Michael Riley: From Head-start to Harvard to the Hoosegow Part 2

Tuesday, July 08, 2014

Michael G. Riley, GoLocalProv MINDSETTER™

 

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Since Taveras and Ortiz finally admitted to lying about Providence, Rhode Island pension assets that just do not exist, you might think they would have to inform the beneficiaries. They do, and to not inform them or existing bondholders about numerous other items, in my opinion, amounts to fraud. Now that my readers all know the $57 million doesn’t exist, no amount of “double talk” in Projo or anywhere else will change that fact. Segal confirmed my suspicions in January this year. It is a pitiful sight now watching the lawyers in the Taveras Administration search for the proper parsing of words over accounting concepts they don’t understand or even care about. This is exactly why Angel Taveras is unfit to Govern. I think everyone realizes that Rhode Island can’t have a liar like Mr. Taveras for Governor. We sent the last Providence liar Cicilline to Congress because that’s where he belongs. So the real question now is whether Mayor Taveras, who decried David Cicilline and then endorsed him, will now be investigated by the Securities Exchange Commission.

What does the SEC want…Truth?

For the SEC to investigate a municipality about misleading the public with their financial reporting, there must be a couple preconditions. Did Providence fairly represent the financial condition of the City and its Pension Plan to holders of Providence debt? And did the Mayor or City fully and accurately disclose those conditions in any new offerings?

One year ago, the SEC charged the City of Harrisburg, Pennsylvania with securities fraud for its misleading public statements when its financial condition was deteriorating and the information provided to the public was inaccurate, incomplete, or outdated. Separately, the SEC issued a report addressing the disclosure obligations of public officials and their potential liability under federal securities laws for public statements made in the secondary market for municipal securities. George Canellos of the SEC division of enforcement said “Statements that are reasonably expected to reach the securities markets, even if not prepared for that purpose, cannot be materially misleading.”

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In their report, the SEC emphasized that municipal issuers should, at a minimum, (1) consider adopting policies and procedures reasonably designed to assure accurate, timely, and complete public disclosures of financial information; (2) identify which governmental officials are involved in the disclosure process (e.g., establish disclosure committees); and (3) assure that responsible governmental officials receive adequate training about their obligations under the federal securities laws.

I have found multiple statements from the Taveras Administration that easily fit this description of misleading and incomplete, I have heard spokesmen for Mayor Taveras make significant misstatements indicating both lack of knowledge and training about securities laws. This is exactly what the SEC is warning about. Just look at what the SEC found in Harrisburg and compare it to Providence Rhode Island.

Harrisburg, PA vs Providence, RI

Here’s what the SEC said about Harrisburg: “A municipal issuer’s obligation to provide accurate and timely material information to investors is an ongoing one. Because of Harrisburg’s misrepresentations, secondary market investors made trading decisions based on inaccurate and stale information.”

It’s not much of a stretch to say that the Taveras Administration  double counting assets, purposely inflating pension assets by $57 million, purposely misrepresenting funding ratios, knowingly not informing the public or pension beneficiaries in a timely manner of a huge discrepancy, miscalculating ARC, and deliberately  understating pension obligations qualify under the SEC standard as “misrepresentations.”

Below are some recent statements emanating from Mayor Taveras office made after I uncovered the “$57.3 million Asset Lie” belatedly disclosed a few weeks ago in an addendum to a municipal bond offering. In response to my criticism and WPRI’s Ted Nesi’s reporting, spokesman David Ortiz said the city revised the bond document “to clarify” what its actuary had suggested. He said counting the October pension contribution ahead of time in June “was the city’s practice for many years before Mayor Taveras took office.”

Hmmmm.  Okay, so was that clear to everyone? No it wasn’t. I am into advanced accounting and financial reporting and that’s not clear to me in any sense. Later, Ted Nesi reported about a discussion with the controller in Providence

 From his article

Providence’s controller was unable to say precisely which mayoral administration began the practice of counting an October pension contribution the prior June, Ortiz said. “The controller’s office confirmed that the city has made payments in the fall dating back to at least 2003, and anecdotally we believe that the practice goes back further,” he said.

Ortiz said investors appeared to have no concerns about the pension numbers reported June 25. “The bonds went to market the next day and demand was so high that the city was able to save more than $1.57 million in interest payments,” he said. “This demand and the recent ratings agency reports show that investors know the city is on the right track.”

Wow! So that’s hutzpah! After throwing previous administrations under the bus, Ortiz proceeds to adlib. Amazing! First they knowingly lie about assets, possibly for years. Then I write an article saying Taveras accounting is wrong in late 2013, then in January 2014 their own accountant tells Providence  to stop reporting assets that way. Ortiz and Taveras  don’t even disclose that fact to anyone until June 25 when the city needed to borrow money and then Ortiz and Taveras “forgot” to disclose it until I commented on a pending bond offering, and then they put an addendum on the offering. This is a textbook case of being misleading. First of all, the $57 million in fake assets is tantamount to fraud. Also, every financial director and actuary employed by Providence since 2003 should have questioned it. Today it is impossible to find an actuary who would allow that treatment. I can’t find any other city in America with that same type of accounting treatment that purposely overstates assets in the pension plan.

So that’s clear enough. Taveras, Mancini, and Ortiz have lied about assets, repeatedly covered up, repeatedly lied, signed documents and not disclosed. But Ortiz amazingly piles on further. “It is important to note that this does not change the cost of the plan,” he said. The city’s annual required contribution to the pension fund in upcoming years “stays the same and the city continues with the same 26-year amortization schedule to reach fully funded status,” he said.

Ortiz said Segal has told Providence officials that two recent accounting changes made by the Governmental Accounting Standards Board (GASB) – commonly called GASB 67 and GASB 68 – “are not expected to affect the Providence Retirement System’s liability as long as the city continues to make its full annual contributions into the pension fund.”

Ortiz may be confused about GASB 68

GASB 68 will cause a complete restatement of Providence Liability. The difference is over a Billion dollars. Ortiz said “GASB 68 is not expected to affect the Providence Retirement systems liability…?” Ortiz is lost or lying. This is not how GASB 68 will work in Providence or anywhere else except for fully funded plans. The whole point of GASB 68 is to correct the tendency of Municipalities to lie about their liabilities by hiring “friendly” actuaries that are willing to use high discount rates. GASB explains that actuaries can still use elevated discount rates as long as they have fully funded plans, and if the asset manager has a record of achieving the returns used to discount liabilities. GASB says go ahead Providence, continue to use a wacky 8.25% on whatever portion of your liabilities that are covered by your assets. In Providence’s case Taveras claims 31% funded. And on the rest, the unfunded part (69%) plan MUST use the 20-year AA-rated Municipal bond rate, which is 3.4% today.

Unfortunately for Providence, the City fails on both measures.

First they lied about assets in the pension plan- subtract $57 million. The ratio drops from 2012 reported AVA/AAL of 31% to 27% ($324m/$1,212m). Second, their asset manager Wainwright Investment Council has not achieved 8.25% over the last 10 years. Not even close. Over ten years the Wainwright achieved 7.7% return on only the assets they actually managed. Their return on ”Stated or reported assets” was much worse. But that’s not fair to Wainwright because they can only invest the assets they have. Their performance was good but not so much when calculated on phony accounting assets that were included improperly. They achieved 7.7% on real assets, on the real dollars and cents invested for beneficiaries in stocks and bonds for the benefit of the pension plan. Again, only Providence, Rhode Island has this issue between fake assets and real and its most troubling. So I will give Providence the benefit of the doubt and they can keep 8.25% for calculating the funded portion of the pension plan.

So What does GASB 68 say about liabilities and ARC?

 Here is the GASB 68 calculation: 27% funded times 8.25% + 73% unfunded times 3.4% = 4.71%

Fantasy

Mayor Taveras says Unfunded Liability is $831 million, using 8.25%

He also says assets are $381 million (really $324 million).

How much does Providence Really OWE?

Reality July 2014

Providence GASB 68 Unfunded liability =

$ 1,212,000,000 * ((1.0825^20)/(1.0471 ^20)) – assets =  Unfunded Liability

(1.94*$1,212,000,000) - $324,000,000= $2.027 billion Unfunded Liability

The SEC will come knocking soon on Angel Taveras’ door to straighten out all these lies. Let’s hope it’s not the Rhode Island Governor’s door they are knocking on in January 2015.

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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.

 

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