Rhode Island Treasurer Gina Raimondo. Press Photo

Like many states, Rhode Island has been placing growing slices of its pension funds into higher-risk investments, entrusting the money to Wall Street financial managers who capture hefty fees. Yet the state has rebuffed requests to disclose the details of the management contracts.

In this regard, Rhode Island is in crowded company, alongside California, Pennsylvania, North Carolina and Kentucky on the list of states that have been tight-lipped about their Wall Street investment deals. But as officials this month rejected a public records request from the state’s largest newspaper, they laid out a seemingly blunt justification for secrecy: If the public learns precisely how much Rhode Island’s Wall Street managers are earning, that might make those executives feel uncomfortable.

"Fund managers keep this information confidential to help preserve the productivity of their staff and to minimize attention around their own compensation," declared the office of Rhode Island Treasurer Gina Raimondo in a letter obtained by International Business Times that elaborated the "explanations supporting confidentiality." Raimondo is a Democrat who founded one of the financial firms that manages Rhode Island pension money.

Citing the case of Eddie Lampert, an investor who was abducted in 2003 by ransom-seeking kidnappers, the letter to Assistant Rhode Island Attorney General Michael Field from Raimondo’s office further argued that disclosing too much information about financial fees and compensation could endanger the lives of hedge fund managers.

Read the full letter from Raimondo's office here.

The secrecy has angered Rhode Island political leaders, unions and pro-transparency groups, some of whom see it as a deliberate effort to protect the interests of Wall Street entities that pour campaign cash into state races while positioning themselves for lucrative pension management contracts.

"This is sycophancy not just to Wall Street but to the hedge fund managers themselves -- the 1 percent of the 1 percent -- at the expense of an informed citizenry and a robust democracy," said former Rhode Island State Representative David Segal (D) in response to Raimondo’s letter justifying the secrecy. "That Raimondo finds this a compelling excuse to keep the documents under wraps isn’t a surprise, but the raw admission that she’s doing so to protect the interests of her Wall Street underwriters is astounding, a Romney-esque slip that should be treated as her '47 percent' moment.”

In a statement emailed to IBTimes, Raimondo's spokesperson Ashley O'Shea portrayed the treasurer's office as a model of transparency. “Rhode Island has become a national leader in disclosing management and performance fees paid to all investment managers, including hedge funds, private equity, equity and fixed income managers." The state has disclosed the total fees paid to financial managers while merely withholding the management contracts, the treasurer's office maintains.

At the same time, O'Shea added, “The Treasurer agrees that there should be more focus on hedge fund managers’ compensation. We need to continue to fight for lower fees, more transparency and a greater alignment of interests, as limited partners in alternative investments.”

Upon assuming office in 2011, Raimondo spearheaded a plan to move billions of dollars of pension money into higher-risk, higher-fee alternative investments. That has coincided with Rhode Island paying higher fees to Wall Street.

The Providence Journal reports that the move has generated roughly $70 million in fees for the financial industry -- the same industry that has made major contributions to Raimondo’s political campaigns. According to GoLocalProv, documents from the Treasurer's office show that before Raimondo took office, Rhode Island "investment fees were among the lowest of any state pension fund in the country," but that "under Raimondo, the cost of investment fees has nearly tripled." A union-financed investigation estimated that fees have increased almost 700 percent in recent years.

According to the Journal, some of those fees from the $7.7 billion Rhode Island pension system are paid to Point Judith, a financial firm created by Raimondo that Rhode Island invested in under the previous treasurer, Frank Caprio (D). Raimondo’s personal blind trust fund still periodically earns income from its Point Judith holdings. Raimondo’s spokesperson told IBTimes that the Treasurer has taken all “recommended steps to assure that potential conflicts of interest would be avoided during her administration.”

Still, the confluence of new investments, increased fees, below-average returns for Rhode Island taxpayers and Wall Street campaign contributions inevitably raised questions. Seeking to investigate the pension investment shift initiated by Raimondo, the Providence Journal in April of 2013 asked Rhode Island's government to release details of deals between the state's public pension system and major financial firms. Raimondo’s office denied the request. With national headlines swirling about hedge fund managers' billion-dollar payouts, the newspaper filed an appeal with Rhode Island Attorney General Peter Kilmartin (D), who arbitrates such open-records disputes under state law. The Journal argued that "without access to specific information about performance fees of hedge funds, which make up 15 percent of [Rhode Island's] portfolio, neither the Journal nor the public can evaluate those investments."

Kilmartin last week rejected the appeal and agreed with the letter from the Treasurer's office, which advocated helping hedge fund managers reduce public attention around their compensation.

The open acknowledgement by the treasurer’s office of its desire to protect Wall Street is rare in a political era marked by rising concern over economic inequality. But the Rhode Island government's penchant for secrecy in its financial-industry dealings is common. As states and cities have recently moved roughly a quarter of the $3 trillion in public pension assets into high-fee Wall Street investments, and as data show those high-fee investments often do not deliver above-market returns for taxpayers, elected officials have sought to conceal many details of those investments. For example:

- The Kentucky Center for Investigative Reporting last week reported that "a quarter of the $15.7 billion under the [Kentucky Retirement System's] control might as well be in a black hole," as state officials reject requests to release details of fees paid to financial firms. The rejections are permitted under state laws exempting public pension systems from open records statutes. This year, Kentucky Rep. Jim Wayne, a Democrat, proposed legislation to subject the dealings to more scrutiny, but the bill was not acted upon by lawmakers.

- A forensic investigation by the State Employees Association of North Carolina estimated that total annual financial fees paid by the state's $87 billion pension fund will skyrocket to roughly $1 billion a year, but that state lawmakers are being kept in the dark because Treasurer Janet Cowell has not released detailed information about the fund's Wall Street investments. The report concluded that "it is virtually impossible for stakeholders to know the answers to questions as fundamental as who is managing the money, what is it invested in and where is it?" Cowell has disputed the union's conclusion. She has recently backed new legislation to statutorily require details of Wall Street pension deals be kept secret for up to 20 years after the investments are first made.

- California's $301 billion pension system, the largest in the nation, has been the target of an open records lawsuit by Naked Capitalism’s Susan Webber (who writes under the name Yves Smith). She filed her suit after CalPERS officials did not respond to her request for detailed fund performance data. In a lawsuit brought by Reuters, a state court in December of 2013 ruled that even though it is a publicly controlled taxpayer-financed entity, the University of California may continue concealing information about its investments in venture capital firms.

- Pennsylvania officials scrambled to re-hide state pension contracts with major financial firms after Webber republished 12 agreements she discovered posted on the State Treasury’s website. Pennsylvania officials told the Philadelphia Inquirer that as a matter of policy, the Pennsylvania State Employees Retirement System "ceased posting alternative investment contracts that reveal the terms" of agreements between the state and financial firms. The Inquirer noted that Pennsylvania Treasurer Rob McCord, “who used to run a money management firm that ran state pension money [said] the treasurer won't stop PSERS from suppressing” the documents. According to Montgomery County Commissioner Joshua Shapiro (D), Pennsylvania's pension system pays roughly $770 million a year in financial management fees.

Most often, such secrecy is officially defended on the grounds that proprietary information and trade secrets are at stake. Cowell has asserted that if public officials disclose details of government deals, governments could be sued for hundreds of millions of dollars by Wall Street firms, who typically include confidentiality provisions in their contracts with both government and private clients. In her statement to IBTimes, Raimondo’s spokeswoman seemed to echo that argument, asserting that secrecy is essential to “avoid litigation that could have been detrimental to the health of the state’s pension fund.”

Columbia University Business School professor Michael Oliver Weinberg has argued that because better deals can be negotiated in secret, public officials “may be acting as fiduciaries when they negotiate private deals with hedge fund managers, and that less transparency may be more desirable” for the public.

But details in at least two recent leaks of public pension documents hint at other possible reasons that Wall Street firms want their government deals kept hidden.

In the Pennsylvania leak, Webber discovered what she says are provisions outlining a tax dodge technique that may face Internal Revenue Service scrutiny. Similarly, in Kentucky, Chris Tobe, a former pension trustee turned SEC whistleblower, disclosed Blackstone documents whose provisions outlined stealth fees that have been called "the crack cocaine of the private equity industry" and that are now reportedly drawing attention from the Securities and Exchange Commission. Tobe, the author of the book “Kentucky Fried Pensions,” told IBTimes that “another reason contracts are being kept secret is that they disclose risks like the use of leverage and other investments that are illegal by most state fiduciary laws.”

Major Wall Street firms have poured campaign contributions and sent lobbyists into states where they have pension business. According to the Institute on Money in State Politics, North Carolina Treasurer Cowell has received more than $250,000 in campaign contributions from the securities and investment industry. In Kentucky, state ethics records show Blackstone and its affiliates have employed six lobbyists, and the Center for Responsive Politics reports that Blackstone is a major campaign contributor to Kentucky Sen. Mitch McConnell (R).

The intertwined relationships are perhaps easiest to see in Rhode Island, where the state treasurer’s office openly demands secrecy as a way to protect the financial industry, which in turn has spent big on Raimondo’s political campaigns.

The New York Times reported that in the few years since Raimondo assumed office, "the Rhode Island pension system has ramped up its investments in hedge funds, private equity and venture capital from zero to almost $2 billion, or more than one-quarter of its assets under management."

A 2013 Maryland Public Policy Institute report found that “state pension systems that pay the most for Wall Street money management get some of the worst investment returns” -- and Rhode Island seems a case in point. As the Times noted, Raimondo’s move has delivered below average returns for Rhode Island’s pension fund, but has been a fee jackpot for the financial industry.

Meanwhile, a union-financed forensic analysis by former SEC investigator Edward Siedle estimates that Raimondo's initiative to slash pension benefits will end up taking $2.1 billion worth of savings on cuts to cost-of-living adjustments and using it to fund $2.1 billion in new fees to the alternative investment industry.

Simultaneously, Raimondo has raised more than half a million dollars in campaign contributions from the financial industry, according to campaign finance records compiled by her gubernatorial opponent, Providence Mayor Angel Taveras (D). That tally does not count other money to Raimondo-aligned Super PACs, including a $100,000 check from billionaire former hedge fund manager and Enron trader John Arnold. Raimondo now has a wide fundraising lead in her current campaign for governor.

As Raimondo embarked on a national fundraising tour in 2013 that reaped more than $2 million in contributions for her gubernatorial run, the Providence Journal discovered that three hedge fund managers doing business with Rhode Island's pension fund were trustees of the conservative Manhattan Institute, which gave Raimondo an award for her pension policies.

In 2011 and 2012, those hedge funds -- Elliott Management, Mason Capital and Third Point Partners -- were hired to manage almost $200 million of Rhode Island pension money and received $2.6 million in fees from the state. The principals of at least two of those firms are among the world’s highest-earning hedge fund managers. According to data from Institutional Investor, Third Point's Dan Loeb made $700 million in 2013 alone. (Rhode Island has since cashed out its investment with Third Point.)

When the Journal asked Raimondo's office for documents detailing why investments were made in those particular hedge funds, Raimondo's office redacted the corresponding due diligence reports from the state's contracted pension consultant, Cliffwater LLC -- a firm whose SEC disclosure forms show it "receives compensation from the very investment managers it recommends or selects for its clients," according to Siedle's report. Raimondo’s office disputes Siedle’s finding.

The Journal reported that to defend its redaction decision, Raimondo's office "said Cliffwater would not have been given access to the information it provided the investment commission — such as the manner of compensation to key personnel of each hedge fund, investment strategies and risk characteristics — had it not given assurances of confidentiality."

The decision by Raimondo’s office to redact the information and reject the open records request was protested by groups such as the American Civil Liberties Union. However, with Attorney General Kilmartin’s ruling in the state’s favor last week, Raimondo may succeed in her desire “to minimize attention around [hedge fund managers] compensation.”

Providence Journal officials have not said whether they will appeal Kilmartin's decision in court, but Executive Editor Karen A. Bordeleau declared that “we believe [the documents] are public under Rhode Island’s Access to Public Records Act.”

The head of Rhode Island's chapter of the American Federation of State, County and Municipal Employees said his organization would continue its push for more disclosure on behalf of the public employees whose pensions are financing the new Wall Street fees.

"Treasurer Raimondo shows time and time again who she really cares about -- hedge fund managers and Wall Street operatives," said J. Michael Downey, president of ASCME Council 94. "We will continue to demand transparency in regards to all pension information. The time has come for the Treasurer to treat public employees and taxpayers in Rhode Island with the same respect she has for her Wall Street friends."