By Ted Nesi
PROVIDENCE, R.I. (WPRI) – Rhode Island cities and towns are all over the map when it comes to the investment performance of their independent pension plans and how much they pay to manage the money, with some places failing to track basic data about their assets, a Target 12 investigation has found.
The police pension fund in Tiverton posted the worst investment performance in Rhode Island during the 10-year period ended June 30, 2012, with an annual return of just 3.45% after fees. Tiverton’s return was only half as high as the state’s top performer, Providence, which posted a 6.9% return over the same period.
Tiverton’s track record was weaker than its neighbors even though the town paid more to invest its pension money than almost any other municipality during the 2011-12 fiscal year: 0.96% of the assets in its pension fund. The only town that spent a larger share of its money on investment fees was Lincoln, which spent 0.97% of assets. The state spent 0.62% of assets.
“Obviously, we’ve been concerned about this,” former Tiverton Town Administrator James Goncalo, who retired earlier this month, told Target 12 before his surprise departure. He acknowledged, however, he wasn’t aware that Tiverton’s performance was the worst in the state until he saw the results of the Target 12 investigation.
“I just had a feeling that it was lower than it should be because our goals were much higher,” Goncalo said. The town has set an annual investment target of 7% on the advice of its investment adviser, Bank of America, he said. “I understand that there was a big drop in 2008 but I just felt we should have recovered more since then than we have,” he said.
A Bank of America spokesman did not respond to multiple requests for comment on its work in Tiverton. Goncalo said the town is in the process of finding a new investment adviser.
Tiverton is one of 24 Rhode Island cities and towns that manage independent local pension plans for their municipal workers. Target 12 spent the last five months tracking down and compiling data from each community about their investment strategies – and in a few cases found that municipalities were unable to locate any of the information requested.
“I’m surprised at that,” Robert Cusack, an investment manager at WhaleRock Point Partners in Providence and a former East Providence city councilman, told Target 12. “To meet your fiduciary responsibilities as a member of a [pension] board, you should know those numbers. The data that you just mentioned should really be at your fingertips.”
The 17 cities and towns that were able to report how much they spent on investment fees said they paid financial firms a combined $6.6 million to manage their pension investments during the 2011-12 fiscal year.
The information about local pension investments collected by Target 12 has apparently never been compiled by the state and is either unavailable or difficult to find on municipal websites. It is not reported in communities’ annual financial audits or pension studies. The local pension study commission created by the state’s 2011 pension overhaul has obtained only cursory information about the investments.
Two places – Coventry and West Warwick – were unable to provide any of the fee or performance data about their pension investments that Target 12 requested. Both of those communities’ pension funds are in “critical status,” which means they are significantly underfunded, according to the state.
A Target 12 investigation in May revealed Coventry officials had washed their hands of responsibility for one of their three pension plans, alarming state leaders. WPRI.com reported last year that West Warwick’s pension fund was on track to run out of cash within five years without major changes.
Three other communities – Johnston, North Providence and Scituate – couldn’t provide data on how much they spent to invest their pension assets.
North Providence is the only city or town whose pension plan lost money over the last five years. In Scituate, a recent Target 12 investigation revealed officials there charged with overseeing its police pension plan held next to no meetings for more than a decade as its cash shortfall quadrupled.
Some local officials are in over their heads, Cusack said. “Ideally what you’d want in one of these plans is to have a good, well-informed retirement board, and then you’d want to have a good investment process, and then you’d like to have good investment people executing it,” he said. “Often you don’t have that. Sometimes you do, but often not.”
Over the last 10 years, all but two local pension plans trailed the 6.6% average annual return earned by the state-run pension system. The two exceptions were Providence, which earned 6.9%, and Warwick, whose municipal and new police pension plans earned 6.7%.
Providence Mayor Angel Taveras has said that although he’s pleased with the city pension plan’s strong investment performance, he’s concerned about how much the capital is spending on investment fees: $2.16 million in 2011-12 alone, or 0.8% of assets, among the highest levels in the state. He has asked the city’s advisers to find cheaper options.
Warwick officials said one of its five local pension plans – the one for school personnel other than teachers – is managed separately from the city’s four plans for municipal workers, even though Warwick taxpayers are responsible for all five. The school plan earned just 5.19% over the last 10 years, significantly less than the four city plans.
Tiverton’s Goncalo said the town’s police pension board is made up of the town administrator, the town treasurer, the police chief, a member of the police union and a member of the town council. Since they lack investment expertise, they rely on Bank of America’s advice to invest the nearly $7 million in its police pension fund.
“They are the people in the know,” he said. “They know more about investments than we do, so we have taken their advice.”
Goncalo said he would prefer to have Tiverton merge its police pension fund into the state-run Municipal Employees’ Retirement System, but was told by state officials that the pension plan would need to be fully funded in order to do that. The Tiverton plan was just 51% funded, with a $6.5 million shortfall, as of June 2012.
“I think the general treasurer’s office and the [state retirement] board probably has more expertise than the local level in these areas,” he said.
Cusack said the Providence and Warwick cases show that in some cases communities can do a better job managing their pension funds than the state can. “I think if it’s well-run there are advantages to having independent plans,” he said. “It’s not automatic that they should all be put with the state plan.”
In addition, Cusack said some cities and towns with solid pension returns may actually be masking deeper problems, “because you might still get returns inadvertently for a period.”
When he was in East Providence, Cusack said, “I looked at the portfolio and I said, ‘Congratulations on these returns. Things are really great here. You’ve done really well. However, because of the risk you have, it’s so high that you’ve been lucky. You’ve just been lucky.’” The town lowered its portfolio’s risk prior to the 2008 crash, he said.
• Interactive: See all 24 municipalities’ pension investment returns and fees (WPRI.com)