Riley: Puerto Rico Hedge Fund “Bailout” to Follow Rhode Island Law

Tuesday, January 05, 2016

 

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A recent Projo editorial as well as a letter from Fromma Harrop referenced the second missed payment on Puerto Rico’s massive debt as something of grave concern. Citing a potential bailout or an aide bill, both authors correctly stated that it would be extremely unfair for bondholders to be bailed out of bad investments by US taxpayers. They reasoned that bondholders knew there was risk in their investment and knowingly took risk. This is exactly correct and essentially how any free market advocate would view the circumstances as they exist in Puerto Rico.

Unfortunately Ms. Harrop’s letter strayed into political commentary essentially concluding Republicans and their pals, the demon “Hedge Fund Predators”, are conspiring to use U.S. taxpayer dollars to bail out Puerto Rico and their existing bondholders. It’s unclear from the letter where she gets the idea that these bondholders are conservative lead hedge funds. It is well known that Wall Street firms like Oppenheimer have stuffed their Municipal Bond Funds with some ugly Puerto Rico paper and consequently individual investors' own bond funds across the nation that are exposed to losses on Puerto Rico desk.

It is odd that neither author connected these events in Puerto Rico debt with the potential time bomb ticking in Rhode Island. In 2011 as it became clear that Central Falls was on the verge of bankruptcy Rhode Island ffficials became concerned about the financial condition of a dozen other towns and potential bankruptcy contagion. Crisis management ruled the day once again as Rhode Island pre-emptively passed a law placing municipal bondholders in a superior “first Lien" position in the event of Chapter 9 bankruptcy filing. The following article from Bond Buyer describes the move.

The article does not describe what happened next. After contracts were renegotiated following years of union refusals to budge, employees then received cuts of as much as 45 cents on the dollar. This rubbed unions and many other town employees the wrong way. They said “Why should the employees take a hit for poor municipal management and bond holders be spared?” they had a good point. It’s the same point that Harrop makes in her article about Puerto Rico when ascribing the motives to evil conservatives. How does she explain that a Rhode Island law that was designed exactly as she fears that US Senate conservatives and “bond predators” plan in Puerto Rico, having existed in her state for 5 years. She seems oblivious to the fact that this bond holder bailout law had already been passed in Rhode Island and it was done so without a single conservative in State Office. Passed in 2010 by a State Government that is 100% controlled by Democrats obviously means democrats love hedge fund bondholder’s right?

Indemnifying bondholders wasn’t enough

The story of the Rhode Island Muni Bond bailout doesn’t end there and neither does the irony. RI State Assembly leaders were confronted and blasted by union leaders and by Central Falls employees causing the veto proof Democratic Representatives to make a “side deal” to take (appropriate in Budget) State Taxpayer dollars and provide “aide” to the Public workers in Central Falls. (This is otherwise known as a payback or bribe). The Assembly then set up a $2.6 million dollar fund designed to boost pay back to 75% of pre-bankruptcy levels. Insane right? Apparently Ms Harrop didn’t notice that particular unfair maneuver against taxpayers in her own State of Rhode Island. Then, still not satisfied, the Democratic dominated assembly did it again midnight on the last session in 2014. Gordon Fox (D)  Nick Mattielo (D), Paiva Weed (D) et al engineered another $4.8 million in bailout funds passing legislation that was introduced in the Senate by Elizabeth Crowley (D) and Agosithino Silva (D) in the House.

While Ms. Harrop is oblivious to bad law in Rhode Island, she is right about one thing. Bailing out municipal bondholders to the detriment of public workers, retirees and taxpayers is just plain disgusting and insulting. Our General Assembly should get rid of that law and reinstate the notion of free markets and risk taking.

Why does this matter?

The precedent of the State bailing out 75% of pre-bankruptcy compensation exposes all state taxpayers to the City of Providence approaching bankruptcy, thus allowing a reduced hit on Providence citizens and instead shifts the burden to state taxpayers and leaving Municipal bond holders untouched. If that’s not “UNFAIR” I’ll eat my hat.

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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. 

 

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 https://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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