Experts Score Rhode Island Pension Battle
Wednesday, October 09, 2013
"Expect candidates running for office to say anything that could win union votes whether it be true or not," said URI Distinguished Professor of Business Administration Edward Mazze. "The pension issue is complex."
"Raimondo has come under considerable criticism for high investment fees and shifting pension money into private equity and hedge funds. Now a Democrat running for a different office has joined the chorus and pointed out problems with her financial stewardship. This means she is going to be facing criticism over the next year from people campaigning for different offices. This clearly will put the pension debate centerstage in her gubernatorial race and dominate the discussion. What happens in the state pension lawsuit will have a big impact on how people feel about her stewardship."
"First, I have to say that the Rolling Stone article doesn't really take the issue on fairly. Obviously, Taibbi comes to this issue with anti-reform point of view so it is hardly fair to judge press coverage of the issue based on this one article," Duffy said. "Over the past year or so, there have been many more positive stories written.'
She continued, "Pension reform is Raimondo's major issue. Given how successful her fundraising efforts have been, it would seem that a lot of people support her efforts on this issue. More important, there are elected officials from around the country of both parties who are looking at RI's efforts as potential models for their own pension problems. A lot of localities -- Detroit being the most extreme example -- are out of road to kick the can down and can't ignore it anymore. In Illinois, the Democratic Governor has tried to stopping paying the Democratic-controlled legislature over its unwillingness to address the state's significant pension liability. "
Looking forward, Duffy said, "Of course, the pension reform debate will continue through the election. The stakes are high on both sides of the debate. Whichever side best articulates its message probably wins. The unions will continue to argue that bankers are the big winners at the expense of retirees and reform supporters will argue that Raimondo's actions actually saved the pension system on the long term and put the state on more stable footing (e.g., RI will not be the next Detroit)."
Academia on the Issue
"Pension reform will be a critical issue in the upcoming elections no matter the disposition of the current court case/mediation since there will still be more issues to resolve at the local level. Union members and retirees have a long memory, and are upset about the changes made in their pensions by the Governor, Treasurer and Legislature, and losing their cost of living adjustment. Like creating jobs, pension discussions should have taken place ten years ago so that retirees and current public employees receive something for their hard labor," he said.
Mazze then called for greater transparency in the process. "How the funds are invested and in what instruments (and at what professional fees) is best measured by the returns on the investments. Most investors are lucky if they get a 8% to 10% return on their investments in today's marketplace. Anything over 9% after expenses is a good deal assuming this return continues for the next five to ten years and the pension fund investment assumption is a return of 8%. Let's make pension discussions and decisions more transparent. No matter who runs for the Governor or Treasurer, let's start telling public employees the truth and not make them pawns in a zero-sum game."
"Clearly, fixing the Rhode Island economy continues to be a vexing issue for both incumbents and potential statewide candidates. At this juncture, the public understands all too well that the state suffers from numerous structural difficulties and there are no easy answers . Any campaign based upon grandiose claims to” bring jobs to Rhode Island” without addressing these structural problems is likely to fail. And, candidates would do well not to underestimate the public’s capacity to understand that change will take place incrementally and is not likely to be pain free. Inside this 2014 frame, pension reform is likely to take center stage and remain there throughout the election. Unless a compromise settlement is reached and can be sold as shared gain and shared sacrifice, the issue will loom large."
"A substantial number of votes who will be impacted by this issue, and this sort of situation presents the greatest difficulty for candidates: In essence, once candidates stake a claim to a position on pension reform (something that the public is likely to demand even after the settlement is announced) they will, by necessity, shave off a substantial number of potential supporters. Most candidates avoid these sort of economic wedge issues at all costs because their response will impact not only their race, but other races involving candidates of the same party. That won’t be the case in 2014 and, unfortunately, with such high stakes for both unions and for the business community, we’re likely to see the electorate further divided as we also experience an uptick in campaign vitriol over the issue."
"I wonder why Frank Caprio does not just jump right into the governor's race? He can raise money, he knows how to campaign, and if he is running for statewide office, why not?" she asked.
And she shared her concern for the impact on the state's business community. "I think any ways that fees associated with managing public pension funds can be reduced, while still maintaining high returns, is a good thing. I am not totally persuaded that you can fully offset the costs of reinstating COLA's with cuts in money management fees. In times of very low inflation which we have now that might work, but if inflation increases, COLA's will increase and then Rhode Island taxpayers will be on the hook to make up the difference for decades, and that would undoubtedly make Rhode Island a less attractive place for businesses to stay and/or relocate."
Finally, URI Professor of Journalism Linda Levin noted that past actions in the state would have an impact on how the current -- and future events -- would be viewed.
"This is a state that has a long history of labor unions, especially public sector unions, and resentment is still high regarding the give backs, etc. on pensions. There no doubt are several pension investment options for the state, but considering the political corruption that has reared its ugly head over the centuries (yes, centuries) in Rhode Island, any new investment plans for the state pension system must be vetted thoroughly."
Fees as Major Focus
Former Director of Adminstration and Founding Director of the Hassenfeld Center at Bryant University, Gary Sasse noted the larger implications of the issue.
"A column by Andrew Ross Sorkin in the New York Times referenced a study by Oxford University professors that pointed out the weak performance of many pension fund investment consultants and more significantly their lack of performance transparency."
"The issue of public pension funds paying extraordinary fees to money managers is not confined to Rhode Island and is a national concern. There is an appearance that Wall Street interests are profiting at the expense on working families. From what I have seen it appears that Frank Caprio is suggesting that the fees paid pension managers in Rhode Island appear to be excessive. Certainty nobody would disagrees that $70 million is a lot of money. I do not have all the facts so it is difficult to state a definitive position on how economically pension funds are being managed the Ocean State. Nevertheless, I trust that the issue raised by the former General Treasurer and others will becomes a salient issue in the upcoming election. The issue is not just about money but the integrity of the political system," he said.
Raimondo spokesperson Joy Fox defended the Office's investment stategy, "Tying the return of the cost-of-living-adjustments to investment fees is misleading and not fair to any public employee or retiree who is depending on a pension check. In order to have the money needed to pay pensions the system needs to earn an investment rate of 7.5 percent after all fees are paid."
"We are pursuing a strategy of diversification and risk reduction, which we believe will be the best way to reach the state’s investment goal of 7.5 percent over time. The return last fiscal year was 11.1 percent after all fees were paid. The three-year return was 10.43 percent after all fees are paid," continued Fox, noting that thcost-of-living-adjustment comes back when the pension reaches 80 percent funded.
Enjoy this post? Share it with others.
Commenting is not available in this channel entry.