Bloomberg News

Gina Raimondo Math Convinces Rhode Island of America’s Prospects

January 18, 2012

Jan. 10 (Bloomberg) -- Gina Raimondo was running a Rhode Island venture-capital firm in Providence when the mother of two read with alarm that a growing fiscal crisis might force cutbacks in library hours and bus service in 2009.

The threat drove her to seek public office for the first time. “I literally put the paper down and said, ‘I have to do this, I have to run,’” the Democrat said in an interview. Raimondo, 40, won the state treasurer’s office in 2010 with 62 percent of the vote, partly on a pledge to revamp pensions, an issue so politically toxic her backers urged her to avoid it.

Raimondo has since gained fame beyond the smallest U.S. state for her overhaul of a pension system whose promises to workers were eating up local aid and helped push one city into bankruptcy. The changes she persuaded the Democrat-controlled Legislature to pass over union opposition will save about $3 billion by delaying retirement, suspending cost-of-living increases and offering workers 401(k)-type savings plans.

The overhaul may provide a template for other states and cities such as Pennsylvania and Chicago that are grappling with underfunded pension obligations they may not be able to fulfill. Her success has vaulted her into the national spotlight, attracting support from among President Barack Obama’s biggest fundraisers and spurring speculation that she may rise to become Rhode Island’s first female governor or U.S. Senator.

Courage to Speak

“She always understood that the math didn’t work and had the courage to say it,” Orin Kramer, a general partner at hedge-fund firm Boston Provident LP in New York, said by e-mail. Kramer, the former head of the New Jersey Investment Council, which guides pension asset allocations, has raised more than $500,000 for Obama’s 2012 campaign. He also has donated $2,000 to Raimondo since March 2010, according to state records.

“We focused on the math, not politics,” Raimondo said on Jan. 5 after accepting the annual “Urban Innovator” award from the nonprofit Manhattan Institute for Policy Research in New York, which tries to foster individual responsibility and economic choice. “Very early on, that was the tagline -- this is about math, not politics.”

Union leaders aren’t applauding. Raimondo’s overhaul “went too far and it was illegal,” said Robert Walsh, executive director of the National Education Association of Rhode Island, the state’s biggest teachers union. Yet her plan has drawn queries from Democrats such as Chicago Mayor Rahm Emanuel, a former Obama aide, and Pennsylvania Treasurer Rob McCord.

Consulting on Strategy

Both men have sought to consult with her on how the changes were pushed through the Legislature, Raimondo said. Michael Smith, a McCord spokesman, and Tarrah Cooper, a spokeswoman for Emanuel, didn’t respond to telephone calls seeking comment on the discussions.

“There is a generation of Democrats who are becoming truth tellers to their own party about very difficult things,” said Matt Bennett, co-founder of Third Way in Washington, a nonprofit group that advocates for moderate public policies. “That’s going to happen at the national level when it comes to entitlement reform and it’s happening at the state level when it comes to pension reform.”

The collapse of financial markets in 2008 plunged state and local retirement systems deeper into debt, leaving them $1 trillion short of the assets needed to meet promised payments, according to the Pew Center on the States, a nonprofit research organization. A crisis had been years in the making as politicians failed to set aside enough to cover the benefits promised to teachers, firefighters and other government workers, said David Draine, a Pew researcher in Washington.

Funding Plight

Rhode Island had the lowest level of assets to cover projected pension obligations of any U.S. state in 2007, at about 54 percent, according to a study by Bloomberg Rankings. By 2010, its funding ratio had risen slightly, to about 59 percent, ahead of Illinois, Connecticut and five others on the list, while the median value for all states fell to about 75 percent from 83 percent.

By the time Raimondo took office last year, Rhode Island’s system still trailed the 80 percent funding ratio considered adequate by actuaries, with about $7 billion in assets to cover projected benefits for more than 60,000 state workers, teachers and judges. While the state and employees had paid into the fund, lawmakers didn’t authorize recommended amounts until the 1980s and even then it wasn’t enough, as retirement ages were lowered and cost-of-living adjustments were enhanced.

Ambitious Changes

The overhaul the treasurer spearheaded, which raised the minimum retirement age with full benefits for most public workers to 67, is the most ambitious enacted in recent years, said Ronald Snell, a senior fellow at the National Conference of State Legislatures in Denver.

Lawmakers in Illinois, which has the biggest unfunded pension liability of any state, have by contrast been hamstrung by labor opposition. While Governor Pat Quinn, a Democrat, has clamped down on some abuses and recently said he was forming working groups to chart more changes, public-worker unions in May blocked an effort to obtain pension concessions with a campaign of hundreds of thousands of telephone calls, e-mails and letters to state lawmakers protesting the move.

Raimondo emerged from the Rhode Island pension battle as the state’s most-popular politician, with 52 percent rating her performance good or excellent in a December voter survey by Brown University, compared with 27 percent for Governor Lincoln Chafee, a former Republican turned independent. That echoes New York Governor Andrew Cuomo, a Democrat whose approval rating reached 68 percent after he worked with his party’s leaders in the Legislature to hold the line on taxes while closing a $10 billion deficit last year.

Political Future

Raimondo’s popularity and fundraising prowess make her the leading Democratic candidate to challenge Chafee if he seeks re- election in 2014, said Wendy Schiller, who teaches politics at Brown, based in Providence. Raimondo raised about $1 million in her 2010 campaign. She could also run for a U.S. Senate seat if Obama is re-elected and names incumbent Rhode Island Senator Jack Reed, a Democrat, to an administration post, Schiller said.

“There’s enormous pressure building on her to run as a Democrat for governor,” said Schiller, who worked as a legislative assistant to former New York Governor Mario Cuomo, Andrew Cuomo’s father. “She not only understands high finance, she understands retail, on-the-ground politics.”

Rhode Island has never elected a woman governor and has sent only one, Republican Claudine Schneider, to Congress.

Support for Overhaul

In Brown’s December survey, 60 percent said they supported the pension overhaul. The school polled 464 Rhode Island voters and the results had a margin of error of plus or minus 4.5 percentage points.

“In this day when so many people have lost their faith in government, I like to think that we showed the way,” Raimondo said at the Manhattan Institute event last week. She took on the pension overhaul against the advice of her supporters, she said.

“My friends and closest advisers said to me, ‘Stay away from this issue,’” Raimondo said, recalling their words. “‘We know there’s a problem, but it’s too tough -- stay away from it.’”

Part of her motive for tackling the challenge stemmed from her upbringing, Raimondo said. As a child in Smithfield, about 11 miles (18 kilometers) northwest of Providence, she relied on public libraries and buses, while the federal G.I. Bill helped her father go to college, she said.

Taste of Politics

Reed, a family friend, gave Raimondo her first taste of electoral politics. In 1990, while an undergraduate at Harvard University in Cambridge, Massachusetts, she volunteered to help Reed when he ran for a U.S. House of Representatives seat. He won and served three terms before being elected to the Senate.

After graduating in 1993, Raimondo studied at Oxford University in England as a Rhodes scholar before earning a law degree from Yale University in 1998. She worked as a law clerk for U.S. District Judge Kimba Wood in Manhattan before joining the New York office of Village Ventures Inc., a Williamstown, Massachusetts, company that finances startups. Within a few years, she returned to Rhode Island to help start Point Judith Capital, a venture-investing company in Providence, with seed money and partners from her former firm.

Raimondo began weighing a bid for elective office a few years ago when Frank Caprio, then the state treasurer, signaled he would run for governor. Rhode Island already was reeling from a drop in housing prices and an economy that was among the first to slip into recession, with an unemployment rate that surpassed the U.S. average in July 2005 for the first time since the end of the previous recession, according to data compiled by Bloomberg. It still hasn’t returned to the national level.

Providence Scandal

Rhode Island’s political heritage has been defined by scandal for decades, no more so than in 2002 when former Providence Mayor Vincent “Buddy” Cianci Jr. was sentenced to five years and four months in prison for conspiracy. The federal probe that led to his indictment was nicknamed “Operation Plunder Dome” by investigators.

As a candidate, Raimondo cast herself as a Rhode Island native who had come home to create jobs. She pledged in her campaign to fix the pension system, which is overseen by the treasurer, to ensure that it would remain solvent and “fair to taxpayers.” She outspent her Republican opponent, Kernan King, drawing from funds raised through a wide network she developed at Harvard, Yale, Oxford and in the venture-finance industry.

“Once I decided I was going to do it, I went for it,” Raimondo said in a Dec. 19 interview last month in her statehouse office. “I believed. I would call people and say, ‘I never ask for a contribution, I ask for an investment.’”

Obama Backers

In addition to Kramer, the hedge fund manager, state records show she has received support from another Obama fundraiser, Roger Altman, co-chairman of Evercore Partners Inc. in New York and a deputy Treasury secretary for President Bill Clinton. Other donors to her campaign include Whitney Tilson, managing director of hedge fund T2 Partners LLP, Facebook Inc. executive Sheryl Sandberg, and Cory Booker, the Democratic mayor of Newark, New Jersey, who roomed with her husband, Andrew Moffit, at Yale Law School in New Haven, Connecticut.

Raimondo won the biggest percentage of the 2010 vote of any statewide candidate, declaring her victory as a mandate for change. The first thing she did to pursue the pension overhaul was to put the system’s underfunded status in even starker relief. She successfully pressed for a cut in the assumed return on pension investments, which would open an even wider deficit if benefits didn’t shrink or payments into the fund didn’t rise.

Investment Returns

In April, the board overseeing the fund cut the rate to 7.5 percent from 8.25 percent. That meant an additional $300 million would be needed, either in taxpayer money, worker contributions or benefit cuts. Lawmakers were cornered.

“There would not have been comprehensive pension reform if that assumption had not been changed,” said Gary Sasse, the chief of administration for former Governor Donald Carcieri, a Republican who Chafee succeeded. “Once those assumptions were changed, it was fiscally untenable” for the state to raise its annual contribution, Sasse said.

In June, Raimondo released a 16-page report diagnosing the causes of the pension’s underfunded status and created a special advisory group, including union leaders, to help craft ways to solve the problem. She and lawmakers began a series of meetings across the state, to raise awareness and talk about solutions.

“Gina was always willing to meet,” said Walsh, the teacher’s union leader. “She was fearless in that regard. These were large meetings with lots of angry people.”

‘Furious’ Unions

Unions under the umbrella of the Rhode Island Retirement Security Coalition fought the overhaul, drawing hundreds of protesters to a Providence rally against it Nov. 8. In an interview, Walsh faulted Democrats in the Legislature for going along with Raimondo’s overhaul.

‘The democratic majority voted against our interests,” Walsh said. “Labor has carried the Democratic Party’s water for a very long time,” he said, adding that some labor leaders have thought about leaving the party. “They’re furious,” he said.

Unions under the umbrella of the Rhode Island Retirement Security Coalition fought the overhaul, drawing hundreds of protesters to a Providence rally against it Nov. 8. In an interview, Walsh faulted Democrats in the Legislature for going along with Raimondo’s overhaul.

‘The democratic majority voted against our interests,” Walsh said. “Labor has carried the Democratic Party’s water for a very long time,” he said, adding that some labor leaders have thought about leaving the party. “They’re furious,” he said.

Restoring Stability

The treasurer said she kept her eye on the ultimate goal of her effort, to restore fiscal stability to the state.

“I went toe-to-toe with the public unions looking out for the kids of Rhode Island because if we didn’t fix those pensions, there would be no good public schools,” Raimondo said in the interview last month. “That is what motivated me, every single day.”

“This has been a long year, long days,” she said. “Trying to be a Democrat and find your way there is hard.”

Chafee, a scion of a family that traces its roots in New England back 200 years and whose great-great-grandfather was governor of Rhode Island, was endorsed by the teachers union in his run for governor in 2010 after he pledged to protect their pension benefits. The former Republican U.S. senator instead joined Raimondo in pressing for the overhaul.

By October, EngageRI, a group formed to support the effort, produced a survey that said 73 percent of Rhode Islanders backed the changes Raimondo sought. That month the treasurer, with Chafee’s support, unveiled the proposed overhaul’s details, holding a statehouse rally that attracted hundreds. Union opponents had staged a counter-demonstration against the plan in the same spot hours earlier.

Lesser Changes

The Legislature already had agreed to a series a lesser changes beginning in 2005 at the urging of Chafee’s predecessor, altering the calculation for how much a future retiree could receive as well as modifying cost-of-living calculations. Lawmakers faced opposition from national labor leaders such as Randi Weingarten, president of the American Federation of Teachers, and Richard Trumka, head of the AFL-CIO, the largest U.S. union organization. On Nov. 17, the overhaul bill passed the Legislature by an overwhelming majority in both chambers.

While Providence has managed to avoid closing branch libraries, the Rhode Island Public Transit Authority, which runs local buses, has been cutting services since at least 2004 to cope with funding shortfalls and higher fuel prices.

The pension overhaul, projected to cut the state’s required annual contribution to the system by $274 million in fiscal 2013, which begins in July, made headlines around the U.S. Raimondo said callers have inundated her office with inquiries about the law and how it was enacted.

Local Crisis Unresolved

Even after cutting the system’s projected unfunded pension liability by about $3 billion with the overhaul, Rhode Island faces a $120 million fiscal 2013 deficit, according to the state’s budget office. Pension costs for cities and towns, omitted from Raimondo’s plan, are “reaching a crisis point,” Moody’s Investors Service said last month in a report.

Chafee met with mayors and other officials from the state’s 39 municipalities last week to discuss proposals for overhauling local retirement plans. Rhode Island cut aid to cities and towns by about $200 million in the past five years, Moody’s said. The smallest, Central Falls, entered bankruptcy in August, partly because of pensions it can’t afford.

Cutting benefits for public employees “isn’t what you think about when you think about a progressive Democrat,” Raimondo said in the interview last month. “But you have to do it because if you don’t, then you can’t invest in the future.”

--With assistance from Elizabeth Abbott in Providence, Rhode Island. Editors: Ted Bunker, Jeffrey Taylor.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.


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