Will the SEC Investigate Providence’s Pension Plan?

Will the SEC Investigate Providence’s Pension Plan?

A look at new developments with the Providence pension fund by financial analyst and GoLocalMindsetter Michael Riley, who last week revealed the city had "improperly included an asset of approximately $62 million in the Pension Plan" has already prompted a call for an Securities and Exchange Commission investigation - by Riley himself.  

"I filed a motion months ago," said Riley. "I sent a complaint to the SEC last December through their online portal. The [city's] asset treatment was Enron-style and never legal."

Following the change in assets as pointed out by Riley on May 5, council members were undeterred by the accounting -- and the Mayor's office did not respond to request for comment on the situation.  

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"I believe the city will need to fund $140 million in the next year, plus another $40 to $70 million for OPEB.  I expect the reported assets to drop by the amount of the fraudulent asset or around $62 million. And I expect under GASB 68 (June 30 2015), the reported unfunded liability to be $1.4 billion to $1.6 billion," said Riley.  "So sorry, yes, the SEC has to move in."

Timeframe, Costs Questioned

The development comes on the heels of the recent City Council finance meeting, in which city auditor Segal flagged the issue of the no-longer counted discounted contribution. 

"Assumption changes that we've made...most are fine tuning and wordsmithing," said Segal's Kathleen Riley.  "The first one is fairly significant in some respects, and insignificant in other respects."  (See graphic provided by Riley BELOW)  

Riley, who has been writing on the issue for months, outlined why he believed the recent acknowledgement warranted an investigation.    

"For the SEC to investigate a municipality about misleading the public with their financial reporting, there must be a couple preconditions," wrote Riley in 2014.  "Did Providence fairly represent the financial condition of the City and its Pension Plan to holders of Providence debt? And did the Mayor or City fully and accurately disclose those conditions in any new offerings?"

"It’s not much of a stretch to say that the Taveras Administration double counting assets, purposely inflating pension assets by $57 million, purposely misrepresenting funding ratios, knowingly not informing the public or pension beneficiaries in a timely manner of a huge discrepancy, miscalculating ARC, and deliberately understating pension obligations qualify under the SEC standard as “misrepresentations," Riley continued.  

Rhode Islands entities have been the subject of recent SEC investigations, which included a two year look into Governor Gina Raimondo's pension investment financial disclosures as General Treasurer which resulted in no formal action.  

(Former SEC investigator Edward Siedle subsequently called for another look into the state pension system by the agency after undertaking his own investigation -- and is slated to be undertaking another in the near future.)

Raimondo's office did not respond to request for comment on the Providence pension situation on Monday

"Its a huge issue ..not something the Governor who set up the pension crisis commission and sat on it should want to run away from," said Riley. "This is a leadership issue."

General Treasurer Seth Magaziner did not address the viability of Providence's pension plan specifically, but instead pledged his office's support.

“Treasurer Magaziner has expressed longstanding concern with the challenges facing municipal pensions in Rhode Island, and stands ready to assist Providence and any other community looking for assistance in shoring up its pension system," said Magaziner's Director of Communications Shana Autiello. 

Looking Forward

"My understanding is that Mr. Riley was correct in pointing about point out the late payment of the $60 million pension payment. I also understand that the situation is being corrected," said former Director of Administration Gary Sasse.  "Four year ago we had a pension crisis at both the state and local levels. The General Treasurer and General Assembly address the state's pension problems, but punted on the local side. "

Riley, however, said he did not foresee the situation being so easily rectified. 

"Providence can avoid SEC charges by putting $62 Million in 6 weeks and then $65 to 70 million over the next 12 months rather than hold it [until] year end as they have done for a decade or more...additionally its conceivable they owe interest to the pension fund of about $50 million, which should be paid next year as it is in arrears," said Riley

"So 2 million to make up for phony asset plus 50 million in interest owed to plan...plus 65 normal ARC...so not counting the 70 million arc in OPEB, they need to come up with $ 177 million," said Riley. "But I guess they knew all that."

"If they charge around 80 thousand per parking space they have a chance," quipped Riley.