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Michael Riley: These RI Cities + Towns Could Be Next in Bankruptcy

Tuesday, March 18, 2014


The time for taxpayers to speak up for change is running out, believes Michael Riley.

Nationwide, all eyes are on Detroit and San Bernardino—two cities that cannot pay all of their obligations. The cities could pay some creditors in full, but not all of them. Specifically, each of these cities could pay their promised benefits today, but not all of their other obligations. It’s important to remember that in both Michigan and California—if pension promises were to have been guaranteed and untouched—the only choices for municipalities to try and reduce costs is to fire public workers and reduce municipal services. Ironically, this reduces the amount of income through contributions used to support legacy pensions and benefits thus creating further strains.

In Rhode Island we have a process for distressed cities and through 2010 legislation we have also strengthened the protection of Municipal bondholders. Central Falls went through this process and the result was an overseer, commission and ultimately receivership that resulted in sharp cuts to employee and retiree benefits. Using Central Falls metrics as markers, I have compared their stats just prior to Chapter 9 filings with other current vulnerable cities in Rhode Island and to re-emphasize the point that Rhode Island is much worse than other regions around the country, I have compared some of the most vulnerable and tax burdened towns in Rhode Island to the top 25 Cities in America. Rhode Island municipalities look awful when using very widely used metrics such as Unfunded Actuarial Accrued Liability. UAAL is then measured against payroll, against assets currently in the plan, UAAL per capita and UAAL per household.
















As you can see several RI towns and cities have already passed the point where Central Falls was forced to file for Chapter 9. Measuring household burden shows many RI communities are in serious trouble. Funded ratios are also alarming. This canary in the coal mine, known as Central Falls, has established historic warning levels and if you live in a town on this list you should be asking your town officials what they are doing about it. Far too many officials are still doing nothing because they won’t confront the unions and taxpayers or don’t have any idea what to do. They should be fired.

Ultimately it’s up to the voters. The path of least resistance for elected and appointed officials is still to ignore the problem they have either created or exacerbated. The result will likely be devastating to your personal finances and the town as a whole. Affecting everything from tax rates to municipal services and home values. The time for taxpayers to speak up for change is running out.


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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The answer to this is so simple Mr. Riley. Once again it comes down to good old fashioned responsibility. Whether it's a municipality, a corporation, an individual or the state as a whole; when you enter into a contract you are bound to its conditions. The whole system collapses once you stop honoring contacts. The wonderful thing about America is if you can't honor the terms a contact, whether it's paying a credit card, mortgage or any other obligation the defaultee always has the court system and ultimately bankruptcy as a last resort. In the end, you have to either honor your contracts or file bankruptcy. Trying to pull a Gina Raimondo is downright un-American. We're better than that.

Comment #1 by Jonathan Bainsworth on 2014 03 18

Regardless of the accuracy of these numbers, they mean virtually zero to the third generation middle school janitor or DPW shovel swinger. They know of nothing other than voting democrat, and democrats know of nothing else but to hike taxes to keep from being swamped. In a perfect world, there would be laws that would raise red flags long before towns were allowed to sink under the weight of democrat rule.

Comment #2 by David Beagle on 2014 03 18

Reality for most people is when they receive a lay off notice or a large increase in taxes or a supplementary tax bill.My goal is to arouse those who understand the situation to pressure public officials to close these plans and put reforms in place.Some if not most of the towns on the list have completely ignored the "funding Improvement Plans" submitted to the Municipal Pension Study Commission. The negotiations that have occurred since those filings are either non-existent or a shadow of what was proposed. This has rendered the filings as useless and the commissions effort as not much more than a joke or stalling mechanism.
Coventry is a disaster in the making and if we included CCFD would be on the list above. If ever there was a need for an immediate oversight entity its Coventry,RI. Yet Chafee and Gallogly want to sneak out of town and Taveras wants to bail before more lies are revealed. If the other candidates are smart they will hone in on the questionable nature of Taveras Claimed assets and liabilities over the last few years.The council members can't because they are part of the same charade.

Comment #3 by michael riley on 2014 03 18

Bainsworth--seriously? The answer to dangerous debt driven, in part, by overly generous public union retirements is to "honor the contract"? Obviously you are a recipient of such, and you need is blinding you to reality. Good luck in the future.

Comment #4 by Jimmy LaRouche on 2014 03 18


Your persistent effort and factual approach are greatly appreciated.

Comment #5 by Art West on 2014 03 18

Providence is the next Detroit.

Comment #6 by LENNY BRUCE on 2014 03 18

Another well written (and documented) article. Thanks Mike.
Your continued efforts are appreciated by some, but not enough, taxpayers.

Your observation that Taveras is "bailing out" is dead on. He made some initial efforts to address the Providence pension crisis then went into hiding not to be heard from since. Funny how all the candidates want the job until they learn what it entails. Their response, try to run for even higher office, comical. Will the voters catch on? Not holding my breath.

Comment #7 by Walter Miller on 2014 03 18

Mr. Riley, I too continue to enjoy your insight and commentary. At the end of the day, the problem starts and ends with the General Assembly and their unwillingness to address the issues in a way that serves the best interests of the State and not just their favored constituents. It is a shame that so much money and attention is focused on the run for Governor, when in fact the office is no more than an "ego stroke" that is beholden to and frankly reports to the General Assembly. Budgeting, allocation, an atmosphere for job creation, are not the province of the neutered Governor's office, but the General Assembly. Until a focus is directed on defeating some of these long-term, stale, self-centered GA leaders, and other elected "soft officials", the State is destined to continue its long clockwise spiral into the crapper.

Comment #8 by David Allen on 2014 03 18

When you think about it, the governor's job in Rhode Island is like the Lt. Governor' job in Rhode Island.

Comment #9 by David Beagle on 2014 03 18

You are right, Mr. Beagle, the Executive branch is completely ineffective. We need to focus our efforts on removing the GA incumbents that have stood in the way of progress, and get them off the dole. We cannot move forward with the present, self-serving leadership, and "go-alongers" that provide them with the leeway to serve themselves.

We also need to do what we can to put some teeth and investigative powers back in the Ethics Commission and focus them and the AG on the Assembly... It must be done.

Comment #10 by David Allen on 2014 03 18

Mr. Riley I also applaud your efforts in highlighting the severe problems we face. I voted for you in the last election even though your t.v. persona came across as smooth as sandpaper and you were about as likable as ants in your pants. Defeating a left wing democrat was always going to be to be an uphill battle in RI. I find Ken Block much like you accept a finer grit. I know your done with politics, but if you decide to run again a little advice; In politics being liked by the voters goes a long way. Good luck and keep up the good work.

BTW, you still got my vote.

Comment #11 by Redd Ratt on 2014 03 18

Thanks Redd. I really am a fun guy with a great sense of humor. I've found politics is just too hard and have chosen to contribute in other ways.

Comment #12 by michael riley on 2014 03 18

Mr. Riley:

I'm a bit confused by the Narragansett numbers. Allegedly the plan was 57% funded on 7/1/13 and you have it roughly at 45% Is that because the Town didn't meet their ARC in the current fiscal year? Now we are going to spend millions for more bonds for an athletic complex while the Town officials don't cover their obligations? Sounds like a bad mix.

Comment #13 by Gansett Proud on 2014 03 18

first narragansett hasn't paid its ARC in recent memory...this is a very conscious decision by the town manager and town council. They want to leave room for the raises they promise and increasing health care costs that they do not prefund.... second they suffer from the same garbage in garbage out disease other towns in rhode Island suffer from....they use one and two year old figures and hire gun actuaries even though nearly every financial analyst could put a good "number" or estimate on finances daily.
Narragansett was informed in 2005 about OPEB issues and the coming requirement to disclose the liabilities. They then first did it in 2009 when forced to. They have been informed by moody's that a discount rate of 6% or lower will be used to determine liability especially for underfunded plans like Narragansett which is now in critical status. Despite 10 years of breaking state law and numerous warnings , the Narragansett Town Council has still never put a dime into the pension plan . Several times officials have lied that they have put money into the plan.
If Narragansett actually had to treat OPEB and Pension Liabilities as debt they would be violating all their debt covenants. opeb and pension debt alone are nearly 25% of the annual budget. If the pension and OPEB obligations were all converted to real debt like a pension obligation bond . The debt service would be $ 12 million annually or 25% of the tax levy. this would cause massive cutbacks in the rest of the budget and increased taxes of all kind especially property taxes.

This is all known to the council and known by Rosemary Booth Gallogly, yet they will act as though nothing could be done in just a few weeks when the commission will let Narragansett yet again "slide " on the ARC payment,

Comment #14 by michael riley on 2014 03 18

Mr. Riley: Thank you for that info. How is it that one rating agency just raised Narragansett's bond rating in light of all the games being played. One would think that Moodys, Standard & Poor and Fitch would be on the same page.

Comment #15 by Gansett Proud on 2014 03 18

If you are an ERSRI retiree and want to continue the fight in Court, to restore your COLA,please email [email protected]

Comment #16 by catherine celeberto on 2014 03 18

Gansett: You mean the same rating agencies that rated BOA, Merrill, JP Morgan, Country-wide (BOA), etc., junk mortgage debt as AAA leading to this current economic crisis? Their for sale.

Comment #17 by bill bentley on 2014 03 19

I too thank Mike Riley for the time he takes to provide real info though I think he represents me better as a private advocate than he would have as a Reresentative (I'm not relly in District 2). I'm amazed that my town, North Providence is not on the top few trouble spots , but Charley Lombardi, who seems to try to spend public money as frugally as posible, and pushed thru a real tax increase early on, seems to have really helped the town's financial footing. It also helped to get the "google money" to deal with police pension funding.

I don't agree the Governor is so powerless. Te Governor, especially now after "separation of powers" gets to appoint all the agency heads that actually run the state agencies including EDC, now Commerce. The Governor proposes the budget that is the basic starting point for the legislature. The Governor gets to oversee the negotiation of contracts with state employees. The Governor gets the bully pulpit to set the agenda which Carcieri used too often to polarize the electorate, Chafee hasn't known how to do this at all.

I also think Taveras is getting too much blame for problems in Providence. Besides excessive pension promises (I think it was Cianci who gave out those 6% "cost of living" COLAs) widespread poverty, decades of "white flight" and disnvestment, a who-you-know culture of public goodies, extensive tax exempt property, auto dependency policies which helps suburbs, and "free trade" rules that encouraged traditional manufacturing to leave the country present challenges not easily or quickly overcome. I think he made progress.

Comment #18 by barry schiller on 2014 03 20

Barry ..the problems for nearly every town go back years and include several administrations and is rarely a single person...but both Taveras and Cicilline before him have outright lied and claimed conditions are "excellent" or more recently knowingly produced misleading numbers...thats just disgraceful and not what anyone should want from a leader. The people of Providence deserve better than that and Taveras and the council should come clean.
For those who are asking about Narragansett I wrote an updated letter about Narragansett finances to the South County Independent linked below .


Comment #19 by michael riley on 2014 03 20

Mr. Riley:

Excellent viewpoint article in the Independent. We will see what develops with the budget. The present Town Council adopted a plan last summer to meet the State deadline and has failed to honor their commitment to the plan. They reneged on the amount the need to fund, just like paying the minimum balance due on a credit card. We all know how that plays out. 102 days until the next COLA is due to retirees and 3 of the 5 unions still have it payable in their contracts. No talks with retirees, negoitating with 2 unions while a 3rd remains under the control of the school committee. Mr. Vandermersch wrote quite the letter basically absolving the Town of having to make good on their contracts just to save bucks. There needs to be a balance, not extremes. For starts, the Town can pay what it owes for their contracts that employees paid every penny for.

Comment #20 by Gansett Proud on 2014 03 21

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