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When Bill Clinton spoke at the Democratic National Convention in September, he gave the party faithful an arithmetic lesson — and stole the show. The former president poured scorn on the proposed plan of Republican presidential candidate Mitt Romney to both cut taxes by $5 trillion over ten years and reduce the federal budget deficit, exclaiming, “The numbers just don’t add up!”

Gina Raimondo knew what he meant. The Rhode Island treasurer, a venture-capitalist-turned-political-rising-star, was listening as a convention delegate and understood tough fiscal math. When she took office in January 2011 — she had won a commanding electoral victory after campaigning for fiscal and pension reform — her tiny state was struggling under a huge debt burden and ballooning pension liabilities. The $7.4 billion state retirement plan was only 50 percent funded and on course to run out of money as early as 2019. For decades Rhode Island officials had fitfully tried to reform the system, with little success, as workers and retirees fought to keep hard-won benefits that the state could no longer afford.

With focus and determination, a sure command of finance and a gift for forging consensus, Raimondo took up the challenge. She produced a blunt, hard-hitting report titled “Truth in Numbers: The Security and Sustainability of Rhode Island’s Retirement System” that made a stark case for pension overhaul:  Without drastic measures to rein in costs, the report asserted, the state’s retirement liabilities would devastate a wide range of government programs and ultimately bankrupt the pension plan itself, to the detriment of retirees.

Pension reform was not an easy sell in a state with a Democratic-controlled legislature and strong unions. But Raimondo traveled across Rhode Island, arguing her case with voters, legislators and union representatives in a series of town-hall-style meetings. Her campaign received a powerful boost in the summer of 2011 when Central Falls, a small city just north of Providence, became the first-ever Rhode Island municipality to file for bankruptcy, almost entirely because of its pension burden. The treasurer’s efforts secured a dramatic triumph when in November 2011 the state’s legislature passed a major pension bill by a wide margin and the reforms were signed into law by Governor Lincoln Chafee, a Republican-turned-independent and son of a longtime U.S. senator.

“I just could not live with myself for not fixing the retirement system, knowing at some point in time the well would run dry and someone would be told they don’t have a pension,” the slight and personable Raimondo tells Institutional Investor in an interview at her office at the state capitol. “Once people started to grapple with the consequences of not fixing the problem, they started advocating for change.”

The Rhode Island Retirement Security Act of 2011 increased the minimum retirement age for most employees not already eligible to retire, suspended cost-of-living adjustments for retirees and moved all public workers except public safety officers who pay into Social Security and judges to a hybrid defined benefit–defined contribution system. Even more significant, the new law rewrote the rules for everyone, including fully vested employees and current retirees, not just 20- and 30-something workers. That achievement, the first by any state, has a meaningful impact on the funding gap and promises to ease some of the generational tensions that hamper many pension reform attempts. Government officials in other cash-strapped states have taken notice, as have labor advocates. All are closely following a lawsuit filed by public sector unions to block the Rhode Island law. High-profile litigator David Boies is aiding the state’s defense.

“It is just a mathematical fact that if you have a pension reform that only impacts new employees, young employees or people who aren’t vested, it’s simply unfair,” says Raimondo, 41. “It is intentionally pushing the debt onto the backs of our youngest and newest workers.”

The treasurer’s legislative achievement has translated into considerable political capital: Along with Angel Taveras, the mayor of Providence, she now ranks as one of the two most popular politicians in the state. Many see the quietly ambitious Raimondo as a prime prospect for higher office.

In tackling Rhode Island’s pension woes, Raimondo joins a new generation of politicians and policymakers, both Democratic and Republican, who are trying to solve deep-seated fiscal and economic problems in their cities and states. At a time when partisan wrangling is wreaking havoc in many state capitals and politicians in Washington are engaging in a game of chicken over the so-called fiscal cliff, Raimondo and her cohorts take a pragmatic approach and seek to respect the views of all stakeholders. In Newark, New Jersey, for example, Democratic Mayor Cory Booker worked with Republican Governor Chris Christie to forge a deal with the city’s teachers’ union that includes a pay-for-performance component. In California the Republican mayor of San Diego, a former police chief, and the Democratic mayor of San Jose led calls for referendums on cutting pension benefits in their cities; both passed by wide margins.

Before Raimondo succeeded in obtaining the pension law, she had already taken an important step to bolster the retirement system, persuading her colleagues to reduce the pension funds’ projected annual rate of return from 8.25 percent to 7.5 percent. Although the change made the funds look even sicker, lowering the funding ratio (now at about 51 percent), ­Raimondo believes it is critical to use realistic investment assumptions. As a former investor, she also moved quickly to retool the plan’s portfolio to reduce risk while still generating reasonable returns. For long-term health, she knew, the pension system needed three elements: reduced liabilities, a realistic assumed rate of return and effective investment management.

Established in 1936, Rhode Island’s retirement system comprises four plans: the employees’ and teachers’ retirement funds, which are combined; the Judicial Retirement Benefits Trust; the State Police Retirement Benefits Trust; and the Municipal Employees’ Retirement System. The entire system is managed by the treasurer and her staff and overseen by two boards. The Employees’ Retirement Board of Rhode Island has oversight for the plan’s liabilities, and the ten-person Rhode Island State Investment Commission oversees investment strategy, manager selection and asset allocation. The treasurer chairs both boards.

The retirement system has had a significant impact on the state’s fragile fiscal condition. When Raimondo took office, the state, with a population of just over 1 million and an unemployment rate of 11.9 percent in January 2011, had laid off a larger share of its state and local government workers than any other state, according to a study by the Nelson A. Rockefeller Institute of Government.

Rhode Island is far from the only state suffering from pension funding woes and budget deficits. A June report by the Peter G. Peterson Foundation, which focuses on the nation’s urgent “fiscal challenges,” paints a grim picture of declining aid from Washington and tax revenue against a backdrop of rising Medicaid and pension costs. After the financial crisis erupted in September 2008, pension funds suffered a one-two punch of depressed equity markets, which lowered portfolio returns, and unprecedented low interest rates, which increased future liabilities. As a result, the funding ratio for state retirement plans — the key measure of their health — fell from 100 percent in June 2001 to 76 percent in June 2011, according to a report by Santa Monica, California–based investment consulting firm Wilshire Associates. Many critics argue that accounting practices such as smoothing and assuming a high rate of return mask numbers that are in truth even worse.

Raimondo’s pension overhaul has brought her national attention from both sides of the political aisle. “Gina understood the opportunity that Rhode Island’s pension funding situation provided long before she took office. She has a great future,” says well-known DNC fundraiser Orin Kramer, who is founder and managing partner of New York–based hedge fund firm Boston Provident and former chairman of the New Jersey State Investment Council, which manages that state’s $70.8 billion pension fund. Last January the Manhattan Institute for Policy Research, a right-leaning think tank, presented Raimondo with its Urban Innovator Award. Says Michael Allegretti, director of the institute’s Center for State and Local Leadership, “Gina Raimondo touched a third rail of politics, and not only did she survive, she is thriving.”

Raimondo grew up in a middle-class Italian-American family, the daughter of a Navy World War II veteran who worked as a chemist at the Bulova watch factory in Providence and a homemaker who looked after Raimondo, her brother and sister, and their grandfather. Raimondo attended Catholic schools in Smithfield and Providence, got good grades and was valedictorian of her class at La Salle Academy. “She’s a local girl who worked hard and is very intelligent,” says Gordon Fox, the powerful Democratic speaker of the Rhode Island House of Representatives.

After graduating magna cum laude from Harvard University in 1993 with a BA in economics, Raimondo attended the University of Oxford as a Rhodes scholar. Among her fellow scholars were Eric Garcetti, a Los Angeles city councilman currently running to become LA’s next mayor, and Newark’s Mayor Booker. (Both Garcetti and Booker made donations to Raimondo’s campaign for treasurer.)

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