Providence Pension Scam..Now for the rest of the Story

We all loved his style and stories with the shocking twist at the end. Paul Harvey was fantastic and loved by nearly all who heard him. I say "nearly all" because on rare occasion he would reveal uncomfortable facts about corruption and criminality that certainly would not have pleased the subject of his story. Most of the Stories involved happy and optimistic stories with success as the outcome and perseverance the lesson. Alas this story has no such happy ending , although the final chapter has not yet been written.
          This is the story of Providence Rhode Island , long considered to be the most corrupt City in America.It is the story of a $100 million dollar theft of taxpayer funds and Pension Plan money designated for retirees mostly Police and Firemen. The scam is right out of Enron and Ponzi lore. It is the people involved that is so surprising and has happens so often, Like Watergate its the coverup that shows how corrupt our officials can become. Could they really steal from their own family? Could a ill advised accrual to cover up illicit borrowing from the pension fund evolve into fraud? The answer is a resounding yes. Under what circumstances did Buck consulting get fired and sued yet the actual Actuary Dan Sherman of Buck consultants was immediately appointed the Actuary for the  RI Municipal Pension Crisis Commission ? Who is Dan Sherman and when did he decide on the accrual accounting idea? Was he pressured? By who? Did he recommend the same accounting for any of his hundreds of other clients? Why not? Why did every actuary and 2 commissions on "Category 5 " miss what Segal called inflated Assets in the pension fund?

The rest of the Story goes deep and involves several officials in Providence Politics.

Providence Pension scam may exceed $100 million

total arc due to plan  $540,000,000  $54,000,000 <<<<< Average Float        interest due to plan on  "float"  $45.3 Million  actually paid to plan since 2006    $477,000,000  $63,000,000  <<Shortage  after 10 years  $45,300,000 interest on float city owes pension funds  $108,300,000 TOTAL DUE TO Providence  PENSION PLAN

Cicilline,Buck Consultants and Dan Sherman

           Here is a snippet from the Actuarial valuation of Providence pension system. The author is Dan Sherman and he has a huge resume certainly accredited but i would like to know why Dan reported this  and when it started because not only do i believe this accounting improper apparently so does Segal Consulting. When Segal was pressed last week about disallowing 62 million in assets attributed to the pension plan. they agreed with my view.
          I believe Providence is bankrupt and for sometime has been playing with the float and various accounts just to get by. Somehow , sometime this lack of payment of the ARC turned into an asset. If Dan Sherman did not suspect fraud he should have or maybe , just maybe somebody forced him into doing this. The last Valuation available on line is 2007. I am sure if we go back we will find how this started. The valuation in 2007 is titled the "eightieth valuation report"  

 http://www.providenceri.com/efile/299
please copy paste to read

from that report this nugget

2. The market value of the assets of the

  pension system as of June 30, 2007 on a “cash basis”

was $413,539,963. 

To convert this amount to an “accrual basis,”

this amount should be increased by the discounted value of the City’s contribu

tion already appropriated for the July 1, 2007 -June 30, 2008 fiscal year                                                 

  ($55,328,995) but assumed not to be deposited until June 30, 2008.

The discounted value of this contribution is   $50,994,465. Therefore, the market value of the

assets of the system as of June 30, 2007 on an “accrual basis”

was $464,534,428. 

 In 2007 the Mayor was David Cicilline, Bruce Miller was the director of Finance,the valuation report(audit) was conducted by Dan Sherman of Buck Consultants. The internal auditor was James Lombardi and the Director of Administration was John Simmons. This is where the SEC and United States Attorney or FBI should focus.

from 2012 to 2015  Dan Sherman  was appointed the Actuary for  Rhode Island municipal pension and OPEB commission . Talk about covering your tracks. Buck consultants where Sherman was in 2007 was fired in 2012 by Angel Taveras and both the city and Buck are suing each other .

Expect Providence Mayor Elorza to admit Providence over-stated Assets in Pension Fund

Remember these articles,
 http://www.golocalprov.com/politics/riley-providence-pension-scam-is-unraveling


http://www.golocalprov.com/politics/michael-riley-from-head-start-to-harvard-to-the-hoosegow-part-2

http://www.golocalprov.com/politics/michael-riley-from-head-start-to-harvard-to-the-hoosegow


  According to the minutes of the finance committee meeting on Tuesday April 28  the Providence Council was informed by the auditor Segal Co that there is in fact $61 million missing from Providence Pension Plan assets as I had charged . I expect the Mayor to have to inform MSRB,the SEC and retirees this week that they have overstated assets in the Pension plan for as many as 10 years.
      The feds should move in here because misleading municipal bond investors is fraud and a criminal offense.

Raimondo,Magaziner to raise Discount rate ?

         In 1997 The RI Actuary and investment consultants advised the Retirement Board to adopt an investment return assumption no higher than eight percent. Against advice, the Board decided on an 8.25 percent rate of return.  The level of subsequent underfunding due to using unrealistically optimistic actuarial assumptions  have in fact increased the unfunded liability over time.

        The discount rate is in theory determined in large part by the yield curve and the prevailing risk free rates. In 1997 rates were significantly higher and so it was a fairly easy to promise to achieve 8 % returns without much risk. As can be seen in the chart below, the 10 yr. risk free rate was 6.5% and the 30 yr. risk free rate was close to 7%. Had the retirement board simply invested in zero coupon bonds @ 6.8% in the 1990’s going forward they would almost fully guarantee normal cost funding.

But the rate scenario can change and generally speaking the lower the risk free discount rates the lower expected returns are on all risky assets. Stocks are the riskiest of the asset classes and as such most fiduciaries, like the State of Rhode Island, have roughly 55 to 65% invested stocks and the remainder in Fixed Income and alternatives. 

Interest Rates in 2015

    Last year 2014 was the fifth year of extraordinary federal monetary intervention and we are still operating under ZIRP (zero interest rate policy). Given those facts, a super majority of U.S. economists and money managers are predicting much lower returns on their portfolios. Now rates look like this: 

 

    Last year’s 2014 RI Treasurer Debates with Ernie Almonte, Seth Magaziner, and Frank Caprio featured Seth Magaziner declaring he that he (Seth Magaziner) was a superior money manager and also stated he would “raise” the discount rate.  In my opinion “RAISING” the discount rate from 7.5% would be truly insane and serve no public purpose but is completely in line with his senior policy advisor Tom Sgouros whose stated  belief is  that Gina Raimondo created a “false crisis” by lowering the rate to 7.5% during the 2011 Pension reform.

     If Treasurer Magaziner were to make his senior advisers  preference   to raise the discount rate, it would lower the "budgeted" amount necessary for funding the pension plan in 2016, 2017 etc. and thus make it easier to spend on other items like social programs  or fill budget holes on the horizon such as probable  lost casino revenue.  Once in effect, Treasurer  Magaziner , Governor  Raimondo  and adviser Sgouros would have fulfilled progressive promises to ignore deficits and  pension or OPEB liabilities . Then they could better balance the near term State budget by kicking – the –can and placing an even larger burden on the next generation.This  has been policy  for 40 years in Rhode Island  and now it will be again.

     This raise  would be completely irresponsible, yet not unheard of in Progressive thought, which increasingly seems to be Governor Raimondo’s path.She appears to be abandoning her belief in "its just math". Political calculation has replace pension calculation. The evidence is real.  If the former Treasurer  does in fact believe that a lower discount rate was necessary in 2011  and she wasn't lying ,then there is even more evidence today 7.5% remains way too high and should be moved toward Warren Buffets 6%. Regardless of what Magaziner decides, both GASB 68 and Moody’s will ignore Magaziner ‘s rookie guess  and use rates approaching 5.4% in calculating unfunded liabilities.  

                                                         New Liability figure explodes

       Here‘s what the new  funded ratio in Rhode Island  will look like in just 3 months when fiscal year 2015 comes to an end.:

	RI State Pension Unfunded Liabilities   (billions)	RI State Pension Funded ratio (80%=healthy)
2011 prior to RIRSA and amortization 8.25%	$2.67	48.6%
RIRSA Raimondo Nov 2011 post reform 7.5%	$1.79	58.6%
RIRSA June 30 ,2014 7.5%	$4.35	58.7%
June 30,2015  5.4% GASB 68, Moody’s  **	$9.11	41.5%

 **Assumes 2.5% fy 2015 return on assets 

                                                   RIRSA is just not Working

        Even under 2011 RIRSA reform and after a massive bull market the funded ratio has not improved, that means that costs have been calculated incorrectly and discounted incorrectly. Using GASB 68 the State and Magaziner will be forced to report a collapse in the funded ratio and a huge increase in Liability. Under current law the State does not have to fund reality but they do need to show a 5 year plan and clearly spell out the current financial condition of the State. That should be interesting.