Riley: Pension Returns Lag
Tuesday, December 30, 2014
Last summer just prior to the 2014 elections there was an awful lot of posturing by candidates about their money management skills. The Treasurer’s race included claims by Seth Magaziner that were imaginary, Seth, a junior equity analyst, never managed money but now he is our Treasurer and we wish him well.
Democratic Primary Politics
In the Governor’s race there was a lot of focus on the relative returns of both deeply underfunded pension systems. Angel Taveras and Providence touted the returns of their investment adviser Wainwright Investment Counsel LLC. It’s not clear whether Taveras was very active in decision making but he was certainly willing to highlight it when the City had outperformed the State and Ms. Raimondo. Providence clearly outperformed the State last year and both badly lagged the S&P 500 for fiscal year ended June 30, 2014. But that was old news, useful for campaigns. Nevertheless it was a great year for the pension funds. Alas, even with those performances,neither plan has improved their funded ratios. Not improving after the strongest 4 years of equity returns in 50 years is shocking. The State is currently funded at 58% and considered in critical status. Providence is far worse. Additionally the funded ratio for both plans will dramatically worsen if State pension reform is overturned. On the municipal side, the crisis cities, lead by Providence, did not improve at all even after high teens returns on assets in 2014. Even more alarming, is the performance this calendar year and thus far in the the 2015 fiscal year. Both plans returns are badly lagging the markets and each investment commissions discount rate assumptions. GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST
Discount Rates too high
Governor(then Treasurer) Raimondo lowered the discount rate to 7.5% in 2011 as she simultaneously re-amortized the liabilities. The 7.5% was still somewhat high then but it was much more realistic than Providence outrageously high 8.25%. Providence stands as among the highest discount rates in the country. Had the rates been properly lowered Providence would have had to come up with millions more annually to pay of the enormous pension obligations. Mayor Taveras decided to kick the can to the next guy. Mayor elect Elorza will almost certainly get hit with a billion or so in previously understated liabilities and in addition to than plan Assets will fall due to correcting for Taveras and Mancini improper accounting of assets. That violation will drain $57 million from the pension plans.
How is the performance in 2014 and fiscal year 2015?
2014 is over and the city of Providence edged out the State pension plan in calendar year performance gaining 6.51% compared to Raimondos 5.52%. That’s January 1, 2014 until today December 29, 2014. The fiscal year ends annually on June 30 th. So fiscal 2015 is half over now, and after 6 months both pension plans have struggled badly. Fiscal year 2015 shows the State gaining 0.56% and the city of Providence 1.13% versus the S&P500 return over the same period of nearly 6%. More importantly both the State and Providence performed well below the discount rate.
So now the elections are over and Governor Raimondo now has a chance to focus on Providence and the pension problems. Providence faces a drain of roughly $7 million dollars a month and has assets of $ 297 million. If the next 6 months go like the last 6 months Providence will have about $260 million in assets or $160 million less than Taveras reported in 2011. In addition, Liabilities are understated and the city will be forced to recognize real debt on the balance sheet due to GASB 68. The discount rate used will be less than 6%.
Here is the Pension Scoreboard
Pension Plan Return Comparison 2014 Calender Year To Date
City of Providence 6.51%
State of RI 5.52%
S&P 500 12.65%
Fiscal 2015 Returns
Providence fiscal 2015 1.13% Discount rate 8.25%
S $P 500 fiscal 2015 5.96%
State of RI fiscal 2015 0.56% Discount rate 7.5%
Both plans are lagging and not well positioned for a rise in interest rates. Providence is taking more risk but the state is overly complex. The State and city could achieve S$P 500 returns with less risk than the S & P 500 and the current portfolio using fewer than 5 managers. This can be easily done with lower cost, superior liquidity and complete transparency. The city currently has about 2 dozen allocations and the state has approximately 125 managers receiving fees.
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: Raimondo Policy Summit Suggestions
Governor-elect Gina Raimondo will be hosting a "transition policy summit" with 80 thought leaders throughout the state on Tuesday.
GoLocal crowdsourced input from those Rhode Islanders who are not attending the summit as to what their suggestions would be -- below are just some of the comments provided on the GoLocalProv Facebook page as to what they would like to see.
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