This week, IA reporter Kaitlyn Mitchell had an in-depth conversation with Seth Magaziner, the General Treasurer of Rhode Island. A young man at age 35, Magaziner, who is responsible for the administration of $8.3 billion in assets at the Employees’ Retirement System of Rhode Island (ERSRI), is running for re-election this fall, after making improvements to the state’s various pension funds over his first four-year term beginning in 2015. Magaziner’s father, Ira Magaziner, was the senior advisor for policy development to President Bill Clinton and now serves the Clinton Foundation on two international development initiatives.
SM: We try to stay diversified—our fund is separated into three main buckets: The largest is the growth strategy, which is about 55% of our portfolio, and is composed primarily of index funds, private equity and non-core real estate; the next biggest strategy is our stability class, which primarily includes fixed-income, infrastructure, core real estate and absolute return–this makes up about 38-39% of our portfolio; and the remaining 7-8% is what we call income class—these are primarily strategies that have a high-cash yield, largely devoted to private credit, but can include certain types of infrastructure and REITs.
KM: What is the current funded status of ERSRI?
SM: ERSRI is composed of several plans that are managed together in a pool for investment purposes. Each plan has its own funded status: the teachers’ plan is 56% funded, the state plan is 52%, and the state’s 150 municipal plans range from 60-80% funded. All of the plans are under the umbrella of ERSRI. The major types of employees covered are state employees, teachers, and municipal employees. Only municipal employees have a commonly used sub-designation which is “Municipal Employees’ Pension System” (MERS). Each has its own unique characteristics, but all together they comprise ERSRI.
KM: In January 2017, the Rhode Island Treasury created an advisory committee to aid locally administered pension plans in the state as they navigate the barriers to joining the state municipal system. Tell me more about this decision.
SM: In Rhode Island, the state pension fund underwent significant trials over the last decade. The State underwent a significant pension reform in 2011 that was ultimately settled in 2015. The state system is on a much better course today than then. If we shift our focus away to look at municipal plans, it’s a mixed bag. Of 150 plans in total, 116 are managed as a part of the state system, MERS, while 34 are still managed by the local authority. Those 34 plans have a combined underfunded liability of $2.4 billion, and include some of the biggest independent municipal plans, like Providence.
Perhaps the biggest distinction between municipal plans in MERS and those that operate locally is that the state can compel municipalities to make their full annually required contribution each year and can even withhold state aid payments if a town were to fail to do so. It has no such mechanism for the independently managed municipal plans. Forty are not managed by the MERS system, and are run by the cities and towns themselves—some are as low as 15-20% funded and are getting worse, not better in many cases. (See related IA story.)
We put together a commission to shine light on the locally administered pensions, and this past spring published report cards that showed not only their funded status, but other key metrics including their history of making contributions. Small plans shouldn’t manage themselves because they don’t get the same rates [as larger plans] and don’t have access to the same quality of managers. They’re more likely to make policy mistakes, miss required contributions and make unreasonable assumptions. The legislation we’re working on passing would make it easier for the state to manage small plans, though it would still be optional for the municipalities to join. Legislation has been introduced in each of the last two years’ legislative sessions. As to when it will pass, we hope the answer is ‘soon.’
KM: With which asset managers and consultants does ERSRI work?
SM: We are one of if not the most transparent public pension plan in the country. We report manager by manger performance monthly and even break out fees and expenses on a manager-by-manager basis. We work with a number of outside managers and consultants across different asset classes—these include Cliffwater for private equity, Pension Consulting Alliance for real estate and NEPC for asset allocation. The fund employs roughly 60 asset managers in total.
KM: Tell me about your career path.
SM: I’m a born-and-raised Rhode Islander, from Bristol. After graduating from Brown University in 2006, I started my career as an elementary school teacher with Teach for America at Creswell Elementary School in Opelousas, Louisiana, right after Hurricane Katrina and Hurricane Rita. Then I got my MBA from Yale University in 2010 and got a job at a firm in Boston, Trillium Asset Management, one of the oldest investment firms in the country. As part of a socially responsible mandate, Trillium’s clients are based on social criteria rather than investments, and include religious associations and nonprofits. I started there as a portfolio analyst then moved up to vice president while living in Rhode Island and working in Boston. I took leave from the firm to campaign for office in January 2014.
I saw the opening in the office of the Treasurer as an opportunity to use my financial background to help my home state. At the time I won office in 2015, Rhode Island had the highest unemployment rate in the country, and was in the midst of a series of financial and economic challenges. I had never run for public office before then, and was fortunate to be elected.
We are one of if not the most transparent public pension plan in the country.
KM: How do you describe or characterize your investment philosophy?
SM: I have a very strong sense of duty as a fiduciary to the public servants for which the pension fund was created to provide security—the nurses, social workers and public school teachers. These people who spent their lives serving the community deserve retirement security and dignity in retirement. Every decision that I and the office makes is with the best interests of the participants in mind. That is why we have a well-diversified, stable portfolio and do not expose [the fund] to too much risk in any way. We are not market timers and don’t want to be. When managing a large fund that services the population with a high percentage of people that are retired, the asset allocation must deliver strong risk-adjusted returns across a full-market cycle. We have an equal duty to a 25-year-old plan participant as to a 95-year-old retiree, and must be mindful of managing risks while staying focused on the long-term.
KM: What was the best career experience so far?
SM: My favorite part of my job is getting to interact with members of the pension fund, including police officers, firefighters and social workers. We spend a lot of time meeting with member unions and retiree groups. In government, it’s easy for elected officials to live in a bubble. When I took office, we as a state had just gone through a pension reform, and a number of members saw a pension structure change. I inherited a number of lawsuits related to the reform—there was not a lot of trust and goodwill between members of the pension system. We took their feedback and it is in much better shape than it was two to four years ago.
KM: What was the worst career experience?
SM: Since starting this job, one major challenge has been cyber security—there’s been a noticeable uptick in attempts by outside actors to launch cyber-attacks against the system. Thus far we haven’t had any serious fallout, but it’s an issue that all asset owners and particularly pension funds need to be concerned with.
One phishing attempt was successful in accessing an employee’s email contact file. Since then, we have taken steps to prevent similar attempts, which I will not specifically identify as that information could be used to circumvent our procedures. I will, however, share that one of the most effective tactics against cyber-attacks is regular employee training on how to spot incoming attempts.
Each attempt against the system is different; that being said, we need to ensure that our staff is very good about using proper ‘hygiene,’ and don’t make simple mistakes with their email and web browsing, like clicking on dangerous links. We also have to ensure that our partners, whether fund managers, vendors or participants will be immediately communicative when something happens.
KM: In what part of the industry have you witnessed the most change?
SM: One area where I do see a lot of change is around transparency of fees and expenses regarding asset managers. When I took office, I mandated that all fund managers allow us to publish fees on our website. After all, at the end of the day we’re a public pension fund. The public has the right to know what the fund is being charged. Over the long run, greater transparency gives an allocator more bargaining power to get better deals on expenses.
After we made that 2015 announcement, CalPERS, CalSTRS and the New York City pension funds adopted similar policies. Since we launched, we haven’t lost a single manager over this policy—this shows that they’re willing to accept the policy if put in place.
We have an equal duty to a 25-year-old plan participant as to a 95-year-old retiree, and must be mindful of managing risks while staying focused on the long-term.
KM: What aspect or element of the industry would you most like to see changed and why?
SM: Across the public pension world, we need to adopt more realistic assumptions when we are developing funding plans—that’s the biggest reason that so many pension plans got into trouble over the last couple of decades. In the mid-2000s, the median state pension funded level was over 100%, today that number is in the mid-70s. Rhode Island lowered its assumptions from 8.5 to 7.5 to an aggressive target of 7%. Our portfolio is 55-60% invested in assets strongly correlated with stock markets, while other pensions invested 70% to more than 80%. I worry that a lot of pensions nationally still take too much risk in the market to meet their assumptions, which were high in the first place and elevate the risk of trouble during the next market downturn.
KM: Are you married?
SM: I got married a week and a half ago [late July]. My wife Julia and I met in college—she’s a Pittsburgh native and a Steelers fan, I’m a Patriots fan being born and raised in Rhode Island. Our first conversation was about football and those will continue for a long time, we hope.
KM: What are you reading?
SM: The War on Normal People by Andrew Yang–it’s about the social and economic risk of job displacement from the rise of automation. It’s a topic that I think investors and policymakers should be paying more attention to.
KM: What are your next travel plans?
SM: I’m campaigning for re-election this year, so I have no travel plans outside of Rhode Island. My wife and I need to go on our honeymoon after the election!