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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.

Curious 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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In the five years before Raimondo was elected, pension changes included a decrease in established retirement age from 65 to 62, increased eligibility to retire, and modified COLA adjustments.
Read the Senate Fiscal Office's Brief here.
(Photo: 401(k) 2013, Flickr)
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January 2009

Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:

1. An established minimum retirment age of 59 for all state and municipal employees.

2. Elimination of cost-of-living increases.

3. Conversion of new hires into a 401(k) style plan.


See WPRI's coverage of Carcieri's proposal here.

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Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions. 


Read the NCSL report here

(Photo: FutUndBeidl, Flickr)

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Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.

"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo


Check out Wall Street Journal's coverage here.

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November 2010

Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot. 

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April 2011

Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.

Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.

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May 2011

Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.

"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)


Read GoLocalProv's analysis of the report here.

Read the Truth in Numbers report here

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October 2011

Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.

“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee

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October 2011

Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.

“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)

Read more from the firefighters' battle with Raimondo here.

Check out the New York Times' take on RI's  pension crisis here.

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November 17, 2011

The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.


Read more from GoLocalProv here.

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November 18, 2011

Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.


Read about how Rhode Islanders react to RIRSA here.

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January 2012

Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms.  The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.


Read about the pension workshop here.

Read Raimondo's feature in Institutional Investor here

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March - April 2012

Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.

“The present law is sound fiscal policy and should remain unchanged.” -George Nee (Rhode Island AFL-CIO President)
See WPRI's coverage of Chafee's attempt to cut pension fund deposits here.
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December 5, 2012

Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package.  In response, Chafee issues a statement supporting the negotiations.


Read more about Raimondo's opposition here.

Read about Chafee's statement http://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">here

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March 2013

Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.


Read about Raimondo's discussion of distressed municipalities here

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April 2013

The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.

"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)


Read GoLocalProv's coverage of the State Pension Fund's losses here

Read Ted Seidle's criticism of Raimondo in Forbes.

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June 2013

Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.


Read GoLocalProv's investigation into the rising pension costs here.

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September 2013

Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform. 

Read Taibbi's article in Rolling Stone.

Read GoLocalProv's response to Taibbi here.

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October 2013

As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.


Read more from GoLocalProv about the players in the pension battle here.


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