Last week, I wrote a post titled Looking at the Causes of the Public Pension Problem in America. In it, I provided some reasons why states and municipalities may not be able to meet their pension obligations to retiring workers: the financial meltdown and subsequent loss of billions of dollars in pension fund money, the willful underfunding of public worker pensions by states and municipalities, and the “borrowing” of pension money “to finance other budget needs.”
I did not mean to imply that many public pension plans should not be revisited…that many may not need to be reformed…that some individuals aren’t abusing the system. Still, we have not been getting the whole story about the “public pension crisis” in America from the mainstream media. I hope to provide more information on the subject to readers of this blog as I continue my research to find out what’s really going on with public pension reform in this country.
The Institute for America’s Future recently published a report on the subject of pension reform titled The Plot against Pensions, which was written by David Sirota. In his report, Sirota said that many of the pension reforms being advocated today are akin to “President George W. Bush’s proposal to radically alter Social Security”—in that they would “transform stable public pension funds into individualized accounts.” He adds that these pension reforms “would most often reduce millions of Americans’ guaranteed retirement benefits. In many cases, they would also increase expenses for taxpayers and enrich Wall Street hedge fund managers.”
Matt Taibbi writes about the recent “reform” of public worker pensions in the state of Rhode Island in his Rolling Stone article titled Looting the Pension Funds. His article speaks to Sirota’s claim of hedge fund managers being enriched by pension reform.
Gina Raimondo and Public Pension Reform in Rhode Island
(Note: Gina Raimondo, the State Treasurer of Rhode Island, is a Democrat. “Raimondo clerked for U.S. District Judge Kimba Wood before joining the New York offices of Village Ventures, a venture capital firm based in Williamstown, Massachusetts. She returned to Rhode Island to found the state’s first venture capital firm, Point Judith Capital.”)
According to Matt Taibbi, the state of Rhode Island declared war on public pensions and rammed “through an ingenious new law slashing benefits of state employees with a speed and ferocity seldom before seen by any local government.” Gina Raimondo spearheaded this effort as a means to avert a “looming pension crisis.” Raimondo’s reform plan—known as the Rhode Island Retirement Security Act of 2011—was “hailed as the most comprehensive pension reform ever implemented.” Reportedly, some people in the state were “overwhelmed” and didn’t know how to react to the pension reform being instituted in their state. Paul Doughty, president of the Providence firefighters union, was quoted as saying: “She’s Yale, Harvard, Oxford – she worked on Wall Street. Nobody wanted to be the first to raise his hand and admit he didn’t know what the f*ck she was talking about.”
Maybe that’s the way Raimondo, a Rhodes Scholar, wanted it. After all, people can’t complain about the bad things that might happen to their retirement pensions and benefits if they don’t know what’s really going on.
Taibbi said that no one was aware “that part of Raimondo’s strategy for saving money involved handing more than $1 billion – 14 percent of the state fund – to hedge funds, including a trio of well-known New York-based funds: Dan Loeb’s Third Point Capital was given $66 million, Ken Garschina’s Mason Capital got $64 million and $70 million went to Paul Singer’s Elliott Management.” These hedge funds will be paid “tens of millions in fees every single year…” Taibbi adds that Loeb, Garschina and Singer all serve on the board of the Manhattan Institute, “a prominent conservative think tank with a history of supporting benefit-slashing reforms.” (Note: Raimondo was named the Manhattan Institute’s “Urban Innovator” of the year in 2011.)
Former SEC watchdog Edward Siedle also had something to say about Raimondo and her pension reform plan in his Forbes article titled Rhode Island Public Pension ‘Reform’ Looks More Like Wall Street Feeding Frenzy.
A look behind the curtain reveals her[Raimondo’s] changes to the investment portfolio of the $7 billion Employee Retirement System of the State of Rhode Island will inevitably dramatically increase both risk and fees paid to alternative investment managers, such as hedge funds and private equity firms.
There’s no prudent, disciplined investment program at work here—just a blatant Wall Street gorging, while simultaneously pruning state workers’ pension benefits. It’s no surprise that some of Wall Street’s wildest gamblers have backed her so-called pension reform efforts in the state legislature. Former Enron energy trader emerges as a leading advocate for prudent management of state worker pensions? That’s more than a little ironic.
What’s happened to date in Rhode Island is unprecedented in public pension history and, given the myriad risks involved, should be setting off alarms: A little-known money manager hired by the state’s pension to manage a paltry $5 million succeeded in getting herself elected as state Treasurer. That means she’s now responsible for overseeing the entire $7 billion.
Essentially, there has been a coup—the foxes (money managers) have taken over management of the henhouse (the pension). To make matters worse, she’s an unproven veteran of the “alternative” investment industry—the hallmark of which is a profound lack of transparency…
I’m all for public pension reform—prudent contributing and investing coupled with sustainable benefits. However, when alternative investment managers take control of a state pension and recklessly dump pension assets into high-cost, high-risk alternative investments, while they slash workers’ benefits, that’s no reform. Call it what it is: a money grab.
David Segal of RIFuture.org said that Raimondo had “convinced Wall Street’s 1% to pay for a secretive propaganda campaign to advocate for deep cuts in the state pension system. Doing so garnered her effusive praise from right-wing stalwarts: from the Wall Street Journal’s editorial page, to the National Review, to Rhode Island’s own tiny Tea Party, which congratulated Raimondo for her ‘true leadership’ as General Treasurer.”
Segal said “Raimondo’s ‘true leadership’ consisted of slashing benefits even for already-retired seniors on fixed incomes while sending millions of Rhode Island taxpayer dollars to pay the bloated fees demanded by her hedge fund manager friends…”
Back in 2011, Raimondo informed the people of Rhode Island that in order to avoid shortfalls in the state’s pension fund, “modifications” had to be made to the cost-of-living-adjustments (COLA) that had been promised to retired state workers. She said that “real sacrifices” would be required in order to “fix” the pension.
From the website of Rhode island State Treasurer Gina Raimondo:
Cost-of-living adjustment (COLA)
The COLA is one of the most expensive aspects of the current pension system (continuing to pay out a COLA may eventually deplete the pension fund if the 7.5 percent investment return assumption is not achieved).
From David Sirota’s The Plot against Pensions:
Reviewing the state’s new hybrid plan that involves a 401(k)-style defined contribution program,
Forbes’ Ted Siedle found that the system is “unprecedented in public pension history” in that it is “just a blatant Wall Street gorging” that “will inevitably dramatically increase both risk and fees paid to alternative investment managers, such as hedge funds and private equity firms.” Siedle noted that the cut to retirees’ cost-of-living adjustments ended up “going into the already-stuffed pockets of Wall Street’s most highly-compensated gamblers—almost dollar-for-dollar,” with $2.3 billion in cost-of-living-adjustment savings going to finance $2.1 billion in fees…paid by the pension to hedge, private equity and venture capital tycoons. The Economic Policy Institute followed up with a report showing the program “actually increases costs to state and local governments and taxpayers while making retirement incomes less secure.
So…this is Raimondo’s plan for pension reform: Cut retirees’ benefits to save the state money. Then use the money saved by cutting retirees’ benefits to pay huge fees to hedge funds. Does that sound like fiscal responsibility? What kind of pension reform is that?
Matt Taibbi wrote that state workers are being required “to subsidize their own political disenfranchisement, coughing up at least $200 million to members of a group that had supported anti-labor laws.” What’s just as bad is that Raimondo claimed she didn’t know how much the state was paying in hedge fund fees when asked by Edward Siedle. Later, Raimondo told the Providence Journal that she was “contractually obliged to defer to hedge funds on the release of ‘proprietary’ information.
Matt Taibbi on How Wall Street Hedge Funds Are Looting the Pension Funds of Public Workers
In Rhode Island Treasurer Misleading Public Is Worse Than Withholding Hedge Fund Information (Forbes), Siedle told of how interested groups were demanding information from the treasurer’s office regarding Raimondo’s refusal to disclose hedge fund records to the Providence Journal:
In their letter released today four open-government groups – Common Cause Rhode Island, the state’s chapter of the American Civil Liberties Union, the Rhode Island Press Association and the League of Women Voters of Rhode Island have voiced legitimate concerns regarding Rhode Island treasurer Gina M. Raimondo’s strategy of withholding hedge fund records from the local paper, the Providence Journal. The groups were reacting to a Sunday story in the Journal about the state’s $1 billion investment in hedge funds.
These groups may be surprised to learn that the Journal was neither the first nor the only party to request reports detailing the state’s hedge fund operations and fees. The American Federation of State County and Municipal Employees and I, as well as others (including individual participants in the pension), have been requesting information regarding hedge fund and other alternative managers at least since the beginning of 2013. We’ve all been provided even less information than the Providence Journal.
Further, we’ve been told that we would have to pay—which the Journal did not—for the information the treasurer provided to the Journal for free. We were also warned that there was no assurance, even if we did pay thousands of dollars, that we would receive any of the details (documents without redactions) we sought.
Matt Taibbi explains why hedge funds may not want the public to know what fees they charge:
They’re insanely expensive. The typical fee structure for private hedge-fund management is a formula called “two and twenty,” meaning the hedge fund collects a two percent fee just for showing up, then gets 20 percent of any profits it earns with your money. Some hedge funds also charge a mysterious third fee, called “fund expenses,” that can run as high as half a percent…
Matt Taibbi often describes the financial screwing of the average American by Wall Streeters and their henchmen best:
This is the third act in an improbable triple-f*cking of ordinary people that Wall Street is seeking to pull off as a shocker epilogue to the crisis era. Five years ago this fall, an epidemic of fraud and thievery in the financial-services industry triggered the collapse of our economy. The resultant loss of tax revenue plunged states everywhere into spiraling fiscal crises, and local governments suffered huge losses in their retirement portfolios – remember, these public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years.
Today, the same Wall Street crowd that caused the crash is not merely rolling in money again but aggressively counterattacking on the public-relations front. The battle increasingly centers around public funds like state and municipal pensions. This war isn’t just about money. Crucially, in ways invisible to most Americans, it’s also about blame. In state after state, politicians are following the Rhode Island playbook, using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters and cops – not bankers – as the budget-devouring boogeymen responsible for the mounting fiscal problems of America’s states and cities.
~ Elaine Magliaro
The Plot Against Pensions (Institute for America’s Future)
Educating Gina Raimondo, Rhode Island’s Wall Street-Friendly State Treasurer: Rhode Island’s State Treasurer Needs to Learn More About How Wall Street Conflicts of Interest, High Investment Fees and Risky Hedge Funds Harm Pensions (Forbes)
Raimondo raises support, while protesters raise their voices/ Poll (Providence Journal)
In hedge fund world, transparency takes a hit (Providence Journal)
Gina Raimondo Biography (Wikipedia)
Two And Twenty (Investopedia)