PAUL J. TAVARES
POSITION: Outgoing general treasurer for the State of Rhode Island
BACKGROUND: Tavares has served as the general treasurer since 1999.
He previously had been a vice president at Bank Rhode Island, from 1996 to 1998, and had served as a vice president at other banks, some of which experienced mergers. He began his career in financial services as a bank teller at People’s Savings Bank.
Tavares also has served as a state senator representing East Providence from 1993 to 1998, and as a city councilor in East Providence from 1989 to 1992. His political career began in 1979, when he became a school committee member in East Providence.
EDUCATION: East Providence High School, 1970; college coursework but no degree
RESIDENCE: East Providence
AGE: 54
Among other duties as general treasurer, Paul J. Tavares served as Rhode Island’s chief fiduciary and chairman of the State Investment Commission, which oversees investments in the state’s $7.8 billion pension fund and its 529 College Savings plan.
The state pension fund broke $7 billion in assets in fiscal 2006 and outperformed benchmarks for the fourth year in a row, earning a 12.6-percent return. During Tavares’ eight years as treasurer, the state’s 529 College Savings Plan has grown to $7.6 billion in assets under management, making it the second-largest such plan in the nation.
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PBN: The state pension plan’s portfolio has performed very well in the past few years. What’s contributed to that success?
TAVARES: We all suffered the challenges of 2001 and 2002 – those were very difficult years for anyone who was responsible for investing money. But I am extremely pleased with the recovery. Our plan of asset allocation is working. It’s a proven fact, historically, that over 90 percent of a fund’s return is derived from its asset allocation, and I’m extremely pleased that, with the assistance and guidance of the State Investment Commission, we made some prudent decisions … and now we’re reaping the harvest.
PBN: And yet the pension fund is underfunded by something like $4 billion, and that number is projected to grow?
TAVARES: Yes, we’re approximately 60-percent funded, which is not a good level of funding. Money comes into the fund from the employee contributions, it comes from the return on the fund, and then the balance is made up by taxpayer dollars, whether they are state dollars or municipal dollars. What is occurring is that the liabilities – the payouts – are growing at a very aggressive rate.
PBN: Why is that?
TAVARES: There are a whole host of factors. The simplest is, people are living far longer in retirement, and it causes a challenge on the fund. And this isn’t just a problem in Rhode Island; this is causing challenges to pension funds nationally.
PBN: How can Rhode Island go about solving the problem?
TAVARES: To solve the problem is really a policy decision that is somewhat complex. The simple solution is, you go to a defined-contribution plan – your 401(k) plan. The downside of that, and one that needs to be acknowledged, is if you abruptly stop even new employees from contributing to the defined-benefit plan, you’re drying up a revenue stream. … There will be a transition that will have to be dealt with.
The other concern under a defined-contribution plan is more of a social question. What happens to the individual who, because of age, does not have a lot of years to accumulate … a sufficient amount to retire? This needs to be considered. The other aspect is strictly an economic factor – lower-paid individuals will not have the earning capacity to be able to put sufficient money away. …
If I had the remedy to this, I would be someplace making big bucks. My thought has been, always, that consideration should probably be given to a hybrid system, where state employees have a baseline, safety-net, defined-benefit pension, coupled with a defined-contribution [plan].
PBN: How did the passage of pension reform a couple of years ago affect the situation?
TAVARES: That was a significant first step in reducing the money going out, and the money going in is also being increased. But even though pension reform reduced the contributions required by the state by $44 million in 2006, the number who contributed in 2006 was larger than the number in 2005, and that will grow each and every year. It’s just part of the system.
PBN: What’s the status of the Treasury’s request that the R.I. Economic Development Corporation reimburse it for money it lost as part of its American Express Building sale?
TAVARES: I take slight objection to the suggestion that we are looking to them to bail out the pension fund. In essence, they’re being required to uphold the commitment they volunteered and made five years ago.
The pension fund should be considered as any other debtor in this situation – and the reality is, it’s pay now or pay later. If for whatever reason they do not give the pension fund the money, it would only add to the unfunded liability, which then gets made up out of tax dollars further down the road.
The other thing to put in context here is, you’re looking at $3 million, in relation to a $7.5 billion fund. We need to keep that in context.
PBN: The state’s college savings plan has become the second-largest in the nation. How did that happen?
TAVARES: In 1996, Congress passed the 529 College Savings Plan Act. That required each state to then set up its own plan, and Rhode Island was quite aggressive in doing that. The Treasury and the R.I. Higher Education Assistance Authority co-administer the college fund. I [was] elected in 1998, and our program was up and running and we had approximately $4 million in assets [under management]. As I leave office, that $4 million has grown into $195 million. We redesigned the program in 2000, and took it national.
Nationally, our plan as of Dec. 15 has $7,577 million [$7.6 billion]. There are close to a half-million accounts; it has been rated as a top performer and a top-qualified plan in the nation. I am extremely proud of that achievement.
