Riley: Countdown to Default in Providence
Tuesday, June 09, 2015
It now appears the surreptitious “borrowing” from the Providence Pension Fund extends as far back as last century and well into the Cianci Administration. How much was “borrowed “ is unclear but we can define some ranges from City reports. I’ve spent some time in the City archives and there is evidence of unusual accounting as far back as 1996. A few weeks back Finance Chair John Igliozzi did an excellent job grilling Kathleen Riley of Segal about their decision to declare that a loan that exists as a liability to the city and an asset to the pension fund as defaulted or written off as of June 30, 2015. But Segal was less than clear about what they were saying and refused to identify exactly when this misleading accounting began saying “ we weren’t the actuaries so we don’t know” When Igliozzi pressed Segal as to whether the city had or had not paid interest on the so called “loan” she became very defensive and flustered say “again we don’t know." When Igliozzi pressed her on how much interest we were talking about ,she was wrong by a magnitude of 4 and repeatedly got the numbers wrong and misstated the interest costs for next year in the event Providence repeated its misleading accounting.
A change in Method or a defaulted loan
Ultimately the Segal report made every effort to cover Providence actions and the previous 15 years or so of misleading accounting treatment. The called it a “change” By doing so , Segal and Ms Riley have placed themselves in the crosshairs of securities law violations by misleading the public and bond holders as to the true nature of Providence Financial Condition and that of the pension Fund. For about 15 years Providence, Providence officials, mayors, finance directors, actuaries and auditors have been complicit in overstating Pension Assets by the use of a “false asset”. This asset was really unauthorized borrowing from the pension plan that was always a year in arrears and was never paid back. This “iou” will officially default on June 30,2015 because Segal, the new auditor after Taveras fired Buck Consultants, will “write off” the “IOU” and remove $62 million in assets from the books of the pension plan,. The unfunded liability will increase accordingly by $62 million immediately.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTCurious behavior
This accounting maneuver and huge loss has produced some very curious behavior. First was the utter silence and lack of questioning by the media as to how the pension plan in Providence could lose one fourth of its assets overnight. Second was the utter silence of the Elorza administration. They focused on everything except the biggest issue in town. If that default on June 30 th is ruled a technical default by rating agencies all hell could break loose. I believe that is exactly what this is. It is in fact a “default” on an unauthorized hidden loan from the pension plan to the City of Providence who used the money to cover debilitating cash flow problems. What other explanation could their be for the city to pay 8.5% annually to the pension plan for tens of millions of dollars.? Why wouldn’t they go to the bond market?
Then there is the wacky behavior of the Fire-union head Paul Doughty whose pension plan was robbed of $62 million . In early May, the week after the Segal report of April 28 ,he said he was “unconcerned." Then a week later he said he was suing the city.
That so called lawsuit appears to be a lie as no suit has been filed. Why would he lie about that? Why wouldn’t he file suit? I would. Why wouldn’t the Police Union file suit or even say anything about $62 million disappearing from their Pension Plan? Strange behavior all around.
Elorza Administration goal
At this point in time Mayor Elorza can avoid the approaching paddy wagons by admitting to the scam and firing those he knows are involved. His current goal however is to get to the end of the year before a state imposed budget commission or a receiver takes over Providence. His chance of accomplishing his goal is very small. Providence is indeed ” dead man walking” and filing bankruptcy is the only way out. It is very likely Providence will be forced to pay back the pension plan the pilfered $62 million plus interest payments that could exceed $100 million dollars. This would be in addition to the ARC of $70 million it has to pay “on time” next year to the pension plan. We know they don’t have the money, otherwise they would never had “borrowed it” at 8.5%.
This pension scam will envelope the City and the State of Rhode Island and the Governor better get with it or she’s going to look like the last Governor. Rhode Island still suffers from a lack of moral compass and a lack of leadership.
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: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
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