Providence Bond Refinancing Offering Blasted by Financial Analyst
Tuesday, June 24, 2014
A recent municipal bond refinancing offering by the city of Providence has been criticized by a financial analyst for not accurately reflecting the fiscal condition of the city.
The $17,465,000 Series 2014A tax exempt and $6,285,000 Series 2014B federally taxable general obligation refunding bonds had a preliminary financial statement posted on June 19, with a Moody's rating of Baa1 and a S&P rating of BBB.
"This bond offering overstates pension assets by $57 million and understates the ARC," said financial analyst Michael Riley. "Is the true nature of the pension obligation disclosed? What will the UAAL be under GASB 68? What will the ARC be?"
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTFirst Southwest, the financial analyst being sued by the State of Rhode Island for its role in the 38 Studios, which was recently rehired by the state, is the financial advisor for the bond sale.
"Accounting standards change over time and the City adjusts its practices accordingly. Please see page A-24 of the Preliminary Official Statement for more regarding GASB 68," said Meaghan McCabe with the City of Providence. "The City of Providence has worked with First Southwest for many years and has not had an issue with their performance."
Use of Consultant's Findings Questioned
Riley, who on June 17 posted a piece for GoLocal entitled "GASB 68 Portends Huge Problems for City and State", spoke to what he believed were at the core of the issues with the bond offering.
"First, about $57 million in last year’s assets was essentially a lie. This lie has been carried forward for some time, probably as far back as Cicilline," said Riley. "Taveras decided to carry on the lying tradition but he has a problem, his actuary warned in January 2014 (far after we did) the following:
'Segal Report from January 31, 2014: As in prior valuations, the actuarial value of assets and the market value of assets include the discounted contribution paid by the city for the following year. We recommend that future valuations exclude discounted contributions from reported assets.' That amount was $57.3 million," wrote Riley.
"Where do they show the effects of GASB 68?" asked Riley. "And Segal's diss-allowance of pension assets calculation, how does that show up in this disclosure?"
"[The City of Providence] should in theory refinance as much as the market will bear, but the low rate environment and the lies they have gotten away with will both end soon," Riley continued.
SEC on Record
"[Municipalities] hire actuaries who purposely wait until the last minute that they are legally required to disclose," said Riley. "There has been little teeth in the past, but that's all changing. A SEC commissioner spoke out about it two weeks ago."
On May 29, Lisa Lambert for Reuters wrote "Regulator Hits U.S. Public Pensions for "Misleading" Practices." Lambert wrote the following:
"Trillions of dollars in liabilities -- reflecting amounts promised to state and local government workers -- are not appropriately reflected on government books, thereby seriously misleading investors about the riskiness of their investments in municipal securities," said Daniel Gallagher, one of the five members of the Securities and Exchange Commission, which regulates U.S. financial markets.
Gallagher, who warned last year of an impending "Muni Armageddon," hit every area of public pensions, saying that the current system saves "elected officials from making the hard choices."
Of his assessment of the Providence bond offering, Riley said. "I could buy some bonds and complain," said Riley. "I will have then been harmed by their lack of disclosure and have standing."
Related Slideshow: See How Much Providence Pays in Pension Fund Fees
Per investment information obtained by GoLocal, the following are the management fees paid by the City of Providence Employees Retirment System (as of April 2013 -- Graham Global funds were moved at the last city Investment commission meeting).
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