human behavior is why economists are often surprised by how incentives, or taxes or stimulus affect consumption. People aren't always rational. Here is a good explanation of the math.   

But in my opinion the most interesting fact is that people refuse to accept the odds are against them, even when demonstrated and still stay with their pick. This phenomena is well described in the book “Blink” by Malcolm Gladwell.  

This is a fatal flaw for traders and it’s the reason we posed this question to trader prospects in the early 1990’s. We wanted analytical people AND we also wanted people who when presented with the facts changed their tactics. 

Fully Funded Pensions by 2040?

Last week, I referred to the question on A Lively Experiment of “whether the Rhode Island Pension plan would be fully funded by 2040."

I know that teachers and state workers are praying for it because they would get COLA’s reinstated. Don’t count on it. Just like the Monte Carlo Method finally proved the odds in the Monte Hall problem demanded that the contestant switch, the facts surrounding the chance of being fully funded in any pension plan are calculable and remote given the facts of that plan. In Rhode Island we are 57% funded and have $7.2 billion in assets to pay for $13 Billion in already earned but not yet paid benefits. The difference of $5.8 billion, is the PV (present value ) of the unfunded liabilities discounted at 7.5% (the rate we are supposedly going to compound for the next 30 years). Almost every serious economist finds this estimate of return laughable, especially given the current zero and negative interest rate environment.

But even further to the point, the odds of Rhode Island or any one else in the same circumstance fully funding by 2040 is calculable. Colorado, one of the 10 other states that have “hybrid” pension plans, had their actuary figure out those odds and crafted law designed to automatically adjust when more funding was necessary. The idea was to make it harder for politicians to short change retirees by predicting high returns and then spend the retirees pension money elsewhere. Colorado thought this was the responsible thing to do. Here is the Colorado Plan article:

Rhode Island's goal should be to adjust to reality and to get on track to fully fund our promises. It does not help when the Democratic Party Chair misleads taxpayers and retirees about returns and the condition of the pension plan. According to Mr. McNamara the last 5 years Rhode Island earned 9.3% in its pension plan. I was shocked to hear that and wondered where he got that “talking point” from. Never mind, lets just go to Seth Magaziner's  RI Treasury website.

Just the facts please

The State released the return’s for the Pension plan trough February 29,2016 are summarized below. As can be seen on the transparency website, Rhode Island returns are nowhere near 9.3%. Here are the facts without the spin from our treasurer and Democratic State Chair.

Rhode Island State Pension Plan Returns

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The question I have now goes to panelist and Projo Editor Ed Achorn , who originally endorsed Mr Magaziner for treasurer in 2014 and last week enthusiastically supported Mr. McNamara‘s prognostication that RI would easily be fully funded by  2040. …….    

 Mr. Achorn do you still want door number 1?

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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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