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Forbes Columnist: RI Will Be Blown Away by Pension Investigation

Thursday, October 17, 2013

 

High profile Forbes columnist Edward Siedle, along with the American Federation of State, County, and Municipal Employees (AFSCME) will be unveiling today the findings of a months-long investigation into the Rhode Island pension system.

"I think Rhode Island taxpayers will be blown away by these findings, if they understand what's going on, and I think I've put it in language that they can," said Siedle. "This is a shot across the bow of the hedge fund takeover of public pension funds across the country, which has been going on for close to ten years now."

AFSCME, in conjunction with Siedle, will be unveiling their findings today at a press conference at 2 P.M.  

See Timeline of Rhode Island Pension Reform Battle BELOW

Siedle, a former SEC investigator involved in the Bernie Madoff case, was retained by AFSCME this past June to conduct the investigation. Siedle is the founder of the Whistleblower Opportunity Trust and Benchmark Financial Services, and counts among his experience having "pioneered over $1 trillion in forensic investigations of the money management industry."

The findings will present a major development in the continuing local and national scrutiny of the state's pension system, following on the heels of Matt Taibbi's recent indictment of Rhode Island's pension reforms in Rolling Stone magazine - and could raise questions on the future legal proceedings which are currently the subject of a lawsuit pending before the state.

Fees Under Fire

Siedle, who has written such articles as "Rhode Island Pension Reform Looks More Like a Wall Street Feeding Frenzy," and "Rhode Island's 3% COLA Will Go to Pay Wall Street 4%+ Fees" was tapped by the union to look into Rhode Island's pension system -- and the fee structure to hedge fund money managers in particular.

AFSCME had pursued information on ERSRI (Employees' Retirement System of Rhode Island) through a Freedom of Information Act (FOIA) request back in January for money management fees to investment managers -- both in dollars and basis points.  When told by the General Treasurer's office that they would need to pay a fee for the search and retrieval of the public information on the latter, AFSCME criticized the "continuation of the ratcheting up of opaque investments not on the market."

Siedle said at the time, "In my experience, hedge funds -- and their managers -- know exactly what they're charging, and what their management fees are in basis points. These numbers should be readily available. For a public office to ask that kind of money for public records, while legal, is pretty much unheard of."

The investigation, according to Siedle, was two-fold. "There really were two parallel investigations here, one of the Treasurer, and of the state's pension fund itself."

Siedle believes the findings will have major ramifications nationally -- most notably on the hedge fund industry. "They're savvy, they have incredible financial resources -- you need to understand the level of secrecy, and really understand finance and politics to get a grasp of what's going on here."

He noted however that a great deal of the information he used in his investigation was from the hedge fund industry itself, when he was not getting the information he requested from Raimondo's office.

"The saying is investment money is like water -- if you build a dam, the water will flow elsewhere," said Siedle. "It's the same for information. If you try to stop people from getting it from one source, they'll get elsewhere."

Raimondo's Response to Critics

Raimondo, who was awarded the "Small Public Plan of the Year" award by Institutional Investor magazine in July, currently has over $2 million in her political war chest as of the last campaign filing reporting period, and is widely considered to be announcing a run for Governor soon.

Raimondo recently responded to criticisms of her handling of the state's pension systems in Rolling Stone. Raimondo spokesperson Joy Fox said, “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."

Fox continued, "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.”

Fox went on to note that it was "important to remember" the following regarding pension reform, including that 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," and "all but one vote to approve the hedge funds were unanimous."

Siedle and AFSCME's findings are due to be released today at 2pm.  

 

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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Comments:

We've tried pension reform the AFSCME way: using member dues to finance the campaigns of politicians who will owe you favors when it's time to set pension benefits for members - in essence - putting the union on both sides of the table. Oh, wait ... we're still doing that in Rhode Island.

Call me old fashioned, but that's still a far greater scandal than hedge fund management fees.

Comment #1 by Roger Williams on 2013 10 17

Don't union folk understand that the pension system was headed for trouble long before Gina Raimondo was here? Or, more likely were they shielded from this information by their union bosses. I'd look for this "new" "shocking" information to be skewed to blame recent pension developments instead of decades of democrat neglect.

Comment #2 by David Beagle on 2013 10 17

Let the Unions run their own damn pension systems and be done with it! Why is anyone else responsible for funding or managing anything involved with them? It should also be illegal for any state or public union to endorse or donate any political candidate - they are funded by ALL Rhose Island tax payers and I am sick and tired of my money being given to candidates that I want nothing to do with!

Comment #3 by C B11 on 2013 10 17

Has anything Mr. Siedle has written shown that Rhode Island's pension reform wasn't necessary? I think he will do what he was hired for, setting the union membership on the warpath. In the end it will be lots of smoke and no (or little) fire. Ms. Raimondo will rebut with facts his "findings" and the show will go on. Who are the union members going to vote for. Ms. Raimondo who did exactly what she said she was going to do. Keep the pensions solvent for them. Or Mayors Fung and Taveras who both changed pension benefits for their unions. Chafee, the guy who stabbed the unions in the back after they got him elected would have been their best choice. He either read the writing on the wall or was tired to sucking up to horrible people like George Nee.

Comment #4 by Redd Ratt on 2013 10 17

I’m with C B11, is there any way we can get out of the pension business? It is corrupt, unsustainable and will lead to our ruination.

How about a ballot question? Let the voters decide. Abolish all RI State Employee Pensions. Let the workers have their own IRAs just like the rest of us.

If that is not legal for some reason for current retirees at least make it effective with all new hires. That way our children might survive.

Comment #5 by James Berling on 2013 10 17

Okay, change the pension fund INVESTMENTS however you want. But do not undermine the pension reform legislation that is now in place. And no corrupt closed-door deals (which appear to be going on right now) to undo the reforms.

Better yet, as others have written here, uncouple the pension system from taxpyaers entirely. Give it over to the unions so they can invest their money themselves. Create IRA or 401(k) style plans that enable each union member to designate where his/her money is invested.

Comment #6 by Art West on 2013 10 17

In other words he's going to make it up.

"He noted however that a great deal of the information he used in his investigation was from the hedge fund industry itself, when he was not getting the information he requested from Raimondo's office."

Comment #7 by Jim D on 2013 10 17

Regrettably, Ms. Raimondo is finding out first-hand the price you pay for trying to make reforms to a system rife with problems that have festered for decades.
The union interests have had the sand box to themselves for way too long. Now someone comes along who has the audacity to correctly identify the problem, bring it to the tax payers attention, and move deliberately towards a solution that will ensure the pension system remains solvent (for the retirees). She even gets the Green Button Gang in the General Assembly to support the long overdue changes.

Then out of nowhere, Mr. Seidle bursts onto the scene with his criticism of the legislated changes and the use of hedge funds for a portion of the investment portfolio. And then low and behold, not long thereafter, Mr. Seidle is HIRED by the state workers.
Purely coincidence I'm certain!

It will be interesting to see if the average RI'er stands behind the elected officials who tried to do the right thing OR will they revert to past practice.

Comment #8 by Walter Miller on 2013 10 17

Walter,

Spot-on commentary.

LOL, I love "Green Button Gang." Legislators voting like robots to satisfy the GA leadership's wishes is exactly correct.

Comment #9 by Art West on 2013 10 17

RI will be blown away by the unfunded liability of public sector pensions...the whole primitive system is going to collapse,we will run out of money and that's the end of it.

Comment #10 by LENNY BRUCE on 2013 10 18

RI should only be "blown away" by how lame the reporting is. The union would have been smarter to hire this investigator to investigate how they might keep their plan from going bankrupt. If they are all so sure they can run a better pension plan, then the solution is simple. Move their retirement dollars into 401K plans and they can manage it everyday on their own like most of the working people in America. You investment choices might be smart, they might be dumb, but in the end they will be all yours. That's how it goes outside of the Union Land of Oz. Oh, if only we could all have a pension for life with no risk, no management fees and a guarantee that the investment would only have Up years. Get real.

Comment #11 by Katy Sloop on 2013 10 18




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