Russ Moore: Can Raimondo Out-Spin The Unions?
Monday, October 21, 2013
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
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 here.
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.
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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