National Study Blasts Politicization of RI Pension Portfolio Management; Center renews Call for Pension Fund Protection Act

FOR IMMEDIATE RELEASE: December 15, 2016

Special Interest Politics Should Never be Investment Criteria

Providence, RI — A national report released yesterday by the American Legislative Exchange Council (ALEC) – Keeping The Promise: Getting Politics Out of Pensions – dedicated an entire chapter (p.27) to highlighting a “politically-driven decision to divest from a high performing hedge-fund” by then Treasurer Gina Raimondo. With this incident and others in mind, the Rhode Island Center for Freedom & Prosperity renews its call for legislative action that would end the cronyism and overt politics that has caused instability to the retirement-security of public employees and that has exposed taxpayers to further risk. The mismanagement and politicization of Rhode Island’s public employee pension fund have resulted in sub-standard portfolio returns.

“Enough of the political correctness and insider cronyism. We call on lawmakers to act now to ensure that sound fiscal guidelines are adhered to,” reiterated Mike Stenhouse, CEO for the Center. “The dismal performance of the state pension fund, under General Treasurers Raimondo and Magaziner, could have been minimized if sound investment practices were followed. Some kind of pension-fund protection act is clearly in order.”

Initial research shows that a number of other states have implemented, or are currently considering, provisions that require specific fiduciary guidelines to making pension fund investment decisions. A Pew Charitable Trusts report to the Committee on Alabama Public Pensions indicates that the National Association of State Retirement Administrators (NASRA) has suggested that pension fund trustees should adhere to “a robust fiduciary standard” in the execution of their duties. NASRA supports the action of setting strong fiduciary standards into law so that the paramount goal of investment strategies should be the financial security of pension assets.

In recent years, conversely, Rhode Island policy has put retirees and taxpayers at increased exposure, because political correctness appears to have been the primary motivation for making certain investment decisions:

  • Treasurer Raimondo announced a divestment strategy in 2013 from high performing “gun” related investments … for political reasons. (In a similar move the City of Providence divested from eight fossil fuel companies.)
  • As highlighted in the ALEC report, Treasurer Raimondo divested in 2014 from the states highest performing hedge fund, Dan Loeb’s Third Point LLC … caving to political pressure from teachers unions
  • Instead, Treasurer Raimondo invested in other high-fee hedge funds … some of which were associated with her former investment company
  • Treasurer Magaziner announced in early 2016 that state’s proxy votes would be used to influence investment vendors to diversify their boards … to meet an arbitrary politically-correct standard
  • Treasurer Magaziner announced last month a “back to basics” investment strategy to divest of most hedge fund investments … bowing to political pressure from third-party critics

“Each of these fiscally-irresponsible decisions has led to deteriorating performance of the pension fund. There’s little reason to trust that Treasurer Magaziner’s new back to basics strategy will not continue be overly-politicized,” added Mike Riley, Chairman of the Center, and an investment and pension expert. “It is obvious now that the General Assembly must act to ensure proper fiscal due-diligence is conducted, devoid of political correctness considerations.”

In order to protect the security and stability of state retirement funds, Riley suggests that legislation should include the following goals:

  1. Ensure that all investment decisions are made solely in the best interest of the beneficiaries
  2. Limit considerations for investment vehicles to measurable economic or fiscal factors only
  3. Ban other non-fiscal considerations, except in the most extreme instances (e.g., Iran-based companies)
  4. Ensure that investment fees and costs are reasonable in relation to the assets of the retirement system

The Center encourages lawmakers to honor the promise made to public employees and to support related pension-protection legislation in 2017.

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