I spoke to Seth this afternoon about his new plan for the pension funds which was unanimously approved today by the State Investment Commission.

The state’s public pension funds currently hold around $7.6 billion of which about $1.1 billion has been invested in so-called “hedge funds” that were originally intended to provide investors with good returns and security.

However, as numerous reports have shown, hedge fund performance hasn’t matched hedge fund promises, except perhaps for their managers who have become billionaires while handling other people’s money.

Searching for alternatives, the Treasurer’s office conducted months of research and consultation with financial experts. They also ran “thousands of models and projections” to come up with a better way to get better returns on investment without undue risk.

The result was announced by Seth today – a “Back to Basics” plan to move about half of the money the state has invested in hedge funds – around half a billion dollars – into safer, better investments such as low-fee index funds.

This will take place over the next two years.

I asked Seth to talk about the challenges of coming up with such a plan, such as public impatience with the pace of change.

“When you’re moving this much money,” he said, “You have to do it in an orderly fashion.” He said making such changes was “like steering an aircraft carrier – you can’t turn on a dime.”

Then there is the matter of exit fees involved when leaving investment vehicles such as hedge funds. “We wanted to make sure we avoided early redemption fees” which in some cases could be significant.

The other factor requiring a careful, deliberate approach is the need to find solid investment alternatives.

I told Seth that the dream of many people, me included, is to see pension fund money used to create local jobs and businesses. But I acknowledged the fact that pension law doesn’t really allow that to be a major pension fund priority.

Seth pointed out that the first duty of any pension trustee is to secure the best rate of return for beneficiaries with the least risk.

That said, among the alternatives they’ve explored are funds that invest in infrastructure. He noted the infrastructure investment market is very “hot” at the moment so the cost of buying in is high. Of course, the basic rule of investing is “buy low, sell high” not vice versa, so timing is a key issue.

Rhode Island has used its pension funds’ proxy voting rights to join with other public pension funds around the country to support shareholder resolutions against excessive executive pay and other abusive corporate practices. These pension funds control millions of shares so they carry some weight at corporate annual shareholder meetings.

The state pension fund is no longer in crisis as it was six years ago. Since Seth took office two years ago, the fund has run in the black for the two years, earning more than $390 million and beating the fund’s goal.
Rather than give back so much to hedge funds, the “Back to Basics” plan should reduce costs while boosting earnings while taking a cautious, prudent approach to risk.

Rhode Island’s pension fund lost money for the second straight year because of the hedge fund gamble Governor Gina Raimondo made when she restructured the system as the state’s general treasurer in late 2011.

“This is precisely what we predicted four years ago,” public pension expert Ted Siedle told Jim Hummel on WPRO recently.

The pension fund fell 5.9 percent – or $466 million – thanks in large part to a 6.94 percent decline in hedge fund assets.

Along with switching from a defined benefit-type pension to a defined contribution-style plan, the investment in hedge funds was the most controversial component of Raimondo’s plan to overhaul the state pension system. Siedle told Hummel, “The gamble has not paid off. It has been a massively costly gamble for taxpayers.”

According to Siedle, investments in hedge funds have cost Rhode Island $2 billion since Raimondo revamped the pension plan in late 2011, or $4,000 per taxpayer. Meanwhile, California, the largest public pension plan in the US, has stopped investing in hedge funds and New Jersey has taken $9 billion out of hedge funds. “But in your state,” Siedle said, “the losses continue to mount because of this reckless gamble that Gina Raimondo began and Seth Magaziner has continued.”

Siedle said the continued investment in hedge funds could have more to do with campaign contributions than pension solvency.

“This is a politically motivated decision to invest in hedge funds,” Siedle told Hummel. “This is about campaign contributions, this is about politics. This is not about investment theory or investment philosophy. You’ve got terrible performance but massive political donations. You figure it out.”

Secretary of State Nellie Gorbea described it as “the most progressive platform ever put forward by an American political party.” Sen. Bernie Sanders said, “Our job now is to see that platform implemented by a Democratically controlled Senate [and] a Democratically controlled House.” Yet one small detail might have Gov. Gina Raimondo nervous.

In between verbiage about public college and healthcare in the proposed Democratic Party platform is a small passage that deals directly with pensions.

Democrats believe it should be easier for Americans to save for retirement and prepare for unforeseen risks and expenses. We will defend the right of workers to collect their defined benefit pensions and make sure workers get priority and protection when pension plans are in distress. Democrats will also fight to protect the earned pension benefits of Americans in multi-employer pension plans. And we will fight against any attempt by Republicans in Congress or on Wall Street to roll back the Conflict of Interest Rule, which requires that retirement advisors put the best interests of their clients above their own financial gain.

In layman’s terms, the Democratic Party publicly rebuked the exact kind of pension reform Raimondo pushed in Rhode Island.

Defined benefit pensions were the norm for Rhode Island public sector retirees until Raimondo introduced the concept of the “defined contribution” plan in her signature overhaul of the state pension system in 2011.

This is a strong rebuttal to the Raimondo-flavor of Democrats, fiscal conservatives that used to define John Chafee’s version of Republican Party politics.

If you or someone you know is a pensioner, consider becoming an Associate member of Rhode Island Retired Teachers Association to support their efforts.

Click Here To Download The Membership Enrollment Form For RIRTA and Support Pension Sustainability!

Donate Today to RIRTA!

And even if you are not involved with the fund, you still can donate to this group and help fund their efforts. Donations (checks preferred, made out to RIRTA- memo line LDF) can be mailed to PO Box 7631, Warwick, RI 02887 or sent via PayPal (see below).

The cancellation of pensioner COLAs was supposed to help the fund return the fund to solvency. But even with retirees having no retirement income, the fund has yet to reach 80 percent funding due to outrageous fees and continued mismanagement.

When Raimondo began her efforts, she held a series of public forums that hindered the ability of pensioners to vocalize their objections. This led to a great deal of heartache for those who had done honest work all their life and were given a muzzle and austerity policy in return for public sector service. But now it is plain that, in the long run, it is Raimondo who has just gotten silenced.

Does this open room for better fiscal management of the fund by Treasurer Seth Magaziner now? Will the pension fund have its solvency and security insured through divestment from high-risk, high-fee hedge funds and a dismally under-performing real estate portfolio? Following Raimondo’s failure to deliver the Ocean State for Clinton in last spring’s primary, could this be another nail in the coffin of a political career built on misrepresentation and misappropriation? Could this small item be the location of post-electoral grassroots mobilizing?

Only time will tell.

One New York City official in an April 14 Reuters story said of hedge fund managers, “Let them sell their summer homes and jets, and return those fees to their investors.”

The board of the New York City Employees Retirement System (NYCERS) voted to leave blue chip firms such as Brevan Howard and D.E. Shaw after their consultants said they can reach their targeted investment returns with less risky funds. The move by the fund, which had $51.2 billion in assets as of Jan. 31, follows a similar actions by the California Public Employees’ Retirement System (Calpers), the nation’s largest public pension fund, and public pensions in Illinois. “Hedges have underperformed, costing us millions,” New York City’s Public Advocate Letitia James told board members in prepared remarks… NYCERS had $1.7 billion invested in hedge funds at the end of the second quarter 2015, according to its financial report. That amounted to 2.8 percent of total assets and was the smallest portion of its ‘alternative investments’ portfolio, which included $8.1 billion in private equity.

This begs the question: when will General Treasurer Seth Magaziner do likewise?

To help me parse through this further, Ted Siedle, who is now working on his third forensic audit of the pension, this time dealing with the real estate investment portfolio, sat down with me for an interview. He compared the pension scheme to “nothing Buddy Cianci would have ever dreamed of.”

Click the player below to listen to my full interview with Siedle

“My sense is that, from some some comments I have seen attributed to Seth Magaziner, is that he is preparing to distance himself from at least the Governor’s hedge fund gamble with pension assets. So it appears that he is moving from a ‘stay-the-course and incrementally fire poor performing hedge fund managers and replace them with promising hedge fund managers and make the case that the good outweighs the bad’, moving to an approach where he says either he will abandon the hedge fund strategy altogether or, going forward, or he will jettison perhaps half of the hedge funds and keep the remaining.

Siedle added, “But I think he’s making noises like he may make a bolder move to distance himself from the investment strategies that the Governor implemented. I think that Magaziner is heading in a better direction. I am not hearing a clear indication that his predecessor was wrong about anything and his predecessor was wrong… The massive benefit cuts and the massive investment in speculative hedge funds, high-risk high-cost hedge funds and private equity funds, was a foreseeable disaster, it was foreseen by me, I wrote about it before the strategy had been even fully implemented. Warren Buffett warned this was something that should not be done.”

Projected savings from pension cuts could soon be evaporated by poorly performing hedge funds, Siedle said.

“The benefits were cut to save $2 billion over the next twenty years. Within four or five years … the pension’s lost probably about $2 billion. So all of the projected savings have been, I suspect … will have been eliminated by foreseeable losses. So this has been probably the most disastrous investment decision ever made in the history of Rhode Island.”

He said, “So what I would submit a responsible, courageous State Treasurer would do would to be to call out that this was a horrific mistake, but I’m not hearing that. I’m hearing a distancing but not a mature, responsible response.”

To further clarify what Siedle feels about Magaziner’s time on the job, just look to his recent writings for Forbes:

At 31, Magaziner—lacking any meaningful investment experience—somehow convinced voters in 2014 that he could competently oversee the massively underfunded, embattled $7 billion state pension. Talk about chutzpah—a kid whose personal income the year before assuming office was reportedly approximately $5,183 (yet he somehow loaned his campaign $550,000)… Not only has Magaziner failed to follow through on his transparency promises, despite five years of dismal hedge fund performance at the pension he oversees, he remains committed to Governor Raimondo’s secretive, costly deal with Wall Street.

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In the past month, the RI ACLU has received dozens of complaints from union members and retirees about the settlement’s “opt-out” voting process, which counts all unreturned ballots as votes in support of the settlement. In a letter to the complainants, the ACLU acknowledged the legitimacy of those concerns, noting that:

• Although opt-out voting is a common practice in class-action litigation, such a procedure occurs after a class has been approved, not before.
• An opt-out process fails to give voters the opportunity to abstain or otherwise remain neutral. “The opportunity to take no position on this agreement is one that current union members and retirees should have, and that a normal voting process would allow,” the ACLU letter states.
• Referring to reports of qualified individuals who did not receive ballots, and noting other reasons why some voting members might be unable to return theirs, the letter said that “the inadvertent loss of a right to vote is worrisome enough, but the problem is compounded if the loss of that vote actually counts as a vote in one – and only one – particular way.”

A fairness hearing, in which the court decides whether the proposed settlement agreement is fair and reasonable, will only be held if none of the designated “classes” of voters reject the proposal during the two rounds of voting that will take place.

While planning to submit testimony at that hearing, the ACLU advised complainants it would not be taking any independent legal action. The letter concluded by emphasizing that while the ACLU did not “question the good faith of all the parties who have been involved in this intricate litigation . . . an opt-in process is the only fair way to conduct a vote like this.”

A recently released Brookings Institution blueprint on how to cut public pension plans offered this advice: “having a Democrat lead the effort goes a long way towards countering the charge that reforms are merely a conservative attack on labor.”

Shortly thereafter Gina Raimondo – the living, breathing (and campaigning!) prototype for the Brown Center at Brookings’ wisdom – sent out a fundraising email bragging about the accolade. But instead of just tooting her own horn, she also slipped in a not-insignificant exaggeration about the think tank report.

“Just the other day, a progressive think-tank heralded Gina’s leadership on solving the pension crisis as a national model,” wrote her campaign manager Eric Hyers.

Brookings is not a progressive think tank. It doesn’t pretend to be, and isn’t regarded as such.

Neil Lewis, a veteran New York Times reporter, described Brookings as being “liberal-centrist.” And the progressive blog FireDogLake was :

“The Brookings Institute was once a bastion of liberal thought … Now, though, it has become the Alan Colmes of think-tanks, fake liberals who meekly accept conservative mythology on every major point, but says we should at least think of the misery we are causing.”

And the Center for Media and Democracy, the even farther left-leaning think tank that mainly goes after ALEC and other Koch brother initiatives, had a similar take on Brookings. Its wiki SourceWatch.org described Brookings history as America’s oldest think tank.

Initially centrist, the Institution took its first step rightwards during the depression, in response to the New Deal. In the 1960s, it was linked to the conservative wing of the Democratic party, backing Keynsian economics. From the mid-70s it cemented a close relationship with the Republican party. Since the 1990s it has taken steps further towards the right in parallel with the increasing influence of right-wing think tanks such as the Heritage Foundation.

Brookings, according to SourceWatch, gets major funding from conservative interests.

I asked on Twitter how people would describe Brookings, and here are some of the responses I got:

@bobplain Center-left

— John Perilli (@JohnPerilli) February 27, 2014

and

Dead center RT@bobplain: If you were to describe where @BrookingsInst is on the political spectrum, how would you describe? — Jeff Levy (@jefflevy) February 27, 2014

When I asked if anyone thought Brookings was a progressive think tank, responses ranged from:

@bobplain no, just a tad left of center. — Jason Becker (@jasonpbecker) February 27, 2014

to:

@bobplain@BrookingsInst Ha, ha, ha! What do you mean, during the sixties hippie craze? It helped when they had a left flank. — Karina Lutz (@KarinaLutz) February 27, 2014

.

Why does Gina Raimondo hold such a minority opinion about Brookings? I sent an email to Hyers yesterday and he did not respond yet. So I will offer my theory:

It’s a time-tested political tradition in Rhode Island to claim to be somewhere to the left of one’s actual politics. It’s why the General Assembly is dominated by one political party but not one political ideology. It probably has something to do with why Barrington millionaire Ken Block launched his political career as a “Moderate.” And it’s probably why Justin Katz, who I think is the most unabashedly conservative voice in Rhode Island, thought to tweet this earlier this week:

@bobplain That’s where you’ve got the political spectrum mixed up. I’m really not that far right, by any objective measure.

— Justin Katz (@JustinKatzRI) February 27, 2014

I was surprised Katz wasn’t proud to claim the mantle of most conservative person in Rhode Island.

And then I remembered that Gina Raimondo rebranded herself as a progressive to run for governor. And how many conservatives in the state legislature have confessed privately that they run as Democrats because it is the easiest way to win an election.  And how often conservative pundits blame our economic problems on 60 years of Democrats in power rather than the largely right-wing agenda the current crop of ruling Democrats at the State House have implemented during the past decade (tax cuts for the rich, shrink government and austerity for social services).

And in the future, I’ll recall how the Brookings Institution is advising the world – using Rhode Island as its example – that “having a Democrat lead the effort goes a long way towards countering the charge that reforms are merely a conservative attack.” And that those are the types of organizations that Gina Raimondo would describe as being progressive.

For an actual progressives take on pension politics, read Sam Bell’s post on what Massachusetts Senator Elizabeth Warren said about pension cuts and wealth transfers to hedge fund managers.

The idea to come in and say, “Oops!  We’re really sorry about that, but we’re going to have to cut the pension,” I just think is fundamentally the wrong approach.

Warren went on to excoriate pension fund managers for hedge fund investments, warning that many pension funds made a “big mistake…when they invested in one of the big hedge funds that it turned out fooled them about how much that investment was going to be worth and ended up taking a bunch of money from them.”

Often we hear Raimondo apologists pretend that slashing pensions or dumping retirees’ money into hedge funds is the progressive thing to do.  Fortunately, we have Elizabeth Warren to destroy those arguments with her signature passion, poise, and (presidential) gravitas.

*Illinois has a similar conservative Democrat problem to Rhode Island, albeit on a much smaller scale.  Perhaps the most famous example of this is when Illinois House Speaker Mike Madigan attended a fundraiser for John Boehner.   Interestingly, when Raimondo’s husband was on its board, the corporate charter school outside money group Stand for Children worked very hard to elect conservative Democrats in Illinois.

Those were the days, they will note, when economic growth hit a bump in the road and some of the richest people in society launched a very expensive, targeted and secretive campaign to take from the people who work for the people.

Those future historians will see that the ultimate losers in this “landmark reform” were the only ones who played by the rules and paid their fair share. There’s just so much inherently wrong with that, and history never judges such circumstances kindly – even though they probably all seemed to be the best course of action in the present tense.

And, of course they will see a Wall Street millionaire who made her foray into politics to accomplish this taking. And they will see that she used a Wall Street billionaire’s dark money to do it. And they will see, in the short term at least, that the taking didn’t end up as savings but rather a transfer of wealth to other Wall Street millionaires and billionaires.

But those future historians studying Rhode Island will also see a society that tied itself in all sorts of logical knots to pull this off.

They will see that we calculated the costs of pensions much differently than any other public spending item. Imagine what the “unfunded liability” would be for even a single school or for corporate tax subsidies to CVS alone!

They will see that the same labor leaders who were fighting against pension cuts were also begging to repeal the tax cuts given to Rhode Island’s richest residents while pensions were being underfunded. They will see that as we were cutting pensions, we were also ensuring that Wall Street bondholders would always get paid before said pensioners.

And those future historians will see that the biggest newspaper and radio station in the state engaged in a borderline misinformation campaign through their wildly one-sided opinion and analysis of the situation.

And those future historians will see that a “haircut or a beheading” was a mantra in Rhode Island.

And to that end I am glad the state workers, public school teachers and retirees – who were so clearly treated like an oppressed class of people throughout the era of pension political football (even if they did manage to swing a decent deal for themselves back when everyone thought growth was infinite) -took back even just a small slice of their dignity when they state shied away from being taken to court for its “landmark pension reforms.”

To my mind, $230 million is small price to pay for Rhode Island’s reputation as a decent society. It means for the rest of history we get to answer, “Not us, we settled out of court instead” when asked: “Hey isn’t Rhode Island the state the ruthlessly screwed over its teachers and plow drivers like a bunch of fist-wagging Wall Street barbarians searching for public sector blood?”

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