Riley: Puerto Rico and Providence on My Mind
Michael G. Riley, GoLocalProv MINDSETTER™
Riley: Puerto Rico and Providence on My Mind
Congress has been wrestling with the fact that currently Puerto Rico does not have the ability to file bankruptcy and reorganize under bankruptcy code. Some worry the United State taxpayers could end up on the hook and almost certainly will take a loss. Other Americans losing would be Puerto Rican municipal bond holders who own them through U.S. Municipal Bond Funds.
PR bill headed to House floor Friday
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThe political wrangling is fierce, but the basic idea is that someone has to pay the debts or maybe the promises made to employees will just be canceled and they are out of luck. The possible losers are the bond holders (including heavy Wall Street interests), the state employees, Puerto Rico taxpayers, 170,000 creditors and vendors who haven’t been paid and maybe U.S. taxpayers.
After weeks of negotiations there appears to be a potential solution that shares the pain. A bill is being drafted. The bill, which would give Puerto Rico certain powers that are normally available only in bankruptcy, is scheduled to be the subject of a hearing before the House Natural Resources Committee then final amendments before being sent for debate on the floor of the house.
Paul Ryan is spearheading the effort to head off a full blown crisis. “Congress has a constitutional and financial responsibility to bring order to the chaos that is unfolding in the U.S. territory — chaos that could soon wreak havoc on the American bond market,” Mr. Ryan said. Without naming names, he said the bill “holds the right people accountable for the crisis.”
Wisconsin Rep proposes a law very different from Rhode Island law
Representative Sean P. Duffy, a Wisconsin Republican who supported earlier efforts to give Puerto Rico direct access to chapter 9 municipal bankruptcy, introduced the bill on Tuesday last week. In particular, it would give the island the power to unilaterally discharge debt and to force creditors to accept settlements for less money than they were seeking.
The bill also contains provisions meant to reassure Puerto Rico residents that Congress does not want to sideline their elected government during the coming debt negotiations. A previous draft of the bill would have created an oversight board with significant power over Puerto Rico’s economic affairs, such as raising taxes if necessary and repealing certain laws.
Rhode Island law does the opposite. It protects the bond holders to the detriment of employees' promises and RI taxpayers. Rhode Island leaders were concerned that if they didn’t protect bondholders a contagion would spread due to Central Falls bankruptcy in 2010. In addition Rhode Island receivership law would strip the city officials of power temporarily as an overseer would take charge. Providence is on the verge of bankruptcy now and is rated one step above junk.
Opponents of the proposed bill are mostly Wall Street related
Opponents of the bill said on last Tuesday that it was essentially chapter 9 bankruptcy by another name. Matthew Kandrach, vice president of the 60 Plus Association, said the bill “draws on nearly every provision of chapter 9 of the U.S. Bankruptcy Code, and gives a federally appointed ‘Oversight Board’ the authority to apply them retroactively.” Large numbers of investors bought Puerto Rico’s bonds while they were still rated investment grade and when the island was officially excluded from taking shelter in bankruptcy.
Did Puerto Rico and bond underwriters mislead investors?
Puerto Rico has major bond payments coming due in just a few weeks, and its government risks running out of cash. If it simply stops making debt payments, it is likely to be sued by one creditor group after another, creating a tangle of lawsuits that could take years to unravel.
In the meantime, Puerto Rico would be a pariah in the bond market, unable to borrow affordably. Because it is not a sovereign nation, it cannot seek help from such lenders of last resort as the International Monetary Fund. But lawmakers have also been worried about setting a dangerous precedent by giving Puerto Rico extraordinary tools to wipe out debt, fearing it would not be long before troubled states like Illinois came to Washington seeking the same thing.
So how would a Providence receivership happen?
“In one sense, a local government fiscal crisis is simply a lack of cash to pay ongoing commitments. These commitments may include vendor payments, pension payments, payroll, bond payments, and other such items. Governments typically hold both cash and investment vehicles for financial assets. When cash and short-term investments on hand are less than immediate cash commitments, there is situation of cash insolvency, or a local fiscal emergency.”
Providence has been in crisis a long time. Somewhere along the way, Providence was insolvent and city officials deferred payments to the pension plan probably decades ago, and they kept doing it year after year. They never paid it back or even on time. Yet they counted the missing money in the Pension plan as an asset. The money is gone. It was spent on other things and a full regulatory analysis will either reveal that Providence has either mislead everyone (my claim) or alternatively that every city and town in America can increase their cash flow by using Providence and Enron style of accounting.
Most likely Providence will be in receivership, but unlike Puerto Rico who will properly impair bondholders as well as haircut employee benefits and tax Puerto Ricans more, Providence employees and taxpayers and bondholders will all share less of the burden than will RI State taxpayers in all 38 other communities. People in Tiverton or Cumberland will be paying for the retirements of firemen in Providence. Does that sound fair? Ask Gina Raimondo if she would bail out either Puerto Rico or Providence.
Main photo: Old San Juan, Puerto Rico. Flickr/cogito ergo imago
Timeline - Rhode Island Pension Reform
2005-2010
January 2009
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
2009
Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions.
Read the NCSL report here
(Photo: FutUndBeidl, Flickr)
2010
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
November 2010
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
April 2011
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
May 2011
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
October 2011
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
October 2011
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
January 2012
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
December 5, 2012
Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package. In response, Chafee issues a statement supporting the negotiations.
Read more about Raimondo's opposition here.
Read about Chafee's statement here.
March 2013
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
April 2013
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
June 2013
Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.
Read GoLocalProv's investigation into the rising pension costs here.
September 2013
Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform.
Read Taibbi's article in Rolling Stone.
Read GoLocalProv's response to Taibbi here.
October 2013
As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.
Read more from GoLocalProv about the players in the pension battle here.
