RI pension fund's assets dropped by $200M in 2011-12

PROVIDENCE, R.I. (WPRI) - Rhode Island's pension system lost $200 million during the 2011-12 fiscal year, as the amount of money paid out to retirees continued to outpace the amount of money put into the fund, the auditor general's office said Friday.

The net assets of the Employees’ Retirement System of the State of Rhode Island totaled $7.3 billion on June 30, 2012, down from $7.5 billion a year earlier but up from $6.6 billion in mid-2010, following the financial crisis.

The state pension system's expenses totaled $903 million in the 2011-12 fiscal year, the vast majority of which was $881 million in benefits paid to retirees. The pension system's revenue totaled $698 million, including $583 million contributed by employees and taxpayers, plus $116 million in gains from investments.

• PDF: Read the pension fund audit
• Nesi: In-depth pension coverage

Treasurer Gina Raimondo frequently cited the fact that the pension system's expenses were rising faster than its revenue as one of her arguments for reducing benefits in the months before lawmakers passed the pension overhaul she championed. Governor Chafee signed the changes into law in November 2011.

Citing the state's actuary, The Providence Journal reported Friday that taxpayers will be asked to put $380 million into the pension fund in the 2013-14 fiscal year and $405 million in 2014-15. There continues to be a large gap because previous generations of Rhode Islanders failed to set aside enough money to fund workers' retirement benefits, ignoring warnings as long ago as 1974.

However, the actuary said taxpayers' 2014-15 pension contribution would have been $734 million - almost twice as much money - if state lawmakers hadn't enacted the 2011 overhaul. The biggest savings in that law, a suspension of annual cost-of-living adjustments (COLAs), is still projected to remain in effect through 2032.

The auditor general's report didn't include updated estimates of the pension system's overall balance, relying on numbers from 18 months ago that were put together to reflect passage of the overhaul.

As of June 30, 2011, the pension funds for state employees and teachers had about 59% of the assets necessary to pay future benefits. That figure likely declined in 2012.

The 2011 changes, as well as earlier reductions in COLAs enacted in 2009 and 2010, are all being challenged in court and could be struck down. "An adverse judgment to the state in the pension litigation could significantly increase both the unfunded liability under the plans within the System and the state's actuarially determined annual required contribution," the auditors warned.

The most recent fiscal year also marked a change in the State Investment Commission's approach to investing the pension fund's assets.

At the urging of Raimondo and her predecessor Frank Caprio, the commission has set a target of investing 15% of its assets in hedge funds, a bid to increase returns. Slightly more than $1 billion of the pension fund was allocated to hedge funds as of June 30, 2012, the auditor general said.

The treasurer says the state has to be willing to take more risks. "In government there is a view that the status quo is safe," Raimondo told Institutional Investor recently. "But when it comes to investing, doing nothing is making a decision to do something."

The pension fund's investments earned a meager 1.4% rate of return in the 2011-12 fiscal year, far below its annual target of 7.5%. The fund's long-term return has averaged 7% since 1995, according to the treasurer's office.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi