Riley: RI Has $600 Million Shortfall for Fiscal Year 2015

Tuesday, March 10, 2015

Michael G. Riley, GoLocalProv MINDSETTER™

Don’t fall off your chair - that half a billion or so is just the RI pension fund. It’s not real. The ugly details are at the end of the article. If the State wants to check my numbers or if the ProJo actually wants to do some real reporting and confirm these facts, I am available.

Providence finally posted various financial reports from Wainwright Investment Counsel LLC in the past week. Though the new commission has maybe met just once in 2015, the City of Providence according to Wainwrights unaudited submitted reports achieved returns of 6.2% for the Calendar year 2014. The return of 6.2% badly lagged that the 8.25% the city estimated last June (by 250 basis points) and underperformed the S&P 500 return by a WHOPPING 750 basis points. The S&P 500 return was 13.7% in 2014.

Providence's big 2014 flop was confirmed by this report which was finally posted on the city data website last week.

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The new Finance Director and Auditor appear to be sticking with the Discount rate of 8.25%. Properly correcting the city’s discount rate to 6% would add nearly $1 billion dollars to the pension fund and those dollars are due from Providence Taxpayers. We believe this is part of the continuing effort of the last 4 consecutive Mayors to mislead municipal bond investors about the true condition of Providence finances. Other evidence includes strange accounting for what is essentially the City borrowing from the pension fund every year. Despite auditor concerns and warnings in January 2014 the Elorza administration appears to be continuing to mislead bond investors as to the true level of Assets in the pension fund, therefore distorting liabilities as well.

It’s a mystery to me why Moody’s or the SEC has not commented on this misleading behavior in accounting for assets and the outrageous discount rate used. The SEC warned about this behavior a few years back, but they seem unaware of the Providence malfeasance. I welcome any other journalist from any newspaper to ask the city about these two items. Providence won’t talk to me.

How is the State Pension Fund doing?

The State has also had a pretty poor investment record over the last 13 months. The return for calendar year 2014 was even more disappointing with a return over the 12 months 2014 of just 4.4%. January 2015 started with a loss of .31% so fiscal 2015 looks awful at -1% vs. the 7.5% discount rate with just 5 months left in the calendar year. While both are badly underperforming the market in general. The state of Rhode Island is struggling even more than the city of Providence. This amounts to a roughly $600 million dollar shortfall in investment returns in the state of Rhode Island for fiscal 2015.

I would think this would be front page news. In many states pensions ARE the daily story and people really care about returns and reform. In a bull market, like in the last 5 years huge run, the unusually positive returns help keep Investment decisions & performance from being scrutinized. That period is over and both the Investment Commission for the state of Rhode Island and the city of Providence need to explain their poor performance and the crazy discount rates. Why are they so high? Who decided to use these rates?

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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.

Riley: RI Has $600 Million Shortfall for Fiscal Year 2015

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