Experts React to Call for SEC Investigation Into RI Pension Fund

Friday, October 18, 2013

 

Former SEC investigator and Forbes columnist Edward Siedle released Thursday the findings of his months-long investigation into the Employees' Retirement System of Rhode Island (ERSRI) -- and made a call for the U.S. Securities and Exchange Commission (SEC) to now look into the dealings of the state.

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Specifically, Siedle says that the SEC should "investigate ERSRI’s failure to disclose skyrocketing investment expenses, questions surrounding ERSRI’s Point Judith venture investment, and ERSRI investment consultant conflicts (and) payments from money managers."

Matt Taibbi, who recently wrote a scathing indictment of the hedge fund industry -- and Rhode Island's reliance on it in "Looting the Pension Funds" for Rolling Stone magazine, told GoLocal, "This is a pretty damning report. It goes into areas that are far uglier that the stuff we wrote about."

Taibbi: Hedge Funds Create "A Whole New Class of Insiders"

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Matt Taibbi

What is emerging as one of the biggest battles over billions of dollars in public pension investments across the country is playing out -- real time -- in Rhode Island

The main findings of Siedle's report released Thursday allege that ERSRI "secretly agreed to permit hedge fund managers to keep the state pension in the dark regarding how its assets are being invested; to grant mystery hedge fund investors a license to steal, or profit at its expense using inside information; and to engage in potentially illegal nondisclosure practices."

"I think the obvious conclusion from the report should be a warning signal -- not just in Rhode Island -- but anyone, anywhere as to the possibilities of manipulation with the pension systems," said Taibbi.

"One thing becomes immediately obvious when you start learning about state pension funds -- every one of these transactions creates a whole new class of insiders...and it's not clear to me there's adequate disclosure of that," Taibbi continued.  "Even outside RI, I've encountered stories where people have traded ahead of movements of state pension funds. There's so much money to be made off this information -- forget the fees."

Report-author Siedle told GoLocal following the report's release that he thought a federal investigation could in fact stem from his findings. "I think the chances are very good for the SEC -- especially looking at these "mystery" investors who are benefitting and not being disclosed," said Siedle.

Former union head Steven Day, who was at Thursday's press conference at AFSCME 94 headquarters, told GoLocal, "I'm angered they're wasting taxpayers money...I'm angered they're hurting people who trusted public office."

"I'm not under any gag order with federal mediators," said Day, referring to the pension reform lawsuit currently pending before the state. "If they find out they've been lied to, that whole mediation may be tainted."

National -- and Local -- Reactions to Report

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Darrell West

The report, which took three months to conduct -- was met to mixed reactions both locally and nationally.

"There is a curious mix of disturbing facts and sensationalized headlines in this report. It is clear there has been a lack of transparency in the state pension and a startling rise in investment fees. Those are issues for voters to judge in the upcoming election," said Darrell West, Director at the Washington DC-based Brookings Institute and former Director of Brown's Taubman Center for Public Policy.

West continued, however, "I was not persuaded that the Treasurer's behavior constitutes a license to steal and the basis for an SEC investigation. The authors would have been better served by sticking to the facts and letting others judge the seriousness of the behavior."

URI Distinguished Professor of Business Edward Mazze thought that the as far as the SEC is concerned, "They have more important things to investigate."

"Siedle's report is a "war" document prepared for AFSCME. There is no information in the 100+ pages that has not appeared before in publications or news conferences," said Mazze.

He continued, "In the report, there are four recurring themes. First, communications - give technical information to everyone whether or not they understand it or can use it. Second, transparency - open your books so that competitive information is not protected. Third, if you have a background in the finance industry you should not work in any activity that involves money. And fourth, if the first three things do not work - call the SEC."

"The report leaves out two of the the most important things in managing pension funds - spreading the risks and getting good returns on your investments," said Mazze. "A 50/50 stock and bond portfolio may do better than hedge funds but an equal split of hedge funds, stocks and bonds may do even better. There have been many times where hedge funds significantly outperformed traditional asset classes. Every investment instrument has its risks, and the risks vary depending on economic events.

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Gary Sasse

Former Director of Administration Gary Sasse, however, thought that the "labor sponsored Siedle report raises some very serious questions about the General Treasurer’s transparency in managing the State pension system."

"I would hope that the Treasurer will respond to the finding in a comprehensive, direct and transparent manner. I have no way of knowing if the if the Siedle report is accurate and fair. Thus I will withhold any judgment until hearing from all parties," said Sasse.

He continued, "As the federal shutdown showed each side claimed the other was making the fiscal of the united States a political football. As we move into the election season there will be the inevitable calls that critical public policy questions should not evolve into political footballs. This is not either practical or possible in our democratic system, we can’t take politics out of politics."

"In Rhode Island , the most recent example of this was the call by the General Treasurer that management of the pension system should not be made a political football. Of course the Treasurer is correct. Investment decisions should be based upon the best available evidence , including transparency with regard to the performance of money managers," said Sasse. "Now the Siedle report challenges the stewardship of the Treasurer and there are two very conflicting views. Hopefully ,the public will gain from a complete airing of the differences."

"Keep in mind that informed investors have not always agreed on the future wisdom of current investment decisions, and there is nothing inherently wrong with political debates on how the people’s money is being managed. History is replete with very smart people whom both profited and lost on the stock market , as well as, with alternative investment choices. Therefore, when public monies are invested it is both natural and appropriate for investment decisions and practices to become part of the political discourse. When public funds are in question the people are best served by erring on the side of open government."

General Treasurer Responds

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Gina Raimondo

“This is clearly another political propaganda piece aimed at discrediting the Treasurer and the state’s pension reforms," said Treasury spokesperson Joy Fox. "None of this innuendo-filled report presented today seems new or different from the claims made in the past by Ted Siedle, who is being paid by AFSCME."

Fox continued, “The biggest innuendo is the false accusation that the Treasurer is using her position to enrich herself or that the state pension fund is not well-managed. These false personal and political attacks are red herrings intended to undermine pension reform."

“The Treasurer is proud of the work of the General Assembly did to provide retirement security for hardworking public employees and retirees. She also stands by the State Investment Commission strategy of maintaining strong long term returns, while working to minimize risk, by diversifying the portfolio.

“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. Critics of the reform who cannot accept the math that the pension system was in crisis are like the climate change deniers who dispute basic scientific facts.

“The hypocrisy of this political attack is overwhelming. The City of Providence, the state’s second largest public pension fund has also suspended cost-of-living-adjustments, has a higher percentage of its pension fund invested in hedge funds and publishes less information than the state about the fees, investment portfolio, and investment commission actions.

“Despite all this, Ted Siedle is not being paid tens of thousands of dollars to criticize the City of Providence’s fund. The reason for this is clear: this isn’t about investment strategies, it’s about attacking the Treasurer and pension reform.”

“It is time to stop using pensions as a political football and instead put the best interests of our valuable state employees and teachers first. The political temptation is to go backwards, but let's move forward to avoid hurting people, just as they were hurt in Central Falls when pension checks were cut in half."

At the press conference on Thursday, AFSCME's Michael Downey said, "We want to make sure that this isn't a "political football" -- we want to make sure the fund is sound."
 

 

Related Slideshow: Timeline - Rhode Island Pension Reform

GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform. 

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2005-2010

In the five years before Raimondo was elected, pension changes included a decrease in established retirement age from 65 to 62, increased eligibility to retire, and modified COLA adjustments.
 
Read the Senate Fiscal Office's Brief here.
 
(Photo: 401(k) 2013, Flickr)
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January 2009

Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:

1. An established minimum retirment age of 59 for all state and municipal employees.

2. Elimination of cost-of-living increases.

3. Conversion of new hires into a 401(k) style plan.

 

See WPRI's coverage of Carcieri's proposal here.

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2009

Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions. 

 

Read the NCSL report here

(Photo: FutUndBeidl, Flickr)

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2010

Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.

"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo

 

Check out Wall Street Journal's coverage here.

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November 2010

Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot. 

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April 2011

Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.

Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.

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May 2011

Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.

"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)

 

Read GoLocalProv's analysis of the report here.

Read the Truth in Numbers report here

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October 2011

Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.

“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee

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October 2011

Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.

“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)

Read more from the firefighters' battle with Raimondo here.

Check out the New York Times' take on RI's  pension crisis here.

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November 17, 2011

The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.

 

Read more from GoLocalProv here.

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November 18, 2011

Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.

 

Read about how Rhode Islanders react to RIRSA here.

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January 2012

Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms.  The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.

 

Read about the pension workshop here.

Read Raimondo's feature in Institutional Investor here

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March - April 2012

Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.

“The present law is sound fiscal policy and should remain unchanged.” -George Nee (Rhode Island AFL-CIO President)
 
 
See WPRI's coverage of Chafee's attempt to cut pension fund deposits here.
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December 5, 2012

Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package.  In response, Chafee issues a statement supporting the negotiations.

 

Read more about Raimondo's opposition here.

Read about Chafee's statement http://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">here

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March 2013

Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.

 

Read about Raimondo's discussion of distressed municipalities here

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April 2013

The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.

"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)

 

Read GoLocalProv's coverage of the State Pension Fund's losses here

Read Ted Seidle's criticism of Raimondo in Forbes.

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June 2013

Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.

 

Read GoLocalProv's investigation into the rising pension costs here.

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September 2013

Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform. 

Read Taibbi's article in Rolling Stone.

Read GoLocalProv's response to Taibbi here.

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October 2013

As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.

 

Read more from GoLocalProv about the players in the pension battle here.

 
 

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