The real action on Rhode Island pensions has begun
Although the national media has always been a fan of Rhode Island State Treasurer Gina Raimondo, I’ve personally been lukewarm on her performance. She built a case for draconian changes in pension benefits for current workers by inflating the portion of the state pension plan that was unfunded. This led the State Assembly to adjust pension benefits in a way that seemed to go against the law. Unions sued the state and State Superior Court Associate Justice Sarah Taft-Carter has just ordered the case to undergo federal mediation. But I’ve always thought the bigger issue for Rhode Island was that its pension fund had horrible investment returns; some of the lowest in the country. And Treasurer Raimondo has only taken steps this week to change the fund’s management.
Pension funds derive 60% of their revenues from investment returns on a national basis. The other 40% of revenue comes from employee and government contributions. Rhode Island pension funds have had sub-par investment returns for years. The first thing that I would have done was change the pension fund manager before making legislative changes. One year ago I wrote this:
[…]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.
The investment returns of the Rhode Island funds have continued to lag since I cited that data. The Employee Retirement System of Rhode Island report for fiscal year ending June 30, 2011 shows 10 year investment return results of 5.3% (page 23) versus 6.2% for the 10 year national median, according to Wilshire Associates. Wilshire said that public funds returned 21.4 percent in fiscal 2011, while Rhode Island funds returned 19.5%. Even these small differences can quickly increase the underfunding of a pension.
The last thing that public employees can endure is poor investment returns. Raimondo had a career as a venture capitalist prior to her election as Treasurer, so this should be home cooking to her.
Raimondo’s proposed pension reforms go a lot further than any other state has attempted by pushing employees and retirees from a defined benefit plan into a hybrid plan (a plan that combines a 401(k)-style account with a much smaller guaranteed pension). It’s hard to know whether these reforms will be overturned by the courts. Although Raimondo claims that these legislative changes were fully vetted with national experts, it’s not clear that the legal system will agree. But making sure that state pension funds have the strongest returns and management possible is within Raimondo’s purview. It is good that she has finally addressed this enormous weakness.