Riley: Providence Pension Scam is Unraveling

Riley: Providence Pension Scam is Unraveling

The Providence pension scam is unraveling. The first quarter returns are in from Wainwright Investment Counsel LLC, Providence adviser since being hired by Buddy Cianci in 1995. The pension assets managed by Wainwright have returned 2.76 % as of March 31 for calendar year 2015. For fiscal year 2015, which ends in June the returns, are 4.23% and have badly lagged the 8.25 % expected by Mayor Elorza and his hired actuaries. 

The problem is that the actual return on plan assets is very unclear because it appears that either the city of Providence is borrowing from the Providence Pension Plan and paying 8.25% or the city is overstating  $50 -60 million in plan assets that simply don’t exist. If total plan assets are actually $357,000,000 as reported in city documents, then why is Wainwright only managing $268,000,000? 

 “ OTHER”

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A closer look reveals that also listed as plan assets in addition to $265,000,000 in stocks, bonds, funds, and cash, are two curious items “loans receivable” and “other." Those two items totaled $ 89,560,000 in 2014 CAFR. Tracking this down we found an item listed as “payable to retirement fund” on the city’s balance sheet in the amount $ 53,907,000. 

In January 2014 Segal Co completed an audit of the pension plan and said Providence had inappropriately counted $ 57 million of discounted contributions as a plan asset and Providence should end that accounting practice. In June after months of this columns persistent condemning of Providence officials for “pumping up” pension assets, Providence was forced to amend its bond documents to reflect the Segal admonition. Kate Nagle had written repeating my charges and Providence lawyers then decided they needed to disclose the Segal findings.

Consequently Providence amended the offering document and successfully refinanced bonds yet still did nothing to address the Segal charge. 

How does this affect Pension Funding?

So Providence and their actuaries under each Mayor knowingly overstated Pension Assets producing an inaccurate and overstated Funding ratio. This allowed the Mayors to set less aside for ARC payments and spend tax dollars on other items including raises. The tactic of over reporting the assets and funded ratios caused an estimated $60 to $100 million shortfall in what should have been contributed to the pension over the last decade.  Pension beneficiaries should be outraged unless of course they received those raises and the compounding effect on their pensions that they believed to be guaranteed anyway.  

The reality is that there is only $268 million in assets invested by Providence to pay for what in 2 months will be shown to be at least  $1.7 billion in liabilities. Fully 25% of the supposedly $357 million in assets fall into loan receivables and  “other." This is highly unusual accounting, possibly criminally misleading  so I decided to try and find a city in Rhode Island that had the same treatment or characteristics. There were none. Then I tried 25 top cities all over the United States. Again there weren’t any cities that accounted for pensions or pension assets this way. I have created a table below showing what cities have reported as Pension Assets and the amount that is invested by each city in stocks, bonds, funds and cash. 

Also shown is the percentage of Pension Plan assets listed as “other."

 

 

 

 

 

 

 

As you can see in the table above, there is something very wrong in Providence and it’s about time the Mayor and Finance Director explain what’s going on.  

Next week…what does Dan Sherman have to do with all this?

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.