As Rhode Island General Treasurer Gina Raimondo promotes her 2014 gubernatorial campaign, she touts her supposed success in putting her state’s pension fund on firmer financial ground. That message has helped Raimondo surge to a lead in the polls, as reported by WPRI. What she fails to mention, though, is that the returns from her investment strategy have been far less beneficial for state pensioners than for the Wall Street firms now managing a growing share of Rhode Island’s money.
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 similarly 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.
Raimondo’s determination to transform Rhode Island’s investment strategy turned “the small state into a national battleground over pensions,” the Wall Street Journal wrote in 2012. Other states such as New Jersey and North Carolina follow similar strategies — and have also generated below-average returns after plowing pension money into high-fee investments. And in Rhode Island, as in New Jersey and North Carolina, the political leaders pushing to put more money into so-called alternative investments have been backed by campaign contributions from the financial industry. (An NPR affiliate, WFAE has covered this issue in North Carolina.)
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.
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.
By way of comparison, $372 million represents more than one-half of the entire annual budget of the state’s largest city, Providence. In all, had Rhode Island’s pension system merely performed at the median for pension systems of similar size, the state would have 5 percent more assets in its $7.5 billion retirement system. Tobe, a former public pension trustee in Kentucky and the author of the book “Kentucky Fried Pensions,” said this difference between Rhode Island and the median can be directly linked to the high fees of the state’s alternative investments, which he said drags the system’s performance below that of traditional public equities.
In response to a request for comment, a representative of the Rhode Island Treasurer’s Office, Ashley O’Shea, said in an email that “it is dangerous to weigh any short period of time too heavily” and she asserted that if Raimondo’s investment strategy had been in place during the 2008 financial crisis, Rhode Island’s “losses would have been mitigated by almost $500 million.” She also said the percentage of the state’s portfolio in alternative investments is at the median, and she argued that giving more Rhode Island pension money to Wall Street firms was a way to reduce risk.
“Rhode Island has a mature plan, that is significantly underfunded, and pays out hundreds of millions of dollars more per year than it takes in, which requires the State Investment Commission to take less risk than younger, better funded plans,” O’Shea wrote, adding that the “strategy is working; the portfolio risk has been reduced substantially and returns remain strong.”