Providence Rhode Island defaulted ..Does Moody's care?

        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 15^th 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

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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.

Judge Taft Carter should Vacate Providence Pension protection Plan

On April 30, 2012 this announcement was a bald faced lie and Judge Taft -Carter should vacate the agreement. I will produce a report showing that Taveras and others knew of  facts  presented to the court that were Materially misleading  should make this agreement null and void.

 


Mayor Taveras Signs Providence Pension Protection Plan
Monday, April 30, 2012


 http://www.providenceri.com/mayor/mayor-taveras-signs-providence-pension-protection-0


Surrounded by youth leaders from across Providence, Mayor Angel Taveras today signed a comprehensive pension reform ordinance into law that saves city pensions and positions Providence for the future. The Mayor signed the ordinance less than an hour after the structural, sustainable pension reform plan was unanimously approved in a second and final vote of the City Council.
"The Providence Pension Protection Plan is a big step toward the necessary structural changes we must make to put Providence on a sustainable fiscal path and position our city for the future. These reforms have overwhelming support from the community, business leaders and the Local 1033 Laborers union," said Mayor Taveras.
During his budget address one week ago, Mayor Taveras called on the City Council to pass the Providence Pension Protection Plan. City actuaries expect the reforms to save at least $16 million and reduce the city's unfunded pension liability by more than $236 million.
The reforms suspend all guaranteed annual raises (COLAs) for retirees until the pension system is 70 funded and caps all future pensions at one-and-a-half times the median state household income. The reforms also reduced the disability benefit from 66.6 percent of an employee's final salary to 50 percent. Lastly, the reforms changed current rules regarding payments into the system and will now require employees to pay into the pension system for as long as they are earning credit toward a pension.
Mayor Taveras and the City Council have spent months examining the city's pension crisis and have developed a comprehensive plan to save Providence's pension system for current employees and retired city workers. The Providence Pension Protection Plan will save pensions for current employees and all of Providence's retirees and will allow the city to protect and improve the health, safety and quality of life for all Providence residents.
"I want to thank the Mayor for signing this important piece of legislation," said City Council President Michael Solomon. "More than six months ago the City Council set out to fix the pension system with the goal of forming recommendations that would result in a sustainable system for the city, taxpayers, and retirees. After much testimony and deliberation, our Subcommittee on Pension Sustainability made a series of recommendations that will substantially reduce our unfunded liability and put our city and pension system on a path towards fiscal stability."
"Comprehensive pension reform was critical to addressing the city's dire financial situation and protecting retirement benefits for current employees and retirees. With an unfunded liability over $900 million and an annual required contribution skyrocketing, we recognized that the system was unsustainable and chose to act," said City Councilor David Salvatore (Ward 14), who chaired the Subcommittee on Pension Sustainability. "I thank the Mayor and my colleagues for supporting this reform and ensuring that Providence's brightest days are yet to come."

Judge rules Providence pension settlement fair - Providence Business News

Superior Court Associate Justice Sarah Taft-Carter has issued a ruling that Providence’s pension settlement is “fair, reasonable and adequate,” according to...

pbn.com

Judge Carter did not have the facts straight because the truth was withheld by significant city and State leaders. By the time this investigation is finished we could see dozens of law suits and criminal charges.

Rhode Island Governor and Treasurer Mislead Municipal Bond Markets

                               Governor Raimondo and Treasurer Magaziner have  joined  Providence in misleading municipal bond markets and rating agencies as to the true financial condition of the State Capitol.
The state is a cesspool of insiders.

        

I live in Rhode Island a state where the elected leaders consider it moral to unilaterally alter the terms of employee benefits and also consider it moral to obligate state taxpayers to pay off a debt that is legally not theirs ,the $100 million in insured bonds of the EDC for 38 Studios were paid so that assembly members and insiders are not investigated by the insurance company. This is massive public corruption. Had the assembly or Governor or Attorney General actually instituted an investigation ,as they all promised, anytime in the last 18 months they could make a case that they were pursuing the truth, but the fact is that the purpose of these payments is to protect insiders.This budget included yet another appropriation for 38 studios payment by taxpayers. It wasn't highlighted by the Governor and it wasn't even mentioned by the Speaker. They consider this a closed subject. Now their brethren and fellow insiders in Providence have been found to have been stealing money from the police and fire pension fund. Again the speaker and the Governor are silent because they know Providence can't pay back the fund the money they stole ,in this case $62 million plus interest. To illustrate how desperate Providence has been to hide cash flow problems and mislead Municipal bondholders they have been crediting 8.5% interest to the pension fund for this unauthorized loan. They are ,with good reason , afraid to open their books to outsiders. There can be no rational explanation for this misappropriation of $62 million , secret borrowing at 8.5% and accounting that has recently been ruled inappropriate. This has been going on for ten years at least. Who knows what else is going on and what is being covered up?
In just two weeks Providence will default of a loan (short term IOU) , to the pension fund in the amount of $62 million dollars. This technical default should bring in ratings agencies and the Feds but Providence and the Elorza administration will try to do exactly as the Taveras Administration before and double talk and mislead the municipal bond market as to the true financial condition of the pension plan and the city. the regulators can then watch them mislead municipal bondholders in "real time". I will be issuing a 40 page report to the media and regulators on June 29 for everyone's review. Not everyone in city hall is or has been misleading but many are guilty and they need to come clean. 

http://www.golocalprov.com/politics/riley-default-in-providence-huge-shortfall-in-state-pension-plan.-where-is

Elorza 5 year forecast GIGO Garbage in Garbage out

                   How in the world did Mayor Elorza think the 5 year forecast for Providence wouldn't include paying off a $62 million dollar swindle of the pension plan plus interest owed,. The answer is likely that he didn't disclose those facts to the company he hired. If those facts were not incorporated the five year forecast isn't valid and not useful. It also adds to the growing roster of providence Officials releasing misleading financial data to taxpayers, and municipal Bondholders. I am sure this wasn't the Mayors self guide idea and project and most likely the city official who worked with PFM on this project was well aware of the Auditor Ruling re a false asset on the Pension funds book of $62 million dollars.The auditor says this is due by June 30.2015 or the asset will be "written off.and Providence pension liability will immediately increase by $62 million dollars, In addition once this "loan/asset is written off there is the question of interest owed to the pension fund for having illegally annually commandeering at least $50 million  dollars in order to finance city operations. The interest owed to the pension would be the Discount rate used by the Pension fund of 8.5% compounded. The incredibly stupid plan of the mayor borrowing from its own pension fund at 8.5% for a decades is ample evidence that Providence is broke and being operated by thieves.
              Shortly after Mr Elorza issued this misleading report from PFM ,we called them and asked if they had considered the $62 million due in 45 days as part of the money due in the the next 5 years  or were they even aware of the  fact the Auditor found the city had created a false asset. We asked the same question regarding the interest owed to the pension fund which could be another $100 million. We were told that they could not speak to us without the permission of their client:Providence,
              So if a municipal bondholder read that report issued by Elorza and authored by PFM it would constitute yet another effort to mislead municipal market participants and ratings agencies as to the true Financial health of Providence.

John Simmons, Dan Sherman and buck consultants

         This week we investigate the genesis of Providence Pension Fraud. Someone designed this scheme in the last decade and made a deliberate decision to borrow from the pension fund to cover a dangerous drop in the city's operating cash flow. The likely start of the scheme is somewhere between the  "Category 5" revelation by Angel Taveras in 2011  and his predecessor David Cicilline's fond farewell to John Simmons as his Director of Administration a few years earlier where they both claimed victory over budget, union and pension issues.


      Here's how David Cicilline put it in 2007:

Mayor's Chief Architect in Restoring Fiscal Integrity to City Government to Step Down   November 8 2007

Mayor David N. Cicilline today announced that the City’s Chief of Administration, John Simmons, will step down at the end of the year to take on the role of Executive Director of the Rhode Island Public Expenditure Council (RIPEC). The Mayor hailed Simmons as “one of the foremost authorities on public finance in the northeast” and credited him with playing a major role in getting the city’s financial ship back on course.

“John has been an invaluable member of my team from the very beginning,” said Mayor Cicilline. “His vast experience, financial expertise and keen understanding of the intricacies of public finance have helped put our city government on the strong financial footing needed to accomplish my ambitious goals for the city,” said Mayor Cicilline. “Although John will be missed, he leaves behind a legacy of fiscal integrity, 21-Century labor agreements and “A” grades from all major bond rating agencies.”


      Here's Cicilline in 2010  in Debate with John Loughlin

Loughlin: The City of Providence is broke and you know it … 

Cicilline: The City of Providence has earned an ‘A’ rating from its agencies which are not, you know political campaigns, but are done by professionals externally on the city’s financial condition. I’m very proud of that. The city is in excellent financial condition and the suggestion by the city council auditor that was condemned by the President of the City Council as reckless and false. Representative Loughlin knows that.

Loughlin: Then why won’t you give him the data? Why? He had to file a freedom of information act!


and here is Taveras in 2011

Mayor: Providence, RI, Faces Bankruptcy

Mayor Angel Taveras painted a bleak picture Thursday of the city's finances, saying Providence faces "devastation" and could go bankrupt if retiree benefits aren't cut and tax-exempt institutions like Brown University don't pay more in lieu of taxes.

So now, of course ,we all know that Cicilline was lying through his teeth. But when? Was it in 2006-7 or 2011  or both?  The John Simmons  2007 angle is intriguing and he would certainly be a great person for the Feds to talk to. Its unclear if he was  ever  questioned by the SEC when they looked into Providence irregularities in 2011. Its pretty clear now that the SEC did not "catch" the Fraudulent assets in 2011 that Segal recently confirmed. This huge revelation  also means that the City misled the SEC during their investigation in 2011. .. (to be continued)