West Warwick Fix and 38 Studios Bond Payment?

Tuesday, May 27, 2014

 

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West Warwick recently voted on a series of reforms meant to substantially improve town finances as part of a pension Funding Improvement Plan developed in concert with Revenue Director Gallogly. The Rhode Island Pension Study Commission is the latest governmental attempt to address the pervasive mismanagement of town finances, specifically pensions and OPEB (health care). Numerous commissions and studies over the years have taken place in Rhode Island that have been wholly ineffective in heading off the looming disaster. West Warwick was warned along with 16 other towns in a 2007 study by Auditor General Ernest Almonte. During the last 15 years RI “Critical Status Towns” have shifted between $2 and $3 billion dollars in debt obligations from themselves and the current generation of taxpayers onto their children and grandchildren or new members of the communities involved. These towns have knowingly piled debt on future citizens and home owners substantially lowering the resale value of existing homes. West Warwick is one of those towns and it is worthwhile at this point in history to investigate what happened there and if this latest fix, by far the most substantial effort to date, is enough to save West Warwick or just the latest cynical attempt to “kick–the–can” by a hapless commission of bureaucrats.

In order to fully analyze the fix, as was voted on last week, we would need to know some assumptions that were made to calculate savings and future costs. For example I don’t currently know what discount rate was used for determining savings and for calculating on going funding requirements. If 7.5% was used for example, then it’s quite possible that the GASB 68 adjustments will wipe out any savings made through negotiations in one year. That brings up key questions like… Were taxpayers told this before they voted? Were retirees and active workers apprised of this when they negotiated changes? Did the revenue commissioner omit the very real consequences of prospective changes?

I don’t know for sure because it hasn’t been revealed to the public and I realize voters are unlikely to make these calculations and simply responded to the message served by the Council that "if the voters didn’t approve the fix" which was crafted by Rosemary Booth Gallogly, "then State takeover was imminent.” They also heard references to Central Falls, etc. and were encouraged by present town officials, who stand to be displaced in a state takeover, that a very high premium should be placed on “controlling their own destiny.” Voters dutifully did as told... but was this wise?

Ratings agency Fitch will weigh in on the changes in the first week of June. Their current rating, BBB-, was the result of a downgrade in June 2013. Moody’s downgraded the town in September 2013. Both have West Warwick on “negative watch”. Notably, this reform effort by RI Pension Commission Director Gallogly is more than 18 months after the commission was formed and endeavored to address the crisis. It’s a near certainty that the agencies will soon remove the "negative watch” status and that declare at least the “reforms are better than nothing,” but they may result in no improvement in ratings like Providence mediocre effort. West Warwick measures were measures more comprehensive than Providence... but may also be ineffective.

State Takeover still likely

Unfortunately, we will need to wait for the ratings agencies or the Commission or the Town to reveal their assumptions for further analysis. But for now I remain very skeptical anything more than a minor improvement was made. More troubling is that given how much effort was expended and how obviously reluctant unions were to come to the table this likely represents their last and best effort and ensures the next step is state takeover. It is very hard to say whether the takeover will be in 12 months or 24 months, primarily because no ground rules have been established by the RI Pension Commission. There are currently no penalties for violation of funding improvement plans or promises to pay the ARC or teeth in anything the commission says. What if West Warwick says we won’t pay the ARC or can’t pay it? As of now nothing would happen to them. So this brings up the subject of accountability and the role of leaders in our State.

Ratings Agencies, Retirement benefits and 38 studios

This lack of accountability and urgency in the RI Pension Commission has me wondering about priorities, especially those of Governor Chafee and the General Assembly. Unlike 38 Studios, where the Governor demands we pay a moral obligation bond as the “right thing to do” / “we owe it” / “I’ve never been so certain.” Governor Chafee does not demand, nor do his new gurus, the ratings agencies, that we fund retiree benefits?

Let me say that again. Your Governor Chafee endorses the ratings agency sense of priority, in this case, of “accredited investors” - multi-millionaires invested in 38 studios debt - and the idea they should get paid rather than properly funding of Municipal employees promises. While Moodys has recently increased the importance of pension obligations in GO debt ratings, they have explicitly allowed purposeful underfunding for years. Moodys does not threaten Junk ratings for towns or states willingly building billions of dollars in obligations. They will, however, rate RI “junk” if a criminal enterprise (EDC 38 Studios) totally funded by millionaires aren’t paid principal plus a guaranteed 7.5% rate of return.

For Rhode Island, right now, It comes down to this:

Governor Chafee, Treasurer Raimondo, Speaker Mattiello, Taveras, Pell, Moodys’, Fitch and Standard & Poors’ all have publicly held positions that they will absolutely approve slashing public employee retirement benefits before they will default on this “Privately Placed Insured Revenue Bond “ known as 38 Studios. They do this knowing that the bond in question benefited only accredited investors and their guaranteed 7+ % returns . They agree with the strategy that took Central Falls retirees and slashed benefits while placing new municipal bondholders in first lien position for future Chapter 9 occurrences.

This is the position these righteous leaders take. First, they ignored the imminent municipal Crisis warnings by Credit Agencies on Pension Underfunding. Then these same leaders go around the voters and slip in a privately placed bond scheme at twice the going interest rate and guarantee it for a video game maker. Then the same leaders vote to slash Pension benefits and ultimately decide instead to pay off millionaires holding 38 studios paper.

Let me be clear, the towns and unions have horribly mismanaged many of us into real economic hardship that must be rectified through significant sacrifice. But I cannot abide by the callous disregard and punitive behavior exhibited by our current leaders and the ratings agencies. In my world there is such thing as a “one-off”. There can be a bond issue that is so corrupt, so unclear and so outside the norm that it should not be immediately paid without thorough criminal investigation and it should not reflect on the general credit of the state of Rhode Island. Any Governor who can’t make that argument is not fit to govern and any rating agency who can’t make that call is unworthy of its roll.

 

Related Slideshow: Who Wants to Pay and Who Wants to Default on the 38 Studios’ Bonds

GoLocalProv showcases which Rhode Island politicians and organizations want to pay or default on the 38 Studios' Bonds.

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CON

Allan Fung

Republican candidate for Governor

“I am repeating my opposition to the 38 Studios loan guaranty and to the use of taxpayer dollars to repay those moral obligation bonds.”

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CON

Ken Block

Republican candidate for Governor

“38 Studios was a bad deal and a bad investment from the very beginning and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better...As long as there are serious legal questions still to be decided, we need to stop the repayment process."

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PRO

RIPEC

John Simmons, executive director of the Rhode Island Public Expenditure Council

“We’re not going to punish anybody but ourselves if we don’t pay."

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PRO

Greater Providence Chamber of Commerce

Laurie White, President of Chamber of Commerce

“I think it’s important that action occur quickly. Our view is that economic development in Rhode Island has to be the main event. … We need a very dramatic, aggressive effort to change the path that we’re on.”

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PRO

Gina Raimondo

Democratic candidate for Governor

“Despite my frustration with everything surrounding this transaction, I believe it is in the best long-term interest of the state and all taxpayers to repay these bonds."

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PRO

Clay Pell

Democratic candidate for Governor

“Clay does not believe Rhode Island should default on its moral obligation bonds when they come due. 38 Studios was a terrible mistake — and another example of why we need to change the culture of politics in Rhode Island"-Devin Driscol.

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PRO

Angel Taveras

Democratic candidate for Governor

“While I share the frustration of many Rhode Islanders, I believe that not paying back 38 Studios bondholders would have a detrimental impact on the state’s bond rating that would far outweigh any short-term benefit we might gain. We cannot afford to default on our obligations.”

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PRO

Lincoln Chafee

Governor of Rhode Island

“The candidates who can’t understand these two obvious truths are unfit to be Governor. The consequences of default would place Rhode Island as one of the lowest state bond ratings in the nation, and the industry would reduce Rhode Island to ‘junk bond’ status. We have been told in no uncertain terms that the reaction to not paying our debt obligations will be severe and have an adverse impact on Rhode Island. In addition, failure to honor our obligations could have harmful effects on the pending lawsuit.”

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CON

Mike Stenhouse, CEO of RI Center for Freedom and Prosperity

"It's not just about not paying off bondholders.  Bondholders are adults, they knew the risk.  It's not just a question of the credit agencies.  It's a question of what would payment crowd out, what reforms could we achieve with that money, such as sales tax reform, which would enable us to create jobs."

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CON

Mike Riley

2012 Republican candidate for the 2nd Congressional District of Rhode Island.

"If we had a real Governor, he would stand up for the Taxpayers and the State of Rhode Island and stand up against threats by rating agencies."

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PRO

Professor Ed Mazze

Professor of business at University of Rhode Island

"Even though this is a moral obligation in terms of the way the financial deal is set up I still feel the state has an obligation to the bondholders, to make good on their payments."

 

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