Caprio Dangerously clueless and Magaziner has big holes in his story

  This posting is written as a follow up to todays Go Local piece July 15,2014.

http://www.golocalprov.com/politics/riley-let-the-rhode-island-treasurers-race-begin-with-facts

 and RI Shrugs will be amplifying certain issues relevant to  the Rhode Island Treasurer Campaign. I truly believe the State of Rhode Island has clueless and Corrupt leadership that have combined to form last place Rhode Island. Today is about two treasury Candidates and Pension accounting.

  A sarcastic "heads up " to Candidates for Rhode Island Treasurer printed directly
  from the 2013 State of Rhode Island  Single Audit(hint: it means you follow GASB)

 

State of Rhode Island and Providence Plantations Notes to Basic Financial Statements
                              Fiscal Year Ended June 30, 2013 

Note 1. Summary of Significant Accounting Policies
A. Basis of Presentation

The accompanying basic financial statements of the State of Rhode Island and Providence Plantations (the State) and its component units have been prepared in conformance with generally accepted accounting principles (GAAP) for governments as prescribed by the Governmental Accounting Standards Board (GASB). GASB is the accepted standard setting body for establishing governmental accounting and financial reporting principles.

http://www.oag.state.ri.us/reports.html

So when Ted Nesi  asked  the candidates what they thought about the current 7.5 %  assumed rate of return for RI pension Assets (also known as discount rate) I perked up. Surely Ted  Nesi knew better than to ask that because obviously  Caprio, Magaziner and Almonte will have no choice in the matter  but to follow the formulas prescribed under GASB 68  or i guess they could  abandon GASB. Did Ted not know this? The days of magic  imagined returns eclipsing those of  of Warren Buffett, are gone. No longer can Joe  Cousin the municipal treasurer, then  hire his nephew Hy Raytes  as  his actuary and guess they will make returns of 10% for the next 30 years,thus  creating no need  to fund future obligations today. This is the wink-wink nod-nod game  that RI mayors , unions and treasurers play. Rhode Island has been particularly adept at this sleazy arrangement. That's exactly why the SEC and GASB crackdown is happening now and why GASB 68 was created. Well GASB 68 is in effect as of today and any town or State that is fully funded will not be affected. However, if the pension fund is poorly funded, like the state of Rhode Island , &cities like Providence and Johnston among others, the liability will balloon by billions of dollars.(Providence example at bottom of page)

                    Statement No. 68, which primarily relates to reporting by governments that provide pensions to their employees, is effective for fiscal years beginning after June 15, 2014.

You see this will be a  formulaic calculation  , King Caprio or Magaziner who embarrassingly were clueless about this will not get to guess a rate. Caprio will not get to pay off unions with a  wink-wink nod-nod  hike to 7.75% based on Caprios supposed investment prowess. He says this ,even though his hero Warren Buffett uses 6%.

  Stunning Ignorance                      

As proof Frank Caprio is unaware of what he is allowed to do and how GASB affects his magical powers he said the following " I plan to incorporate the high returns in the market over the last few years and do a study showing that we can raise the discount rate and lower our ARC thus producing near term "savings" we can spend in the State Budget"

Not only does Frank Caprio not no how imprudent that would be for an underfunded plan, HE WAS ACTUALLY ALREADY  RHODE ISLAND TREASURER  !!!!  omg ..This shocking disconnect from prudence and current accounting standards is pitiful. Manipulating the rates to lower the ARC in an unfunded plan is a huge no-no.  Unfortunately for clueless Frank he wont get away with it because of GASB 68. Now over 40% of the plan will be discounted at 3.4% and Franks magic bean forecast will be weighed 60% making virtually impossible to reduce the ARC. In fact the state will likely be calculated as follows (40% *3.4% ) + (60% *7.5%)= 6.46% the drop from the current 7.5% to the GASB 68 rate of 6.46% will increase the States Unfunded Liability by $2.2 BILLION to $6.7 BILLION.  It boggles my mind that a former treasurer and a candidate for Treasurer doesn't know this. And Rhode Islanders wonder how we are virtually  last in everything.

When Seth Magaziner chimed in that Rhode Island could potentially raise money for the budget by increasing the discount rate? He too doesn't get it, but least he never lost $2 billion of the state pension money in 12 months like Frank did. Magaziner then says the following:

          " my track record of investment returns is second to none in this race and by producing higher returns i will improve funding and be able to return colas to the workers."

So , to paraphrase politifact, we wondered just what was his track record? Was he  even aware of GASB 68 ?  As far as his claim of asset management and his returns a cursory google search produced A November 2013 Wall Street Journal article that describes Seth Magaziner as a research analyst not a portfolio manager. Those are two very different things. Maybe the articles author got it wrong but I will be asking about Magaziners real funtion and  supposed returns. He should also be aware that it is both an SEC and FINRA violation to claim returns that you were not exclusively responsible for. He claims great investment acumen and fantastic private sector returns lets hope this all doesn't turn out to be lies or worse  regulatory violations for him and/or Trillium.

   

way more to come on all three and I am just getting started.

Mayer Taveras and Providence under GASB 68

Example 3  Providence Rhode Island

   ( 30% funded *8.25% ) + (70% unfunded * 3.4%) = 4.85%

Adjusting Providence to GASB  68 and subtracting $60 million from assets for accounting lie produces an unfunded liability of $ 1.813 billion . $ 1 billion more than is currently reported.