Friends of Gina Raimondo Get Millions Annually From Rhode Island Pension For Doing Absolutely Nothing
For over a decade, an estimated $30 million annually has been skimmed from state workers' retirement savings purely to reward her political backers. No services required.
When Gina Raimondo pushed through so-called pension reform in Rhode Island, she neglected to tell the public that her plan to shift pension investments from low-cost traditional funds to speculative hedge and private equity funds would result in massive fees paid to her Wall Street supporters. State pension fees exploded from $10 million, pre-Gina, to over $188 million—annually!
Under Gina Raimondo, Rhode Island state pension fees exploded from $10 million to over $188 million—annually!
That has equated to billions (even without compounding) over the past decade-plus to Friends of Gina (FOG).
Slash COLA benefits, transfer worker retirement savings to Wall Street was the secret plan I first exposed in a 2013 forensic investigation, which attracted the attention of Matt Taibbi at Rolling Stone Magazine Looting the Pensions and Gretchen Morgenson at The New York Times How to Pay Millions and Lag Behind the Market. In addition to being outrageously high, the fees these alternative investment funds managed by Gina’s pals charge are, highly questionable.
Among the many controversial practices related to private equity and debt investing are the (1) charging of investment management fees on 100 percent of “committed capital,” but (2) only reporting performance on invested or “called capital.” These are matters about which legendary investors Warren Buffett and Charle Munger have repeatedly criticized the industry and warned pensions.
With respect to charging fees on committed capital, after the investor makes a capital commitment to a private fund, management fees are charged on the entire commitment amount, regardless of whether the capital is actually drawn or invested.
Paying fees on committed, uninvested capital results in exponentially greater fees on assets under management on a percentage basis. For example, imagine the Employee Retirement System of Rhode Island contractually agrees (commits) to invest $100 million (capital) in a private fund over the next ten years, but only actually deposits $10 million into the fund early on. If the fee is 2 percent annually on committed capital (including the uninvested amount of $90 million), ERSRI will be charged fees of 2 percent annually on $100 million or $2 million, not 2 percent of $10 million or $200,000—even though the adviser is only actually managing (investing) $10 million of the pension’s assets initially. Note that in the example, 2 percent on “committed, uninvested capital” equates to an astronomical fee of 20 percent of the $10 million actually invested initially.
Fees on committed, uninvested capital amount to paying money managers for doing nothing—no service whatsoever is provided in exchange for the lavish fee. In my opinion, such fees add insult to injury since these types of investment funds already charge exponentially higher fees than traditional stock and bond managers. For example, the bulk of private capital funds—82 percent—charge performance fees (aka “carried interest”) of 20 percent, in addition to asset-based fees of 2 percent, as well additional operational and organizational fees.
While Gina, her political successors and friends on Wall Street may view $30 million paid for nothing as acceptable, I doubt state workers and retirees who have seen their pension benefits slashed over the past decade-plus feel quite so generous.
In 2017, reportedly 91 percent of private equity buyout funds and 50 percent of private credit managers demanded investors pay fees today on money investors had committed to invest over time, say, over the next 10 years. According to a more recent 2023 Private Credit Fees and Terms Study, only a small portion of management fees (5 percent) are paid on committed capital, generally for newer funds. However, 59 percent of private capital management fees are paid on half committed/half invested capital. In other words, 64 percent of private credit fees include fees on committed capital.
Not surprising, unlike ERSRI, savvy institutional investors are increasingly resisting paying lavish fees to private managers based upon their capital commitments and opting for alternatives that do not charge such fees.
According to ERSRI's Financial Statements as of June 30, 2023, the pension had $1.5 billion in unfunded commitments related to its investments. (It is possible the true number could be greater due to fund of funds and other structures which impose multiple levels of fees.)
Fees on committed capital generally range from 1.56 percent to 2 percent. Assuming ERSRI pays fees of 2 percent on total unfunded commitments, this amounts to an estimated annual waste of approximately $30 million--annually!
While Gina, her political successors and friends on Wall Street may view paying $30 million for nothing as acceptable, I doubt state workers and retirees who have seen their pension benefits slashed over the past decade-plus feel quite so generous.
Most unfortunate that raimondo used her Wall St connections and NY connections since she was there for ten years prior to coming back to RI and I would venture to say at the say-so of both Wall Street and Enron's John Arnold to transfer pension money from hardworking pensioners who worked to save for their old age, only to see her take away the contractual by the way, 3% Cola to Wall Street in return for their help in her acquiring her political aspirations. Wall Street helped one of their own grow from Treasurer to governor to now Commerce Secretary unsuited and inept in all positions. Unfortunately she was able to make it in the smallest state of the union, the state where everyone knows everyone, with three degrees of separation pretty much and where one's vote is for sale. I doubt she would have been this successful in other states.