Michael Riley: Projo, Elorza and Cianci are all Blind to Reality
Tuesday, October 21, 2014
Recently the Providence Journal endorsed Jorge Elorza over Buddy Cianci and Daniel Harrop. I would not normally comment but my focus is and has been on Pension Math with respect to the teetering finances of Providence. The media, most prominently the Providence Journal has been woefully inadequate in explaining Providence and the pension mess. The City’s predicament is far worse than the State pension. Naturally voters should know what is happening and why pension abuses could collapse Providence. The Journal and all the candidates except Harrop have avoided discussion of pension irregularities such as assets being “pumped” by Taveras and Cicilline. They have avoided the outrageous discount rate being used for liability calculations 8.25% in Providence and what effect that has on the budget and future liabilities. They have avoided GASB 68 effects. They have avoided the issue of Taveras investment in Hedge Funds under investigation for billions in tax avoidance. They ignored the question of an adviser, who was connected to Madoff and then dumped by many towns in Massachusetts. The adviser was hired by Buddy in 1995. They have avoided the entire discussion of pensions and finance in Providence because they liked Taveras even when negligent. Similarly, both Elorza and Solomon refused to opine on Providence murky pension accounting despite Elorza claiming recently that he was once an accountant early in his career.
The gist of the Journal’s Elorza endorsement was that Buddy is a felon and also he’s responsible for the hugely important unfunded pension problem in Providence due to Buddy’s inappropriate 5% and 6% colas of the early 1990’s. Some argue Ruggiero was the culprit but I’ll stipulate it was solely Buddy for the sake of discussion. I completely agree they were ridiculous, inappropriate and effectively bribery. I agree we should end them and COLAS were finally reduced under Taveras “reform." I agree with the sentiment that politicians in Providence are the biggest problem in pension liabilities. Cianci essentially had a quid pro quo relationship with unionized employees by promising the moon and never funding the appropriate dollars. Like other mayors from Cianci all the way to Taveras, Buddy hid behind accounting tricks. But in 2014 all these tricks are collapsing. Years of low interest rates have exposed all the assumptions for liabilities and assets as “way off the mark." Government Account Standards are pressing municipalities to tell the truth. Taveras lies are the worst of all and the accounting is misleading. There is no way Providence or any other town can promise 8.25 % returns.
So, the question of pension fund liabilities is huge but the Journals use of the 5 & 6% cola issue as a reason to vote for Elorza without explaining the total financial picture for Providence is an extremely lazy excuse for the Journals agenda of anyone but Buddy Cianci .
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTCan we please just get the Numbers Right?
Instead of relying on unsupported emotional claims let’s put the 5 & 6% colas into perspective. Are those Colas the problem? Back of the envelope calculations will suffice. I am pretty sure the Journal did no calculations what so ever. Let’s start with the value of all the reforms that Taveras touted and the Journal thoughtlessly repeated. According to the 2013 CAFR (pg 8) The total dollar amount of savings by Taveras and the unions was $170 million for all reforms that included suspending all colas for 10 years, eliminating 5 % and 6% COLAS, capping pensions at 150% of Household income, changing calculations of % of salary to final 4 years average, increasing contribution employee contributions and altering the disability payout. All those items together reduced the pension liability by 10%.
Taveras must have been disappointed that the savings from changing beneficiary’s colas to 3% from 5.5% was so small. That didn’t stop the media from jointly proclaiming success with Taveras. But the numbers just won’t go away and tell a different story.
Calculations
The average retiree receives in Providence receives $29000 annually. The range is much wider as has been reported. There are approximately 3094 retirees and sub beneficiaries. This totaled $90 million for the year in 2013.
Here’s the back of envelope calculation for 5 and 6 % cola effect on liabilities when changed to 3% which is all that happened here after a 10 year suspension.
Assume each retiree (3094) receiving benefits totaling $90-95 million a year. (The ARC pmt is $50 to $60 million)
Assume a 23 year lifespan in retirement.
Find the future value of two streams (annually to keep it simple)
>>>Stream 1 pay $90 million for 23 years increasing annually by 3% cola and then take present value.
>>>>>Stream 2 pay $90 million for 23 years increasing annually by 5.5% and then take present value.
Compare those present values.
PV of $90 million growing at 3% compounded annually for 23 years = $471 million
PV of $90 million growing at 5.5% compounded annually for 23 years = $641 million
The analysis is not done. Since only 65% to 70% of retirees received the higher colas, we adjust the present value by multiplying by .7.
Taking the difference in present values of $170 million times .7 = $119 million
Sorry still not done
That would be the calculation if colas were simply reduced to 3% across the board. That’s not what Taveras did. All coals were suspended for 10 years. The present value of suspending all colas for 10 years and then returning to 3% colas is $92 million which is more than half Taveras claimed savings.
6% Colas are wrong but only explain 2% -5% of liabilities
So, the 5 and 6 % colas returning in 10 years to 3% colas account for, or explain, less than 5% of the current problem. The number also barely exceeds the $57 million lost assets that Taveras refuses to explain and Elorza pretends isn’t an issue. The Journal would do well by justifying its mayoral endorsements on the facts rather than grudges. I like Dan Harrop and his suggestion that Providence should seek receivership so the Renaissance city can have a “reset”… I don’t see any other way out.
The Journal is using popular myth and bad math to explain a vote for a candidate that has zero experience and can’t even explain the current finances in Providence. They deserve each other.
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: Cianci’s Coverage in the Providence Journal
A look at recent coverage of former Mayor and Mayoral candidate Buddy Cianci's coverage in the Journal.
Related Articles
- Michael Riley: RI Municipal Pension Study Comm. Is in Failure Mode
- Michael Riley: Taveras and Polisena No-Shows at Pension Commission
- Michael Riley: Rhode Island’s Potential Pension Nightmare
- Michael Riley: State Pension Fix in Limbo as Municipal Debt Grows
- Michael Riley: Municipal Pension Commission Comes Unglued
- Michael Riley: Moody’s Lowers the Bomb…Look Out Rhode Island
- Michael Riley: These RI Cities + Towns Could Be Next in Bankruptcy
- Michael Riley: Analysing A Crisis
- Michael Riley: The Pension Study Commission Needs To Face Reality
- Michael Riley: The Harsh Reality of the Pension and OPEB Crisis
- Michael Riley: Providence Vying for Worst Funded City in America
- Michael Riley: Don’t Pay
- Michael Riley: Failed Pension Commission Ponders Permanent Oversight Commission
- Michael Riley: Can Taveras Clean Up His Act for the New Mayor?
- Michael Riley: Rhode Island Treasurer is About Integrity and Experience
- Michael Riley: Pension Obligation Bonds? Oh My!!
- Michael Riley: Integrity? Whatever…
- Michael Riley: The Reality of Providence Pension Liability
- Michael Riley: The RI Treasurer Democratic Primary Race Gets Uglier
- Michael Riley: From Head-start to Harvard to the Hoosegow Part 2
- Michael Riley: West Warwick and Gallogly Pull Hoax on Taxpayers
- Michael Riley: 38 Studios Insider Trade and Municipal Fraud
- Michael Riley: GASB 68 Portends Huge Problems for City and State
- Michael Riley: From Head-start to Harvard to the Hoosegow?
- Michael Riley: Alerting Treasurers, Governors: Providence Pension Fund Collapsing