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Riley: Did Smiley Use Bankruptcy Threat to Get Grant, Proving Prov is Lying?

Wednesday, July 20, 2016

 

Brett Smiley

On March 14, 2016 Providence RI Officials submitted an application for a grant that reportedly includes the following stark warning about Providence’s finances, even alluding to the possibility of municipal bankruptcy.

“Mayor Jorge Elorza is struggling with a pension fund funded at a dismal 31% coupled with a projected budget deficit ranging from $15 to $20 million,” they wrote. “With such a poor financial outlook, the City cannot afford to operate in a structural deficit mode because receivership or bankruptcy will be in its future. In all likelihood, the Mayor will have to raise taxes, institute a spending and hiring freeze, and look to further reduce City Department budgets.”  WPRI first reported on the city's application on April 1 of this year. 

Admission of Misleading Bond Investors

The Safer Grant success was reportedly due mostly to Jack Reed and provided $15-17 million to hire new fire fighters in Providence and Cranston. But the real story is that Providence is broke and after repeated denials Providence Mayor Elorza or recently departed Brett Smiley admitted the City’s desperate financial condition in the grant application. There is one big problem though, Mayor Elorza and Smiley have told taxpayers and Municipal Bondholders a very different story. Various city officials have all along been misleading municipal Bond Holders and Investors about the true financial condition of Providence. Clearly Providence officials think its ok to lie and overstate assets, understate funded ratios, but misleading Municipal Bond Investors is a crime and is under the Jurisdiction of the SEC and MSRB.

Is anyone Accountable for the lies?

In an era where there are seemingly no consequences for serious violations by government officials it is now time to be held accountable. The SEC should do what they said two years ago and aggressively prosecute local governments that mislead investors in bond offerings and in Official Financial Disclosures. 

In Rhode Island have seen at the local level a total philosophical abandonment of prosecuting what everyone in the state knows was massive fraud in 38 Studios the governor and speaker refuse to clean house. We have seen repeated misconduct followed by slaps on the wrist or no consequences. One example of the costs are that Ray Gallison was put in charge of the Finance Committee my Speaker Mattiello AFTER 38 Studios. Why? Recent weeks have shown that whether it’s a mundane local miscreant like John Carnivale or Kevin Jackson, or a  wrongdoing policeman sheltered by the Mayor of Chicago by withholding video evidence, or a Presidential Nominee/ Secretary of State abusing state Secrets and lying to the FBI., people are getting angry thus demanding accountability and consequences. Without enforcement and consequences citizens across the nation will start to administer their own justice even in Rhode Island.

I have repeatedly called for Providence’s Bankruptcy due to my findings about Enron type accounting in the Providence Pension plan and city finances. I first identified the issues in 2013. In January 2016 Former Hasbro CEO also opined “Someday someone will pull the plug.” Yet local reporters have basically ignored the evidence and instead chosen to rely on their own “instincts”. One reporter said to me “no one in the council or Mayors office seems worried” after Segal ruled that Providence had claimed false assets in the pension plan and so they passed off Hassenfeld and Riley as nutty.

The story in Providence is not hard to follow. The city had no money and stole it from the pension plan in order to continue to hand out wages and promises they knew they could not keep. Handing out raises and pension promises is a good way to get re-elected. Mayors and city as well as State officials have been playing the shell game ever since. If you were to believe the city officials and Auditor Doyles explanation Providence has had a “short term” cash flow problem. (but that has lasted for 20 years) Short term in accounting means less than 12 months. Obviously the cash flow issue was not short term, so the next move was to lie and knowingly pass on the lie year after year.  Angel Taveras handed off David Cicillines “category 5“ lie to Jorge  Elorza who has kept on lying . Now there is proof from Elorza and Smiley that it has all been a lie with the application for the Safer Grant and the City self-diagnosis which dramatically departs from public pronouncements.

Advisor PFM was hired by Elorza/Smiley to put down the idea of Bankruptcy, yet PFM was unaware of the grant application and that Elorza had already applied for a grant stating that Providence was in financial crisis. Here is what the hired firm PFM said in April (a month after Elorza claimed hardship)

“David Eichenthal, a managing director with Public Financial Management Inc. (PFM), told WPRI's Dan McGowan he believes there are “enormous downsides for a city going into bankruptcy” and he doesn’t currently consider Providence a candidate for that option.”

Wait! City made opposite claims in a Grant Application earlier

This PFM quote above was 1 month after Providence had already used potential bankruptcy as a reason for reaching out for the Grant. Mr. Eichenthal went on 

“When people told me that folks were actively talking about bankruptcy in Providence and I read the assessment reports that we did on the city and knew something about the city’s finances, I just didn’t understand why that was part of the conversation,” Eichenthal said. 

Unfortunately, and hopefully not under the direction of Mayor Elorza, PFM made zero effort to run a scenario analysis on Providence Pension Obligations and asset management. PFM did not look at the impact of potentially lower market returns than 8.25 %. Since the pension issue looms over all other expenditures, this significant and suspicious omission of analysis has rendered the entire report extremely flawed.

GoLocalProv readers of my column are fully aware that I believe Providence is bankrupt and that Providence officials have been misleading Municipal Bond Investors since at least 2006. Now with the Smily/Elorza application there is proof Mayor Elorza is knowingly misleading bond investors. So now that we need to hold Providence officials accountable. Where is Peter Kilmartin? Where is Nerhona? Where is the SEC?

EDITOR'S NOTE: An earlier version of this failed to give proper attribution to WPRI, we apologize for this oversight. 

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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2005-2010

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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2009

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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2010

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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