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Michael Riley: Don’t Pay

Wednesday, May 14, 2014


I am taking this week away from the RI Pension Commission and the worsening Municipal Pension Crisis to instead focus for a moment on the EDC 38 Studios debt and the decision the General assembly will soon have to make regarding paying this tranche of $12.4 million. Yesterday, S&P and Moody’s predictably warned that they have placed Rhode Island General Obligation debt on negative watch.

Here is last years’ statement just prior to the first $2.5 million vote in the appropriations. And here’s yesterday’s by S&P.

These actions are expected

No one should be surprised at the ratings agencies’ actions this year. Hopefully, when the General Assembly soon votes that this payment should NOT take place, we will see the actual Rating reaction by S&P and Moody’s. If they downgrade Rhode Island General Obligation (GO) Bonds to junk, even below the debt of Puerto Rico (as they promise), then RI residents and individual investors may sell their GO bonds at crash prices to people like me, based solely on Moody’s and Standard & Poors’ ratings.

So they rate us “junk.” Then what?

Perhaps in a few weeks, when those bonds are trading at investment grade prices, there should be a federal investigation into those unnecessary investor losses. Maybe the individuals who suffered losses when junk bond ratings scared them into selling to opportunistic investors like me should then go to the SEC or even the justice department with complaints or inquiries. Then the rating agencies will be appropriately asked “what justification was there to rate Rhode Island General Obligation Debt below Puerto Rico,” as SJ Advisors has warned the agencies will do. SJ Advisors has produced a lengthy report that, in my analysis, substantially overstates the worst case scenario cost using questionable risk premia assumptions, questionable comps and an unexplained discount rate for determining the present value of potential costs to tax payers. While the scenario analysis format in the report is acceptable for a range of outcomes, the outcomes are not specifically weighted by probability, as a rigorous analysis would normally provide. In sum, the SJ Advisors report is unconvincing.

So why do voters overwhelmingly want to default?

I‘ve seen a few online polls where generally the results are 20% pay and 80% do not pay. One reason: taxpayers are unwilling to pay off a bond that today is still mired in investigations and possible criminality. They see the obfuscation, and know one of the parties involved is under investigation. The second reason is that they are clearly not legally obligated to pay.

I estimate at least a dozen times in this highly unusual private placement memorandum the investors are told that the State of Rhode Island is in no way obligated. This private placement went to accredited investors ONLY. They had to have a net worth of $1 million dollars beyond their residence to read the docs and participate. The investors signed off on the 336 pages describing the risk and received 7.5%, part of which was spent on an insurance policy from Assured Guaranty, who in turn made clear that they were not assigning any accuracy at all to the PPM.

Wrapping it up

So, just who exactly is Moody’s trying to protect with these potential “punishing ratings” that could, in fact, turn out to be horribly wrong and unjustified? Who then will be responsible for what SJ Advisors estimates as a $200 million dollar loss in market value (3 times the bond issue in question) that resulted from RI General Obligation bonds being rated junk?

I don’t believe Moody’s really thinks RI GO debt is a worse credit than Puerto Rico. I think they are overreacting, or more likely manipulating, in order to scare off other entities across the country. And they can do so because we are such a small state with a very weak Governor. Remember that Moody’s and S&P are quasi government approved entities. They are trying to flex their muscles against the smallest State in the Union. Have they never heard of a “one-off” situation, which is trading vernacular for unusual or separate and apart from the norm? Are they unaware of the corruption involved in Rhode Island and as yet uninvestigated regarding this specific bond? No responsible credit analyst truly believes RI General Obligation Debt will default before Puerto Rico. That would simply be an unprofessional analysis. My prediction is, if the payment is voted down in the GA and our GO debt is then downgraded to “junk," then the market participants will step in and buy RI GO bonds. Those bonds will trade, in very short order, significantly above junk rating and return to investment grade prices. Rhode Island has far larger issues affecting investor attitudes and rating agencies that include 1) the “corrupt state” impression we have cultivated and 2) the massively underfunded State and Municipal Pensions plans that Mr. Chafee’s Commission completely ignores.

A major reason on the horizon to be worried about a more permanent and significant downgrade is the potential reversal of pension reform. I estimate this cost at over $5 billion, starting with $600 million over 3 years. Those potential costs dwarf any “potential worst case” loss due to 38 studios, as described by the governors hired guns. If we had a real Governor, he would stand up for the Taxpayers and the State of Rhode Island and stand up against threats by rating agencies.


Related Slideshow: PAC Spending in the 2014 Rhode Island Governor’s Race

With Election Day now just months away, GoLocal took a look at PAC spending in the Rhode Island gubernatorial campaigns.

Who is giving to who -- and how much?  And what's worth more, the money or the grassroots support?

Below is look at recorded PAC giving by the candidates in their campaign finance reports for the 2013 calendar year, by quarter.  Candidate Todd Giroux has an affadavit for an annual filing exemption.

Prev Next

Gina Raimondo - Q1 2013

PAC money received: $7,000

AON Corporation:  $2,500*
Attorneys Partridge, Snow, and Hahn: $1000
Brokers for Better Health Care: $250
Engage RI PAC: $1000
Hinckley Allen and Snyder: $1000
Hinckley Allen and Snyder Rhode Island PAC: $1000
RI Medical PAC: $250
Cash balance ending March 31, 2013: $1,723,203.71
Excessive donation made in error, said would "be reflected" in 2nd quarter report
Prev Next

Gina Raimondo - Q2 2013

PAC money received: $4,400 

Amica RI PAC: $250
Cox PAC: $1000
Federal Express RI State PAC: $250
IBEW Local 99: $500
Iron Workers Local 37: $250
Metlife Insurance PAC D:  $200
Plumbers and Pipefitters Local: $500
RI Bricklayers PAC: $500
RI Carpenters PAC: $200
RI Laborers PAC: $500
Sheet Metal Workers: $250
Cash balance ending June 30, 2013: $2,063,548.54
Prev Next

Gina Raimondo - Q3 2013

PAC money received $1,750 

Citzens Bank PACOM: $500
Delta Dental of RI PAC: $500
International Union of Painters: $250
Cash balance ending September 30, 2013: $2,305,657.89
Prev Next

Gina Raimondo - Q4 2013

PAC money received: $6,950

Attorneys Partridge, Snow, and Hahn: $750 
Building Industry PAC: $500
Capitol Communications Group LLC, PAC: $500
Emily's List RI: $1000
IBEW Local 99: $250
Plumbers and Pipefitters: $500
RI Laborers' PAC: $1000
RI Medical PAC: $750
RI Public Employees Education PAC: $1000
United Food and Commercial Workers: $500
Utility Contractors' Association: $200
Cash balance ending December 31, 2013: $2,508,647.86
Prev Next

Angel Taveras - Q1 2013

PAC money received: $3,600

Capitol Communications Group, $500
Iron Workers Local 37, $100
IOUE (Intl. Union of Operating Engineers) Local 57: $1000
Moses and Afonso PAC: $1000
Plumbers and Pipefitters Local 51 PAC: $500
RI Carpenters PAC: $250
RI NERCC (NE Regional Council of Carpenters PAC) PAC: $250
Cash balance ending March 31, 2013: $560,779.72
Prev Next

Angel Taveras - Q2 2013

PAC money received: $6,550

Attorneys Partridge Snow and Hahn: $250
Attorneys Partridge Snow and Hahn: $750
Building Industry PAC: $500
Chartercare Employee PAC: $250
COX PAC: $250
COX PAC: $750
Hinckley, Allen, Snyder PAC: $1000
Hinckley, Allen, Snyder Rhode Island PAC: $1000
IBEW Local 99: $100
Local 791 UCFW PAC: $500
Providence Firefighters Local 799: $200
RI Troopers Association: $1000
Cash balance ending June 30, 2013: $692,590.12
Prev Next

Angel Taveras - Q3 2013

PAC money received: $1,300

Connecticut Healthcare District 1199: $500
Providence Firefighters Local 799: $800

Cash balance as of September 30, 2013: $759,150.22
Prev Next

Angel Taveras - Q4 2013

PAC money received:  $6,100

American Association of University Professionals: $1000
Darrow Everett PAC: $500
Enterprise Holdings PAC of RI: $500
Enterprise Holdings PAC of RI: $500
Middletown Firefighters COPE: $100
RI Laborers Public Employees PAC: $1000
RI Medical PAC: $1000
RI State Association of Firefighters: $1000
United Food and Commercial Workers: $500
Cash balance as of December 31, 2013: $1,025,981.62
Prev Next

Allan Fung -- Q1 2013

PAC money received: $1,550*

Amica PAC: $250
Cox PAC: $200
IBEW Local 99: $250
International Brotherhood of Police: $350
RI Troopers Association: $500
Cash balance as of March 31, 2013: $160,520.12
* A later filing amended the PAC amount to $1,650 and cash balance to $159,520.12.
Prev Next

Allan Fung - Q2 2013

PAC money received: $1,600 

Amica PAC: $250
International Brotherhood of Police: $650
MetLife PAC D:  $200
Opticians PAC: $500
Cash balance as of June 30, 2013: $256,498.77
Prev Next

Allan Fung -- Q3 2013

PAC money received: $1,100

CIRI PAC: $100
Darrow Everett: $500
RI Troopers Association: $500
Cash balance as of September 30, 2013: $336,553.93
Prev Next

Allan Fung -- Q4 2013

PAC money received: $3,800

Amica / RI PAC: $500
Capitol Communications Group $500
Hinckley, Allen, Snyder: $500
MetLife PAC D: $800
Opticians PAC: $500
RI Medical PAC: $1000
Cash balance as of December 31, 2013:  $384,925.44
Prev Next

Ken Block

Quarter 1:  No PAC $; cash balance   $20,000.07
Quarter 2:  No PAC $; cash balance   $73,987.53
Quarter 3:  No PAC $; cash balance $547,685.26
Quarter 4:  No PAC $; cash balance $634,126.60
Prev Next

Clay Pell

Quarter 4 (first report filed): No PAC $, cash balance $1,105,152.43 


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Agree with you M Riley. When it comes to General Obligation Debt, Rhode island's laws has to offer some of the strongest bondholder protections in the country. In the ongoing Detroit bankruptcy case, GO bondholders are taking a significant haircut and pensioners, on the whole, are being protected. In Central Falls, just the reverse, pensioners took significant cuts and bondholders were paid in full.

Comment #1 by Roy D on 2014 05 14

Very well done Mr. Riley. Agree with you. Let's hope the General Assembly also agrees.

Comment #2 by Bob Beagle on 2014 05 14

There is precedent locally for what Riley is saying. Back in the 1970s, I worked briefly on loan to the state budget office. At that time, Rhode Island bonds were rated B+. I don't know if they were using the same system as today. The rating was that low because rating companies like Moody's decided that Rhode Island had too many bonds outstanding. However, the market disagreed and the bonds would sell at significantly lower interest rates. Market forces at work.

Comment #3 by Fruma Efreom on 2014 05 14

Thank you Fruma here is a real time ,real world example of what you are talking about and its happening now in New jersey.


Comment #4 by michael riley on 2014 05 14

This is a spot-on analysis from an industry expert who has no financial ties to any currently-elected politician in RI. This is the kind of testimony the GA needs to hear. I wouldn't ever trust anything Chafee or any of cronies and their associated contractors put out there - it's going to be biased and facts will likely be manipulated to support Linc's "told you so" position he's taken all along.

Comment #5 by Russ Hryzan on 2014 05 14

Best analysis of the situation available!

Comment #6 by Marie Dawn Christie on 2014 05 14

Mr. Riley you are correct on the 38 bonds. State wasn't even a co-signer. Perhaps why the bonds were insured. As for the State Commission on municipal pensions, the next installment is Monday 5/19 if they get a quorum. I would expect more vague statements and conjecture. Much like the new budget in Narragansett which gives money to a School Dept. with surpluses to pay their pension and OPEB. Meanwhile underfunding capital projects just to keep the tax rate low. It took more than 40 years to create the OPEB problem and 14 to create the pension problem. Now the guns or butter Finance Committee wants to solve it all in 6 years on the backs of employees and retirees who paid for their benefits. More than a dozen Town Managers, Finance Directors, and numerous Town Councils played this dog and pony show on taxpayers and employees. When does reality kick in? After a multi-million dollar bond issue passes this fall?

Comment #7 by Gansett Proud on 2014 05 16

Mr. Riley what is the rate a GO bond for RI normally pays compared to the 7.5% that the MO bond payed?

Comment #8 by Redd Ratt on 2014 05 16

A recent auction of bonds- $78.7 million refinancing of approximately $84 million existing debt -the issue which matures in 2025.

These bonds, sold at an interest cost of 2.22 percent as compared to 4.7 percent on the prior bonds, were issued in 2005, 2006 and 2007 to fund various projects statewide.

The notion that any investor thought that the 7.5% bonds backed up by insurance were also backed up by taxpayers is ludicrous. No one especially Moodys should have ever listened to begging from self appointed king and Queen Fox or Weed or whoever...i think the ratings agencies actually are partially liable to RI taxpayers for rating these bonds in the first place.

Comment #9 by michael riley on 2014 05 16


On another note, am I the only one that sees the irony of the pending downgrade for not paying a MO bond, but an upgrade for not paying a contractual obligation to our state employees and retirees? I support the pension reform as a necessary evil to save (or postpone) the cities and towns from bankruptcy. But I have little respect for the rating agencies after the great recession, and even less for even offering guidance on our GO bond rating now.

Comment #10 by Redd Ratt on 2014 05 16

The rating agencies and the Governor both should answer that question.I dont believe rating agencies are overstating potential downgrade from pension liabilities but after seeing this manipulation I am not sure. Perhaps ratings agencies are losing their credibility.Governor Chafee has already lost his.

Comment #11 by michael riley on 2014 05 16

After seeing the Rating agencies up the rating of bonds for Narragansett which has a large OPEB and pension problem, why would anyone really care what they say.

Comment #12 by Gansett Proud on 2014 05 16

Mr. Riley:

Well said comments at the commission hearing today. As usual Polisena and the commission don't have the same story. Looking forward to your comments tomorrow.

Comment #13 by Gansett Proud on 2014 05 19

Thanks...small crowd next time say hello

Comment #14 by michael riley on 2014 05 19

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