Rhode Island Gov. Gina Raimondo. As state treasurer, she supported moving pension funds into "alternative investments" that charged high fees for underperforming returns. To make up for the shortfall, she trimmed payouts to retired state workers. Raimondo Campaign Website

Rhode Island has in recent years been cited as a model for how states can reform their pension systems to put them on better financial footing. But a new report suggests that changes to the state’s retirement system have done the opposite, instead blowing a gaping hole in the system’s finances.

The report from former Securities and Exchange Commission lawyer Ted Siedle looks at the results of the state, beginning in 2011, to shift hundreds of millions of dollars of retirees’ savings into hedge funds, private equity, venture capital and other higher-risk “alternative investments.” In all, Siedle’s analysis shows the move -- which was championed by Gina Raimondo, a Democratic former financial executive who was then state treasurer -- has cost Rhode Island taxpayers $1.4 billion in just four years. That is a dramatically higher cost than the savings created by Raimondo’s cuts to retirees’ benefits. (Raimondo was elected governor in 2014.)

The report was the first crowdfunded investigation of a state pension plan, financed by plan stakeholders.

The costs, says the report, stem from both underperformance and fees: The alternative investments have not kept up with the traditional stock market and the state’s own projections, and they have forced the state to pay “stratospheric fees” to Wall Street -- far higher than the state would pay if it had invested in stock and bond index funds. Raimondo’s old financial firm received the highest fee rate from Rhode Island’s pension fund.

“Rhode Island’s underperformance -- largely caused by Raimondo’s foray into alternative investments -- has cost the state far more than any of the supposed savings created by benefit cuts,” Siedle said.

Gov. Raimondo declined to answer questions from International Business Times.

Critical Timing

Siedle’s report was released at a critical time in the debate over the management of America’s $3 trillion public pension system. Days before the report was published, New Jersey legislators held a hearing investigating why Republican Gov. Chris Christie’s administration has overseen a significant increase in fees paid to Wall Street firms -- some of whose executives have made contributions to Republican groups backing Christie’s election campaigns.

Since its reforms in 2011, Rhode Island has been viewed by political and financial experts as illustrative of the broader debate over pension policy. As she championed both a big shift into alternative investments and big cuts to retirement benefits for teachers, firefighters, police officers and other public workers, Raimondo received hefty campaign contributions from the financial sector and from hedge fund billionaire John Arnold, whose political apparatus is pushing for pension benefit cuts in states across the country.

In 2014, IBTimes reported that Rhode Island had lost $372 million relative to the average public pension return, largely due to the shift toward alternatives. In response to public records requests for fee information related to alternative investments, Raimondo denied the request, saying that she wanted to “minimize attention” to financial managers’ compensation.

Last month, Raimondo’s successor in the treasurer’s office, Seth Magaziner, promised more transparency in the state’s pension investments, yet continued to defend the state’s investments in alternatives.

Notoriously Opaque

Siedle’s report focuses in on notoriously opaque kinds of investments such as in real estate and private equity.

The former, which until the 1960s were illegal for pensions to invest in, have generated just a 2 percent rate of return for Rhode Island in the past 10 years, while the benchmark against which the state measures its real estate return has paid 9.2 percent. The underperformance has cost the pension fund approximately $638 million in the past 10 years, Siedle found.

As for private equity, Siedle said the SEC should investigate how Rhode Island taxpayers are paying fees not merely on the money the state has invested with financial firms, but on all the money it has committed to such firms. Essentially, he said, if the pension fund has committed $100 million to a private equity firm, but has only $2 million invested for the first few years, it is nonetheless still paying management fees on the whole $100 million. That, Siedle said, has Rhode Island’s pension fund paying “$30 million in fees to private equity firms -- for doing nothing.”

A Rhode Island judge is set to rule on the constitutionality of the pension cuts in the next few weeks. Legal precedent had traditionally ruled that promised pension payouts are a form of deferred compensation, and as a result are not subject to cuts.