September 21, 2014
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No reason to demonize long-term pension funds
My Take on the News
Lonnie Barham

WARWICK FIXING A PROBLEM THAT’S NOT A PROBLEM:  Warwick Mayor Scott Avedisian wants city council approval to pay Citizens Bank $152,000 for a two-year contract to open a post office “lock box” to which residents could mail their tax payments.  Avedisian contends the process would expedite getting tax payments into the city’s bank account and generate more interest income for the city.  The tax processing problem Avedisian identified that causes 45 days to process a tax payment will not be resolved with this very expensive lock box.  The lock box will be designed for tax payments that have accompanying tax stubs and that are easily processed. The difficult-to-process tax payments will still be handled by city employees.

Avedisian said the lock box will allow the city to “...get the ones that are easily processed deposited quickly and free the staff to deal with the others.”  

So, Warwick taxpayers should pay $152,000 to hire the bank to handle only those tax payments that are not a problem to start with?  It doesn’t make sense!  Can’t the tax collector just require that all tax payments that have accompanying stubs be processed for deposit immediately; prioritize them ahead of the problem tax payments?  While it might require hiring a $30,000 per year clerk to handle these no-problem payments, there is certainly a more cost-efficient way to handle the easy-to-process payments than paying $152,000 to the bank.  

Maybe there’s much more to the story than Mayor Avedisian has mentioned, but taxpayers should be very concerned when government seems intent on cavalierly dishing out taxpayer dollars to solve a problem that’s not a problem.

FORBES’ BLOGGER AND RAIMONDO:  One need only read a few of Forbes’ blogger Edward Siedle’s recent offerings to understand that he is an ardent, anti-innovation, low-growth, low-risk investment supporter who tends to demonize long-term pension funds that invest in anything alternative, such as investments in real estate, gold and private equity.  He recently excoriated Rhode Island General Treasurer Gina Riamondo for her state pension fund investment strategy. The blog, which was full of inaccuracies and unsupported opinions, simply reflects Siedle’s belief that pension funds should invest in exactly the same way they did before the market collapse of 2008 and 2009, i.e., put everything into the same pot - primarily stock market index funds.  Raimondo, on the other hand, rightfully believes that putting some of the pension fund’s money into alternative investments not so directly tied to the stock market is the best way to protect the fund from future market collapses.  Gina Riamondo is perhaps the first general treasurer in Rhode Island’s history who actually has an investment strategy for the state pension fund.  It’s a strategy based on her private investment background and her clear understanding of market forces and how they affect investment growth and risk.  While Siedle spews forth his silly, unsupported opinions that fly in the face of reality, Raimondo continues to do what she does best - invest wisely while protecting the pension fund.

 

WHO’S RIGHT ON ROADS?  Governor Chafee wants to pay for $10 million of local road repairs with money appropriated in the 2014 state budget.  Providence Mayor Angel Taveras wants to borrow $40 million for Providence road repairs using his city’s embarrassing BBB bond rating.  General Treasurer Gina Raimondo wants to use the R.I. Clean Water Finance Agency’s AAA bond rating to borrow money that would be further lent at a low interest rate to cities and towns for local road repair.    

Chafee’s plan, though an admirable pay-as-you-go method, just isn’t enough to fix the thousands of roads and bridges that need repair in our cities and towns.  $10 million distributed to 39 municipalities will barely fix one road in each town.  Taveras’ plan for Providence is downright scary.  His administration admits outright that it would save money using Raimondo’s plan while tacitly admitting that it hadn’t considered that alternative.  Spending $40 million without first exploring cheaper bonding sources borders on gross financial mismanagement. Raimondo’s plan, which is as innovative as her pension investment strategy, seems to be the only one that uses any out-of-the-box thinking.  It gets double the money to municipalities each year than does Chafee’s plan and it doesn’t waste taxpayers’ money on bad credit investments as does Taveras’ plan.  

 

ANONYMOUS BOND BUYERS FOR 38 STUDIOS?  The Providence Journal and various other detractors are trying desperately to determine exactly who bought the bonds that financed the now-defaulted $75 million loan guarantee to 38 Studios.  Why so much interest in who bought the bonds?  Jim Taricani, co-host of the news talk show “10 News Conference,” made a comment that explains why.  He said that Rhode Islanders might feel differently about paying the bonds if they knew who purchased them.  What a crock!  Do Rhode Islanders really think that our responsibility to repay a debt should be based on how much money the creditor has or what position the creditor holds in our society?  If that’s the case, why should we pay our mortgages? Aren’t the banks that make mortgage loans rich?  Can’t they afford to absorb the losses?  What about our electric bills? Maybe we shouldn’t pay them either since National Grid is a big, rich company.    

We should assume that the people, banks or companies who bought the 38 Studios’ bonds are pretty well off and that some may be well-known public figures.  So what?  That certainly doesn’t mean we shouldn’t pay them back for their investments.  Wealthy investors supporting emerging businesses create the engine that leads to a thriving economy.  If we send the message to these investors that we aren’t going to pay them back just because  they are well off and might be able to afford the loss, we are sealing the tomb on Rhode Island’s economic future.   

 

GOODBYE TO THE IRON LADY:  For those with a fiscally conservative, free-market bent, the world lost one of its greatest heroes this week - Margaret Thatcher.   Along with Ronald Reagan, she forged a new perspective on government and what it should and shouldn’t do for its citizens.  Seeking a classless society that allows those who work hard to succeed without big government holding them back, she made changes to British government that led to the United Kingdom’s economic rebirth.  Her reliance on free markets instead of a strong central government to move her country forward upset many who ached for a stronger welfare state, yet her actions and policies greatly strengthened the United Kingdom both economically and politically.  The country is far better off today because of her leadership.  She will be remembered as one of the lions of the twentieth century.  Goodbye, Maggie! You were indeed an Iron Lady!

 

QUOTE OF THE WEEK:  Steve Bucci, a personal finance columnist, wrote a piece for the Providence Journal in which he decried the burgeoning student loan industry and its pushing of loans on “inexperienced students and their emotionally compromised parents...without regard for their ability to repay. “ Lenders approve as many loans as possible since they profit while someone else (government) is responsible for defaults.  Referring to the Einstein adage that insanity is “doing the same thing over and over again and expecting different results,” Bucci compared the easy-money student loan default problem to the easy-money mortgage loan problem that caused the housing market to crash because banks had lent so much to homebuyers who couldn’t afford their mortgages.  Bucci ended his article with this:  “Lending $100,000 to a high-school kid with no income and no firm idea of what he or she will do for a living, who may not even graduate, is truly insane.”  For student loans we’re doing the same thing we did before the mortgage crisis but expecting different results.  Yes, Dr. Einstein, we’re totally insane!


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