POLITICO Pro Enron billionaire frets about public pensions' solvency

When former Enron trader and Texas billionaire John Arnold donated more than $1 million to a November 2014 initiative to reform the public pension system in Phoenix, pension activists took notice.

Arnold’s donation to Proposition 487, also known as the Phoenix Pension Reform Act, constituted close to 75 percent of total donations for the ballot measure, which failed. Had it passed, it would have moved new state employees from a defined benefit plan into a less generous (and less expensive) defined contribution plan such as a 401(k).


Despite his Arizona defeat, no one believes Arnold is done.

“In nearly every single battle over public pensions, we can follow the money trail back to John Arnold,” said Jordan Marks, executive director of the National Public Pension Coalition, a union-funded organization. “It’s a highly coordinated national effort that comes from [the] same dark-money, ideological source.” Arnold was not available for an interview.

The problem Arnold wants to fix is real. Public pension systems currently face a shortfall of more than a $1 trillion. They’ve helped put two cities — Stockton, California and Detroit — into bankruptcy. In October, a court-approved exit plan for Stockton’s bankruptcy eliminated nearly $550 million in retiree health care benefits for city workers but did not cut pensions. Detroit’s bankruptcy exit plan, approved in November, included public pension cuts.

At the state level, Illinois’ public pension fund is the most troublesome in the nation, with more than $100 billion in unfunded liabilities. A state plan to address the shortfall would reduce cost-of-living adjustments, raise the retirement age and lower employee contributions. But its fate remains uncertain after Sangamon County Circuit Court Judge John Belz declared the cuts unconstitutional. The Illinois State Supreme Court will hear the case in March.

Arnold’s critics argue that he exaggerates the insolvency of public pensions nationwide. They also question his fitness to evangelize for pension austerity, given that he made his fortune at a company that in its 2001 collapse wiped out $2 billion of its own employee pension funds and cost public employees whose pension funds invested in Enron an additional $1.5 billion. “We’re talking about a former Enron executive who profited off a bankruptcy that destroyed the retirement savings of millions of hard-working Americans,” says Randi Weingarten, president of the American Federation of Teachers.

Still, Arnold is undeterred, giving generously to politicians who support pension benefit cuts. In the 2014 cycle, Arnold and his wife donated $200,000 to a super PAC that supported Democrat Gina Raimondo’s successful gubernatorial campaign in Rhode Island. As Rhode Island’s state treasurer, Raimondo had enacted pension benefit cuts that cost her union support. Rahm Emanuel, who made similar changes to Chicago’s pension system, also received financial assistance from Arnold.

San Jose Mayor Chuck Reed, another Democrat, tried, unsuccessfully, to place an initiative on California’s November 2014 state ballot that would have allowed public employers, under specific circumstances, to reduce employee benefits and to increase contributions to underfunded plans. Arnold bankrolled the entire effort, to the tune of $200,000.

According to data compiled by the NPPC, based on donations disclosed on the website of the Laura and John Arnold Foundation and on news articles, Arnold has since 2008 spent more than $53 million on pension policy reforms, not all of it in the political realm. (In an email interview with Reuters, Arnold disputed those numbers.)

Other beneficiaries listed include universities and think tanks such as Brookings and the Pew Charitable Trusts. Much of the money was spent to support pension reforms, but some was spent on education reform. Both efforts, unions point out, tend to favor benefit cuts to public employees.

Josh McGee, vice president of public accountability for the Arnold Foundation, says its research aims to make public pension systems more financially sustainable. “I’m not a [defined benefit] versus [defined contribution] guy,” McGee said. “I think that debate is false. I’m perfectly happy to see defined benefit plans maintained as long as they include all the elements that are important to retirement plan design.”

Arnold has previously emphasized that he has no self-interest in the debate other than philanthropic and public interest. In December 2013, Arnold told The Sacramento Bee the government “has a strong role to play funding the safety net.” He said “attempts to meet the obligations of a broken system” can lead to serious ramifications, including cuts to social programs, increases in violent crime and the closing of libraries and fire departments.

“The losers end up being taxpayers,” Arnold said.

As a star Enron trader, Arnold reportedly earned the company $750 million just in 2001 and received an $8 million bonus. He said he was not involved in the company’s division that led to its demise, and that he has cooperated with investigations. In 2002, Arnold founded Centaurus Advisors, a hedge fund that specialized in energy trading. In 2012, he retired from the hedge fund.

McGee says distrust of Arnold comes from general distrust of wealthy individuals and the need for advocacy organizations to produce a “compelling narrative” when they face political and financial pressure. “I think John’s bio makes people think he is … right-leaning [and] wants to cut benefits,” McGee said. “The truth of the matter is that we advocate for fully funded systems.”

The NPPC, the American Federation of Teachers and others predict the next battles over public pension funds will take place in Oklahoma, Colorado, Florida, Pennsylvania and Nevada. Arnold has already donated to Secure Oklahoma, which favors moving the state public pension plan from defined-benefit to defined-contribution.

The Arnold Foundation is also participating in the Colorado Pension Project, chaired by former Colorado Govs. Bill Owens, a Republican, and Richard Lamm, a Democrat. As governor, Lamm drew national headlines 30 years ago when he said that elderly people who were terminally ill had a “duty to die and get out of the way.” (Lamm will turn 80 next year.) The Colorado Pension Project’s website says that recent legislative reforms to the state pension system — which reduced cost of living adjustments, raised the retirement age for new employees and increased employee salary contributions — did not go far enough. McGee said Arnold’s foundation was drawn to the state’s history of “fruitful left ideological discussions.”

The political battle over the preservation of defined benefit public pension plans versus the creation of defined contribution plans stems largely from a debate about whether pension funds are underfunded because they’re structurally weak or because they have yet to recover fully from the 2007-2009 recession.

Those who favor preservation of defined contribution plans say 401(k)s and cash balance plans (technically defined-benefit plans, but practically equivalent to defined-contribution plans because the benefits are determined by the plans’ cash balance) are more transparent and more cost-effective. But those who favor defined benefit programs point out that the new systems inherently cut benefits by providing employees with a lump sum rather than guaranteeing benefits throughout their lifetime. The mere fact that governments favor them as cost-saving measures, they say, proves that they have smaller payouts.

According to McGee, state and local pension plans require fundamental restructuring. Many of the plans were well-funded in the early 2000s, but McGee says that’s largely because of the economic boom of the late 1990s. He said blaming the public pension shortfall solely on the recent recession places a “huge bet that things will certainly bounce back … Thinking we’re going back to the ’90s and betting people’s retirement security on that seems entirely inappropriate.”

A Pew study in collaboration with the Arnold Foundation attributed public-pension weaknesses to “a combination of investment return shortfalls, missed contributions and unfunded benefit increases.” The study indicated that only 15 states had consistently fulfilled 95 percent or more of their annually required contributions.

But Dean Baker, co-director of the liberal Center for Economic Policy Research, says that plans are in decent financial health so long as they’re about 70 percent funded. A recent study from Boston College’s Center for Retirement Research indicated that a healthier stock market has already helped improve funding for public pension plans, and that by 2017, assuming a healthy stock market, most public plans would most likely be funded at least 80 percent.

Baker added that while a $1 trillion shortfall might sound alarming, over a 30-year period it wasn’t particularly worrisome. “The idea that this is an impossible burden — that’s just nuts,” he said. “I think they have done a lot to exaggerate the size of that number. It sounds really big, it sounds really scary.” Arnold and others, Baker said, use that number “to force drastic changes in the structure of pensions.”

Correction: An earlier version of this story stated that John Arnold donated to the Pew Research Center. He donated to the Pew Charitable Trusts.

CORRECTION: Corrected by: Daniella Diaz @ 12/31/2014 01:39 PM Correction: An earlier version of this story stated, erroneously, that Arnold donated to the Pew Research Center. In fact, he donated to the Pew Charitable Trusts.

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