STUMP » Articles » Public Pensions Watch: Alternative Asset Classes, pt 6 of many, Rhode Island » 7 September 2014, 01:49

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Public Pensions Watch: Alternative Asset Classes, pt 6 of many, Rhode Island  


7 September 2014, 01:49

Okay, enough of the rah rah rah, back to the specter of liquidity (and other) risk hanging over alternative assets in public pension portfolios.

Next up is Rhode Island, and specifically coverage from Ted Siedle at Forbes. Ted has been relentless at going after Democratic politician Gina Raimondo, currently Rhode Island state treasurer, but a gubernatorial hopeful.

His most recent piece is part of the continuing series

The glowing article about Raimondo tellingly did not mention the investment performance track record of this small-time venture capitalist that succeeded in getting herself elected as state Treasurer and chief fiduciary of the $8 billion pension after only a few years of dabbling in the venture biz.

Surely, I reckoned, whether she was adept at managing institutional portfolios was more important than knowing she grew up in a middle class Italian-American family, got good grades and was valedictorian of her high school class. There was no clue about her investment capabilities in the 2013 article.

(To this day, no one knows for certain how the venture funds Raimondo formerly managed and sold to the state and city of Providence pensions have performed. She and her former employer refuse to disclose this key information claiming it is proprietary.)

As a seasoned forensic investigator, I knew that successful money managers shout about their performance and assets under management from the rooftops. They won’t shut up. I wasn’t sure Raimondo’s stats outright stunk but the secrecy surrounding them was a significant “red flag” to me—as was the fact that, up to that point in time, apparently no one had even bothered to ask.

Pay attention to that bolded bit.

Now, Raimondo may be a crap asset manager herself, but currently she doesn’t pick the public pension assets directly (at least, I hope not.)

In my inaugural post, I explained one big reason public pensions go chasing alternative assets is so as to make unrealistically high return targets.

But what is going on here?

Before adopting sweeping new pension reform legislation in 2011, the state of Rhode Island lowered its projected rate of return from 8.25% to 7.5%.

Now, I’m not saying 7.5% is all that realistic, either, when risk-adjusted. But it’s obviously more attainable than 8.25%.

Still, think about Rhode Island “needing” to lard on the alternative assets to make up for their shortfall.

How bad is it, exactly?

The new deal rolls back some of the reforms. COLAs are no longer based on investment returns, but half on returns and half on the consumer price index; and they can be made even if the plan is less than 80% funded. Employees with 20 or more years of public service can move back into a defined-benefit plan. Workers can retire at 65 instead of 67. In return, contributions go up slightly for most workers. The state’s pensions are now 56% funded instead of 57%*—a shortfall of $5.05 billion instead of $4.8 billion. *Without any reform at all, they would have been only 42% funded.

Now, keep in mind that these pension reforms from years back are going to trial. They may be removed, at which point, we’re back to the 42% funded point.

Rhode Island is desperate to make up the gap without going to the taxpayers for more money.

It doesn’t help that the gaps may be understated due to some accounting trickery.

Now Siedle isn’t the only one covering the Rhode Island issue — David Sirota is as well

According to four years’ worth of state financial records, Rhode Island’s pension system has delivered an average 12 percent return during Raimondo’s tenure as general treasurer. That rate of return significantly trails the median rate of return for pension systems of similar size across the country, based on data provided to the International Business Times by the Wilshire Trust Universe Comparison Service. Meanwhile, the pension investment strategy that Raimondo began putting in place in 2011 has delivered big fees to Wall Street firms. The one-two punch of below-median returns and higher fees has cost Rhode Island taxpayers hundreds of millions of dollars, according to pension analysts.

The gap between Rhode Island’s returns and median returns occurred as Raimondo spearheaded a plan to invest more public money with high-fee money managers. Under her direction at the State Investment Commission, “The Rhode Island pension system has ramped up its investments in hedge funds, private equity and venture capital from zero to almost $2 billion, or more than one-quarter of its assets under management,” the New York Times reported.

Had Rhode Island pension funds followed the median public pension return rate, the state would have earned an additional $378,682,787.28 in returns. International Business Times/Hanna Sender

The high fees associated with those alternative investments — costing Rhode Island $70 million in the 2013 fiscal year alone, the Providence Journal reported — are supposed to buy above-average investment performance. However, according to pension consultant Chris Tobe, the gap between Rhode Island and the median, a gap to which the fees contributed, means the state effectively lost $372 million in unrealized returns.

And back to Ted, who has come up with a great strategy for underperforming pols and asset managers: We should pay them to go away

“Pay-to-go-away” refers to the calculated decision to pay an individual to no longer provide services—i.e., render no opinions, advice or decision-making—just go and stay far, far away. Sure, some progressive corporations are paying their workers to go away on vacation. Very nice. I’m not talking about that.

The “pay-to-go-away” I’m advocating means to rationally conclude that the services provided by an individual are so destructive that it is preferable (assuming that for some reason they can’t simply be fired) to pay them a substantial, albeit lesser amount, to walk and keep walking. Relocate to a tropical paradise perhaps.

Different state—Rhode Island—same strategy makes sense. State Treasurer Gina Raimondo may not be the sole trustee of the state pension but she’s the architect of the deeply-flawed hedge fund gamble the $8 billion pension is taking to address its underfunding.

To be sure, “pay-to-go-away” may be out-of-the-box thinking in the public sector. It’s no secret that private corporations pay idiot managers all the time to quietly go away.

However, when it comes to pensions and investments in particular, the costs of permitting incompetent decision-makers to continue mismanaging is so significant that paying millions, or even billions, to send them on their way is the best financial course.

Perhaps Rhode Islanders will just not vote Raimondo in for governor, which would send her away. Maybe.

Or she may have some other issues to deal with.

Stay tuned.

Compilation of Rhode Island posts

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