Among unions, the term “pension reform” is a red flag. In Rhode Island, labor officials are taking their opposition to a higher level. Early this month, a prominent researcher hired by the American Federation of State, County and Municipal Employees (AFSCME), Ted Siedle, filed a request with the Securities & Exchange Commission requesting an investigation of Rhode Island State Treasurer Gina Raimondo (in photo). Back in mid-October Siedle had released a report accusing her and her various associates in the financial industry of siphoning benefits. Not long after, Rhode Island State Senator and Laborers union official Frank Ciccone filed a similar request with the SEC. Yet in November he resigned from his union posts. That raises the question: Is the main issue Raimondo? Or is it the role of unions, and not just in Rhode Island, in driving public-sector pensions toward insolvency?
National Legal and Policy Center has described in detail why a growing number of state governments have become fiscally strapped as a result of the explosive growth in benefit commitments driven by union contracts. Arguably nowhere do these commitments pose more risk to taxpayers than in the area of retirement pensions. A study released this September by the Washington, D.C.-based American Legislative Exchange Council, “Promises Made, Promises Broken – The Betrayal of Pensioners and Taxpayers,” (see pdf), concluded that state-level public-sector employee pensions as a whole are underfunded by $4.1 trillion, with assets constituting only 39 percent of projected liabilities. In Illinois, the worst-funded of all states, the figure is 24 percent. Connecticut, Kansas and Kentucky are only marginally better, with each registering asset-to-liability proportions of less than 30 percent. California, by far the most populous state, has a shortfall of around $640 billion; assets are only 42 percent of liabilities. As a benchmark, Pension Benefit Guaranty Corporation, which insures private-sector pensions, considers a plan funded at than 65 percent to be in “critical” condition.
State governments are facing a real crisis. And their officials more than ever have to choose between putting their retirement systems on firmer ground and retaining the trust of beneficiaries who expect to collect their full benefits. As one has seen these past few years in heavily unionized Wisconsin and Michigan, each with a Republican governor, proposing reforms of any sort can be risky to one’s political career. Rhode Island, long a Democratic Party stronghold, would seem an especially tough place. Barack Obama received 63 percent of the presidential vote there in 2012. Still, many people in the state across party lines have come to recognize that the possibility of a pension collapse is real. According to State Budget Solutions, the Rhode Island retirement system is only 33 percent funded, a gap representing about $7.5 billion in assets versus $22.5 billion in liabilities. An official state calculation, using different actuarial and legal assumptions, put the funding status at 48 percent. Even accepting the latter figure, the situation poses a high risk. A couple of years ago, lawmakers took steps to mitigate the risk. The driving force behind that effort was the new Rhode Island General Treasurer, Gina Raimondo.
Now 42, Gina Raimondo, a graduate of Yale Law School, a Rhodes scholar, and founder of a Rhode Island-based venture capital firm, was elected state general treasurer in November 2010. Though a Democrat, Raimondo was not beholden to the unions. She recognized the necessity of controlling costs and restricting pension benefits. Since 2005, in fact, the legislature had gone the opposite way, lowering the minimum eligible retirement age, increasing the basis for early retirement, and raising the cost-of-living adjustment (COLA). Wasting little time, Raimondo, with support from Independent Governor Lincoln Chafee (now a Democrat), developed a reform plan. And by the end of the year, she won the day. On November 17, 2011, the state House of Representatives and Senate, by respective margins of 57-15 and 35-2, passed the Rhode Island Retirement Security Act (RIRSA). Gov. Chafee signed the bill into law the next day. The measure, which took effect the following July, raised the minimum retirement age for state employees, suspended annual COLA increases, and replaced the traditional defined-benefit pension system with a hybrid that included a 401(k)-style plan.
A number of union leaders were opposed to these reforms from the beginning. And they’re taking steps to undermine them. For one thing, they’ve gone the legal route. Labor organizations in June 2012 filed four separate lawsuits against the law in Rhode Island Superior Court, claiming they are unconstitutional. Though unsuccessful in blocking the law from taking effect, the cases are still active. Second, they’ve tried to discredit Raimondo’s motives and ultimately reputation. A group of unions, led by AFSCME District Council 94, the state’s largest public employees union and one of the plaintiffs in those suits, this May commissioned an investigator, Edward “Ted” Siedle, to investigate how the 2011 law came to be and how it personally has benefited Raimondo and her friends in the financial industry. On October 17, he announced his conclusions in a scathing 105-page report. The treasury secretary and her associates, Siedle charged, engaged in a pattern of self-dealing to create an “opportunity to enrich herself and her hedge fund backers.” The title of the report, “Rhode Island Public Pension Reform: Wall Street’s License to Steal,” says it all.
The Employees’ Retirement System of Rhode Island (ERSRI), charged Siedle, fell victim to a “Wall Street coup.” He elaborates: “Gina Raimondo, a venture capital manager with an uncertain investment track record of only a few years – a principal in a firm that had been hired by the state to manage a paltry $5 million in pension assets – got herself elected [general treasurer] – with the financial backing of out-of-state hedge fund managers.” A former securities lawyer and currently the CEO of the Ocean Ridge (Palm Beach County), Fla.-based Benchmark Financial Services, Inc., Siedle accused Raimondo of “misleading the public as to fundamental investment matters, such as the true costs and risks related to investing in hedge, private equity, and venture capital funds…understating the investment expenses and risks…[and] misrepresenting the financial condition of the State of Rhode Island to investors.” He also accused her of personally gaining from blind trusts, which he termed “two illiquid, opaque venture capital partnerships she formerly managed at Point Judith Capital,” and in which state has a $5 million investment. Raimondo, he charged, personally derived between $201,000 and $500,000 in 2012. Several weeks later, in early December, Siedle called upon the SEC to investigate these and other arrangements.
All of this appears convincing – on the surface. But there are some other realities that Ted Siedle and his union allies prefer not to address.
First, the RIRSA law is intended to minimize rather than elevate financial risk. It isn’t to make one state official and well-connected hedge fund managers rich. And it was developed with wide opportunities for public feedback. In a six-page response to the Siedle report, Anne-Marie Fink, the State of Rhode Island’s chief investment officer, asserted that the author “resorts to incendiary language and gross misrepresentations to attack the work of the (pension reform commission), the treasurer and the General Assembly.” She added: “Contrary to his narrative, the treasurer did not enter public office to enrich herself. Rather, she did so because politics as usual, including attacks like this, were getting us nowhere fast. Rhode Island was struggling as a result.” The Treasurer’s Office projects that the changes to the pension system will save Rhode Island residents a combined $4 billion over the next two decades and reduce unfunded short-run liability by about $3 billion, raising the funding status of the retirement system from 48 percent to 60 percent. State officials, in fact, had put the system during its proposal stage through rigorous stress tests, using a variety of scenarios. They also explained the issues to a wide cross-section of Rhode Island residents. And far from singling out one segment of the population for making sacrifices, they devised a compromise to balance cost burdens as equally as possible among employees, retirees and taxpayers.
Second, lawmakers in Rhode Island were fully aware of the bitter opposition by public-sector unions in other states to proposals to replace defined-benefit with defined-contribution systems. That the House and Senate each overwhelmingly voted in favor of Raimondo’s plan testifies to their recognition of the risks posed by the system then in place. “Defined-benefit” plans, as they are known, give full control over contribution levels and asset portfolios to fiduciaries who don’t have to adhere to guidelines set by the Governmental Accounting Standards Board (GASB). Cato Institute Senior Fellow and Social Security Advisory Board Member Jagadeesh Gokhale noted last year in an institute monograph, “State and Local Pension Plans: Funding Status, Asset Management, and a Look Ahead” (see pdf): “Pension plan authorities can control fund inflows through a direct decision about employer and employee contribution rates. States have no obligation to stick to actuarially-determined annual required contributions.” Based on calculations from Boston College’s Center for Retirement Research, based on nearly 125 major plans across the U.S., Gokhale concluded that for all years during 2001-09 save for one, required contributions exceeded actual contributions.
Defined-benefit plans, unlike defined-contribution plans such the 401(k) and the 403(b), place the responsibility for investment decisions on designated managers and trustees, not current and future beneficiaries. When such plans are driven by union negotiations, employers necessarily become beholden to union demands. This is especially true in the public sector, where the result often is a proliferation of unsustainable provisions. A few examples:
New York City. Firefighters and police officers may retire after 20 years of service at half pay and may participate simultaneously in more than one plan.
Chicago. Eight of the highest ranking municipal union officials received pension credit from each of their City-sponsored and union-sponsored plans; back in October 2011, Union Corruption Update explained in detail a case of public-sector “double-dipping” by public employees represented by the International Brotherhood of Electrical Workers.
New Jersey. Republican Governor Chris Christie, who has called benefit commitments “the main driver of our spending increases at all levels of government,” has cited the case of a 49-year-old retired state employee paying a combined $124,000 into the New Jersey pension and health care systems, and standing eligible to receive $3.8 million in benefits – about a 3,000 percent return.
Why would anyone think that Rhode Island is immune to the politics that create such contractual obligations? Lawmakers in that state certainly didn’t.
Third, and related, ERSRI beneficiaries had done extraordinarily well under the current system prior to reforms. The Cranston, R.I.-based nonprofit research group, the Rhode Island Center for Freedom and Prosperity, provided a lengthy list of retired state and local employees by name, job title, current age and retirement age, indicating beside each person the relevant pension data. The researchers routinely found cases of individuals who, having retired in their 50s, 40s or even earlier, and having already collected hundreds of thousands of dollars in pension payouts, stood to collect millions of dollars over the remainder of their lives, taking into account COLA increases. In one all too typical case, a 57-year-old state police judge who had retired at age 45 and collected $830,913, stood to collect a lifetime sum of $3,598,827.
Fourth, union opponents of pension reform may not have connections to hedge funds, but they have interests of their own. Rhode Island is no exception. Frank Ciccone III, a prominent official of the Laborers International Union of North America (LIUNA) and a critic of General Treasurer Gina Raimondo, is also a Democratic state senator representing Providence and North Providence. This past October, he filed a request with the SEC asking it to conduct a full probe of how Raimondo personally benefited, and stands to benefit, from the new pension law. He filed the request shortly after the release of the Siedle report. Yet on November 21, Sen. Ciccone resigned, “effectively immediately,” as president of the Rhode Island Laborers’ District Council, and, effective in February, as business manager for LIUNA Local 808. He did not give an explanation. Given that the council post alone provided him in 2012 with a combined salary and benefits of $178,753, it’s fair to say that his departure was not voluntary; in all likelihood, top LIUNA officials pressured him to leave.
One plausible explanation for Ciccone’s resignation is that the Laborers actually supported the pension reform legislation insofar as it would apply only to state government. Senate Majority Leader Dominick Ruggiero and Armand Sabitoni, each a leading Laborers official, in fact, had worked with Gina Raimondo’s office in drafting the final legislation. And they succeeded in persuading her to excise the portions applying to local governments. From a public-regarding standpoint, one has to wonder why. Local pensions in Rhode Island, in fact, face enormous unfunded liabilities of their own. The Mercatus Center, a think tank affiliated with George Mason University in Fairfax, Va., in November 2011 released a report (see pdf) prepared by researchers Eileen Norcross and Benjamin VanMetre on the condition of three dozen municipal pension plans in Rhode Island. The conclusion: All were underfunded. And more than a dozen were funded at less than 60 percent. The respective funding ratios for Providence, Cranston, Pawtucket and Warwick, for example, were 34.1 percent, 43.1 percent, 46.3 percent and 57.0 percent. The worst cases were Coventry and Central Falls, funded, respectively, at 20.1 percent and 20.9 percent. Norcross and VanMetre moreover estimated the combined shortfall at $6 billion rather than the reported $2.4 billion because the former figure reflected actual market values rather than actuarial estimates. If anything, the true percentages are substantially lower. That raises a couple questions: Does the LIUNA hierarchy believe underfunding only exists at the state level? And what’s in it for them at the local level?
Gina Raimondo, meanwhile, is about to find out how popular she and the new pension law are. Last Wednesday, on December 18, she declared herself a candidate for Rhode Island governor in 2014; incumbent Lincoln Chafee has declined to seek another term. Raimondo can count on a plethora of union-funded attack ads accusing her of making out like a bandit. That’s not to say she is above the law. But it is to say that her accusers have motives apart from the guarding the public interest. Public-sector unions have become an enormously powerful interest group. Their collective bargaining, lobbying and campaign financing go a long way in explaining why state and local employee pension plans in a growing number of states are on weak ground. This governor’s race may wind up as a test of support for public employee pension reform across the U.S.
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