Riley: Does the RI Treasurer Know his Senior Policy Adviser?

Riley: Does the RI Treasurer Know his Senior Policy Adviser?

One of the first appointments made by Treasurer Seth Magaziner in 2015 was his senior policy adviser Tom Sgouros. It is astounding that considering the current $500 million dollar shortfall in Treasurer Magaziner’s pension plan returns for fiscal 2015 and Rhode Island’s worsening funding ratio combined with perilous ongoing litigation on State Pension reform that Magaziner would chose the advice of Tom Sgouros. What changes will be made to save the state pension system from irreversible damage in the event of a bear market? Often overlooked in the 2011 Pension reform solution was the re-amortization of debt that kicked the can further down the road. In 2011 Raimondo, according to a Brown University article, referred to the State Pension system as in a “death Spiral." Today she oversees Magaziner and a fragile Providence system that could create contagion that collapse State finances.

Governor Raimondo clearly saw the danger in the State plan but wouldn’t even address Providence. Ironically the State was in an infinitely better position than our State Capital of Providence is in today. In 2011 Rhode Island was roughly 48%.  Immediately after reforms it was stated at 58%. Today ,4 years later after a massive bull market in both bonds and stocks, and the  groundbreaking reform that included amortization the state funding ratio is still 58% or less. Zero improvement. Providence is 26% funded and heading lower. This is frightening and the combination of an inexperienced Treasurer and a leftist Policy director should be enough to convince Moody’s that there is a real problem afoot. Undoubtedly Sgouros will recommend even further amortization since his public statement show  he clearly does not believe in “generational equity." Sorry youngsters, but Tom Sgouros and his ilk don’t care about your economic burden. Article after article point to the willingness of Sgouros to mislead bond investors and the choice of Sgouros by Mgaziner shows that a similar cynicism is held by the new Treasurer. 

Consider these two views

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Joe Newton of Gabriel Roeder Smith & Co:  Raimondos actuary 2011

“There are only three levers you can pull,” Newton said. In order to close the gap between its current assets and its commitments to pensioners, the state could increase taxpayer contributions to the pension system, reduce the cost of the benefits the system pays out or increase the system’s investment earnings — a tall order in volatile economic times. Continuing without reform would lead to decreased benefits, salaries and services, as pension contributions drain resources from other areas of the state budget, he said.

Tom Sgouros Quote 

October 2011

“I wrote a few weeks ago about how the biggest problem our state pension plan faces is in the accounting rules we follow. These accounting rules were designed for private companies, to help protect pension funds from the risk that the employer who set up the fund would go out of business. The state won't cease to exist, so protecting against that risk is pointless -- and expensive. But there is a flip side to this point: there certainly are risks that a public pension plan suffers from. I don't know a way to say whether they're greater in the public over the private sector, but do the accounting rules we use protect us against those risks?”

Further quotes from this policy director can be found in his scary “The Manufactured OPEB Crisis.” Can you imagine a guy who never managed money being elected Treasurer of Rhode Island in the midst of a pension Crisis and selecting an anti-capitalist political supporter who doesn’t believe basic financial concepts as his policy adviser? Sadly, you don’t have to imagine this scenario because you are living it.

Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.