Guest MINDSETTER™ Steve Laffey: Providence Leaders Need Reality Check

GoLocal Guest MINDSETTER™ Steve Laffey

Guest MINDSETTER™ Steve Laffey: Providence Leaders Need Reality Check

Steve Laffey, former Mayor of Cranston
Sometime in early 2002, I went to one of my first Cranston city council meetings.  There would be many more, but this one was pretty enlightening.   

I had returned to my beloved hometown in September of 2001 and over the next few months discovered a city in financial ruin, with its leaders either too stupid to know what was going on, or complicit in its upcoming financial crisis/near bankruptcy.  

I had read the papers about millions of dollars “missing” and had gone to City Hall to request an annual audit, only to find that they hadn’t done one in three years.  “Totally illegal…” I told the older lady. She informed me that the computer system was slow and it was taking them a long time to get the audits out.  

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This was the first time, out of the hundreds and maybe thousands of times, I would think, “Does she believe this story?  I mean, with an abacus I could do any medium sized city’s annual audit in under a year.  Has she been told to say this?  How many people know the city is going to go broke?” 

Pension Problems

Fast forward to the spring of 2002, when the city was trying to sneak its $22 million of overspending into a Pension Obligation Bond (POB).  The city had $18 million in assets and $254 million in obligations in its city pension plan.  Not as bad as Social Security but as far as City Pension plans go, a 7% funding ratio was maybe the worst in the country.  

Now back then, POBs were all the rage, as the Wall Street financial con artists had convinced many a complicit state and local elected official that they could borrow tons of money at a fixed low rate, say 5%, invest it in stocks and make, say 7%, making money on the spread to fund their pensions.  They were sold as if there was no risk because “over 20 years stocks always make at least 7%!” Of course these kinds stupid statements seem to come near market tops and this was true of POBs.

So with my financial background, most recently serving as President and COO of a large investment banking firm, I went to this well attended meeting to hear what the leaders of my beleaguered city had to say.

The city’s advisors had all kinds of “great” information; charts and figures about how this would all work out well for the city, there would be no problem borrowing the money, etc.

Luckily in America, there is still a portion of meetings where the public is allowed to speak, so when the time came I raised my hand and went to the podium.  It is possible, after effectively living away from RI since I graduated Cranston High School East 20 years earlier, that only one person in the building had any idea who I was.

Chicken and the Egg

In a forceful way, I pointed out to the Mayor, City Council members, staff, hired guns and the members of the public, several things of great importance.  First, there was the chicken and egg problem.

“You have to go to New York, to Wall Street and meet with firms that will issue these bonds.  They are all going to ask you one simple question, ‘where is your recent audit?’  You are going to tell them you haven’t done one in 3 years and then they are going to laugh out loud and escort you out of their offices as quickly as possible. If you come in with an updated audit first, you are going to have to disclose that you are trying to put $22 million of overspent money into a POB, which they will tell you is illegal.  When the bond rating agencies figure this out, your bond rating will tank and you will never be able to issue the bonds anyway.”

It seemed from the elected officials faces that some did not did not know any of this, which seemed both unbelievable and sad, but I continued with some other points, the most important one being the size of the proposed POB.

I had gone back and looked at some other recent POBs.   I stared at the size of New Jersey’s POB, issued in 1999 (a complete calamity, so disastrous they had to issue another one, after the stock investments lost so much money, to cover the first one!) and did some simple ratio analysis, comparing it to Cranston’s proposed POB.  

I told the crowd that Cranston’s proposed POB was much higher per capita than New Jersey’s, by a factor of at least 4 and there was no way the city, even if not lying about it’s financial condition, could issue bonds of this magnitude.  “Folks remember, Cranston has only one way to tax people, the property tax, while New Jersey has a multitude of ways including an income tax, a sales tax, a cigarette tax etc… “

The meeting sort of ended with a lot of dejected people:  the mayor probably realized his career was over, the city’s advisors realized they weren’t going to get paid a large fee for helping issue non-issuable bonds, and many on the city council just happy they weren’t part of a public company where they would probably be personally sued for malfeasance.

No one ever discussed a POB for Cranston ever again and no one even bothered to debate my inarguable points.  They tried other, equally stupid actions to avoid reality, all to no avail.  I ran for Mayor, won, and with a great team, helped turn around the city over the next four years.

What This Means for Providence 

So why do I write this?  Some have thought that there is a financial way to save Providence without bankruptcy.  Comments like “You saved Cranston without bankruptcy!” are not helpful in comparing apples and oranges.  The Cranston pension system was a closed system.  No new people would enter the system, so around 2025 people in the system would really start dying at faster rates and eventually it would go away.  In Providence, despite all logic, they kept it open so all new people just kept going into the already insolvent system.

And then there is the size of Providence’s pension problem. Arthur Laffer, the noted economist, recently wrote a column about California going broke over its pension problem. (In California’s Pension Casino, The Taxpayers Are Going Bust, IBD September 26, 2016).  In it he writes, “With a roughly $139 Billion Pension shortfall, every household owes around $11,000 for public pensions.”

Hmmm…lets go back to the New Jersey/Cranston analogy above.   If Providence has a $1.8 billion problem, and 60,000 households then that’s $30,000 per household - about 3 times the magnitude of California!!  Hello, anyone listening!  And California has the same advantages of a state over a medium sized city. Case closed.  

Providence will never climb out of its hole without declaring bankruptcy and RI will never be able to climb out of last place among the 50 states without a complete restructuring of its largest city. 

When is the next Providence City Council meeting?

Steve Laffey (www.stevelaffey.com) served as mayor of Cranston from 2003 to 2007.


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