Russ Moore: Can Raimondo Out-Spin The Unions?
Monday, October 21, 2013
Both Gina Raimondo and her critics can be accused of conflating pension reform with investment in hedge funds.
If you listen to the two sides, and didn’t know any better, you would think investing in hedge funds and pension reform are the same exact issue, or at the very least, each is intrinsically connected to the other.
But that’s not the case. In reality, one has nothing to do with the other. Or, at the very least, they shouldn’t. But both Raimondo and her critics are spinning and conflating the two issues in such a way that makes them seem exactly alike.
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Investing in hedge funds is an investment strategy. Pension reform was undertaken to insure that the pension system was safe, secure, and affordable on an ongoing basis.
Yet when Raimondo is asked about her criticisms from the unions by reporters, she answers by telling us how important pension reform was. It’s a true statement, but it avoids the real question as to whether the state needs to be spending upwards of $70 million in investment fees the lion-share of which are going to the hedge fund cowboys--the new alchemists on Wall St.
Meanwhile, the public sector unions are using the fact that Raimondo is paying very high investment fees to try and discredit pension reform. Here’s the thing: Raimondo could have easily not pursued pension reform and invested in hedge funds. Or, what would’ve been better, pursued pension reform and not invested in hedge funds.
There’s a reason why the two sides are conflating the issues. It’s because it’s in both of their political interests to do so. For the unions, it’s to try to discredit pension reform by making it seem like it was undertaken strictly to enrich Raimondo’s Wall St. allies.
Raimondo, on the other hand, can keep pointing to her pension reform efforts, which slashed the system’s unfunded liability and made the it stronger for employees and more affordable for taxpayers when she’s asked about the union criticisms.
Pension reform was vital
And Raimondo is correct. Let’s not forget that a pension system that isn’t affordable for the taxpayers is a system that isn’t secure for the retirees both present and future. Nobody should want to see state retirees have their pensions slashed in half the same way that Central Falls retirees were. That’s why both Raimondo, and her predecessor Frank Caprio proposed pension reform to begin with.
What caused our pension problems? The answer is astonishingly simple. For years, Governors, many of them Republicans, were promising future benefits that they knew the state would never be able to make good on, but that they themselves wouldn’t be around to deal with. They were writing checks that their successors simply couldn't cash--and they knew it.
It might have been a convenient vote-buying scheme, but it endangered the financial existence of the state. Fortunately, since 2007, we’ve had General Treasurers with the fortitude and leadership to address the issue honestly and directly. Also give credit to the leaders of the General Assembly like Gordon Fox and Teresa Paiva-Weed, both of which could’ve turned a blind eye to the problem like so many before them. And let’s not forget the legislators who voted for pension reform and lost their seats thanks to doing the right thing.
Hedge fund follies
But the public sector unions, on the other hand, are also correct to attack hedge fund investing. Contrary to what Raimondo says, hedge funds are more expensive and more risky than index fund investing.
Raimondo loves to point out that the pension fund suffered massive losses in 2008, but what you’ll never hear her say is that the system lost less money, percentage-wise, than the Harvard and Yale endowments—both of which were heavily invested in hedge funds and other ridiculous “alternative” investments.
And after the financial crisis ended the Rhode Island pension fund made up nicely for the losses it suffered during those unprecedented difficult times.
In 2010, under the previous Treasurer Frank Caprio’s administration, the Russell 3000, the index that basically measures the whole market, increased by15.7 percent. But the Rhode Island pension fund skyrocketed simultaneously—by an impressive 13.5 percent. That’s roughly 86 percent of what the market rendered.
Now let’s compare that to this previous year. In that fiscal year, the Russell 3000 increased by 21.5 percent. The Rhode Island Pension Fund, under Raimondo’s stewardship, increased by 11.1 percent.
In other words, passive index investments scored a higher rate of return in 2010 than the state garnered this year, despite the fact that the total market didn’t do as well in 2010. If that doesn’t make the case for a low fee investment style investing than nothing will.
We can blame hedge funds, and the high fees associated with them, for not reaping the benefits of a bull market. Hedge funds are a raw deal. Last year, we paid $70 million in investment fees. In 2010, we paid just $20 million. (Kudos to Raimondo for finally disclosing what the state paid in investment fund fees last month.)
Keep dialogue honest
Raimondo, however, smartly pointed out that Providence, on a percentage basis, invests more in hedge funds than the state of Rhode Island. It is very curious as to why the wrath of Siedle has come down on Raimondo, but we never hear so much as a peep about Providence's hedge fund investments. That's partly because the fees in Providence will be lower due to the fact that Providence’s system is much smaller when compared to the state fund.
It’s a shame that the dialogue about hedge funds seems like it will continue to be tied to hedge funds over the course of this campaign. If we have an honest dialogue, the public will call on the state to retain pension reform, but get rid of hedge funds. The money we save by not investing in hedge funds will make the system stronger, and could restore some of the cost-of-living-adjustments to the state retirees that were suspended by pension reform.
In other words, with an honest dialogue, we’ll all be better off.
A native Rhode Islander, Russell J. Moore is a graduate of Providence College and St. Raphael Academy. He worked as a news reporter for 7 years (2004-2010), 5 of which with The Warwick Beacon, focusing on government. He continues to keep a close eye on the inner workings of Rhode Islands state and local governments.
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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