Rhode Island’s awful investment returns
It’s getting a little tiresome to hear all the adulation that’s being heaped on Gina Raimondo, the Rhode Island General Treasurer. She’s been praised in the Wall Street Journal, Time, and now CNBC as some sort of fiscal Joan of Arc who rescued the state’s public pension system from insolvency. I’ll give Raimondo credit for leading the charge to reduce benefits to Rhode Island public workers and increasing their retirement age, but she’s far from a pioneer in making tweaks to state pension plans — 17 other states have also made changes recently.
More importantly, the problems Raimondo addressed were not the biggest that the state faced. The main problem with Rhode Island’s pension system is that it has very poor investment returns on its $6.5 billion portfolio of assets. Over the past ten years the state’s investments returned 2.47 percent compared with the national median of 3.4 percent (page 6). These returns are in the lowest tier of state pension plans, and this chronic underperformance is causing a substantial shortage of assets to pay retirees.
A national clearinghouse for public pension fund data, the Public Fund Survey, wrote in its report for FY2010:
Over time, investment earnings have a major effect on the cost and funding condition of a public pension plan: from 1982 through 2009, investment earnings accounted for 60 percent of all public pension revenue.
So the major source of pension plan funding, investment returns on plan assets, has been terrible in Rhode Island. I’m not aware of any discussion or changes in the law to address this issue. Instead, state workers and retirees are carrying the load of getting the pension plan in better shape. The latest pension reform only addressed state worker conditions. Check out this list from WPRI.com:
- cost-of-living adjustments (COLAs) may be awarded every 5 years during freeze
- all employees except public-safety workers and judges go into the hybrid plan
- same funding calculation to end COLA suspension for judges and troopers as others
- part-timers will be able to get a pension, but based on 10 highest years to avoid “spiking”
- all active workers will get a retirement age between 59 and 67 based on how close they are now
I’m withholding my praise for Gina Raimondo until the investment returns of the Rhode Island pension plan move closer to the national median. Then state workers won’t have to bear the entire burden.
RI Treasurer: RI Treasurer 2010 Report
Pew: Rhode Island plan proposes new approach to states’ pension woes
WPRI.com: Study: RI pension bill ‘a good approach’ – and it may be legal
WPRI.com: Chafee bucks AFL-CIO, stands by law protecting bondholders
Providence-Journal: Rhode Island union official Paul Valletta says big change in predicted mortality rate helped create pension crisis
ProJo: Overhaul won’t fix R.I. pension problem forever