Treasurer Caprio on Pension Performance
Rhode Island’s General Treasurer is also the chair of the state’s investment commission, which as part of its duties determines the asset allocation of the state pension fund. (Professional fund managers then decide specifically which funds to put the money in).
Breaking news: You may have heard that that markets did not do so well in 2008. Treasurer Frank Caprio quantified exactly how badly the Rhode Island retirement system was hit between June 30, 2008 and October 31, 2008, and provided a comparison to several other benchmarks…
|State of Rhode Island||-19%|
|City of Providence||-30%|
|Harvard University |
(aka the Gold Standard of Institutional Investors)
We asked the General Treasurer what the ramifications of a sudden 19% downturn for the pension system were…
General Treasurer Frank Caprio: The pension system values the fund with a five-year smoothing, so any one big positive or negative year doesn’t really move the needle as you would expect. We take five-year blocks and average those years. A down year has an impact, no doubt about it, but it’s not as if our fund is viewed as having dropped by whatever our negative number is for the year. Most large pension funds use this type of smoothing.
Now, we will be penalized for that too. In strong positive years, you don’t get the full benefit either, as they’re averaged again over time. If you look at the value of our fund at any point in time, there will be two numbers, what the fund is actually trading at, and what the five-year smoothing is. On the way up, you usually lag where the fund actually is. And when you have a down year, it’s factored in over the five years. So there is an impact, but it’s not an immediate impact.
Anchor Rising: There are some non-fiscally conservative people out there who would like to reamortize the whole system and start the clock again…
FC: I’ve talked about the thirty year mortgage, where we’ve paid ten years and have twenty years to go. What they would want to do is say let’s cease that and start a new thirty-year mortgage. Just like any mortgage, if you paid ten years, assuming the value of the house hasn’t dramatically decreased, when you refinance, you have the benefit of spreading out a smaller liability over a longer period of time.
That type of engineering is fine if you’re making other material changes that benefit the taxpayers. But if you are just doing those one-time gimmicks, that’s not going to strengthen the system for the long term. If you want to do that in conjunction with some of these other things that are being debated that materially reduce the liability, then that’s something that not only a policy leader can live with, but that the rating agencies will look at as neutral or favorable and not mark you down for.