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Magaziner candidacy puts spotlight on state pensions

Rhode Island Treasurer Seth Magaziner‘s move to dump hundreds of millions in hedge fund investments from the state pension was, at the time he made it six years ago, his boldest step into the political spotlight.

After all, the investments were made by predecessor Gina Raimondo, then governor, a rising star in the national Democratic establishment and a role model for Magaziner. And they were a sore spot for Raimondo, who as treasurer weathered union criticism she was beholden to Wall Street as she pushed for cuts in public employee retirement benefits. 

It was one of the only times Magaziner publicly broke with Raimondo and it gave him the chance to brand his own investing strategy as “Back to Basics,” a slogan he still uses on the campaign trail.

But as he breezed through the Democratic primary in his bid for Congress, Magaziner ran into some of same criticisms that hit Raimondo about management fees, risky investments and connections to the financial industry.

They came first in an article published on leftist website Jacobin, then spread through dark-money mailers paid for by a group called Ocean State Forward, whose funders and full identity have not been revealed. 

While Magaziner’s Republican general election opponent, Allan Fung, isn’t known to quote Jacobin, the Democrat’s stewardship of the $10.3-billion pension fund is certain to be an issue in their race to replace Rep. Jim Langevin in Washington. 

Even though more dollars are involved, running the state pension fund is in many ways simpler than running Cranston, where Fung was mayor for a decade. There aren’t as many variables on the spending side of the ledger.

So after diving into Cranston’s finances two weeks ago, Political Scene looked into the pension fund, which the treasurer oversees as chair of the State Investment Commission and Retirement Board.

One takeaway is that in 2021, with stock prices soaring, anyone might have had a good year managing money, but the Rhode Island pension fund had one of its best years ever.

Another is that the pension’s good recent run hasn’t been all down to vanilla investments as “Back to Basics” implies. Higher-fee alternative investments are still a big part of the portfolio and Magaziner is relying on them to limit losses as the market heads south.

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Magaziner took over from Raimondo as treasurer in 2015, just as the national economy was starting to accelerate post recession.

The pension had $7.9 billion in assets during Magaziner’s first month in office and at the end of July, the most recent figures available, the value of those assets had grown by $2.4 billion, according to the State Investment Commission.    

Pension investment returns remained fairly anemic through 2016, but spiked to 11.6% in 2017, followed by 8% in 2018, 6.5% in 2019, 3.8% in 2020 and then the record 25.6% last year as markets caught fire in the later COVID years.

While some of the earnings go back out the door each year to pay for the retirements of former government workers and teachers, the rest has been plowed back into the fund.

In particular, the state’s private equity portfolio has grown under Magaziner.

At the start of 2015 the pension had $539.5 million in private equity assets. That had grown to $1.8 billion at the start of August. By comparison, the pension’s portfolio of public equities, including stocks, has been roughly the same size over the past seven years (around $3.8 billion).

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Hedge Funds

After being elected treasurer, former venture capitalist Raimondo embarked on a controversial restructuring and cutting of public retirement benefits to shore up the ailing pension fund.

At the same time, she began buying more than $1 billion in hedge fund assets as a new diversification strategy.

The anger generated by the cuts combined with what would turn out to be lackluster returns from the hedge fund assets became a politically toxic combination.

The largest state employee union, Council 94, American Federation of State County and Municipal Employees, hired Raimondo critic and former securities lawyer Edward “Ted” Siedle to investigate. 

When he entered office in 2015, Magaziner sold a few underperforming hedge fund assets before, in September 2016, announcing that he would dump more than $500 million in hedge funds, dubbing the policy “Back to Basics.” Instead of hedge funds, the money would be invested in “crisis protection” assets, including treasury bonds, and cash-generating investments, and the pension system would put more into private equity.

Magaziner did shrink the pension’s hedge fund portfolio, but he didn’t get rid of the funds that were doing well and by the start of August the pension still held $721 million in hedge fund assets.


The knock against putting public money into alternative investments, including hedge funds and private equity, is that the investments are risky and fund managers charge high fees that eat into whatever returns they provide.

The thrust of the Jacobin piece was that Magaziner is plowing money into expensive and risky investments to benefit fund managers and Wall Street traders.

The riskiness varies and Raimondo argued that it is even riskier to put all your money in the stock market, because one market downturn would be devastating, as it was in the recession. 

As for fees, it’s no secret that exotic investments are more expensive than plain index funds.

And it is true that with the pension fund’s improved performance over the last five years, fees have risen, from about $82 million in 2015 to $188 million last year. Most of that increase came in the outlier record returns from last year. As a share of the total fund assets, fees have been around 1% annually until suddenly doubling to 2% last year. 

“The most important thing is we we deliver strong investment returns for the pension fund so that retirees can get their pensions and retire in dignity and taxpayers are not overburdened,” Magaziner said when asked about fees in an interview last week.  

“In my judgement, most of the hedge fund investments were not performing well, they were paying more in fees than they were getting back in returns,” he added. “On the other hand, if there are others that charge strong fees but deliver stronger performance, that is a positive outcome.”

Magaziner also noted that he is the first treasurer to require all fees paid to fund managers be publicly disclosed and even during Raimondo’s term pension expense totals were incomplete. 

Fee totals for the year that ended June 30 will likely not be available until next spring, but there is a decent chance they look different from the 2021 numbers as it was a much rockier year for the economy.

Fortunately for pensioners, and Magaziner’s campaign, it was not as bad a year for the pension as it could have been.

That 1.4% investment loss beat 98% of 533 public pension plans in an InvMetrics database, according to the Treasury, which did not provide access to the database itself. (The fund’s benchmark lost 3.3%.)

While the pension’s stock portfolio was down more than 8% last year, the private equity assets lost 0.7% and real estate grew 3%.

Magaziner also noted that Cranston, which has one of the most underfunded public pensions in the state, has not lowered its assumed rate of return to reflect more likely long-term investment performance, as he did with the state pension. 


The central attack in the Ocean State Forward mailers targeting Magaziner in the primary was that he takes campaign contributions from the financial sector while managing the pension.

According to breakdown compiled by campaign finance tracker Open Secrets, Magaziner raised around $95,000 from donors in the finance, securities and investing sectors. He raised even more from retirees ($366,000), lawyers ($249,000), and people in real estate ($111,000).

Fung, who didn’t have a competitive primary, raised $37,000 from the finance industry. A corporate lawyer when not in office, Fung received more campaign cash from the legal profession ($71,000) than any other industry. 

“I have not taken a dime from anyone who manages money for the state,” Magaziner said about the Ocean State Forward attacks. “While there are those who work in the industry, to conflate the two is very disingenuous.”

The Jacobin article questioned more than $8,000 in campaign contributions over several years to Magaziner from members of the Buonanno family while the pension had investments with Nautic Partners where Bernard Buonanno III is managing director. 

None of the contributions were from Bernard Buonanno III, who is the brother of Helena Buonanno Foulkes. Foulkes’ entry in the governor’s race helped force Magaziner out of that primary, which doesn’t immediately suggest they are in cahoots. 

The state has invested in Nautic since 1980 when it was part of Fleet Bank, Treasury spokesman Ben Smith said. The last three Nautic funds the pension invested in returned between 45% and 52%, he said.  

Progressive David Segal, who came in second to Magaziner in the Second District Democratic primary, was seen as the beneficiary of the Ocean State Forward ads, even if he wasn’t directly involved. He endorsed Magaziner after the primary, saying despite their differences it would be worse if a Republican took the seat.

Does he agree with the left-wing criticism of Magaziner on pensions?

“We’ve seen organized labor, which has the greatest stake in pension be supportive, so my inclination is to defer to those who have most at stake wit how he has managed the fund,” Segal said.

The Fung campaign did not respond to requests for comment on Magaziner’s handling of the pension.


(401) 277-7384

On Twitter: @PatrickAnderso_

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