Riley: Providence’s Cash Flow Problem
Tuesday, August 11, 2015
Michael G. Riley, GoLocalProv MINDSETTER™
Providence Rhode Island officials and Providence Mayors are notoriously misleading about the financial condition of the city and as a rule admit to nothing. Mayor Elorza unfortunately is no exception. Despite Mr. Elorza’s silence on a $62 million dollar default and theft of the City’s own pension fund assets he is still stuck with the enormous issue that Providence has a huge cash flow problem and is perpetually on the brink of bankruptcy. Rather working to address the problem through a packaged receivership, this new mayor is stuck in the same egotistical mindset that says “I am Mayor and I know how to fix things”. I believe, he does know in his own heart that bankruptcy is the proper course but he won’t do it. He won’t do what is right. He won’t file for bankruptcy protection or ask for a receiver because he will lose the power he craves. If he really cared about the City of Providence and its 178,000 constituents he would not lie about the recent $62,000,000 default. He would not chose to mislead municipal bondholders with false and misleading financial information. And he wouldn’t secretly borrow at 8.25% instead of easily borrowing at 1 to 2% or less like other distressed cities.
Despite the trouble, Providence can be much smarter about its predicament. Mayor Elorza , a self-proclaimed accountant, runs the scam this way. After skimming and diverting Pension fund contributions all year long then borrows the diverted amount of $62 million for four months at 8.25%. This probably illegal, expensive and secretive maneuver costs Providence tax payers an additional $1.7 million every year. That’s an awful of of trouble to go to even for a scheming politician. Why doesn’t he just do what Bridgeport is doing now?
Why does Bridgeport borrow at 1% and Providence 8.25%?
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Despite Bridgeport declaring bankruptcy in 1991 and then issuing an ill-timed Pension Obligation Bond (POB) of $350 million in 1999 which was lost in the dot com and 2008 crashes, Bridgeport can still borrow for short term cash flow issues at approximately 1%. It doesn’t borrow from its own pension fund. Bridgeport like every other cit in America with cash flow problems uses tax anticipation notes. On October 22, 2013, Bridgeport issued a tax anticipation note in the amount of $71,500,000 to fund cash flows and for operating expenses. The note matured on February 18, 2014 with an interest rate of 1.00%. On April 15, 2014, the City issued a tax anticipation note in the amount of $20,000,000 to fund cash flows for operating expenses. That note matured on August 15, 2014 with an interest rate of 1.0%. On November 19, 2014, the City issued a tax anticipation note in the amount of $50,000,000 to fund cash flows for operating expenses.
What is Elorza hiding?
I suspect that one reason Mayor Elorza does not seek to finance the obvious cash flow problems in Providence using tax anticipation notes is that Providence is so broke they can’t even pay their legal bills or a ratings agency to issue the notes. Another reason may be that for secretly borrowing from the pension fund has worked if your original intention is to default, like Cicilline and Elorza before him, Maybe Elorza never intends to pay the pension fund back and will eventually default on the loan just like Providence did a few weeks back. This of course would be known as accounting fraud and would land the Mayor in Jail.
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.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
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2005-2010
In the five years before Raimondo was elected, pension changes included a decrease in established retirement age from 65 to 62, increased eligibility to retire, and modified COLA adjustments.
Read the Senate Fiscal Office's Brief
here.
(Photo: 401(k) 2013, Flickr)
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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.
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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)
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
“The present law is sound fiscal policy and should remain unchanged.” -George Nee (Rhode Island AFL-CIO President)
See WPRI's coverage of Chafee's attempt to cut pension fund deposits
here.
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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.
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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.
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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.
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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.
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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.
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