Riley: Did Smiley Use Bankruptcy Threat to Get Grant, Proving Prov is Lying?
Wednesday, July 20, 2016
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
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThe 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
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