Riley: Repeating My Call for Providence Bankruptcy

Each day that Providence, Rhode Island avoids filing for bankruptcy and a nice clean “reset”, the city’s wealthy residents and property owners are placed in a more perilous condition. Delaying the inevitable will cause great harm.  A closer look at the financial circumstances shows that Providence has all the signs of Detroit before its downward spiral. Residents and businesses pay property taxes that are among the highest in the nation.

They would sell their properties if they could, but to whom would they sell? As businesses and residents leave, valuations collapse, resulting in fewer and fewer taxpayers paying more of the burden. The liabilities of the city's “governmental activities” exceeded its assets for the fiscal year ending June 30, 2014 by $142.9 million (presented as "total net position"). Of this amount, a negative of $341.9 million was reported as "unrestricted". Major buildings are empty. The per capita and median household incomes are anemic. The city has a stated pension liability and OPEB of over $2 billion, and I believe that this is understated by at least $1 billion dollars. Providence's credit rating, despite the Taveras Reform and a 2011 law placing municipal bondholders in first lien position ahead of retirees, is currently rated just Baa1 by Moody’s, uncomfortably close to “junk.”

Pension Accounting Abnormalities Reveal Stress

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I think a review of Providence Accounting for Pension Liabilities and Assets is quite revealing and shows the stress Providence is under. It makes clear the fact that systematic pension underfunding has morphed into the City actually borrowing directly from the pension fund to survive. One of the mysteries of Providence’s persistent Pension fund deterioration over the last 20 years has been the lack of accuracy of actuarial analysis.

Supposedly, the returns on pension assets have been stellar, and for the last three years investment adviser Wainwright Investment Counsel LLC claims to be at or near the top in return of investments for all pension consultants. They claim a 3 year performance of 10.9%, and this claim was used by Taveras in his run against Gina Raimondo. (Wainwright's claimed a 10 year record of approximately 7.5%) Now, Mayor Elorza is using it to justify the use of their 8.25% discount rate assumption.

There are two major problems with this January 31, 2014 report generated by Wainwright Investment Counsel LLC at the behest of Taveras. First the obvious fact that Wainwright, according to its own calculation, achieved only 7.5% over the 10 years not 8.25% which it endorses. (This does not include calendar year 2014 which was a 6.2% return). So where does this 8.25% assumption come from?  Second, and even more important than the fact that an 8.25% discount rate is ludicrous, is the fact that Wainwright returns are based only on the investments they managed, which were well below the assets reported in the Pension fund that Providence reported to the public and existing bond holders.

What are the Assets in Providence pension plan?

In June 2013 Providence stated assets in the Pension Plan, according to official documents, were $380 million dollars. Yet according to Wainwright they were only managing $247 million dollars in 2013 and managed $265 million in 2014. These numbers are confirmed in CAFR 2013 and CAFR 2014. An audit of the pension plan produced in January 2014 by Segal Company shows that since at least 2007, the City of Providence has been borrowing money from the pension fund paying between 8.25% and 8.5% annually.

Not only is this stupid, some consider it illegal, and others wonder why the city doesn’t borrow elsewhere? Segal in the Audit report of January 2014 suggests the arrangement should be ended and its accounting treatment is “inappropriate.”  When I warned in June 2014 that the Providence accounting was materially misleading and the Segal report and their warning was not included in a June 2014 bond issuance.

Mayor Taveras' lawyers became concerned enough to amend the bond offering adding that Segal had warned Providence about the accounting treatment. The lawyers amended the bond offering out of concern for liability to the city. Taveras never spoke of it again and appears no change in accounting treatment has taken place.  So now it appears that either the assets don’t actually exist in the Providence pension plan or the City of Providence is borrowing from retirees paying 8.25%. No matter which way we slice this mess, the fact remains that every CAFR and financial report since 2007 has been purposefully misleading bondholders and retirees .Each Mayor – including Cicilline, Taveras and now Elorza all knew that the city was borrowing from the pension fund. Mayor Elorza is now Chair of the investment commission and signs all city documents and will be held responsible along with other Providence officials for SEC violations of misleading existing bondholders each and every time they issue uncorrected financial reports.

So Providence may or may not have an asset, which is actually a loan to the city, in its pension plan. If it does, then why would did the city borrow from the plan? Why not take $57 million from somewhere else or issue some debt at less than 8.25%? The answer of course is that Providence is so broke it has nowhere else to go. This shady emergency borrowing, if that’s what is going on, has to be the dumbest execution of a de-facto pension obligation bond in Municipal history. At the very least, this situation requires a full investigation by outside authorities, because I have already reported this to the city, and to the Auditor General Dennis Hoyle without any response. I first contacted the city and authorities in August 2013 about the accounting treatment.

The Bloody Details

Below is a chart of 2007 to 2014 Providence Stated Pension assets and the actual Investment Returns of Wainwright Investment Counsel LLC. Providence officials, their Actuary and their adviser Wainwright Investment Counsel LLC claimed they would return 8.25%. The returns have actually averaged 5.5 % on reported assets since 2007. That is a $95 million shortfall in returns from the 8.25% discount rate that providence and its actuaries use.  Neither Providence nor Wainwright could be reached for comment. 

 

 

 

 

 

 

 

 

 

 

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.

429 Too Many Requests

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