Riley: RI Pensions - No Management Fees, No Politics
Tuesday, May 16, 2017
The Sunday New York Times business section featured another article on public pensions penned by Gretchen Morgenson, but this article came close to hitting the subject of abuse of public pension dollars out of the park.
Had the article simply whined about how retirees were made a promise and then referred to an AFSCME diatribe by some paid for pundit, it would have been useless. But, Ms. Morgenson’s article actually mentioned the abuse of taxpayers' money as well as retiree money. That’s a first!
We all know that the promise to fund public retirements came from self-centered sleazy politicians who had no intention of being around to pay when the s--t hit the fan. Elected officials across the nation abused the honeypot. Rhode Island was no exception. Taxpayers easily paid enough taxes to fund pensions, but those funds were diverted and recycled into inefficient wasteful agencies often through higher wages and benefits. Just enough raises to buy the next election. Providence, Rhode Island is a perfect example of this behavior borrowing from the pension fund since 2002. Starting with Mayors Cianci and Cicilline and extending to Taveras and Elorza.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTAt the state level in Rhode Island, not happy enough with ripping off the taxpayers and defending their own pitiful record of funding, budgeting and asset management, the politicians use the assets as a political platform for pet causes. The State of Rhode Island under Treasurer Seth Magaziner has unabashedly pushed his progressive creds. Now after 18 months of no decisions and poor performance, the Treasurer is slowly and finally backing out of Governor Gina Raimondo’s high-fee investments.
GoLocal readers have heard from pension boards and pundits alike as they politicize fund manager allocations and even specific holdings. The first wave of attacks was on the Arnold Foundation and their efforts in supporting Rhode Island Pension reform. Teachers were predictably against any manner of reform because they were made promises. Fair enough.
But why target only hedge funds or some hedge fund managers? There are 75 other well-paid Wall Street managers in Rhode Island and Arnold isn’t one of them. AFSCME has been most identified with the politics of pensions by putting out a hitlist on hedge fund managers who favor pension reform.
Fees are too High!!
Fees are too high and they are actually collapsing as we speak. The infamous “two and twenty” compensation scheme for hedge funds is a rarity today. I agree a two percent management fee and 20% profit participation is excessive and only makes sense for individual investors who have strong faith in particular managers and their strategies. Strangely Raimondo and then Magaziner made heavy use of these inappropriate investments. This ironically riled the unions and unions have been the biggest voice drawing attention to those costs.
They are right -- Mayors and public treasurers have no business committing taxpayer funds to such an arrangement, whether they are hedge funds, private equity funds or real estate partnerships. Boards and/or consultants certainly have no business choosing portfolio managers based on a political litmus test or size of the fund. “Pay to play” has been an awfully big temptation at every level of public pension management. Maybe it’s time to get rid of the temptation.
Pensions should be about retires
In fiscal year 2016, $69.7 million dollars was spent on investment related fees and expenses according to Treasurer Magaziner.
The list of those who owe favors to a politician like Seth Magaziner is lengthy and filled with potential donors. There is absolutely no fiduciary or economic need for this enormous list of managers paid for by Rhode Island taxpayers.
If I were Treasurer I would rid the office of politics - I would manage the plan for the benefit of retirees and taxpayers, period. I would fire all the managers currently managing the pension plan. I would fire the consultants and save an additional $1.5 million and I would let go of much of the staff, especially those jobs it is who promote a political agenda. I would expertly manage the fund to better outcomes and, eliminate conflicts and reduce the overall fees by 60% to 90%. There would be no more than 5 investments after 4 years. Then I would retire and go back to managing my hedge fund.
Ms. Morgenson is right about exorbitant management fees in public retirement plans. She just doesn’t go far enough.
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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