Michael Riley: Projo, Elorza and Cianci are all Blind to Reality

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Tuesday, October 21, 2014

Michael G. Riley, GoLocalProv MINDSETTER™

Recently the Providence Journal endorsed Jorge Elorza over Buddy Cianci and Daniel Harrop. I would not normally comment but my focus is and has been on Pension Math with respect to the teetering finances of Providence. The media, most prominently the Providence Journal has been woefully inadequate in explaining Providence and the pension mess. The City’s predicament is far worse than the State pension. Naturally voters should know what is happening and why pension abuses could collapse Providence. The Journal and all the candidates except Harrop have avoided discussion of pension irregularities such as assets being “pumped” by Taveras and Cicilline. They have avoided the outrageous discount rate being used for liability calculations 8.25% in Providence and what effect that has on the budget and future liabilities. They have avoided GASB 68 effects. They have avoided the issue of Taveras investment in Hedge Funds under investigation for billions in tax avoidance. They ignored the question of an adviser, who was connected to Madoff and then dumped by many towns in Massachusetts. The adviser was hired by Buddy in 1995. They have avoided the entire discussion of pensions and finance in Providence because they liked Taveras even when negligent. Similarly, both Elorza and Solomon refused to opine on Providence murky pension accounting despite Elorza claiming recently that he was once an accountant early in his career.

The gist of the Journal’s Elorza endorsement was that Buddy is a felon and also he’s responsible for the hugely important unfunded pension problem in Providence due to Buddy’s inappropriate 5% and 6% colas of the early 1990’s. Some argue Ruggiero was the culprit but I’ll stipulate it was solely Buddy for the sake of discussion. I completely agree they were ridiculous, inappropriate and effectively bribery. I agree we should end them and COLAS were finally reduced under Taveras “reform." I agree with the sentiment that politicians in Providence are the biggest problem in pension liabilities. Cianci essentially had a quid pro quo relationship with unionized employees by promising the moon and never funding the appropriate dollars. Like other mayors from Cianci all the way to Taveras, Buddy hid behind accounting tricks. But in 2014 all these tricks are collapsing. Years of low interest rates have exposed all the assumptions for liabilities and assets as “way off the mark." Government Account Standards are pressing municipalities to tell the truth. Taveras lies are the worst of all and the accounting is misleading. There is no way Providence or any other town can promise 8.25 % returns.

So, the question of pension fund liabilities is huge but the Journals use of the 5 & 6% cola issue as a reason to vote for Elorza without explaining the total financial picture for Providence is an extremely lazy excuse for the Journals agenda of anyone but Buddy Cianci .

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Can we please just get the Numbers Right?

Instead of relying on unsupported emotional claims let’s put the 5 & 6% colas into perspective. Are those Colas the problem? Back of the envelope calculations will suffice. I am pretty sure the Journal did no calculations what so ever. Let’s start with the value of all the reforms that Taveras touted and the Journal thoughtlessly repeated. According to the 2013 CAFR (pg 8) The total dollar amount of savings by Taveras and the unions was $170 million for all reforms that included suspending all colas for 10 years, eliminating 5 % and 6% COLAS, capping pensions at 150% of Household income, changing calculations of % of salary to final 4 years average, increasing contribution employee contributions and altering the disability payout. All those items together reduced the pension liability by 10%.

Taveras must have been disappointed that the savings from changing beneficiary’s colas to 3% from 5.5% was so small. That didn’t stop the media from jointly proclaiming success with Taveras. But the numbers just won’t go away and tell a different story.

Calculations

The average retiree receives in Providence receives $29000 annually. The range is much wider as has been reported. There are approximately 3094 retirees and sub beneficiaries. This totaled $90 million for the year in 2013.

Here’s the back of envelope calculation for 5 and 6 % cola effect on liabilities when changed to 3% which is all that happened here after a 10 year suspension.

Assume each retiree (3094) receiving benefits totaling $90-95 million a year. (The ARC pmt is $50 to $60 million)

Assume a 23 year lifespan in retirement.

Find the future value of two streams (annually to keep it simple)

>>>Stream 1 pay $90 million for 23 years increasing annually by 3% cola and then take present value.

>>>>>Stream 2 pay $90 million for 23 years increasing annually by 5.5% and then take present value.

Compare those present values.

PV of $90 million growing at 3% compounded annually for 23 years = $471 million

PV of $90 million growing at 5.5% compounded annually for 23 years = $641 million

The analysis is not done. Since only 65% to 70% of retirees received the higher colas, we adjust the present value by multiplying by .7.

Taking the difference in present values of $170 million times .7 = $119 million

Sorry still not done

That would be the calculation if colas were simply reduced to 3% across the board. That’s not what Taveras did. All coals were suspended for 10 years. The present value of suspending all colas for 10 years and then returning to 3% colas is $92 million which is more than half Taveras claimed savings.

6% Colas are wrong but only explain 2% -5% of liabilities

So, the 5 and 6 % colas returning in 10 years to 3% colas account for, or explain, less than 5% of the current problem. The number also barely exceeds the $57 million lost assets that Taveras refuses to explain and Elorza pretends isn’t an issue. The Journal would do well by justifying its mayoral endorsements on the facts rather than grudges. I like Dan Harrop and his suggestion that Providence should seek receivership so the Renaissance city can have a “reset”… I don’t see any other way out.

The Journal is using popular myth and bad math to explain a vote for a candidate that has zero experience and can’t even explain the current finances in Providence. They deserve each other.

Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC news, Yahoo TV, and CNBC.

Cianci's Coverage in the Providence Journal

Column - September 21

Taveras Adds Voice of Criticism

In an interview with the Providence Journal's Ed Fitzpatrick on Cianci, Providence Mayor Taveras said, "I'm not sure what city he was talking about. Facts are pesky things. Let's make sure, as we start looking at the old days, we realize just exactly what those old days involved."

Politifact - September 21

Cianci's Claim About the Deficit Not on Money

Cianci's claims were ruled "half-true" in a September 21 Politifact.

"...the ad implies that things were rosy under Cianci and went downhill after he left. That ignores the future problems he caused by underfunding the pension system, the effects of the Great Recession, and the strides Taveras made to bring the city back from bankruptcy," wrote Alex Kuffner.

Letter - September 22

Calling Cianci a Liar is Sensationalism

Paul J. Salesi wrote in a Letter to the Editor, "I find your September 17 editorial "Lying for votes" a case of the pot calling the kettle black. You accuse Vincent Cianci of lying when in fact he may have taken a statement out of context, something The Journal and the press in general do on a regular basis."

Letter - September 23

Editorials on Cianci are Risky for Journal

In a Letter to the Editor, William G. Touret of Providence called out the Journal on its perceived bias.

"Enough already. We get it. The Journal's decades-old crusade against former Mayor Vincent Cianci will never end, even if the Journal's ill-will, the origin of which I can only imagine, risks the Journal's further alienating and losing its subscriber base," wrote Touret

Article - September 23

Cianci Envisions Brighter Broad Street

John Hill reported that Cianci's plan to revitalize for Broad Street may be to snag minority votes.

"The city's heavily black and Latino south side is seen possibly up for grabs in the November election...but Cianci denied his plan's focus on Broad Street was a strategy to win votes there."

Editorial - September 23

Clubbing with Cianci

The Providence Journal Editorial Board weighed in on the claim that Cianci asked Elorza for his support.

The Editorial Board wrote, "That seems doubtful, since the recommendation of an ex-felon who went to federal prison for running City Hall as a criminal enterprise would hardly elevate the reputation of a candidate running on a platform of serving the public interest."

Letter - September 24

Cianci Went to Prison for a Very Good Reason

In a Letter to the Editor on September 24, Marvin Greenberg calls out the voters of Providence.

Greenberg wrote, "I can't vote in Providence, but how can the intelligent people who can vote think that things will be different if they reelect Vincent Cianci?"

Article - September 24

Police Union Gives Ex-Mayor Its Endorsement

Katie Mulvaney refered to Cianci's criminal record in a September 24 article on the Providence Police union endorsement.

"A twice convicted felon, Cianci previously served as Mayor of Providence from 1975 through 1984 and from 1991 to 2002," wrote Mulvaney.

Article - September 24

Cianci's Convictions on the Minds of Undecided Voters

John Hill cited a recent Providence Journal/WPRI-12 poll on September 24.

Hill writes, "Vincent A. Cianci Jr.'s criminal record could be a problem for him among undecided voters as he tries for a second comeback to City Hall, the results of a Providence Journal/WPRI-12 poll indicate."

Article - September 24

13-Year-Old Lawsuit Against Cianci Heard

On September 24, Richard Salit reported on a 13-year-old lawsuit against Cianci.

Salit wrote, "A state Supreme Court hearing on whether Vincent A. Cianci Jr. unlawfully ordered firefighters to participate in a 2001 gay-pride march gave the former Mayor an opportunity on Tuesday to tout his record of support for the gay community as he runs for his old seat."

Editorial - September 24

Cianci's Half-Truths

The Editorial Board of the Providence Journal calls out Cianci on his "half-truths".

"The twice convicted felon running for mayor has no qualms about telling half-truths and outright lies in his quest for power," the Board wrote.

Column - September 26

Candidate Elorza Must Say Why Cianci's Crimes Matter

Edward Fitzpatrick wrote in a September 26 column, "You know, if you've been convicted of two felonies, you might have a tough time getting a job running the Coolatta machine at Dunkin' Donuts."

Editorial - September 26

The Mayoral Poll

In reaction to the latest poll results, the Providence Journal Editorial Board wrote, "People who love Providence and want to see it move beyond its corrupt past can be forgiven for feeling discouraged by this week's Providence Journal/WPRI poll. Nearly 30 percent of registered voters indicated that Vincent Cianci's two felony convictions-including four years in federal prison for running City Hall as a criminal enterprise-were 'not at all' important in determining their vote."

Column - September 28

Come On Now, What's the Biggest Outrage Here?

Is it the article -- or the headline?

Jim Donaldson compared Cianci and Ray Rice in a September 28 column -- and it appears the headline was changed from above to "When it comes to Rice and Cianci, it's time we get our priorities straight" -- a kinder, gentler offering, perhaps?

"While 38 percent of voters, and even the Providence police union, think it's OK for a two-time felon with a conviction for racketeering to run a city, the nation is outraged over the thought of Ray Rice running with a football," wrote Donaldson.

Opinion Piece - September

Rise Up Everyone, and Keep a Crook Out of City Hall

Formal Journal reporter Brian C. Jones responded to the Providence police and firefighter unions endorsing Cianci.

"Should you call 911? Well, maybe. There is a crime in progress in the city of Providence: Vincent Cianci is running for mayor, and, as of last week, he was winning," Jones wrote.

Letter - September 28

Cianci's Half-Baked Vision for Providence

Jim Galkin of Cranston challenges Cianci's vision for Providence.

Galkin wrote in a Letter to the Editor, "Perhaps it is a "vision" if it does not succeed and a plan if it does. Hey, I have a plan and a vision: Call magician Mat Franco (winner of "America's Got Talent") and make all these politicians disappear."

Editorial - September 28

His Own Words

The Editorial Board of the Providence Journal suggested Cianci's biggest enemy is himself.

"There are many compelling arguments against letting Vincent Cianci, the twice-convicted felon running for Mayor of Providence anywhere near City Hall again. But it is fascinating that one of the strongest cases against his return has been made by one of his strongest supporters: Cianci himself."

Article - September 28

Providence Teachers Union Back Cianci

C. Euguene Emery Jr.'s article makes mention of Cianci's criminal record.

"The vote came four days after the city's police union also voted to endorse Cianci, a two-time felon, to run for the city again," wrote Emery Jr.

Politifact - September 28

Cianci's Pension Funding Claim is Overdrawn

In the September 28th Politifact, it is ruled that Cianci's claim that, "In 2001 and '02...we had the pension system funded at {the} 100 percent level in that year, and we did for two years at that point", is "half-true".

Michael Riley: Projo, Elorza and Cianci are all Blind to Reality