UPDATED: SEC Investigating RI Bonds

Friday, February 04, 2011


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The U.S. Securities and Exchange Commission has launched an investigation in the state’s bond offerings—which raises major red flags about the health of the state’s finances, particularly its pension system.

“There’s no secret that the SEC is concerned about states issuing bonds when the states in many cases may be on the verge of bankruptcy,” said Ed Mazze, a business professor at the University of Rhode Island. “So I’m not surprised that they would be looking at Rhode Island because in the last couple of weeks Rhode Island has hit the list again in terms of its unfunded pension liability, budget deficit, etc.”

Illinois also under investigation

The investigation puts Rhode Island in a league with Illinois, which earlier this month came under investigation by the SEC for not fully disclosing to investors the risks in its method of funding its pensions. Rhode Island uses a pension funding method similar to Illinois' method, according to the New York Times.

Peter Nigro, a finance professor at Bryant University, told GoLocalProv he believes that Rhode Island, like Illinois, may not have been accurately or thoroughly reporting its future pension obligations to investors, triggering the SEC investigation.

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He said it will take anywhere from six months to a year for an investigation to be completed. In the meantime, just the news that the SEC is looking into state finances could have an impact on the state’s ability to issue bonds, according to Nigro. “It’s probably going to spook the market a little bit,” he said, as investors wonder why the SEC is investigating. “It’s probably not something good.”

Impact on state finances

If the state receives a less favorable bond rating as a result of the investigation, he said that would make it more costly for it to borrow money—only further exacerbating the financial conditions that put the state in this situation in the first place. The impact, he noted, could have a broad effect on the state budget and efforts to balance it.

“We are spending more than we have,” Nigro said. “So what do we do? We borrow money. How do you borrow? You issue debt.”

Nigro, who worked in the U.S. Treasury Department for about a decade, said the investigation could also affect local communities. “It could have a trickle-down effect,” he said.

Raimondo: ‘I was not entirely surprised’

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In a statement from her office announcing the investigation yesterday, General Treasurer Gina Raimondo said she was not surprised by it.

“It is regrettable to have inherited this situation so early in my administration before having an opportunity to fully address these issues,” Raimondo said. “Regardless if the SEC decides to proceed with a full investigation, work has begun to improve the state’s disclosures in bond issuances. The state needs to be able to access the bond market in the years to come on the most favorable terms possible. It is critical to present a complete picture of our finances to potential bond investors.”

Earlier this week, Raimondo initiated her own review of every aspect of the General Treasurer’s office, including the state’s bond disclosure practices, which she said she will ensure are in keeping with the “best practices nationwide.”

“I was not entirely surprised to receive the SEC’s call,” Raimondo added. “For months Rhode Island has been listed among several states with precarious finances. This challenging position is in part due to our significant and growing unfunded pension liability. It is unacceptable to be on these lists. The first step to addressing these challenges is to be accurate about the numbers we are using and to not underestimate the magnitude of our problems.”


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