The debate over Rhode Island’s pensions

October 18, 2013

Former SEC attorney Ted Siedle (currently formerly Putnam Investments’ compliance director), has issued a new investigative report that blasts Rhode Island Treasurer Gina Raimondo about her lack of transparency over the state’s pension investments. The report was commissioned by the Rhode Island chapter of the American Federation of State, County and Municipal Employees (AFSCME).

Raimondo says that Siedle’s allegations are entirely driven by politics, but four Rhode Island public interest groups have nevertheless encouraged the treasurer to release the pension information. From Siedle’s report (page 5):

Recently, four open-government groups – Common Cause Rhode Island, the state’s chapter of the American Civil Liberties Union, the Rhode Island Press Association and the League of Women Voters of Rhode Island released a letter to the Treasurer voicing their concerns regarding the Treasurer’s strategy of withholding hedge fund records. These groups believe that since the financial reports are paid for with public funds and detail how the state is investing the public’s money, they should be made public in their entirety; further they found ‘troubling’ the Treasurer’s decision to allow the hedge funds to decide what information to release.

Rhode lsland eliminated cost-of-living adjustments (COLAs) for public pensions and moved all new employees out of traditional pensions and into defined contribution plans. These changes have been challenged in state court.

Perhaps the most anti-union move made by the state was a law that required local government bondholders to be repaid in full in a municipal bankruptcy. During the bankruptcy proceeding of Central Falls, Rhode Island, bondholders were repaid 100 cents on the dollar, while pension holders in the city took haircuts of up to 45 percent. Rhode Island is the only state with this type of law. Public unions have a right to question information about their pensions.

There are some instances of states granting special privacy rights to hedge funds and alternative investors. From a piece by David Sirota and Matt Taibbi

In more than a dozen states, legislators have enacted exemptions for hedge funds and other alternative investments to laws such as the Freedom of Information Act. Other states simply fail the transparency test.

Then they nail Treasurer Raimondo:

Rhode Island illustrates what that kind of thing means in practice. There, state Treasurer Gina Raimondo cited the need to protect Wall Street’s proprietary information as a justification to hide the cost estimates of the new pension system she championed in 2012 [2011].

Only after that system was ratified by the state Legislature did former Securities and Exchange Commission lawyer Ted Siedle estimate that the reforms will take the roughly $2.3 billion cut to workers’ cost-of-living adjustments over 20 years and use it to pay roughly $2.1 billion in new hedge-fund fees. Raimondo later relented and disclosed at least $70 million in fees for next year alone.

Siedle went a lot further than criticizing the lack of transparency over hedge fund fees. He called out Raimondo over her ownership of a venture fund (held in trust) that has disclosed almost no information. This venture fund has a $5 million investment from the state of Rhode Island. Siedle said that the SEC should investigate Rhode Island’s pension fund.

In the 106-page report, titled ‘Rhode Island Public Pension Reform: Wall Street’s License to Steal,’ author Edward Siedle recommends that the U.S. Securities and Exchange Commission investigate the Employees’ Retirement System of Rhode Island (ERSRI) and its managers for failing to disclose increased investment expenses as well as the state pension fund’s investment with Point Judith Capital, Raimondo’s former employer.

Raimondo says that the report contains no new information and is a union vendetta against her. But it may be a good road map for the SEC.

ASFME report: Full Report (PDF)

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