Eventually Rhode Islanders Will Catch on to the Pension Scam

Mike Riley identifies two outrages in the latest report on the state pension fund’s returns.

The first is how poorly it’s doing.  For the current fiscal year, the fund is actually losing money.  That can’t happen.  When you’re relying on fund returns of 7.5%, a loss of 1.3% (since last July, per this Providence Journal article) means that, unless the fund makes up that ground before the end of June, the state will have to realize a 17.1% return next year in order to make up the difference.

(There may be nuances to the numbers that I haven’t done the additional research to catch, but I intend the above paragraph simply as an illustration.)

The second outrage is the spin from elected officials, as opposed to laying out the information for the people of Rhode Island and the state’s retirees.  In this, General Treasurer Seth Magaziner (D) is merely continuing the usual practice of government officials on this topic.

If we assume a return rate of 7.5%, we can’t have annual “benchmarks” of 4.4%, whether or not it’s calendar year or fiscal year — as nice as it might be to be able to claim that the fund beat the benchmarks.  And sure, we can look at five-year averages, as the latest summary apparently did, but that’s arbitrary on a long-term investment.  For one thing, the five-year gain of 8.78% may exceed the 7.5% the fund requires, but at the end of the last fiscal year, the valuation report put the five-year gain at 12.0%.  That’s quite a drop.

The longer-term is more important, though.  At the end of June, the valuation report put the 10-year gain at 6.9%, which is actually negative 0.6 percentage points from where the state needs to be and which must be lower now, too.  What’s more, in June, the return since 1995 was exactly 7.5%.  That means that the news of the last six months is that, by the longest-term measure reported, the fund is now doing worse than it needs to do.

And this is all with the benefit of quantitative easing from the Fed and massive government debt from the Obama Administration propping up the investment markets.  That can’t continue much longer, which is bad, bad news for the pension fund.

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