Dylan Petrohilos/Shutterstock

Meet The Hedge Fund Wiz Kid Who’s Shrinking America’s Pensions

When longtime private equity analyst Gina Raimondo won her bid to become treasurer of her home state in 2010, Rhode Island’s public pension system was in such disarray that federal regulators were sniffing around to make sure the state was reporting the funding levels accurately.

Within two years, Raimondo (D) would push through the most significant cuts to public worker retirement benefits in the country and begin a campaign for the Governor’s mansion. The changes she masterminded in 2011 shrank the state’s pension funding gap by billions of dollars almost overnight, an achievement that would have taken years under the more moderate reforms other states have tried. But the rapid, aggressive approach came at a steep cost for the 66,000 men and women who teach, fight fires, and administer public programs in the state.

After years of paying into a retirement system that promised fixed annual payments in their golden years, Rhode Island’s public workforce got herded into a new, far riskier system. Raimondo’s policy is what’s known as a “hybrid pension,” where the system of guaranteed payments to retirees was replaced by a combination of individual investment accounts and a much smaller version of the traditional pension payments. The change amounted to a large benefit cut for thousands of workers.

“She knew what she wanted to do and it was all just a facade of engagement,” said John Adler, Retirement Security Campaign Director for the Service Employees International Union (SEIU). “She steamrolled it. The process was a fake process.”

Raimondo’s urgency carried the day in Providence. “It has to be done,” said state Rep. Nicholas Mattiello on the day the legislature approved the bill. “We have no choice.”

Such sweeping changes would be hard for someone with years of political experience and connections. For a person holding her first-ever political office, they should have been even harder. But Raimondo didn’t do it alone. Her campaign to rewire the smallest state’s pension system got a huge, quiet boost from one of the largest states, thousands of miles away.

The Man, The Money, And The Message

In Texas, a man named John Arnold is a few years into a sort of third career.

After earning a reputation as the smartest trader at Enron and walking away with several million dollars before that notorious firm’s collapse, Arnold launched a hedge fund. He excelled, turned his millions into billions, and recently began a philanthropic career with his wife Laura that spans a diversity of interests and crosses some traditional political divides. The Laura and John Arnold Foundation and other Arnold-financed donation centers are backing everything from bleeding-heart causes like sweeping reform of the criminal justice system and improved research on public health and diet to corporate-oriented projects like education reform that shifts control of public schools into private hands.

But Arnold has made his biggest splash in the pension fight, and not always in the way he wants. After his multi-million dollar donation to New York’s PBS affiliate for a series of reports on pensions was made public by reporter David Sirota, the station returned the money. Though the series was discontinued, WNET stands by what The Newshour Weekend reported on public pension funding in “Pension Peril” — a name Sirota argued biases audiences toward Arnold’s favored position that pension promises should be revised urgently rather than honored in full.

Some of Arnold’s money found its way into Rhode Island too. There, an outside group called EngageRI that spent over $700,000 helping to drive Raimondo’s pension reform proposal through in 2011 received much of that money from the Arnolds — “less than half a million,” a spokesman told the Wall Street Journal. When Raimondo moved on from her pension triumph to run for governor, Arnold was there again. Raimondo’s super PAC has gotten $200,000 from the Arnolds in recent years.

Arnold’s spokespeople bristle at the suggestion that the billionaire is out to cut pensions, insisting that he only wants a realistic accounting of the under-funding problem. But the similarities between what Raimondo did in Rhode Island and what the Arnold Foundation advocates nationwide are striking.

A white paper on the Arnold Foundation’s website depicts all forms of defined benefit pensions for public workers as doomed to failure, and lays out four principal ideas for addressing “this looming crisis” in public pension funding. As with Raimondo’s Rhode Island push, the Arnold vision of pension reform is motivated by a sense of impending disaster and unpayable obligations.

The paper proposes either wholly replacing traditional pensions with defined-contribution 401(k)-style plans, radically reforming the way traditional pensions are funded, or shifting to the sort of hybrid approach that Gina Raimondo employed.

In Rhode Island, the bulk of the money that Ocean State workers contributed to their old pension fund now goes to the new 401(k) system. That form of retirement savings requires workers to decide how they want their money invested by advisers who charge a wide variety of esoteric, poorly-disclosed fees. Instead of being assured of a certain level of money coming in each year of their retirement, workers now count on a set amount of cash going out of their checks and into the 401(k) accounts in perpetuity. Fees extract as much as a third of the investment gains a typical 401(k) earns over a person’s working career, according to research from Demos. Even if the remainder is well managed, a 401(k) balance can shrink drastically due to simple bad luck, as workers nearing retirement age learned when the financial crisis wiped out over $3 trillion in savings in 2008.

The changes “completely screwed mid- and late-career workers,” said SEIU’s Adler. For someone with 20 years of public service under his belt and a decade to go before hitting retirement age, “you’re losing 10 years of wage increases and 20-plus percent of whatever that final average salary [used for calculating pension payments] was going to be. So it’s an enormous reduction.” (Earlier this year, the state struck a deal that allows workers with at least 20 years on the job to pay significantly more to stay in the old system, but everyone else will still be placed into the new hybrid system.)

“Many folks take public sector jobs because they have good pensions and benefits, and in many cases they’re forgoing better pay in the private sector,” Adler said. “That got thrown out the window on a dime. If you’re late in your career you’re going to get the bulk of what you had coming to you, and if you’re early in your career you have time to decide if this job is still worth it. But if you’re mid-career, you’re stuck.”

Searching For A Crisis

Claims about the scope and immediacy of pension funding problems are seriously overblown, according to economists at the Center for Economic and Policy Research (CEPR). While would-be pension reformers are fond of citing multi-trillion-dollar raw figures for future retirement system obligations, CEPR’s Dean Baker and David Rosnick wrote in 2012, “the numbers actually don’t seem that large expressed relative to future GDP.” The year before, Baker crunched state-level pension numbers and found that those multi-trillion-dollar shortfalls are “less than 0.2 percent of projected gross state product over the next 30 years for most states,” and less than 0.5 percent of projected future economic output even in the states with the worst-funded pensions.

Economists at the Center on Budget and Policy Priorities have also found claims of a multi-trillion-dollar pension shortfall to be misleading and overblown, and say that a more accurate and “still troubling” figure is $700 billion. Center for American Progress (CAP) research also cites that figure in policy papers that argue for retaining defined-benefit pensions.

When journalists at McClatchy tried to sort out conflicting claims about the severity and urgency of the pension funding problem in 2011, they also concluded that the systems are not in crisis. Some are more distressed than others, Boston College researchers told McClatchy, but none is on the brink of collapse or poised to devour state budgets entirely.

The Center for American Progress’s David Madland, who studies economics and pension issues, agrees. “For most plans it’s not a crisis. It’s something they can, over the longer run, get out of,” he told ThinkProgress. “When you have these shortfalls, yes there are tweaks you can make, but most of the time minor tweaks are all that’s required to get plans back on track.”

The key is for lawmakers to make the payments they’re supposed to make when they’re supposed to make them, Madland said. Trying to use past failures to make pension payments as a reason to ditch traditional pensions entirely is “saying we can’t really trust ourselves to do the right thing so we won’t really do the optimal thing in the first place.”

Like basic financial management for any working-class person, maintaining a healthy pension system requires getting into good habits and sticking with them. States that fund their pensions appropriately rather than reneging on the obligations “generally do it because that has been the practice in the state, but generally not because of state law,” according to SEIU’s Adler.

If a state can stay in the habit of funding its pension system adequately, that will pay bigger dividends for taxpayers than shifting risks to workers through a 401(k) plan. “There are lots of advantages of defined-benefit pensions. They’re actually less expensive for states to operate and they provide workers with more security,” Madland said. “You want to be providing as good of a system for the workers, as efficiently for the taxpayers [as you can].” A paper Madland co-authored explains how the defined-contribution plans that Arnold and other reformers favor are almost twice as costly for states to maintain as traditional defined-benefit pensions.

“[Pension] opponents make it sound like every public pension is in crisis, unsustainable, providing lavish benefits to workers,” SEIU’s Adler said. “That’s malarkey.”

“The vast majority of public pension funds are looking at problems that are 30 or 40 or 50 years down the road,” said Adler, “and that means that we have 30 or 40 or 50 years to carry them.’ The weakness in pension funds from decades of underfunding by state governments needs to be addressed and there’s no reason not to start now, he said, but the radical revisions and abandoned retirement promises Raimondo and Arnold support are unnecessary.

‘Give Them Credit For Innovation’

Billionaires helping elect people they like to promote policies they favor is fairly normal in American politics. But Arnold’s money didn’t stop with Raimondo and her allies within the political system. It’s also funding those research organizations whose work conveys a sense of crisis around public pension funding.

The severe reforms Rhode Island adopted drew praise from the Brookings Institution, one of the old lions of the Beltway think tank business. A Brookings report praised Raimondo’s political efficacy and legislative boldness, and even quoted someone from Arnold-backed EngageRI praising her work.

Brookings’ pension research is funded in part by John and Laura Arnold, who have given over $1.6 million to the group for pension research and analysis since 2012. As Sirota notes, the Arnolds have a policy foundation that could have issued its own analysis of pension reform efforts in Rhode Island and elsewhere, but they chose to fund research from Brookings instead. The Arnolds also fund pension research at the libertarian Reason Foundation, which also praised Raimondo’s efforts.

In an email, Arnold Foundation Vice President of Public Accountability Josh McGee called it “inaccurate to say that the Brookings report ‘praised’ the reforms in Rhode Island” and defended the foundation’s funding of “highly reputable, independent, and moderate think tanks to analyze our nation’s retirement security problems and propose solutions.” But in addition to extensively quoting praise of Raimondo’s efforts from a spokesman from the Arnold-backed EngageRI, The Brookings report says in its own voice that “one of the most important factors in the success of comprehensive pension reform in RI was the political courage and effective leadership of the state treasurer.”

On top of citing Arnold-funded political operatives, the Brookings report draws upon pension research from the Pew Charitable Trusts. Pew has received “up to $4,850,000” for its pension work from the Arnolds since 2012 according to the Arnold Foundation’s website.

Reporters who talk to Arnold usually ask how much he has spent on the pension reform fight. In 2013, he told Reuters the figure was $10 million. In August, he told Bloomberg it was $12 million. A spokeswoman for Arnold told ThinkProgress that out of $515 million in charitable giving, “approximately $10 million” has gone to pension reform work, and declined to provide a specific figure for separate, non-charitable political contributions tied to that policy area. Whatever the exact total amount the Arnolds have spent on pension causes would “pale in comparison to the $1.1 billion the nonpartisan Center for Responsive Politics estimates unions have spent on political activities between 2005 and 2011,” she said.

“I wish I had billions of dollars to spend on this,” SEIU’s Adler said when pressed on the comparison between Arnold’s spending and union activism. Compared to the major research departments Arnold supports at Pew and Brookings, the union official said, “we’re getting by with rubber bands and chewing gum.”

With union members now making up just 12 percent of the American workforce, and barely half that ratio of the private-sector workforce, Adler said, the balance of power between labor groups and arch-capitalists is roughly the opposite of how Arnold’s team paints things.

“They depict us as big labor, billions of dollars,” he said, “and the reality is that we are fighting desperately to maintain the rights of our members under a furious, multifaceted right-wing assault.”

The political contributions Arnold’s staff declined to tabulate are listed on the Arnolds’ website, though only at imprecise ranges rather than exact dollar figures. According to that list, though, the Arnolds have spent as much as $53.1 million on pension-related research and advocacy. Much of that money goes to education reform groups that specifically target teacher pensions as a source of problems within the public education system. Much of it goes to places like Brookings and Pew that have traditionally been viewed as either at the political center or just to the left of it.

“I give them credit for innovation,” Adler said of the Arnolds. “You would expect someone with those views on pensions would fund the Heritage Foundation and Reason or Cato. His network is Pew and Brookings and Urban and public television. It’s brilliant.”

Arnold’s money has reached a variety of other pension policy showdowns around the country. In Ventura County, California, the Arnolds spent $150,000 supporting a ballot initiative that would have pulled the county out of the state pension funding system they agreed to decades ago and replaced county workers’ pensions with a 401(k) system. They gave another $200,000 to the mayor of San Jose, who was trying to put a similar initiative on the statewide ballot. The push to use ballot initiatives to break up the state pension system got the blessing of the Reason Foundation, which has received just over a million dollars from the Arnolds for pension research since 2013.

A judge recently struck the Ventura initiative from the ballot on a technicality. San Jose Mayor Chuck Reed has abandoned his own Arnold-backed ballot initiative, at least for the time being.

Elsewhere, the innocuously-named Colorado Pension Project held a panel discussion of how pension rules influence teacher hiring and school performance. Panelists from Bellwether Education Partners, the National Council on Teacher Quality, and the New Teacher Project all argued that traditional pensions hurt school districts’ ability to attract the best teachers.

All three groups are funded by John and Laura Arnold, whose foundation has given them a total of nearly $7 million.

Keeping Promises In The Garden State

For an example of the kind of pension reform deal that unions can endorse, Adler says, look no further than New Jersey.

After decades of underfunding by successive administrations in New Jersey, the state’s pension funds face one of the largest shortfalls in the country. After the 2010 elections, workers agreed to a pension overhaul that required higher contributions from employees but left their defined-benefit pensions otherwise unimpaired.

In exchange for those concessions, Gov. Chris Christie (R) promised to make large annual payments to the pension funds to put the state on track to close the gap over the coming decades. For workers, higher payments out of their own checks were an acceptable price for stabilizing the system in general.

“We have generally been willing to support negotiated increases in employee contributions in exchange for the employer making good on its contribution,” Adler said, pointing to dozens of similar state reforms enacted with union support. “It’s in our interests to make sure these funds are sustainable and are paid for and are there for generations to come,” provided that reforms “protect current employees who have made life decisions based on this pension being in place.”

The pension fix was a fiscal feather in Christie’s political cap. But Christie is more committed to tax cuts, it turns out, and when the $3.4 billion in business tax breaks he’s handed out failed to produce enough economic activity to fill the state’s coffers, the pension payments he had promised workers became a liability.

Faced with a choice between sticking with his tax policy and living up to the 2013 pension deal, the governor opted to revoke the bulk of the retirement system payments. Instead of $3.8 billion in 2014 and 2015, he will now put $1.4 billion into the plans — far less than promised, and too little to achieve the sort of major improvement in the funds’ finances that both sides wanted.

The episode is a prime example of what not to do in the face of a genuine underfunding problem created by years of missed payments, according to CAP’s Madland. “You create this supposed deal that’s going to get the pension up to reasonable funding levels, and Christie walks away from the obligations,” he said. “He’s replicating the kinds of problems that got the plan into trouble in the first place.”

To Adler, the union analyst, the episode illustrates how much more influence wealthy investors have in the debate over public retirement funds. Christie “said he wasn’t going to pay for the sins of his predecessors. But he didn’t say that I’m not going to pay the bond obligations that my predecessors took on,” he said.

“If you stiff your bondholders they won’t lend you money. So they have power. Workers, what are they going to do?” Adler asked. “They’re powerless.”

When Christie announced the pension reversal in May, he depicted the broken promise in ways that might be familiar to Rhode Island’s public servants. New Jersey, according to the business-friendly governor, simply has no other choice.

“Given the circumstances that we’ve been confronted with,” Christie said, “I believe this is not only the best but the only decision we’re left with to deal with the magnitude of the problem that we have.”

Four months later, John Arnold found time to tweet mild criticism of the New Jersey governor. “Shame on Gov. Christie,” he wrote in September. At the time of the announcement in May, though, Arnold said Christie’s move proved his team’s point. “[Defined-benefit] pensions always enable politicians to abuse the system,” he tweeted.

Arnold expounded on that thought in an email to ThinkProgress. “By reneging on his promise to close the funding gap in New Jersey’s public pension system, Chris Christie showed once again why the design of most public pension systems is fatally flawed,” he wrote. “Politicians can and frequently do divert money that is meant to fund long-term worker retirements to solve their own short-term political problems.”

He seems skeptical that the good financial management habits that have kept other states out of pension funding trouble can be transferred to states that have failed to make full and timely payments in the past. A healthy pension system “won’t be achieved by simply slashing worker benefits, as some on the right propose, or by feeding more money into a broken system, as advocated by some on the left,” Arnold wrote. “Our foundation will continue to support local efforts to fix public pension systems because we believe this is a policy issue of significant importance.”

“I don’t have a crystal ball,” SEIU’s Adler said, ‘but I think in 2015 Christie is going to push for something like the Raimondo approach.”

« »