Pensions – Page 3

October 3, 2013October 3, 2013

Renn: ‘Innuendo not evidence’ for me but not for thee

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’ll admit it. I love Urbanophile blogger Aaron Renn. He never fails to entertain and often makes some good points. But his hit job on Rolling Stone writer Matt Taibbi was profoundly deceptive.

If you clicked on the link or pay close attention to the local news cycle, you probably know I wrote my lede in a way to tease Renn. (Welcome to RI, Aaron!) But also to prove a point. My lede is virtually identical to the lede Wrenn wrote when he tried to discredit Taibbi’s blockbuster Rolling Stone article in GoLocalProv yesterday, I just switched Taibbi for Renn and Raimondo for Taibbi! Now, I will systematically discredit Renn’s reasoning in the same way he tried to do to Taibbi’s.

But before I do, like Renn, I will disclose that I too have worked for an entity with a profound stake in pension politics. While Renn has done some freelance work for the Manhattan Institute and I’ve done some work for the union-backed cable access show Labor Vision and organized labor sometimes (though not as often as it should!) advertises with RI Future. If you think my previous relationships somehow matter more than Renn’s, then either you are trying to influence politics yourself – as me and Renn are clearly doing! – or I would like to invite you to invest in the hedge fund I am starting later this afternoon (full disclosure, you may lose your money)

Here goes:

Renn says Taibbi blames Wall Street for Rhode Island pension cuts and lets Dems off the hook, including Providence Mayor Angel Taveras because he never worked on Wall Street.As a factual matter, this is not why Mayor Taveras does not reap the same treatment as does Raimondo. It’s well-known that Taveras cut pensions by sitting down and negotiating with labor while Raimondo fist-pumped at rallies and pushed through severe cuts that union leaders vociferously and publicly opposed. He’s just wrong on this point.As far as blaming Wall Street rather than Rhode Island Democrats. Yes, local liberals deserve much fault, and I would love to see a Rolling Stone article or MSNBC segment about how often Ocean State Democrats side with Wall Street interests over local retirees. (I believe we are still the only state in the nation to have a law that guarantees bondholders get paid before retirees.) But again Renn is wrong when he asserts that Taibbi says Wall Street and/or its shibboleths are “responsible” for pension cuts in Rhode Island. Rather Taibbi says they helped fund a campaign to do so and that they benefited from it.

“Where’s the evidence,” writes Renn. Taibbi “only makes two actual attempts to link Raimondo to a hedge fund plot.” There it is, the evidence! Oh wait, only two pieces of evidence. Nevermind. Does journalism critical of Wall Street require at least three? Or just at least one more than the author can dig up?What’s even more rich is that Renn does absolutely nothing to discredit the evidence!!First, he offers the ridiculous false equivalent of noting that labor supported Raimondo too, so they must be in on the scam as well. I don’t believe Renn believes that. Labor bet that Raimndo could do less damage to their interests than Kerry King – a bet they lost in spectacular fashion, I might add. I’m sure most union members wish they backed Tom Sgouros rather than Raimondo to run for treasurer. Wall Street, on the other hand, I would guess is pretty happy with how it worked out.Secondly, he says Taibbi’s evidence falls flat because he “quotes a third party.” Not only is quoting a third party more commonly referred to as “sourcing” information in the act of journalism, but Renn doesn’t even try to discredit Taibbi’s source.

Renn’s big picture isn’t all that big. In fact, it read like what one might call “innuendo, not evidence.””Taibbi seems to think if the government is spending money on anything he doesn’t like, from hedge fund fees to the bone-headed state investment in video game company 38 Studios, then the state cut the pensions specifically to fund those bogus expenditures,” he wrote.
My favorite part is when claims that smaller risks are illogical. Vegas should hire Renn as a consultant for roulette players. Though maybe the Manhattan Institute pays better to convince taxpayers to bet big on Wall Street.

October 2, 2013October 2, 2013

Math versus morality

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“The pension reform debate is … a dispute over which members of society will have to make sacrifices and which ones will not,” Rolling Stone magazine’s Matt Taibbi tells GoLocalProv.

Long before Ted Seidle parsed pension cuts as a wealth transfer from Rhode Islanders to hedge fund managers, this was the non-labor left’s biggest issue with the struggle to save public sector retirement security by taking money away from public sector retirees. It is inherently wrong to ask the people who played by the rules (labor) to fit the bill for those who didn’t (management).

I would argue that Raimondo’s star power, bolstered by anonymous out-of-town money and an adoring local media unwittingly conspired to make a very regressive pension reform proposal seem the only sensible thing to support. There is math component to the political problem that is pension reform in that a deficit exists. But the morality part is what we do about that. All too often in today’s political climate, very powerful people spend a lot of money saying the way to fix this deficit is to take from the poor and give to the rich.

Personally, I’d much prefer to live in a financially bankrupt society than a morally bankrupt one and by foisting all the responsibility on retirees, Rhode Island legislators may have made prudent moves away from the former, but they also made foolish leaps toward the latter.

Here’s Taibbi’s response in GoLocal:

For the record, I appreciate Treasurer Raimondo’s thorough response. I understand this is a tough issue and there are heated opinions on all sides. She was gracious enough to speak to me at some length before the article came out, and she did so probably knowing that the article was going to be critical. She clearly believes she is pursuing the correct policies and the fact that she was and is willing to openly engage critics in discussions about those policies is absolutely to her credit.

However, nothing in the response released by her spokesperson Joy Fox yesterday makes me believe that we got the story wrong.

Raimondo dismisses me and her union critics as politically and ideologically motivated, which is fine and understandable. But she doesn’t acknowledge that her own decisions and policies are similarly political and ideological. She presents herself as merely a technocrat who “puts politics aside” to do what’s best for Rhode Island.

But this is wrong on its face. The pension reform debate is the ultimate political and ideological argument. It’s a bitter fight over resources, a dispute over which members of society will have to make sacrifices and which ones will not.

The advocates of pension reform, not just in Rhode Island but across the country, believe that ordinary public workers — teachers, police, firemen — are inherently overcompensated, politically over-empowered by unions, and receive unsustainably high incomes and benefits. They also believe that the solution to the nation’s fiscal problems lay in asking these workers to make the first financial sacrifices — something Raimondo (like other politicians in other states) often describes as “making tough choices.” (By coincidence, these tough choices also seem quite often to involve privatizing large amounts of public retirement money into the hands of the financiers who stand behind these politician-advocates of pension reform.)

All of this falls in line with certain trends in political thought nationwide. A lot of people these days genuinely believe we must invest in employers first and foremost, and that ordinary wage-earners, public or private, are essentially drains on the bottom line, whose benefits especially are luxuries we can’t afford.

It would be silly to deny that a lot of people find this ideology convincing. But it’s certainly an ideology. That’s why it’s disingenuous when Treasurer Raimondo describes my article as political propaganda, when she had no such reservations about the public relations efforts of organizations like EngageRI and the Manhattan Institute, groups that not only supported her politically, but which have clear financial interests in this debate. But this a common tactic, dismissing critics of pension reform as ideologues clouded by frustration and unreason, while pension reform itself — well, that’s just math.

Having interviewed public workers in Rhode Island and in many other states, I know that state employees on the whole are absolutely willing to make sacrifices, if they’re needed to help states get out of fiscal crises. What they resent is being told they’re the cause of these crises and that the size of the sacrifices they must make is beyond debate and just mathematical fact. Time and again, when they ask questions about the reform plans, they’re dismissed as recalcitrant ideologues unwilling to accept reality. This is condescending and I think they’re right to be angry about it. Talking about omitting facts, most of these people haven’t been told even part of the story about the widespread crime and fraud in the mortgage/finance sector that caused the crash and put the retirement savings of people all over the country in jeopardy. Going forward, they were also not told about things like high management fees, the role of consultants and placement agents, and other such dubious nooks and crannies of pension reform.

All of which is a long-winded way of saying that I think politicians like Raimondo would do better to stop pretending that pension reform is somehow not about politics. This whole thing is political, on all sides.

And here is the comment from Raimondo’s spokeswoman Joy Fox he was responding to:

This is clearly a political propaganda piece driven by the critics of pension reform, including those who are paid by local labor leaders to discredit the state’s reforms and its investment policies. The author does not appear to have a clear understanding of the 2011 pension process and its goals, and conveniently omits many important facts.

The Treasurer stands by the work of the General Assembly to provide retirement security for hardworking public employees and retirees.

This story also unfortunately glosses over what actually happens to people when leaders do not make tough choices. The retirees of the City of Central Falls saw their pensions cut in half. Leaders do not want the same to happen again to public employees and retirees in the state system.

In 2011, Rhode Island had a choice. It could have done nothing and been dishonest about its problem. Instead, Rhode Island leaders came together, courageously put politics aside, and made the tough decision to protect the retirements of hard working public employees and retirees.”

It is important to remember:
– The treasurer fought to always keep a defined benefit pension, and always respected collective bargaining.
– Reform passed overwhelmingly in a Democrat-controlled General Assembly
– There were countless hours of labor-attended pension advisory group meetings, legislative hearings and town hall-style meetings with the Treasurer and Governor
– All but one vote to approve the hedge funds were unanimous. The only vote to approve hedge funds that was not unanimous was due to one abstention – again, showing strong SIC support to execute this investment strategy.

September 30, 2013

Taibbi on TV: pension deform is wealth transfer to Wall St

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In October of 2011, when Rhode Island’s ruling class was drooling all over Gina Raimondo’s efforts to deform public sector retirement plans, a group of outcasts were occupying Burnside Park to call attention to Wall Street greed.

Two years later, Rolling Stone has a blockbuster story focusing on Raimondo and Rhode Island’s pension deform called: “Looting the Pension Funds: All across America, Wall Street is grabbing money meant for public workers.” If you haven’t read it yet, you should. Or, at least watch Matt Taibbi talk about it on Democracy Now!.

He calls the COLA freeze “wealth transfer from teachers, cops and firemen to billionaire hedge fund managers” and calls John Arnold, the moneyman behind EngageRI, to “the new Koch brothers figure.”

He also says, “Pension funds are sort of the last great big unguarded piles of money in this country and there are going to be all sort of operators who try to get their hands on that money.”

The solution that a lot of Wall Street-funded think tanks are coming up with is to get higher returns by putting these funds into alt investments like hedge funds and in a lot of cases what i;m funding is that tee fees that states are paying for these hedge finds and new type of alt investments are actually roughly equal to cuts they are taking from workers.

In the state of Rhode Island, for instance, they’ve froze the cost of living adjustment and frozen COLA roughly equals the fees they are paying to hedge funds in that state. So essentially it’s a wealth transfer from teachers, cops and firemen to billionaire hedge fund managers.

September 26, 2013September 27, 2013

Rolling Stone on RI: ‘Looting the Pension Funds’

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When Wall Street broke the American economy, the Pew Center for the Public Trust told Rhode Island and others it was the retirees’ fault. So we cut their salaries and transferred the savings to the same sector that broke the economy in the first place. That’s how renowned Rolling Stone journalist Matt Taibbi describes the Ocean State’s 2011 pension cuts.

The blockbuster article accuses Raimondo of transferring wealth from local retirees to Wall Street tycoons, which has become an increasing narrative about the rookie general treasurer since Ted Seidle exposed her reliance on hedge funds.

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.

It also ties together the Pew Charitable Trust and former Enron trader and Engage RI financier of working together to overstate the “unfunded liability.” This is especially interesting because legislators, experts and reporters all relied on research done by the Pew Center during the lead up to the pension legislation.

In 2011, Arnold and Pew found each other. As detailed in a new study by progressive think tank Institute for America’s Future, Arnold and Pew struck up a relationship – and both have since been proselytizing pension reform all over America, including California, Florida, Kansas, Arizona, Kentucky and Montana. Few knew that Pew had a relationship with a right-wing, anti-pension zealot like Arnold. “The centrist reputation of Pew was a key in selling a lot of these ideas,” says Jordan Marks of the National Public Pension Coalition. Later, a Pew report claimed that the national “gap” between pension assets and future liabilities added up to some $757 billion and dryly insisted the shortfall was unbridgeable, minus some combination of “higher contributions from taxpayers and employees, deep benefit cuts and, in some cases, changes in how retirement plans are structured and benefits are distributed.”

What the study didn’t say was that this supposedly massive gap could all be chalked up to the financial crisis, which, of course, had been caused almost entirely by the greed and wide-scale fraud of the financial-services industry – particularly with regard to state pension funds.

A study by noted economist Dean Baker at the Center for Economic Policy and Research bore this out. In February 2011, Baker reported that, had public pension funds not been invested in the stock market and exposed to mortgage-backed securities, there would be no shortfall at all. He said state pension managers were of course somewhat to blame, but only “insofar as they exercised poor judgment in buying the [finance] industry’s services.”

In fact, Baker said, had public funds during the crash years simply earned modest returns equal to 30-year Treasury bonds, then public-pension assets would be $850 billion richer than they were two years after the crash. Baker reported that states were short an additional $80 billion over the same period thanks to the fact that post-crash, cash-strapped states had been paying out that much less of their mandatory ARC payments.

So even if Pew’s numbers were right, the “unfunded liability” crisis had nothing to do with the systemic unsustainability of public pensions. Thanks to a deadly combination of unscrupulous states illegally borrowing from their pensioners, and unscrupulous banks whose mass sales of fraudulent toxic subprime products crashed the market, these funds were out some $930 billion. Yet the public was being told that the problem was state workers’ benefits were simply too expensive.

It concludes:

The bottom line is that the “unfunded liability” crisis is, if not exactly fictional, certainly exaggerated to an outrageous degree. Yes, we live in a new economy and, yes, it may be time to have a discussion about whether certain kinds of public employees should be receiving sizable benefit checks until death. But the idea that these benefit packages are causing the fiscal crises in our states is almost entirely a fabrication crafted by the very people who actually caused the problem. It’s like Voltaire’s maxim about noses having evolved to fit spectacles, so therefore we wear spectacles. In this case, we have an unfunded-pension-liability problem because we’ve been ripping retirees off for decades – but the solution being offered is to rip them off even more.

It’s well worth a read if you still don’t understand how Raimondo used pension cuts to enrich Wall Street or if you still don’t understand how the the 1% wants pension funds to fuel their continued economic growth.

August 28, 2013

The ProJo opinion: Stop saying things we don’t want to hear

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I get that the Providence Journal editorial board (read: Ed Achorn) really doesn’t like union workers, and feels very strongly that public sector retirees should bare the brunt of elected officials’ overly-optimistic and/or irresponsible plan for dealing with future employee expenses, but I think that calling for a judge to chide the governor for speaking to the media is more than a little bit of an extreme reaction from Rhode Island’s paper of record.

“On Latino Public Radio Saturday, Governor Chafee brazenly ignored a judge’s gag order, imposed for the benefit of all parties,” read this morning’s editorial.

As journalists first, Achorn, et al should be more weary of siding with secrecy, even when it suits their special interest. But that’s their prerogative as chief ProJo philosophers. It’s a journalism high crime, however, for their editorials to so pervasively misrepresent reality for what read like cheap political pot shots. For example, does anyone believe the Journal when it writes that Chafee leaked this “brazenly?” I suspect “accidentally” or “clumsily” might be more accurate adverbs.

More importantly, today’s editorial misstated the situation it was ostensibly explaining. The governor “publicly pitched his hopes to ‘make the unions happy’ with concessions that he asserts will not cost taxpayers too much money,” according to the piece.

Well, not exactly. Or, more precisely, not at all. What Chafee actually said, according to the Providence Journal, was, “There might be some room for something that won’t cost the taxpayers a whole lot of money but will make the unions happy.”

One has to wonder if the Projo takes issue with the statement or the sentiment. I so highly doubt there would have been a similar opinion offered from the Providence Journal if Gina Raimondo said there was a potential solution that was going to make George Nee and Bob Walsh really sad.

The editorial then asks the judge to give the governor a little talking to for the breach, and cautions Chafee about his legacy. I’d be concerned if I were Governor Chafee, too. After all, the so-called paper of record is saying things about him that aren’t true.

August 16, 2013

Stop calling the pension cuts a ‘reform’

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“Pension reform.” It’s a phrase we’ve all heard. We’ve heard it from right-wing pundits and conservative politicians. We’ve heard it from ALEC. We’ve heard it from RIPEC. We’ve even heard it from labor leaders, progressive politicians, and the august pages of this blog. I’m embarrassed to say I’ve heard those words tumble out of my mouth. And that’s a problem.

Rhetoric matters. Conservatives never say they want to cut Social Security, they say they want to “reform” it. It’s the same story with Medicare, Medicaid, food stamps, and welfare. And pensions. At the national level, liberals occasionally slip up and say, “entitlement reform,” but most liberals and unbiased journalists call cutting Social Security “cutting Social Security.” So it is a touch odd that in Rhode Island we adopted this right-wing phrasing whole cloth. Somehow, everyone started calling the pension cuts “pension reform.”

It’s time to stop. A few months ago, the Rhode Island Progressive Democrats made a decision. We decided we were going to call the pension cuts exactly what they are–pension cuts. I’m asking you to join us. Call the cuts cuts. Whenever you hear anyone say, “pension reform,” correct them.

The correct phrase is “pension cuts.”

August 15, 2013

ALEC loves Raimondo

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The pro-big business bill mill known as ALEC released a report this week that not only praises Gina Raimondo and local legislators for what they did to retirees in 2011, but also uses Raimondo’s Rhode Island model for why and how to downsize public sector pension plans.

The new ALEC overview even uses Raimondo’s emotionally compelling words as a visual graphic in its executive summary. Furthermore, the 45-page report is also the same exact game plan she used to sell the state on her plan.

“Legislators should move defined-benefit systems to properly designed alternatives, such as defined-contribution, cash balance, and hybrid plans,” suggests the summary. “They offer increased predictability for the employer and an increased likelihood for the employee that the money promised will actually be set aside.”

ALEC’s report is called “Keeping the Promise” and Raimondo’s legislation was called the “Rhode Island Retirement Security Act.” Both names imply that the effort is on behalf of the employee, but both ALEC and Raimondo are known for championing a much different demographic.

The crux of both is that a defined contribution plan, which is more management-friendly, is more sustainable than a defined benefit plan, which is more retiree-friendly. Rhode Island switched from a defined benefit plan to a hybrid plan.

Using the same pretense of being retiree-focused, the report also cites Central Falls fiscal problems as an example of why pension cuts can be needed.

More than anyone else, though, public retirees suffer from ill-funded plans. For example, in August 2011, the city of Central Falls, RI, filed for bankruptcy protection and went into receivership. As a result, some retirees saw their monthly payments cut in half.

It’s the second reference to financially-struggling cities benefiting from pension cuts. The first page of the executive summary says, “In the most extreme cases of fiscal distress induced by poorly managed pensions, some cities have had to go to court to seek bankruptcy protection and restructuring.”

National media briefly concerned itself with this same topic last summer when Joe Nocera of the New York Times wrote a column saying Woonsocket’s budget problems were more closely related to conservative government-shrinking efforts than to pension obligations. Josh Barro, a conservative columnist who then worked for Bloomberg, quickly fired back that pensions are to blame.

This is at least the second ALEC report to laud Rhode Island for its pension cuts. “Perhaps the biggest pension reform success last year came from Rhode Island,” reads ALEC’s 2012 Rich State Poor State report.

Another local connection to the two ALEC reports: Jonathan Williams, a contributor to the local ALEC-aligned small government group the Center for Freedom and Prosperity, is listed in the acknowledgements of this year’s report and was a co-author of the previous report.

Something else worth noting: Last year (when Raimondo was still known as a “pragmatic progressive” rather than a “Wall Street Democrat”) only RI Future published a report on ALEC’s thoughts on Rhode Island’s pension cuts. This year, it was covered by at least two TV stations, one radio station and the Associated Press. At least three local reports used the word “praise” to describe what ALEC thinks of Rhode Island’s pension cuts. None of the reports call the changes to state’s pension system a “reform.”

August 5, 2013August 5, 2013

Hedge fund investment good, but for who?

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There is a difference between a thing having a good effect and a thing being a net good.

Take hedge funds, for example. They do produce a good outcome, in that they manage against investment risk. But that doesn’t mean that investing in hedge funds is a net good for the state’s pension fund. Mike Stanton’s Sunday blockbuster on Rhode Island’s hedge fund gamble points out that there are lots of competing goods going on here.

Hedge funds do manage investment risk, there’s no doubt about that. But this management strategy has required a massive divestment from our workforce and a transfer of that wealth to Wall Street.

Ted Seidle writes, “paying huge pension fees to Wall Street hasn’t hurt the Treasurer’s campaign fundraising efforts.”

It’s reasonable to assume hedge fund managers would be willing to underwrite pension reform if reform means they make tons of money on the deal. Billionaire hedge fund manager John Arnold underwrote pension reform in Rhode Island with massive donations to Engage RI and now he is investing in pension reform in California, Reuters reports.

June 26, 2013June 26, 2013

Budget hinges on moral obligation to the rich or retirees

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The biggest debate of the budget process turned out not to be about a moral obligation to Wall Street but rather a moral obligation to Rhode Island retirees.

While the local media (this site included) focused on the debate concerning a $2.5 million payment to 38 Studios bondholders, the bigger debate during last night’s marathon budget session concerned a $12.9 million payment to the state pension program.

Defecting from House leadership, a wide spectrum of Democrats and Republicans struck down a proposal that would have eliminated an extra payment to the pension system negotiated into the landmark pension reform process of 2011.

“I feel like we are going back on our word and that’s not how I like to operate,” said Rep. Jared Nunes.

For those of you who don’t understand the concept of a moral obligation outside of the bond market, this pretty well sums it up in layman’s terms! Many lawmakers, however, put the pension payment in the exact parlance of a moral obligation (a meta-concept RI Future has dedicated many pixels to championing).

“If 38 studios is a moral obligation, what is this?” said progressive Rep. Larry Valencia, of Richmond, according to the Providence Journal. “I contend this $12.9 million is a moral obligation as well.”

While I don’t like this specific law (I wrote about it last week here) for the same reasons I don’t like the law that guarantees bondholders get paid before pensioners – it sets up a tiered system of budget priorities – I do also understand it as a moral obligation.

“We hurt people’s pensions,” said Joe Trillo, a Republican who supported pension cuts in 20111 and paying the $12.9 million this year. To then go back and nix a silver lining would add insult to injury.

Much more than I take umbrage with the law, I love the debate it has inspired as the 2013 legislative session winds down. The idea that the state has a moral obligation to retirees was unmistakably the theme of the debate last night and RI Future has been publishing posts about this for months now.

This is not only as big victory for the labor movement, but also for the wider progressive movement: a moral obligation has morphed from being a strictly financial concept to being a political and philosophical concept in our marketplace of ideas. In the financial markets, a moral obligation literally means you don’t have to do it, but it may cost you money in the long run. In real life a moral obligation is something you do whether it’s in your own self interest or not.

This gives me hope that our elected leaders will start actually governing instead of simply trying to cut down a spending plan artificially capped by conservative thinking. We have no moral obligation to austerity – though it may or may not be good for our economy; so far it hasn’t shown benefits. We do however have a moral obligation to fully fund our promises.

That didn’t happen last night, though. House leadership, specifically conservative Democrat Nick Mattiello, conceded the goal was a noble one, but said proponents had failed to identify a way to fund it.

“The $12.9 would have to come out of something,” WPRI quoted Mattiello as saying.

This, of course, isn’t true because it assumes the only way to fund government is to cut something else in government (a false choice the many have fallen for during the era of austerity)

Rep. Valencia reminded Mattiello, leadership, the House and those of us watching at home, that in fact both he and Rep. Cimini had income tax increase bills vetted that would raise enough revenue and more.

“A quarter of a Cimini,” would suffice, Valencia said, or a one-fourth of the 2 percent income tax increase the progressive Rep. from Providence proposed on those who make more than a quarter million dollars annually.

The budget debate was put on hold early this morning and continues later today. Whether or not a “quarter of a Cimini” is in play as legislators continue to debate the tax and spend plan will depend on just what kind of moral obligation our elected officials feel they have to the totality of their previous promises.

I know I feel we have a higher moral obligation to keep our word on pension reform than we do to keep in place a tax cut given to the richest Rhode Islanders.

June 20, 2013June 21, 2013

Reports say pension cuts could cost state more money

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Two new reports from the progressive Economic Policy Institute will likely raise three important questions as the state meets in mediation with the labor unions over pension cuts: was the process fair, were RI retirement benefits out of line with other states and did the effort even save the state money?

“Hopefully will make any other state considering cutting their pension think twice,” tweeted anaylst/ author Robert Hiltonsmith today after EPI released his: Rhode Island’s New Hybrid Pension Plan Will Cost the State More While Reducing Retiree Benefits.

Hiltonsmith is a policy analyst for Demos (website / twitter handle).

In the report, he writes:

“Over time, RIRSA will likely lead to a gradual improvement in the Rhode Island pension funds’ funding ratio. However, this improvement can, on net, be entirely attributed to the increase in the retirement age and suspension and reduction of COLA benefits. The change in … plan actually increases costs to state and local governments and taxpayers while making retirement incomes less secure…

Further, the accounts’ exposure to market risk creates the possibility that many individuals’ retirement income will be significantly lower than average.”

In the other paper, Truth in Numbers? A Brief History of Cuts to the Employees’ Retirement System of Rhode Island, Monique Morrissey (site and if you find her on Twitter let me know and I’ll add it) similarly writes that the new “hybrid plan costs taxpayers more than the old system despite providing a less valuable and less secure benefit to workers.”

Both economic analysts also highlight fairness issues with regard to pension politics.

“The shortfall in Rhode Island’s pension plan for public employees is largely due not to overly generous benefits, but to the failure of state and local government employers to pay their required share of pensions’ cost,” Hiltonsmith writes.

He goes on:

The normal cost³ of providing benefits under the old ERSRI system was, on average, 11.4 percent of employees’ salaries (GRS 2011a), of which employees paid a flat rate of 8.75 percent and state and local governments together paid 2.64 percent. However, because of the large hole in the system’s finances, Rhode Island state and local governments combined contributed over $300 million in 2010 in total to the teachers’ and state employees’ pension funds, which is equal to 19.5 percent of employees’ total salaries that year.

Taken together, these findings suggest that the shortfall in Rhode Island’s pension plan for public employees is largely due not to overly generous benefits, but to the failure of state and local government employers to pay their required share of pensions’ cost.

And in her paper, Morrissey writes:

Rhode Island was slower than most other states to fund its pension system. As a result, the Employees’ Retirement System of Rhode Island (ERSRI) had a shortfall even at the peak of the dot-com bubble, despite providing relatively modest benefits. Indeed, workers—many not covered by Social Security—contributed more toward these benefits than their counterparts in other states.

Rhode Island was slower than most other states to fund its pension system. And though workers shouldered most of the cost of current benefits, employers failed to pay their full (smaller) share. As a result, ERSRI had a shortfall even at the peak of the dot-com bubble. Thus, despite a relatively low normal cost of benefits, the total employer contribution for ERSRI was nevertheless large because it had to cover a large unfunded liability. In 2005, the ERSRI funded ratio—the ratio of the actuarial value of assets to the actuarial accrued liability—was 56.3 percent for state employees and 55.4 percent for teachers (GRS 2006). This resulted in amortization rates—the amount (expressed as a share of current payroll) needed to gradually pay down the shortfall—of 19.3 percent for state employees and 20.4 percent for teachers (GRS 2006).

The challenge of paying off this legacy cost was complicated by demographic trends. Rhode Island was one of only two states (the other being Michigan) with stagnant or declining populations between 2000 and 2010 (author’s analysis of U.S. Census Bureau 2011). The public-sector workforce was also shrinking and aging, so there were fewer than 150 active public-sector workers per 100 public-sector retirees in 2005, compared with an average of around 270 workers per 100 retirees for plans in the Public Plans Database (author’s analysis of CRR and CSLGE 2005). Because the amortization rate is conventionally expressed as a share of current payroll, a shrinking workforce can lead to a higher amortization rate even if costs are not rising. This is misleading, because all else equal, a decline in current obligations makes paying down unfunded liabilities easier, not harder.

May 6, 2013

What do Seattle, RI pension plans have in common?

Seattle, like Rhode Island, sunk a healthy chunk of its pension investment into hedge funds. And here’s hoping the Ocean State’s 14 percent foray into these riskier alternative investments works out better than the 8 percent gamble did for the Emerald City.

From Sunday’s Seattle Times:

Shorn of its complexity, the story reads like a financial soap opera.

A decade ago, the pension system for 16,000 current or retired city of Seattle employees invested $20 million in an offshore hedge fund. The secretive hedge fund’s managers made big loans to a prominent Minnesota businessman at extremely lucrative interest rates. Only one problem — he turned out to be running a huge Ponzi scheme.

Officials overseeing the Seattle City Employees’ Retirement System (SCERS) are still paying lawyers to disentangle the resulting mess.

The money they entrusted to Epsilon Investment Management remains in limbo. And the plan has even become ensnared in litigation by the trustee for the Ponzi scheme’s victims.

While no retirement payments are jeopardized by this single deal gone awry, it is a stark reminder of the trouble pension funds can get into by chasing high returns through untraditional investments.

April 30, 2013April 30, 2013

Elizabeth Warren: pensions for middle class workers

Are pensions coming back into fashion? Perhaps, said progressive hero Senator Elizabeth Warren who was in Providence last night at a fundraiser at the Convention Center for her Senate Banking Committee colleague Jack Reed.

Hailed as one of Wall Street’s worst nightmares and the intellectual godmother of Occupy Wall Street, Warren told me that public investment in education and infrastructure is the top priority for progressives in Congress. She also said the Senate Committee on Health, Education, Labor and Pensions is looking at ways “to get more people of moderate income to be able to build their own pensions so they have something in addition to Social Security when they retire.”

Here’s the video:

April 29, 2013April 30, 2013

Raimondo pension/hedge fund beat goes on

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There’s so many news and blog posts being published about hedging our pension investments in hedge funds and venture capital, I decided to make this Storify to try to keep track of all the different strings to this unfolding financial/political drama that has given credence to our claim that Gina Raimondo is a Wall Street Democrat and called into greater question her capabilities and loyalties in running a public sector fund.

I’ll update this Storify as warranted.

April 29, 2013April 30, 2013

What Rhode Island should know about hedge funds, part 1

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What’s the purpose of investing in a hedge fund? Because “hedge fund manager” is almost synonymous with “fabulously wealthy” in the popular press, lots of people think hedge funds are all about high risk and high returns.

Originally, though, hedge funds were thought to provide high returns simply by being consistent, if dull. The idea was that by “hedging” risk with investments whose value fluctuates independently from one another, a good manager could deliver solid but unspectacular results, but do so year after year.

Since the origination of these funds, more than 40 years ago, the industry has transformed from a handful of conservative investor funds in a relative backwater of the investor world to include funds that follow a much wider variety of strategies, and have trillions of dollars under management. In the process, the meaning of the term has changes, and these days, it just means any unregulated investment fund.

What’s that? Unregulated? Well, yes. The SEC, which regulates lots of other Wall Street activity, doesn’t have much to say about hedge funds, except that you have to be a “accredited investor” to invest in one. Essentially this just means you have to be rich enough.

A mutual fund, open to anyone with a dollar, is regulated by the SEC, and is subject to various kinds of disclosure and reporting requirements. Hedge funds, by contrast, only give their clients (usually referred to as fund “partners”, which sounds chummy, doesn’t it?) the information they want to release. If they want to tell you what their returns were, they can. If they don’t, that’s your problem.

Fees are high, too. Where a mutual fund might charge a service charge of one percent or less to its customers’ accounts each year, the standard in the hedge fund industry is 2%, plus a 20% share of any investment gains. Naturally, they do not share in any losses.

Lack of information and high fees? Such a deal. The reason customers put up with this kind of abuse is the promise of high returns. That’s what makes it so shocking that over the past 20 years, most investors would have made substantially more money by investing in low-interest US government bonds. (This is not just a matter of the 2008-2009 downturn, though that plays a role.)

That’s the message of Simon Lack, whose book, “Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good To Be True“, describes his experiences in the hedge fund industry. Lack, a trader at JP Morgan, spent several years investing in hedge funds on behalf of the bank.

JP Morgan did its part to foster the recent flourishing of the hedge fund industry because in the 1990’s, astute traders there noticed the contrast between the weak returns of the industry and the wealth of the managers. The contrast led them to wonder whether they should try investing in a different way. Lack helped start their Capital Market Investment Program, which provided seed money to fledgling funds in exchange for a share of the fees as well as the investment returns. With one foot on the management side of the business and the other with the customers, Lack has a unique perspective on the business.

What he learned was this: The fabulous wealth of hedge fund managers serves as the best possible marketing tool for hedge funds. Look at me, the private jets and penthouse apartments say. I am successful and if you invest with me, you can be too. But he also asked this: where are the hedge fund investors who have become fabulously rich by trusting their money to such managers? And he’s still looking for them.

In his book, Lack points out that a manager can make money when the fund makes money, but that many managers make even more money when a fund’s early good returns inspire lots more people to invest in it. Taking a couple of percent off the flood of new money each year can be much more profitable than hoping for a fraction of the investment gains, and if the fund grows quickly, your wealth can, too, no matter what the returns. The incentives aren’t to nurture your customers money and make it grow, but to expand the business and bring in lots of new money.

What’s more, for a variety of reasons that Lack described, a fund’s growth usually decreases the rate of its returns. A large fund is somewhat more cumbersome and profitable opportunities are not always to scale. So you have managers becoming absurdly wealthy while overseeing a fund whose growth serves their interests, but not those of their customers.

Lack also puzzles over the problem of reporting investment gains. A fund will naturally report its gains in the most flattering light possible. What you might not realize is how much latitude there is for telling the story a fund manager wants you to hear. When reporting returns, a fund might report the growth of the investment pool. But the investment pool can grow both by getting new customers and by investment gains, so that’s not what will be experienced by any individual investor. Plus the shares of a hedge fund can be very challenging to value, and there’s a certain arbitrary nature to any answer to this question.

If a hedge fund invests in bonds, for example, do you value bonds at the price at which they were bought, or the price at which they can be sold? These prices are different at the very moment the bonds are bought, so we’re not talking about market movements, just about the difference between a bid price and and ask price. Depending on which price the fund manager chooses to use to value the portfolio, it will affect the calculation of the fund returns, though the actual amount of money won’t change.

Furthermore, a customer’s shares might be “worth” some specified net asset value, but they might not be redeemable at that value, due to redemption limitations, withdrawal fees, or some other clause in the “partnership” contract. As I’m sure you can imagine, this is just the beginning of the confusion. The point is that when you buy shares in a hedge fund, you are putting a great deal of trust in the management of that fund, and the management holds all the information in the relationship, and has incentives that are not perfectly aligned with yours. Does that sound like a recipe for success?

Read part II.

April 17, 2013April 18, 2013

Pensions, hedge fund managers, David Boies

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As Rhode Island considers whether Gina Raimondo is making a wise gamble with our money by moving more of public sector retirees’ pension account into risky hedge funds, the New York Times Dealbook blog reports that the S&P 500 stock index outperformed the average hedge fund for the fourth year in a row.

Swashbuckling bets and robust returns are exactly what investors are hoping for — and paying for in outsize fees — when they allocate money to hedge funds. But far too often in recent years, investors have paid hefty fees for lackluster returns.

And last year was no different.

For the fourth consecutive year, most hedge funds failed to beat the market. The average hedge fund gained 6.4 percent last year, according to a composite index that tracks 2,200 portfolios compiled by Hedge Fund Research.

By comparison, the Standard & Poor’s 500-stock index climbed 16 percent when factoring in dividends. In 2011, the average hedge fund lost more than 5 percent, versus a 2 percent gain for the S.& P. 500.

The Dealbook post also listed the 10 highest paid hedge fund managers, according to Institutional Investor Alpha’s annual “Rich List. At least two of whom Rhode Island invests a considerable sum of our pensioners retirement security with:

David Shaw made $530 million last year. According to public documents on the Treasurer’s website, Rhode Island invested $61,453,935 with his hedge fund called DE Shaw Composite Fund LLC.
Dan Loeb made $380 million last year. According to public documents on the Treasurer’s website, Rhode Island invested $62,998,187 with his hedge fund Third Point Partners Qualified L.P.

Loeb was featured in Rolling Stone magazine on April 11 about his crusade to take over more pension plans, and his lack of affinity for defined benefit pension plans.

Dan Loeb, who isn’t known as the biggest hedge-fund asshole still working on Wall Street (only because Stevie Cohen hasn’t been arrested yet), is on the board and co-founder of a group called Students First New York. And Students First has been one of the leading advocates pushing for states to abandon defined benefit plans – packages which guarantee certain retirement benefits for public workers like teachers – in favor of defined contribution plans, where the benefits are not guaranteed.

In other words, Loeb has been soliciting the retirement money of public workers, then turning right around and lobbying for those same workers to lose their benefits. He’s essentially asking workers to pay for their own disenfranchisement (with Loeb getting his two-and-twenty cut, or whatever obscene percentage of their retirement monies he will charge as a fee). If that isn’t the very definition of balls, I don’t know what is.

There’s an interesting connection here between hedge fund managers, public teacher pensions and the so-called ed. reform movement; StudentsFirst was founded by Michelle Rhee and she is also on the board with Loeb and other hedge fund managers.

But there’s another interesting local connection too: David Boies, the high-price super lawyer who is defending Raimondo and her pension plan at a great discount is also on the StudentsFirst board with Loeb and Rhee.

According to a Ted Nesi post from November, Boies agreed to defend in court the pension cuts to state workers and teachers for $50 an hour when he usually charges $960.

April 16, 2013April 16, 2013

Siedle says COLA cuts are paying Wall Street fees

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Forbes.com opinion blogger Ted Siedle has posted another piece highly critical of Gina Raimondo’s so-called reforms to the state pension system.

This time he suggests that the amount retirees’ cost of living adjustment was slashed might be just enough to afford the new fees being paid to the venture capitalists and hedge fund managers with whom Raimondo gambled the state’s pension fund.

The so-called “reforms” of the state pension in the Rhode Island Retirement Security Act of 2011, which include slashing the COLA, I’m told are projected to save $2.9 billion over 20 years. Suspension of the COLA is estimated to represent $2.3 billion of that savings.

I can tell you where that COLA savings is going—into the already-stuffed pockets of Wall Street’s most highly-compensated gamblers—almost dollar-for-dollar. By my estimate, $2.1 billion in fees (out of the $2.3 billion in COLA savings) will be paid by the pension to hedge, private equity and venture capital tycoons. That’s some “reform.” No wonder Wall Street is so eager to support this shameless public pension money grab.

Here are his other posts on Raimondo’s pension work:

April 16, 2013April 16, 2013

For sale from Raimondo: access to public records

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It turns out I wasn’t the only one told by Gina Raimondo’s staff lawyer Mark Dingle that public record requests from the general treasurer’s office literally come at a cost.

For me, when I asked for records of Raimondo and her staff’s communications with members of Engage RI, the price tag was $435. For AFSCME, a labor union that wanted to know how much fees money managers are making on their pensions, the cost was $1,485, according to a GoLocalProv story.

Steven Kreisberg, the director of collective bargaining for the American Federation of State, County, and Municipal Employees told GoLocal in no uncertain terms that he thought the treasurer’s office was requiring prepayment as a way to stifle public scrutiny.

“That language was clearly written for a desired outcome, and that was that was to deter us from following up on the request,” said Kreisberg. “These are public records — and they want to gouge us to get them, if at all?”

The treasurer’s office told me it would take about 30 hours to investigate my request. AFSCME’s request would take 100 hours. The wheels of democracy turn slowly when it comes to compiling information for the public.

Recall what Raimondo told the ProJo in December about her frequent travel out of state (ProJo link here): “It is extremely important, actually, for the treasurer … to spend time, in person with investors, so they can ask questions and I believe, especially in these times of uncertainty and fiscal distress, it is more important than ever that [a] treasurer bend over backwards to be transparent and open with our investors…”

In March, I wrote this about Raimondo: “Gina Raimondo will surely always represent Rhode Islanders above her out-of-state Wall Street donors … the question is how close of a second will the Wall Street donors be.”

But now I’m starting to think Mike McDonald got it right when he wrote that her moral obligation seems to reside with Wall Street first and us Rhode Islanders somewhere after that.

April 14, 2013April 14, 2013

Conventional wisdom shift on Raimondomania

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I love that Ted Nesi kicked off his weekend column by invoking the concept of conventional wisdom. It’s a topic that came up often last week about why RI Future does what it does in the manner in which we tend do it.

Conventional wisdom, I explained to Ted in an email, is why I devote so many posts to critiquing the mainstream media (here in RI, one newspaper and one or two radio and TV stations each) and the marketplace of ideas (the rest of the collection of communicators who, from Twitter to TV, broadcast our thoughts): for good, bad or indifferent this relatively-random though not-all-that-eclectic chattering class is largely responsible for what the rest of the residents know about Rhode Island. We foment and solidify conventional wisdom.

Think about it: most Rhode Islanders don’t actually know the first thing about life on Smith Hill or local politics beyond the headlines, tweets and soundbites that the chattering class feeds them – some of whom themselves are getting their information second hand! I almost wrote a piece a few weeks back about how, of course, the media is responsible for Chafee’s approval rating – whatever it happens to be – the real question is whether he deserves the approval rating he has.

Conventional wisdom is also what makes Forbes blogger Ted Siedle’s posts on Raimondomania so politically consequential for Rhode Island. He wrote his first post in response to an Institutional Investor article that said she “defies conventional pension wisdom.”

But prior to the Siedle posts conventional wisdom in Rhode Island held that Gina Raimondo was a benevolent reformer who had enriched Rhode Island at the expense of the unions (which, by the way, the chattering class, as an organism, tries real hard to paint as Public Enemy #1). Sure, Mike Downey and I had publicly called her a Wall Street Democrat, but we’re part of what the chattering class by and large sees as the dastardly special interest known as labor. And, for what it’s worth, me and Mike are pretty easily dismissed by said chattering class…

…A Forbes.com columnist known as the Sam Spade of Money Management, not so much though.

The Siedle posts pointed out the indisputable fact that the manner in which Raimondo has invested the state’s pension fund will be a huge boon for the hedge fund managers and venture capitalists who get the work while many experts including Warren Buffett believe it is a bad bet for Rhode Island. That hadn’t been reported yet.

I believe the Siedle posts shifted the conventional wisdom on Gina Raimondo. Whereas it once held that she had taken from labor and given to the taxpayer, it now also holds that she then subsequently gambled that windfall with her Wall Street cronies who are the only guaranteed winners in ever-unfolding drama that conventional wisdom dubbed “pension reform” until Forbes.com called it “a money grab.”

April 11, 2013

Crucial Questions For Raimondo

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There are many important issues that Ted Siedle of Forbes raises about Gina Raimondo and what he calls her pension overhaul – avoiding the loaded term reform so often used by the local media.

Here are two that I’ve been asking on this blog for some time now.

One is that she is employing a very high-risk strategy that will definitely benefit Wall Street hedge fund managers and venture capitalists and might also be good for Rhode Island – though he and other experts are skeptical. Siedle told Buddy Cianci earlier this week that Warren Buffett has a “very public” $1 million bet that the S&P Index will outperform these more costly and riskier investments – in other words, Warren Buffett thinks Raimondo is wrong. Siedle says the state is paying more to money managers for the right to take this risk.

This is an issue with special resonance for progressives, as most of us strongly feel a giant problem with Rhode Island’s economy and American capitalism in general is that Wall Street comes first and everyone else gets in line according to how well they serve Wall Street’s interest.

The other issue, which has been raised locally, is that some members of Engage RI may have a financial stake in pension reform. See question 18 of his 22 Tough Questions For Rhode Island’s Pension ‘Reform’ Treasurer:

Do any of the contributors to Engage Rhode Island have any financial relationship, direct or indirect, with any of the investment managers of the pension? For example, do any contributors to Engage Rhode Island have assets managed by, or an ownership interest in, any of the pension’s managers or any fund managed by these managers?

These are both uber-important questions that all Rhode Islanders should want answered.

Raimondo doesn’t want these questions answered. Please re-read this post I wrote on December 13. In it, I point out that one the very same day in the Providence Journal, Raimondo tells Mike Stanton that she feels it’s okay for Engage RI members to be anonymous and Kathy Gregg quotes her as saying, “it is more important than ever that [a] treasurer bend over backwards to be transparent and open with our investors.”

So I made a public records request to Raimondo’s office on Jan. 8 asking for all of Raimondo’s communications with Engage RI members. I got a letter from Mark Dingley 15 days later, the treasurer’s legal counsel, informing me they wouldn’t even consider my request, unless I give them $435 first. Here’s what he wrote to me:

I would estimate that Search and retrieval will require thirty (30) hours at Fifteen Dollars ($15.00) per hour with the first hour free. See Rl. Gen. Laws 38-2-463), Accordingly, kindly provide pre-payment of Four Hundred Thirty-five Dolîars ($435.00).

Please be advised that payment does not guarantee that the records you have requested constitute public records (in Whole 0r iu part, i.e., redacted), but only authorizes this Office to conduct its Search and retrieval to determine if responsive records exist, and if so, Whether said records are public records. Should actual Search, retrievàl, and copying fees exceed pre-payment, this office will advise you to seek your authorization before continuing. Should your pre-payment exceed actual Search, retrieval, and copying, you will, of course, be reimbursed.

Given the voluminous nature of your public records request, the time for this office to respond is extended an additional twenty (20) business days as set forth in Rl. Gen. Laws 38-2-3(e). Notwithstanding this extension, the time period for this office to respond to your request is also tolled as ofthe date of this letter pending pre-payment and authorization.

Sadly for me, RI Future doesn’t yet enjoy such access to capital. But if you want to help us get to the bottom of this, please make a donation here. If I’m able to raise the $435, I’ll send Raimondo a check and we can begin the process of getting some answers.

April 7, 2013April 7, 2013

Gina’s Moral Obligation: Wall Street, Not RI

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There is an old saying in politics. “Don’t tell me what your priorities are. Show me your budget, and I will tell you what your priorities are.”

Over the course of her first term as General Treasurer, Gina Raimondo, when pressed to make a choice stand with workers or with Wall Street she will choose her friends from New York over hard working Rhode Islanders. At least thus far.

She was endorsed by working men and women throughout Rhode Island and had an opportunity to work with our public employees to collaboratively put together a plan to strengthen our obligation to the men and women who provide vital services for our state. Raimondo chose a different route.

The treasurer chose to call on her Wall Street friends to fund a front group by the name of Engage RI. They raised nearly $1 million, and proceeded to travel from town to town, city to city pitting RIPTA users vs. public employee retirement security, pitting social service providers vs. public employee retirement security, pitting small business owners against public employee retirement security, and worst of all pitting school children against the very public school teachers who work with children every day.

In the end big business financing, financial manipulation, scare tactics, and pitting one Rhode Islander against another was enough to secure passage of the what has been called “the single most harmful pension reform ever passed in the United States.”

Frozen COLA’s, slashed defined benefits, massive increases in age requirements, and 401k’s with an anemic 1 percent match were just some of the ways Treasurer Raimondo chose to deal with this particular obligation to hard working Rhode Islanders.

Fast forward to 2012, the 38 Studios deal has proved to be a failure and the state is on the hook for over $100 million in the form of a “moral obligation” bond. The dust had yet to settle from media reports and the Governor’s announcement concerning the state’s role in this failed venture there was the treasurer calling for the state to honor its “moral obligation” to the bond holders. She made her opinion known early and often, and continues to assert the state must pay in light of the fact other elected officials, and industry leaders have expressed concern and feel it may not be in the State’s best interest to pay.

As a proud public servant who works side by side with hard working men and women every day it is alarming an elected official in this case the treasurer would put such extraordinary effort into persuading the state to walk away from its “moral obligation” to public employees and teachers.

What is even more alarming is while the treasurer advocated for the state’s “moral obligation” to hard working Rhode Islanders be broken she has consistently asserted her position we cannot under any circumstances walk away from our “moral obligation” to bond holders. I find these two contrasting positions to be especially concerning, and they lead me to question who exactly does our General Treasurer – with gubernatorial aspirations – stand with?

Does she stand with the cashier at the local market, the gas station attendant at the local gas station, the cook at one of our great restaurants; the life guard at one of our beautiful beaches. Does Raimondo stand with the child care provider, the painter, the lobsterman, the nurse and the bus driver?

Or Does the Treasurer stand with the Wall Street insider, the bond holder, and hedge fund partner? Does Treasurer Raimondo stand with John Arnold former ENRON Executive who pumped more than half a million into Engage RI while she pumped her fists to crowds at the State House.

“Don’t tell me what your priorities are. Show me your budget and I will tell you what your priorities are.”

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