Over the last few weeks Providence Rhode Island defaulted on a $62 million dollar loan to the City Pension Plan. They did it without notice or disclosure to investors,taxpayers,beneficiaries or the public.
In my attempts to have regulators and law enforcement investigate I have been stonewalled and blackballed. Those who live in Rhode Island are likely not surprised by the treatment I have received and those who are not from Rhode Island and are considering moving here should read this as a cautionary tale of corruption and abuse that you or your business can expect upon arrival. The Governor , the Treasurer , the Speaker of the House are all aware of the issues in Providence, they know it is on the verge of bankruptcy and has been lying about its financial condition, yet they participate in silent approval of the illegal and misleading reports that come from Providence and are imbedded in State Reports.
I have contacted the Attorney Generals Office, the Providence Town Council, the Mayor and the entire council were cc'd on a letter from Auditor General Hoyle, No one can say they didnt know of Providence default on June 30 th. Governor Raimondo knew as did State Treasurer Seth Magaziner. Yet they remain silent. Where is the leadership?
Below I have reprinted three letters. the first is my letter to the projo ,which was rejected immediately without explanation. The second letter is one that I received from State Auditor General Dennis Hoyle where he cc's everyone in Providence Government. This letter was reprinted in a column for WPRI reporter Dan Mcgowan. The third letter is my response to Hoyle which was returned to him on the same day within an hour.
Here is the Editorial or letter sent to the Providence Journal, it was immediately rejected with the comment "no thanks".
sent July 7, 2015
Dear Sirs,
Last week,
worldwide concern over the economic fate of Greece and the US territory of
Puerto Rico dominated the news cycle. Both were deeply in debt and facing
default. But a disturbingly similar
story about Providence Rhode Island has not made much news at all.
Here is the
Providence story that we should all be concerned about. On April 28 the Actuary
Segal Co declared that Providence and Providence Officials had for some period of
time carried a “Phony Asset” on the balance sheet of their pension plan. Segal
suggested that if Providence did not pay back the pension plan $62 million by
June 30, 2015, the actuary would no longer consider it an asset, as the city
had stated for years, and Segal would remove the asset from the Pension plan.
The truth was parsed out that meeting by Finance Chair John Igliozzi. We
learned that Segal Co. had warned the prior year, in January 2014, that the
assets were overstated in the Pension Plan. I warned the city the same thing 6
months earlier in the fall of 2013. Segal Co. suggested the previous actuary Buck
Consultants was at fault and Segal had not researched the questionable
accounting to find out when it began and for how long it has existed. Finance Chair Igliozzi correctly followed
through with questions about the $62 million dollar “write off” and any
possible interest owed to the pension Plan by the City of Providence. The total
cost to pension plan may approach $200 million.
Let’s step back
and look at this accounting decision. As
of June 30 2014. Providence showed the following items in documents officially
submitted to ratings agencies, investors, the State Auditor General, MSRB and
the SEC. The CAFR stated a current
liability on the City Balance Sheet known as “Payable to retirement plan
$ 53,907,000” This
extremely unusual line item indicates that Providence believes that they owe
the Pension Fund $53.9 million. There are three sets of beneficiaries in the
City Pension Fund: Class A employees, Class B fire and Class B police. Since the Payment is listed as a “current
Liability” it is due by June 30 2015. Not paying is a technical default. At the same time the Pension Plan Assets were
overstated by $62 million and called “other”. Because I am deeply involved in
pension accounting issues and as part of a 2013 Stanford Business School
project I looked into exactly the subject of accounting for Pension plan
assets. Providence is the only City in America that I could find with this type
of accounting. The accounting seemed entirely illegal to me but I pressed
forward with research before making my recent charges. I asked Lawyers and
accountants if Providence could borrow from the pension plan. Could they do it
without the Plans approval? What was the interest rate? When was it due? Were
there any documents at all? Where were the trustees or fiduciaries of the plan?
Why didn’t they balk when no money came in to invest? The list of questions took up several pages
in my outline.
Here’s the
amazing part, this has been going on for decades and thus Providence has been
illegally representing an asset in the Pension Plan that doesn’t exist. They
have overstated their pension Funding ratio every year and understated the
unfunded pension liabilities to investors, rating agencies and regulators. Clearly a lax or nonexistent system of checks
and balances allowed a cover up to exist. But where was the Auditor General? Were the public statements made by David
Cicilline and Angel Taveras about fixing the pensions untrue or misleading or
both. Were elected officials misled by employees or outside accountants or
both? Where was Governor Raimondo’s Pension Crisis Commission? They accepted
official reports and funding improvement plans for all the cities including Providence.
Dennis Hoyle was on that Committee. Actuary
Dan Sherman, who was with Buck until Providence fired Buck, was the committee’s
actuary. Gina Raimondo was on the commission. None of them saw this accounting?
Clearly Providence
has misled Municipal markets and bond Investors. That is a federal Crime.
Shouldn’t Mayor Elorza disclose this to the pension beneficiaries or the people
of Rhode Island? Should Treasurer Magaziner be aware or should Ms. Raimondo,
who formerly declared the Municipal pension problem to be twice as big as the State
pension problem, take interest? I am asking for an investigation. I believe the
People of Providence and Rhode Island deserve answers. $62 million was
literally stolen from the pension plan and there should be consequences.
Michael G Riley
Narragansett
Here is the Letter from Mr Hoyle
June 16, 2015
VIA EMAIL ONLY
Michael G. Riley
mgriley1929@yahoo.com
Dear Mr. Riley:
I have read your
frequent posts on GoLocalProv.com regarding the City of Providence and their
locally administered pension plan including your most recent post dated June
16, 2015.
I wish to offer
my perspective on the situation since much of which you have written deals with
whether the City’s financial statements are misleading – a matter that I have
both interest and oversight responsibility as the State’s Auditor General.
As you know, I
was a member of the City’s Municipal Finances Review Panel formed in January
2011 to review the City’s finances.
Subsequently, I have been in ongoing contact with the City, in concert
with the Department of Revenue’s Division of Municipal Finance, to monitor key
financial issues, most notably, eliminating threatened operating deficits and
the resolution of prior deficits. The
timing of the City’s contributions to its pension plan has often been
discussed.
My objective in
writing is to correct the record on some of the issues highlighted in your
GoLocalProv.com posts.
The issue
essentially is one of timing and cash flow.
At some time in the past (I’m not sure it has been definitively
determined as to when this commenced) the City’s contribution to its pension
plan was made after the close of the fiscal year. Ideally, contributions to a pension plan are
made periodically throughout the year.
For example, the General Laws require contributions to the plans
administered by the Employees’ Retirement System of Rhode Island be made by the
15th of the month following the applicable payroll period. All would agree that the timing of the City’s contributions to its
pension plan is not the norm or desirable.
However, my
perspective is that the City has appropriately accounted for these events consistent with generally accepted
accounting principles. The City budgets
and accounts for the annual required employer contribution for its
employees. Such amounts are reflected as
a fund level expenditure. At June 30,
when the actual transfer of cash has not been made to the pension trust fund, a
liability is recorded on the City’s General Fund. Accordingly, a receivable for the
contributions owed is recorded as an asset on the pension trust fund. This practice is consistent with generally
accepted accounting principles. Such
amounts are not a “false asset” as suggested but represent a valid receivable
from the General Fund to be Michael G. Riley
Page 2
June 16, 2015
collected within the next 90-120
days. Whether this receivable is an
actuarial asset at the valuation date for actuarial valuation purposes is a
different issue - this has been addressed by the City’s actuary.
In recording a
liability for such contributions on the General Fund balance sheet – the City
and its auditor must consider whether it is appropriately considered a current
liability to be liquidated with current available resources. Generally, that would require that the
liability would be liquidated/satisfied within a year of the balance sheet
date. The City’s practice has been to
make the contribution by October following the fiscal year ended June 30 –
which allows this to be reflected as current liability of the General
Fund. This is not inconsistent with
other amounts, which are recorded as fiscal year expenditures but paid or
liquidated subsequent to fiscal year end such as accounts payable, accrued
payroll, and other interfund payables.
For purposes of
illustration, if the City did not record an expenditure (and a related
liability to the pension trust fund) during a given fiscal year because the
cash transfer to the pension trust fund had not been made, the City’s General
fund would reflect a fund balance of more than $60 million perhaps suggesting
that such amounts were available for appropriation and subsequent
expenditure. This “fund balance” would
result from not reflecting an expenditure for required pension contributions. I would argue that the City’s current
practice of budgeting and recording the full required contribution to the
pension fund is preferable even if actual transfer is delayed. From the actuarial pension funding
perspective, the actuary is factoring in the effect of the delayed contribution
and the attendant interest component.
The City’s
actuary has appropriately revised its consideration of this receivable as an
actuarial asset within the actuarial valuation performed for funding
purposes. This is different from the
presentation of the City’s financial statements in accordance with generally
accepted accounting principles. My
understanding is that the actuary does not include the receivable (amounts due
from the General and other funds) as part of the actuarial value of assets in determining the actuarial funded status
of the plan and the City’s actuarially determined contribution.
I don’t believe
it is fair or appropriate to characterize the City’s accounting for this matter
as a “scam and fraud”. While the timing
of the City’s contributions to the pension fund is problematic and worthy of
attention, it is a function of available cash flow. Due to the large dollar amount involved, I
believe it is unlikely that a complete resolution is at hand although I do
believe incremental progress to improve this timing is possible.
The City’s
financial statements are audited each year by a licensed firm of certified
public accountants with experience in auditing governmental entities. The City’s selection of an auditor is
approved by this Office and we receive the audit report upon completion. One of the principle objectives of an audit
is to assess whether the financial statements are free from material
misstatement and conform to generally accepted accounting principles. The City’s auditor has opined on the
fairness of presentation in conformance with generally accepted accounting
principles.
In sum, my point
is not to endorse the City’s practice of making its pension contribution
subsequent to year-end. However, I
believe it is important to not mischaracterize the situation unfairly. My goal is to continue to work with the City
to explore options, which may ultimately allow such contributions to be made on
a more normal and frequent basis during the fiscal year.
Feel free to contact me if you
would like to discuss further.
Michael G. Riley
Page 3
June 16, 2015
Sincerely,
CC: Mayor
Jorge O. Elorza
Council
President Luis A. Aponte
Tony
Simon
Brett
Smiley
Lawrence
Mancini
Michael D’Antuono Matthew M. Clarkin, Jr. David Sullivan
Susanne Greschner James Wilkinson
My immediate response printed below.
There was no response from the City or Auditor General
Hoyle.
Dear Mr. Hoyle,
Thank you for your interest,
I appreciate your role in assuring Rhode Islanders and Rhode Island bond
holders receive municipal and state financial documents that accurately
portray their financial condition. For the record, none of the people cc'd in
your communication have ever attempted to respond to me or contact me. If you
recall I brought this subject up with you personally a few years back. I'm sure
you won’t be surprised to hear that there are CPA’s , auditors, actuary’s and
accountants who disagree with your characterization of accounting for pension
funds in Providence. I would be happy to see this mess cleared up through an
independent investigation into how this highly unusual accounting came
about and what efforts have been made in the 13 years that I can ,so far ,trace
of misleading and malfeasance in order to
correct the problem.
Specifically,
I am troubled by the fact that every year since at least 2006 , the assets in
the pension fund were knowingly overstated by tens of millions of dollars. It’s
unlikely these amounts would be just one month or quarter of delayed
payments. It appears as though the cash flow problems may have caused the city
to skip almost all payments to the pension plan for an entire year, before then
giving an "IOU" and paying four months late. And then the city then rolled
that missing year forward for over a decade, never quite catching up. It
appears that the city owes $62 million by this June 30 th or they are
defaulting on an unauthorized loan that sits on the city balance sheet as a
current liability. In my opinion on June 30 the city defaults on this unauthorized
loan.. This default should have have taken place years ago had the city
actually arranged a legitimate loan from the pension plan. They did not. They
also did not notify the pension board or beneficiaries or the municipal bond
holders. To this day , years of overstated assets have misled bondholders,
producing fantasy funding ratios and affecting all manner of actuarial
calculations.The ratings agencies have also been misled. Materially
misleading bondholders is a violation of federal Securities law as you know.
The $62 million that Segal proposes to "write off" and remove from
the assets of the pension plan on July 1 upon technical default of the city
(means they once again did not pay) is most certainly "material". The
asset known as "other" represented as much of 25% of the reported
actuarial assets in the pension fund.Not only is this outrageously high, i
don't see any evidence i n any other town of this type of accounting.I also
find it difficult to believe that no one was alarmed by this number or
asked about this anomaly. On really nagging item points to fraud and coverup .
Why in the world would the City repeatedly effectively borrow every year for a
period of time at 8.5% from the pension fund? This is either criminal or stupid
but it is not fully disclosed and i think would be materially relevant to
Municipal bondholders buying the city's paper at 3% This is not the first time
I have pointed this out. I started writing about this in the fall of 2013. The
Taveras administration was also well aware of my charges and they were
warned in January 2014 by Segal and then the city did literally nothing about
it. They then suddenly amended a bond document in June 2014
reflecting the Segal Co January comment. After Kate Nagle and I pointed
out their lack of disclosure in GoLocalProv.
All that being said, I would be happy to speak
with you in person to better understand your explanation of why my analysis is
wrong. May I also say that in the process of investigating this highly unusual
accounting that I could not find any pre-2006 city documents. There
were no pre-2006 CAFR or actuarial valuations on the city
transparency portal. On my visit to the Archives I found that no one had even
inquired about these documents ( 2006 and earlier). They were in the basement.
This tells me that no one even bothered to look into my charges in
the last few years including this administration. There exists a very lax,
arrogant attitude in that city. However, thanks to the hard work of the
archivists at City Hall I now have many city documents dating back to 1990 and
after reviewing them I would be very surprised if anyone will be able to easily
track down what’s going on in Providence Accounting. Hence my suggestion
regulators be brought in. I should think you would want to know the whole
story.
Sincerely
Michael G Riley
my office # removed
I am available midday tomorrow.
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