INVESTIGATION: Raimondo Investment Program’s Fees Exceed Gains

A program General Treasurer Gina Raimondo launched to help cities and towns better invest their money appears to be generating as much money for the company managing the fund as it is for its members, a GoLocalProv review of state records has found.

Known as the Ocean State Investment Pool, the program was launched in the spring of 2012. Two years later, just three municipalities have signed up: Bristol, Cranston, and Lincoln. The remaining six governmental members are all state entities and include the state pension fund and the Rhode Island Student Loan Authority, for which the treasurer is a board member. Money from the state general fund also accounts for more than half of the assets in the fund.

The Ocean State Investment Pool was designed to help cities and towns maximize investment returns on so-called liquid assets—cash that cannot be invested over the long-term because it needs to be used for day-to-day expenses, like payroll.

Half of interest income went to bank fees

The investment pool is being run by Pyramis Global Advisors, LLC, a company owned by Fidelity Investments. The firm was paid a fee of $757,701 for fiscal year 2013 to manage what was by the end of the year $545.1 million in assets, according to the annual report for that year. After the fee, the pool generated a net investment income of $698,263, according to the report. (The pool earned a total of $1,450,050 in interest income that year.)

For the first three months of the pool’s existence—from March to June 2012—Fidelity Investments fetched a fee of $199,690, almost as much as the $448,680 in interest earned by the pool, according to the last annual report.

In November 2011, the Treasurer’s office announced that Fidelity Investments had been awarded the contract as the vendor for the pool. GoLocalProv has previously reported that Raimondo’s now-former chief of staff, Joseph Pratt, was a former official at Fidelity Investments. He left his position with her office in January 2014 a month after Raimondo announced her run for Governor. (Pratt’s new job is with the Boys and Girls Clubs of Newport County.)

Fidelity Investment employees also account for $4,400 in contributions to Raimondo’s campaign account, most of that coming before her current run for Governor.

No employee contributions are listed under the subsidiary name Pyramis.

Smaller fund is more expensive to manage

Pyramis’ fee ranges from .138 percent to .148 percent of the average net assets. The rates for the fiscal years 2012 and 2013 were on the higher end of that range, at .147 and .148 percent, respectively. The rates decrease as assets increase, meaning that the more money that’s in the pool, the lower the cost.

So far most of the money in the pool is coming from state, not municipal sources.

The bulk of the money in what was a $545.1 million at the end of the last fiscal year was from the state: $300.5 million from the state government and $200.2 million from the state pension fund. Most of the remaining funds are split among the University of Rhode Island, the Narragansett Bay Commission, the Rhode Island Health and Educational Building Corporation, and the Rhode Island Student Loan Authority.

3 out of 39 communities in fund

Of the three towns that have invested with the pool, Bristol has chipped in the most, with $1.7 million, followed by Cranston at about $1 million. The town of Lincoln has less than half that, with about $480,000. For the month of June 2013, those investments paid a combined total of $260.87 in dividends, according to documents provided in response to a public records request.

Over time, Raimondo has said the earnings could be significant. In a November 2011 press release announcing the hiring of Fidelity, the treasurer’s office estimated that if “the fund is able to enhance returns by just two-tenths of one percent, that could mean $10 million to $15 million in new potential revenue to participants over a 10-year horizon.”

The investment pool exceeded returns by .06 percentage points in 2013, according to the annual report. (The annualized return on investments that year was .14 percent.)

When asked why more cities and towns haven’t signed up, Peder Schaeffer, the associate director of the Rhode Island League of Cities and Towns, suggested that the program isn’t meeting any needs for cities and towns. “Interest rates are so low, it doesn’t make any difference, Schaeffer said.

“It could make a difference in a high interest environment,” he added.

But Tom Sgouros, a progressive blogger and policy expert, faults the treasurer’s office for failing to convince cities and towns to sign up. The issue, he suggested, is her team is more experienced in finance than policy.

“A big pool, well-managed, gets better rates than a little pool; that’s the way the money market crumbles. But it has to be enough bigger to make a difference, and getting to that threshold involves getting over the suspicion that the state inspires in town halls around here. If you can’t do that, then it won’t be bigger enough to make a difference and no one will see the need,” he wrote in an e-mail.

“In other words, Gina is right about a bigger pool being better all-around for everyone, but she very much misunderstood how to overcome the municipalities’ reluctance to join with the state. Result: policy fail,” Sgouros said.

A spokeswoman for the treasurer’s office expressed confidence that the program would attract new cities and towns. “The Ocean State Investment Pool is a fairly new program that has been successful and we expect that as market conditions and municipalities’ needs evolve over time, we will see even better program growth,” said Ashley Gingerella O’Shea.

Some finance directors know little about fund

GoLocalProv reached out to several cities and towns, asking why they had not signed up.

Answers varied. In Warwick, a city official said the investment pool does not meet all the city’s criteria for its liquid investments. William DePasquale, the acting chief of staff for Mayor Scott Avedisian, said that after the 2008 recession the city had a adopted a policy of only making liquid investments that were FDIC-backed. For that reason, he said the investment pool was not considered by the city.

In Narragansett, the new finance director, Laura Kenyon, said she wasn’t sure why the town hadn’t joined. “I don’t know why we haven’t joined and I just got started,” Kenyon said. Six months into her new job, she said she is focused on finishing the budget for the upcoming fiscal year and going through the audit for the previous fiscal year. She said the investment pool is on her “list of things to look at.”

At least one municipal finance director hadn’t even heard of the Ocean State Investment Pool.

“First I’m hearing of it—thanks for letting me know, said Robert Thibeault, who became finance director in Coventry in November 2013. He said he would “definitely” call the treasurer’s office to find out more. But when asked if he thought his town might enter the pool, he was non-committal: “We’d have to look at the specifics.”

In Cumberland, Finance Director Brian Silvia had heard of the investment pool. “I really don’t know much about it now,” he added. He said the treasurer’s office had not reached out to him about the program.

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