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Michael Riley: Providence Vying for Worst Funded City in America

Tuesday, March 11, 2014


Chicago, Illinois and Providence, Rhode Island are in a neck and neck battle for the worst funded city in America.

Last week, Moody’s Credit Rating Agency, using new metrics that should surprise no one, unceremoniously dropped Chicago three notches to BAA1. This is three levels above junk and affects $8 billion in GO (General Obligation Bond) debt. Similarly, Providence is also rated BAA1 but that was done in September 2013 prior to Moody’s change in methodology and after Providence’s mild reform effort. The difference between Mayor Taveras of Providence and Rahm Emanuel as individuals is obvious. One mayor is aggressively seeks a solution to an impending calamity and the other Mayor tinkered, caved to union demands and is done, thereby dooming Providence to receivership. Mayor Emanuel thinks the city of Chicago is in dire straits, is pushing the unions, and is looking for solutions. Mayor Taveras has fooled around with the accounting; made the laughably courageous call to end 6% COLAs (Cost of Living Adjustments) and now now everything is fine.

From Moody’s perspective, they both have ratings that fairly “reflect the city’s massive and growing unfunded pension liabilities, which threaten the city’s fiscal solvency absent major revenue and other budgetary adjustments adopted in the near term and sustained for years to come.”

Mayor Emanuel has resorted to taxable bonds for funding the city and Providence’s next Mayor may adopt this tactic. But unless both cities can significantly renegotiate the contracts with their respective unions soon and raise taxes, they both have very few options other than Bankruptcy or receivership.

Did Providence mislead bondholders and citizens?

In Providence there is an additional issue of answering charges that Providence has mislead bondholders and citizens by false and inflated reporting of assets in the pension plan. We were the first in the country to expose this and we are awaiting an answer. Calls to Segal, who recommended Providence discontinue their practice in the audit produced a few weeks ago, have not been returned. We have studied hundreds of cities nationwide, especially poorly funded pension plans and have been unable to find similar asset treatment that used by Providence officials and their accountants.

In July 2013, Miami and its former budget director were charged with securities fraud related to several municipal bond offerings. The SEC alleged that misleading financial information was given to investors. My readings of the last few reports from Providence to its citizens and to the RI Municipal Pension Study Commission show that their numbers will require significant changes to comply with regulators and ratings agencies. Pensions and accounting can no longer be swept under the rug. Providence will have to explain its accounting treatment for assets in the plan and why the auditor told them just a few weeks ago, to end those accounting practices.

An interesting battle in Coventry

Rhode Island has already begun implementing an interesting municipal incentive program known as RIGL 45-13.2-5 and 2-6. This program seeks to reward good behavior in pension management by localities. Coventry believes it deserves its share of “incentive”, approximately $166,000 out of a $5 million program. The idea of the program is to encourage local pension plans to reform and/or join the state pension system. Coventry’s Town Council and town manager argue that the dispute over the $20 million of liability in non-certified school employees should not affect this aid. The town believes the liability and the lack of solution are the schools problem and not the town’s problem. The town has been contributing their required amount for decades. The interesting juxtaposition of funding responsibilities and obligations has created quite a stir and the town of Coventry believes that the state and revenue director may be acting “unlawfully” by withholding aid from Coventry. Coventry claims it is the only town that has had aid withheld. This is especially surprising considering the wide range of compliance and talks associated with Funding Improvement Plans.

From Coventry Town manager Thomas Hoover:

Mr. Hoover said it is very curious to the town that the Town of Coventry is the “only one” in the State of Rhode Island that this has been withheld from. He said the town is working on this issue; however he cannot say that the town is at a conclusion on their discussions, but they are continuing to talk. Mr. Hoover said as you can see from his letter, he is hopeful that the Department of Revenue and the Governor changes their position on the municipal aid since the town is adamantly against the action that was taken, and he said “it not only is it unfair, but the town believes it is unlawful.

While this is all very interesting, it doesn’t change the math and Coventry will be unlikely to make it to year-end 2014 without a receiver. The town awaits a huge arbitration ruling on a police contract that may render this whole discussion mute and trigger bankruptcy. We should know by the end of this month. In addition, the town understates its liabilities by about $64 million. We show Coventry’s Unfunded Pension Liability as $134,000,000 using Moody’s and GASB 2014 metrics. We also have not included the effects of the liability of CCFD liquidation, which is in the tens of millions.

Coventry's Unfunded Pension Liability

Source: http://www.muni-info.ri.gov/documents/Pension-Study-Commission/2014.1.27%20PSC%20Minutes%20Package.pdf " target="_blank">Pension and OPEB Study Commission

In addition, Mr. Hoover said it is very curious that the Town of Coventry is the “only one” in Rhode Island that this has been withheld from. He said the town is working on this issue; however he cannot say that the town is at a conclusion on their discussions, but they are continuing to talk. Mr. Hoover said, as you can see from his letter, he is hopeful that the Department of Revenue and the Governor changes their position on the municipal aid since the town is adamantly against the action that was taken. He also said, “it not only is it unfair, but the town believes it is unlawful.”


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: Providence Pension Liability

A new report shows that Providence’s pension fund—even after the recent reform—is still in trouble. The below slides break out the key numbers for the pension fund, including the unfunded liability, the assumed and actual rates of return, the current level of benefits, and how long it will take the city to pay off the unfunded liability. Figures are current as of July 1, 2013 and are taken from the new Jan. 31 actuarial report from Segal Consulting.

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Unfunded Liability in 2013

Total Liability: $1.2 billion

Actuarial Assets: $380.4 million

Unfunded Liability: $831.5 million

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Unfunded Liability in 2011

Total Liability: $1.2 billion

Actuarial Assets: $380.4 million

Unfunded Liability: $831.5 million

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Percent Funded in 2013

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2013: 31.39%

Percent unfunded in 2013: 68.61%

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Percent Funded in 2011

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2011: 31.94%

Percent unfunded in 2011: 68.06%

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Rate of Return

Former Assumed Rate of Return: 8.5%

New Assumed Rate of Return: 8.25%

What the state’s assumed rate of return is: 7.5%

What Moody’s Investors Service says the assumed rate of return should be: 5.5%

What investor Warren Buffet says the assumed rate of return should be: 6%

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Actual Return on Investment

Actual Market Return in FY 2012: 1.49%

Actual Market Return in FY 2013: 11.35%

Current Assumed Rate of Return: 6.42%

Average Market Rate of Return for FY 12 and FY 13: 8.25%

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Impact of Lower Rates of Return

$72 million:The city unfunded liability increased by this amount when the city lowered its assumed rate of return by a quarter of a percentage point, from 8.5% to 8.25%

$506.2 million: The estimated increase in the unfunded liability were the city to use the 6% assumed rate of return recommended by Moody’s Investors Service.

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Retiree Pay – Fire and Police

Number on Active Duty: 834

Average Annual Pay: $61,325

Number of Retirees: 587

Average Retiree Age: 65.3

Average Retiree Annual Pay: $40,512

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Disability Pensions – Fire and Police

Number on Disability: 418

Average Age: 64.8

Average Annual Pay: $59,028

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Retiree Pay – Other City Workers

Number of City Workers: 2,164

Average Annual Pay: $38,687

Number of Retirees: 1,453

Average Retiree Age: 72

Average Retiree Annual Pay: $18,252

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Disability Pensions – Other City Workers

Number on Disability: 88

Average Age: 66.8

Average Annual Pay: $18,684

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Current Cost of Pension Fund

For 2013

City Contribution: $58.1 million

Employees Contribution: $10.9 million

Net Investment Return: $18.1 million

Cost of Retiree Benefits: $95.4 million

Note: Net investment return is the return on investments after investment and administrative fees have been paid.

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Cost of Pension Fund in 10 Years

Normal Cost: $9.8 million

Additional Cost Because

of Unfunded Liability: $84 million

Total Annual Cost: $94.3 million

Note: Total figure for the year includes a small second payment for the deferred liability.

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Cost of Pension Fund in 20 Years

Normal Cost: $13.9 million

Additional Cost Because

of Unfunded Liability: $118.5 million

Total Cost: $132.4 million

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Paying Off Unfunded Liability

Average annual increase: 3.5%

Number of additional years to pay off: 27

Fiscal year unfunded liability to be paid off by: 2040


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Comment #1 by LENNY BRUCE on 2014 03 11

Mr. Riley. Thank you for your ongoing efforts to educate the public regarding financial calamities befalling several RI communities. I voted for you in the last election and would do so once again.

Regrettably, despite your good intentions, I think your well written (and documented) articles are for the most part falling on deaf ears (eyes).

With regard to Mayor Taveras & his lackluster performance in Providence, it's quite clear he, as you adeptly put it,"tinkered" with the financial crisis and, upon a second look at the road ahead, decided discretion was the better part of valor. Hence he's bailing out as quickly as possible. A true profile in courage.

Thanks for your efforts to educate RI taxpayers. Not certain what fruit they will bear but you are a welcome breath of fresh air as the Pro-Jo and other media continue to be no show's on major public issues.

Please consider a future run for public office. Your honesty and expertise is needed badly.

Comment #2 by Walter Miller on 2014 03 11

Michael, All COLA's were frozen, and will probably never return. Additionally, Those making the highest amounts will never get a COLA. Also the unbelievable fact that all retiree's will go to Medicare at little or no city expense is also left out. Again this is like the 10th article and every one is take more away from the unions and retirees. Not one person is writing about the city's failure to fund the pension. http://caselaw.findlaw.com/ri-supreme-court/1340731.html. This is where the real problem lies. How much more can you squeeze out of the police and firefighters of Providence? How about the retirees? I gave up many raises in my 27 year career. I never once, not even once, failed to pay my contributions to the system. However is the city being punished? No the city is not being punished. Infact, almost all of the cuts came on the backs of the police and fire departments during the Cicilline debacle. Those shortfalls were due to massive state aid cuts by Carcieri. I please ask you, tell the whole story, I know my pension, the only thing I live on, will be gone, and with no SS I will be homeless. But you and your ilk, want us to sacrifice even more? To all posters, we are no different than any other paid fire department in the country. Most have the same or better retirement benefits. The difference? The cities paid in their share.

Comment #3 by Stephen DeNinno on 2014 03 11

Stephen, believe me when I say, I sympathize with your plight. I would hope you also understand the plight of many of us in the private sector that have also not missed one contribution to your pension in the form of taxes that we pay to the state. I'm not begrudging you that but, I am begrudging any attempt to take even more money from my pocket to prop up the pension fund. I've brought up in the past, the unions responsibility in keeping an eye on their pensions. The rebuttal was the "we took the city to court and were told that they didn't need to make contributions......etc." I'm sorry, but I can't accept that that was the end of it. There were/are/have to be other avenues to solve that problem. The first of which would have been voting out the politicians that failed to fund the pension. The power of the unions to get out the vote was quite apparent in the recent election in Woonsocket where the former president of the FF union was elected to fill the seat recently vacated due to whats her names election of Mayor of Woonsocket.

Those are just my thoughts on your last couple of sentences. I do hope things work out for you. Heck, I hope things work out for all of us but I think we all know how poorly this is going to play out for everybody with the exception of some lawyers and politicians.

Comment #4 by Patrick Boyd on 2014 03 11

Patrick, I don't want more money from taxpayers...I want the money you were supposed to pay in the first place. I am in Providence retirement system, so we have case law above, that we sued Cianci and lost. Please read it carefully before you comment. The decision was written by Judge (I get rich on cities Bankruptcy) Flanders. The city was warned back then, and still continued to short change the pension system. Remember Patrick, we paid no SS so the city did not have to pay SS. Did that money go to the system? You be the judge. Remember, the city did not pay in, and the supreme court said they didn't have to! One more thing. Not one tax treaty contract in Providence was broken. Providence Place, G-tech, Blue Cross, and hundreds of other wealthy corporations, including some that expired years ago, are still getting the windfall. Just who is making your taxes go up? And just who is behind the cut the pension deal? Yup the same corporate welfare folks....They're afraid to lose their goodies, at the expense of the working folks. And while I'm at it, how about those city loan programs that never get paid back? The city must pay the feds millions. And what about the 32 million in parking tickets that the city never collected? Yup it's the working guy!

Comment #5 by Stephen DeNinno on 2014 03 11

The one thing that is left out of all the discussions, is the governments that don't pay into the systems. If you bought a house with a 30 year mortgage, and paid nothing for 30 years. Would you expect to get the house for nothing? This is the problem, not the other way around. In Detroit, rich bondholders will get 100% of their money while pensioneers get screwed period!

Comment #6 by Stephen DeNinno on 2014 03 11

"Patrick, I don't want more money from taxpayers...I want the money you were supposed to pay in the first place." And that's what I'm saying. I paid my fairshare. How many more times am I expected to pay it?

You sued Cianci and lost. How much longer was he in office after that? Like I said, the power of the union vote should never be underestimated.

Comment #7 by Patrick Boyd on 2014 03 11

And Taveras will try and skip out of town before the bill comes due. A page right out of David's book. And now he wants to pry open closed agreements so he can say, "I'm not the only liar in the room?" Priceless.

Comment #8 by bill bentley on 2014 03 11

Stephen the bondholders in Detroit are taking cuts as are banks that held secured bonds. Your hatred for the common Providence taxpayers with your comment "Patrick, I don't want more money from taxpayers...I want the money you were supposed to pay in the first place." is why people lose empathy for the public sector unions. The taxpayers paid every dime owed or lost their home. I'm sorry Providence is going bankrupt, but the blame is broad and the unions are the strongest electoral voting block in the state. They have to shoulder responsibility too.

Comment #9 by Redd Ratt on 2014 03 11

Patrick, your assertion that the unions are responsible for their pensions not being funded because they can elect anyone they want, is not only dumb, it illustrates the fact that you can't find anything that will put the blame for this mess on the unions, so you resort to that laughably weak argument because it's all you can come up with. It's clearly nonsense, and I hope you don't actually believe it, because if you do, you're not very bright....

Comment #10 by Hal Simms on 2014 03 11

Redd, do some research, bondholders will not be affected in fact, many think they will be made whole. Even if Providence goes BR, our illustrious GA made sure that rich bondholders get paid just like CF. And Redd, the taxpayers may have paid every penny owed to who? There were years when the city paid nothing into the system zero nada zip. Your point? What happened to that money, probably a line item in the budget that went into someone's pocket? We tried to open the taxpayers eyes but alas the court ruled against us and allowed the city to continue to make promises that they never paid for. While continuing to make tax deals with rich corporations. I have done my homework and know exactly how much the city should be getting in tax revenue from exempt institutions or treaties. While our Country, State, and cities, continue to shift the blame onto the workers, the rich are laughing all the way to the bank. This shift was carefully planned by ALEC, and John Arnold foundation. If you look closely this has been their plan to save corporate welfare on the backs of firefighters and other state and municipal workers. And you bought it hook line and sinker. As far as my love for the city of Providence goes, I have two fractured vertebrae in my neck and will go for my fourth surgery. Building collapse. This is my last post on here.

Comment #11 by Stephen DeNinno on 2014 03 11

Just to be clear i dont work for or Know ALEC and I dont know John Arnold.....What I do know is that the defined benefit system in Rhode Island municipalities is rife with fraud and mismanagement. Every town has a different story. Ive looked at systems nation wide and the following generalizations can be made. 1) our benefits are extremely generous ,among the top in the nation 2) our public safety in RI is among the most well compensated in the country 3) the funding in our pension plans are among the worst in the nation 4)the same people and party keep getting reelected 5) we are already among the most tax burdened citizens in the nation not even counting Pension and OPEB liabilities .

it isnt a conspiracy. these 5 points are all connected ,

Comment #12 by michael riley on 2014 03 11

Stephen please read the link below. The negotiated deal (if approved by the judge)will net the banks that issued Detroit credit default swaps which are secured will get $0.30 on the dollar and unsecured general obligation bondholders are getting $0.20 on the dollar. I do research so I don't make an idiot out of myself. Good luck with the surgery.


Comment #13 by Redd Ratt on 2014 03 11

Once again you are attempting to be rational with irrational people.
Don't you understand, there is little interest in these facts, just what they have coming.

Just like Steve made his pension contributions, so all we property owners paid our taxes. Overly generous salary & benefits, unsustainable COLA's, insufficient municipal contributions, weak leadership, all leads to one inescapable conclusion, NO $$.
So where do we go from here? Regrettably we can't unring this bell.

Comment #14 by Walter Miller on 2014 03 11

I love the argument:

"If the City had just paid annually the full contribution into the pension system in the first place there wouldn't be a problem" -

Like the City withheld the full pension contribution so that it could do something un-beneficial to public employees, like give property tax refunds to residents.....

NO, the City did not make full pension contributions BECAUSE the City budget was strained PAYING OVERTIME BENEFITS TO POLICE OFFICERS AND FIREFIGHTERS. The City budget was strained giving mandatory raises to teachers and hiring substitutes for teacher absences. The City budget was strained paying unionized bus drivers and janitors.

Look, I would also be upset if my pension wasn't what I agreed to, but guess what??? There is no money. Providence County has almost 400 active foreclosures. How many people have to lose their home so you can have a second one??

Retirees real legal claim is against current employees, and vica verca, the taxpayer has nothing to do with the current or past City budgets, the taxpayers have always paid, it's the individual City departments that NEVER stayed on budget.

Comment #15 by George Costanza on 2014 03 12

I'm sorry, my numbers were inaccurate. There are 2,227 foreclosed homes in Providence County, and almost 24,000 homes in default.

Welcome to Rhode Island!

Comment #16 by George Costanza on 2014 03 12

So Hal, the new union mantra is "I'm not at all responsible for my own well being"? Is that pretty much it? I guess the wise people just give over their hard earned dollars and trust that it's being properly taken care of? Go ahead and talk to me about dumb. This crap about not being able to do anything about it is just that, crap!

Comment #17 by Patrick Boyd on 2014 03 12

Mr. Riley:

I hope the Municipal Finance Committee and the Gov. hold firm on Coventry paying their pension ARC's including the one that Coventry wants to walk away from. Perhaps when this community collapses it will also find the stamina to consolidate all the separately taxing fire districts. I'm awaiting to see what Ms. Nolan proposes in Narragansett since it seems like a done deal to not fund pensions, but build athletic fields. I will be interesting to see where our elected Council members fall on paying the Town's existing obligations. I'm pretty sure the retirees intend to hold their feet to the fire before giving up a cent for retirements they paid for in full. Since Narragansett receives so little State Aid other than Education, would it not be cheaper for the Town not to comply than fund their ARC?

Comment #18 by Gansett Proud on 2014 03 12

Ok, I just had to comment. Michael Riley, prove to me that RI firefighters are more compensated than other firefighters around the country. You are absolutely wrong. I speak for Providence only, I don't know about other cities and towns. The big survey that said RI had the highest "fire protection costs" included the draconian fire laws after the station nigh club fire. Those costs also included EMS. In many parts of the country EMS is a seperate entity. So in other words you are comparing apples to watermelons. I happen to know the salaries of other FDs around Providence's size and we were on the lower end of salaries. Most public safety pensions are identical including COLAs. Now most can retire with 20 years, Providence is now 25. What happened to the money? Well how about all the social welfare programs in the city, something the city does not belong in. How about the Carulo act? That says you have to spend the same amount on education as last year even though less students. How about unfunded state and federal school mandates? Considering schools make up 70% of Providence's budget, maybe you can start there!. BTW the teachers in Providence are safe no matter what happens, they are in the state pension system, and are protected from BR. How about grants given out by the city? I can name so many things the city did with the money that was supposed to go into the pension, it's called getting re-elected dummys.

Comment #19 by Stephen DeNinno on 2014 03 12

And George, What the Hell does the pension system have to do with foreclosures? I thought that had to do with biting off more than you can chew?

Comment #20 by Stephen DeNinno on 2014 03 12

And George, What the Hell does the pension system have to do with foreclosures? I thought that had to do with biting off more than you can chew?

Comment #21 by Stephen DeNinno on 2014 03 12

Gansett Proud...the political calculus in Narragansett has long been cynical.The leadership necessary to do what's right in terms of negotiations public employee negotiations never existed and an open and honest dialog with the town about pension & OPEB liability didnt take place until recently. Still, even facing this difficult predicament , they can not pull the trigger. Narragansett will have to raise taxes well beyond the 3050 cap and also try to get the unions and retirees to accept changes that will cost them real money.The town is living a lie and its the voters fault for electing weak and incompetent leadership.
Coventry has a similar problem but the town doesnt have as much room in term of current tax rates (currently double the rate of Narragansett).Both have statutory room to take on debt though neither can solve it by debt issuance alone.
In terms of council behavior, Coventry is begging to have an overseer come in a dictate,so is West warwick and even maybe Narragansett is also begging for some "judge or commission" to do the dirty work. Its very cowardly behavior by all. Narragansett can not claim bankruptcy or hardship , at least not at this point, they just have to act. Coventry cant avoid true hardship much longer.
You made a reference to "priorities" in Narragansett. I agree that the Narragansett Council is behaving bizarrely by recommending harsh cuts to public employees retirement money, reneging on promises and at the same time they are pushing the idea to borrow millions in order to build a new high school football field.A Football field vs retiree promises? Thats just wrong.It is tone deaf and mean.

Comment #22 by michael riley on 2014 03 12

Mr. Riley:

I have to agree with you on several points. I'm just amazed that I actually agree with Stan W. regarding the grand scheme for the athletic complex in light of the debt Narragansett already owes. Every time we hear it's for the kids, and taxpayers don't consider the long term. Narragansett is like a freshman in college with a new credit card. Everything is great until that first statement shows up in the mail. In the case of Narragansett, they have only been paying the minimum balance (paygo) for over a decade. I don't think the Town's retirees many of whom are elderly are going to give back any easier than Chase or Bank of America. Talking with friends who negotiated the benefits the Town now wants back, the Town did discuss the cost of every benefit as part of their bargaining so those discussion did exist. Also in the atmosphere that the Town would tell employees the pension was 102% funded. Until Ceasrine and the Council ignored what Loonjens and Krugman created and Almonte blew the whistle did it become a hot potato with negotiations. Meanwhile, several connected administrators and dept heads bought into the plan and left with COLAS using time bought from other communities. No wonder the employees are pissed! They get whacked while the people who created the problem get a free ride.

Comment #23 by Gansett Proud on 2014 03 12

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