In the 2016 election, executives at high-fee, high-risk investment firms poured cash into a Massachusetts pro-charter school initiative championed by Gov. Charlie Baker. In the years since, those investment firms have reaped a total of $320 million in new lucrative investment management contracts with the state pension fund.

The Massachusetts Pension Reserve Investment Management Board, which oversees more than $74 billion in assets covering 300,000 beneficiaries, frequently touts its investment performance that helps to provide $1 billion in benefits annually. Baker sits on the MassPRIM Board via a designee and appoints two additional members.

A comparison of the pension fund’s return to a straight and simple 70/30 portfolio — wherein 70 percent is allocated toward the S&P 500 and 30 percent goes to a blue-chip bond index fund — reveals underperformance, with the pension returning 10.4 percent annualized for the five years ending December 31, 2020, and the index fund returning 11.58 percent, costing the commonwealth of Massachusetts, its taxpayers, and active and retired public employees more than $5 billion over that period.

Those trailing returns come as the pension fund has made hundreds of millions of dollars in new commitments to high-risk, high-fee, low-transparency “alternative investments” like private equity, private real estate, and hedge funds — including to those managers whose executives donated to Baker and his pro-charter school campaign. Financial reports show that some of those managers may have subpar performance, dragging down MassPRIM returns and forcing taxpayers to contribute more into the funds. Viewed as a whole, the new investments raise the question of whether money managers with political connections were able to reap benefits regardless of their investment performance.

Chris Tobe, a financial analyst and former board member of public pension funds in Kentucky, said that campaign contributions to officials or committees associated with those officials “keeps people quiet from talking about underperformance. Then they buy the next partnership. Public pensions are basically pay-to-play machines. They’re a big source of campaign cash.” Tobe added that “the fees are so high in alternative investments that it’s worth the small risk of an SEC fine.”

While the Securities and Exchange Commission bans direct contributions to executives like Baker with influence over pension funds, indirect donations like those to Super PACs and ballot initiative committees are not covered. The donations illustrate how money managers can develop their relationships with powerful actors with influence over pension funds like Baker without running afoul of strict SEC pay-to-play rules that were developed a decade ago in response to scandals at major pension funds. Scandals related to pay-to-play arrangements at public pension funds — whereby investment managers make campaign contributions or gifts to officials overseeing the pensions — famously resulted in prison terms for the former CEO of the country’s largest public pension fund, CalPERS, and the former comptroller of the state of New York.

Charter schools had long been an issue of particular concern to Charlie Baker. Fresh out of Harvard in the ’80s, Baker headed the Pioneer Institute, a Koch-backed right-wing think tank that has long treated charters as a cause célèbre. Showcasing his commitment to the issue, in his 2015 inaugural address as governor, Baker said, “While traditional public schools will always be the backbone of our education, we need more high-performing public charter schools, especially in under-performing school districts.”

Charters factored heavily into the Massachusetts 2016 general election, given the Question 2 initiative that appeared on the voters’ ballots that year, determining whether to expand charter schools in the state. Top Baker aides Jim Conroy and Will Keyser ran the Yes on 2 campaign, according to WBUR, and Commonwealth magazine called Baker the “main face” of pro-Question 2 advertising. Just eight days before Election Day, political committees supporting Baker’s pro-charter push launched a 30-second ad in which he appeared. “Massachusetts has many great public schools. Some kids aren’t so lucky,” he said as the camera pivoted over to a group of Black and Latino kids. “Where they live, they don’t go to a great school, and they have no choice. Imagine if your kids were trapped in a failing school. Public charter schools give parents a choice and are a pathway to success for these kids. If you like your school, Question 2 won’t affect you. But Question 2 will change the future for thousands of kids who need your help. Please join me and vote Yes on Question 2.”

Despite the ad barrage, the Yes on 2 campaign ultimately came up short in the 2016 election, managing just 38 percent of the vote after spending over $25 million. (Opponents to Question 2 spent over $17 million.) But the ads were paid for by particular individuals who donated to Yes on 2 committees, some of which had gone to significant lengths to obscure their funders. Families for Excellent Schools-Advocacy received the largest campaign finance fine in the history of Massachusetts in 2017 after it was found that the advocacy group had concealed their donors against the rules — including donations from executives of Summit Partners, a Boston-based private equity firm.

Summit, Charlesbank, and Berkshire are all so-called alternative investments, meaning that they are subject to much less regulation than public companies and charge enormous fees that are typically 2 percent of assets and 20 percent of performance, which is over 5,000 percent higher than index funds for ordinary stocks and bonds, which can have fees as low as 0.04 percent or lower.

Some of the wealthiest and most powerful people in the country have come out of private equity: Mitt Romney founded Bain Capital before becoming governor of Massachusetts and then a senator, and Deval Patrick directed Bain’s impact investing arm before taking his own turn as Massachusetts governor.

Three private equity investment managers who supported the Yes on 2 campaign then saw their companies receive a windfall of investments from MassPRIM.

  • Summit Partners executives Martin Mannion and Bruce Evans made $230,000 in direct contributions to support the Yes on 2 efforts. Just $30,000 of that total, all of which was contributed by Mannion, was disclosed prior to Election Day. The other $200,000 in contributions were made to Families for Excellent Schools-Advocacy and were disclosed to settle litigation between the pro-charter group  and Massachusetts state campaign finance regulators. In August 2018, MassPRIM committed $150 million to a Summit Partners hedge fund. MassPRIM declined to provide performance data about its investments in Summit.
  • In early 2016, MassPRIM made a $175 million commitment to Berkshire. Berkshire executives Bradley Bloom, David Peeler, Robert Small, and Ross Jones made $350,000 in campaign contributions to Yes on 2 committees in 2016. In 2017, MassPRIM made an additional $20 million commitment to Berkshire. That investment, Berkshire Fund IX, has returned about 24 percent from inception through June 30, 2020, compared to a return of 65.7 percent for the S&P 500 over the same time period. MassPRIM’s previous foray into Berkshire, their eighth fund, has also had subpar performance, with a return of approximately 70 percent, as opposed to a return of about 192 percent for the S&P 500 over the same time period.
  • Charlesbank Capital Partners CEO Michael Eisenson is on the board of the Boston Foundation, which donated $760,000 to Families for Excellent Schools, the 501(c)3 version Families for Excellent Schools-Advocacy, which is a 501(c)4 that can engage more directly in political activities, in 2016. In August 2017, MassPRIM made a $150 million commitment to two Charlesbank funds. Both funds have trailed the S&P 500 during that time.

Baker, Charlesbank, and Summit did not respond to or declined requests for comment.

Other donations made by executives at the same firms reveal the supportive relationship for committees associated with Baker while not running afoul of SEC rules.

Mannion also contributed $10,000 to the Massachusetts Republican Party in 2014, when Baker was the frontrunner for the nomination, and Summit Managing Director Tom Roberts donated $100,000 to the Republican Governors Association in 2016. A Republican Governors Association-backed Super PAC, Commonwealth Future, spent $6.2 million to support Baker’s reelection in 2018.

Berkshire Partners founder and senior adviser Carl Ferenbach and his wife Judy donated $1,000 each to Baker’s reelection campaign at the end of 2018. Ferenbach also donated $50,000 to a “Baker-linked” Super PAC in February 2020. A spokesperson for Berkshire said that the company and Ferenbach complied with all federal rules.

MassPRIM said that the onus of compliance with pay-to-play regulations was on the manager, not on the pension fund, saying that the money managers “are responsible for complying with this rule. … [MassPRIM] assesses and seeks confirmation of each adviser’s policies and procedures to ensure compliance.” Additionally, it said the pension fund “focuses on three principles of investing: risk, return and cost. No investment analysis is complete without considering all three equally. MassPRIM has engineered a portfolio to perform well in a strong market environment and, more importantly, in more challenging times. Focusing solely on returns is incomplete. Using a 70/30 model portfolio to manage $90 billion would be inconsistent with PRIM’s sound investment principles — exposing the PRIT Fund to greater market volatility.” Finally, the PRIM said that it holds its fiduciary duties to be “paramount, and all investment decisions are made only with the pension beneficiaries’ interests in mind. PRIM staff analyze investments solely on their merits, and do not [recommend] managers based on non-investment criteria.”

Tobe, the Kentucky pension analyst, said that the conclusion that private equity and other alternative investments offer less volatility is an accounting trick, saying that the managers “smooth pricing, allowing a perception of less risk.”

“Dark-money schemes represent an attack on the common good — and they continue to pose a significant threat to public education in our commonwealth.”

Merrie Najimy, the president of the Massachusetts Teachers Association, which represents 110,000 members of the pension said, “The depth and extent of the questions concerning political influence over the investment of state pension funds are an issue of public trust. They clearly justify the steps that educators’ unions took in 2016 to protect the integrity of pension oversight, including filing a complaint with the Securities and Exchange Commission.” The union has been a vocal antagonist against Baker’s charter school push.

Najimy added that the new investments in 2018 and revealed donations in 2017 “underscore the need for investigation and appropriate state and federal action, along with careful scrutiny in the future. Dark-money schemes represent an attack on the common good — and they continue to pose a significant threat to public education in our commonwealth.”

Baker, who is eligible for reelection in 2022, is intimately aware of the way that the alternative investment industry works and has dealt with pay-to-play allegations ever since his first run for governor. In 2014, investigative reporter David Sirota revealed that Baker, while working as an “executive-in-residence” at private equity firm General Catalyst in 2011, had made a $10,000 donation to the New Jersey Republican State Committee a few months before the New Jersey pension fund made a $25 million commitment to General Catalyst. As governor, Christie appointed many of the pension fund’s trustees. The issue dogged Baker throughout his 2014 campaign, though he was cleared by the Gov. Chris Christie-controlled New Jersey State Investment Council in 2015.

Sirota and Andrew Perez also reported on the pay-to-play issues during the Question 2 fight in 2016, prior to the new investments made in the donors’ firms in the successive years.

Maurice Cunningham, a professor of political science at the University of Massachusetts Boston who has studied the role of the charter school lobby in Massachusetts, said that the donations and the pension contracts are “bad for the public and bad for people counting on those pensions.”

“We just don’t have a functioning democracy,” he said. “More charter schools would never have been on the agenda without the funding.” Referencing the fact that many donors were only released after the election, Cunningham said, ”The fact is that citizens were denied their right to know who is spending this money to influence public policy.”

Cunningham urged the public to pay more attention to the post-Citizens United impact on state politics. “It’s a lot easier to play at the state. It’s less expensive, with fewer players with the muscle to go against them.”