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Michael Riley: Don’t Pay

Wednesday, May 14, 2014


I am taking this week away from the RI Pension Commission and the worsening Municipal Pension Crisis to instead focus for a moment on the EDC 38 Studios debt and the decision the General assembly will soon have to make regarding paying this tranche of $12.4 million. Yesterday, S&P and Moody’s predictably warned that they have placed Rhode Island General Obligation debt on negative watch.

Here is last years’ statement just prior to the first $2.5 million vote in the appropriations. And here’s yesterday’s by S&P.

These actions are expected

No one should be surprised at the ratings agencies’ actions this year. Hopefully, when the General Assembly soon votes that this payment should NOT take place, we will see the actual Rating reaction by S&P and Moody’s. If they downgrade Rhode Island General Obligation (GO) Bonds to junk, even below the debt of Puerto Rico (as they promise), then RI residents and individual investors may sell their GO bonds at crash prices to people like me, based solely on Moody’s and Standard & Poors’ ratings.

So they rate us “junk.” Then what?

Perhaps in a few weeks, when those bonds are trading at investment grade prices, there should be a federal investigation into those unnecessary investor losses. Maybe the individuals who suffered losses when junk bond ratings scared them into selling to opportunistic investors like me should then go to the SEC or even the justice department with complaints or inquiries. Then the rating agencies will be appropriately asked “what justification was there to rate Rhode Island General Obligation Debt below Puerto Rico,” as SJ Advisors has warned the agencies will do. SJ Advisors has produced a lengthy report that, in my analysis, substantially overstates the worst case scenario cost using questionable risk premia assumptions, questionable comps and an unexplained discount rate for determining the present value of potential costs to tax payers. While the scenario analysis format in the report is acceptable for a range of outcomes, the outcomes are not specifically weighted by probability, as a rigorous analysis would normally provide. In sum, the SJ Advisors report is unconvincing.

So why do voters overwhelmingly want to default?

I‘ve seen a few online polls where generally the results are 20% pay and 80% do not pay. One reason: taxpayers are unwilling to pay off a bond that today is still mired in investigations and possible criminality. They see the obfuscation, and know one of the parties involved is under investigation. The second reason is that they are clearly not legally obligated to pay.

I estimate at least a dozen times in this highly unusual private placement memorandum the investors are told that the State of Rhode Island is in no way obligated. This private placement went to accredited investors ONLY. They had to have a net worth of $1 million dollars beyond their residence to read the docs and participate. The investors signed off on the 336 pages describing the risk and received 7.5%, part of which was spent on an insurance policy from Assured Guaranty, who in turn made clear that they were not assigning any accuracy at all to the PPM.

Wrapping it up

So, just who exactly is Moody’s trying to protect with these potential “punishing ratings” that could, in fact, turn out to be horribly wrong and unjustified? Who then will be responsible for what SJ Advisors estimates as a $200 million dollar loss in market value (3 times the bond issue in question) that resulted from RI General Obligation bonds being rated junk?

I don’t believe Moody’s really thinks RI GO debt is a worse credit than Puerto Rico. I think they are overreacting, or more likely manipulating, in order to scare off other entities across the country. And they can do so because we are such a small state with a very weak Governor. Remember that Moody’s and S&P are quasi government approved entities. They are trying to flex their muscles against the smallest State in the Union. Have they never heard of a “one-off” situation, which is trading vernacular for unusual or separate and apart from the norm? Are they unaware of the corruption involved in Rhode Island and as yet uninvestigated regarding this specific bond? No responsible credit analyst truly believes RI General Obligation Debt will default before Puerto Rico. That would simply be an unprofessional analysis. My prediction is, if the payment is voted down in the GA and our GO debt is then downgraded to “junk," then the market participants will step in and buy RI GO bonds. Those bonds will trade, in very short order, significantly above junk rating and return to investment grade prices. Rhode Island has far larger issues affecting investor attitudes and rating agencies that include 1) the “corrupt state” impression we have cultivated and 2) the massively underfunded State and Municipal Pensions plans that Mr. Chafee’s Commission completely ignores.

A major reason on the horizon to be worried about a more permanent and significant downgrade is the potential reversal of pension reform. I estimate this cost at over $5 billion, starting with $600 million over 3 years. Those potential costs dwarf any “potential worst case” loss due to 38 studios, as described by the governors hired guns. If we had a real Governor, he would stand up for the Taxpayers and the State of Rhode Island and stand up against threats by rating agencies.


Related Slideshow: PAC Spending in the 2014 Rhode Island Governor’s Race

With Election Day now just months away, GoLocal took a look at PAC spending in the Rhode Island gubernatorial campaigns.

Who is giving to who -- and how much?  And what's worth more, the money or the grassroots support?

Below is look at recorded PAC giving by the candidates in their campaign finance reports for the 2013 calendar year, by quarter.  Candidate Todd Giroux has an affadavit for an annual filing exemption.

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Gina Raimondo - Q1 2013

PAC money received: $7,000

AON Corporation:  $2,500*
Attorneys Partridge, Snow, and Hahn: $1000
Brokers for Better Health Care: $250
Engage RI PAC: $1000
Hinckley Allen and Snyder: $1000
Hinckley Allen and Snyder Rhode Island PAC: $1000
RI Medical PAC: $250
Cash balance ending March 31, 2013: $1,723,203.71
Excessive donation made in error, said would "be reflected" in 2nd quarter report
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Gina Raimondo - Q2 2013

PAC money received: $4,400 

Amica RI PAC: $250
Cox PAC: $1000
Federal Express RI State PAC: $250
IBEW Local 99: $500
Iron Workers Local 37: $250
Metlife Insurance PAC D:  $200
Plumbers and Pipefitters Local: $500
RI Bricklayers PAC: $500
RI Carpenters PAC: $200
RI Laborers PAC: $500
Sheet Metal Workers: $250
Cash balance ending June 30, 2013: $2,063,548.54
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Gina Raimondo - Q3 2013

PAC money received $1,750 

Citzens Bank PACOM: $500
Delta Dental of RI PAC: $500
International Union of Painters: $250
Cash balance ending September 30, 2013: $2,305,657.89
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Gina Raimondo - Q4 2013

PAC money received: $6,950

Attorneys Partridge, Snow, and Hahn: $750 
Building Industry PAC: $500
Capitol Communications Group LLC, PAC: $500
Emily's List RI: $1000
IBEW Local 99: $250
Plumbers and Pipefitters: $500
RI Laborers' PAC: $1000
RI Medical PAC: $750
RI Public Employees Education PAC: $1000
United Food and Commercial Workers: $500
Utility Contractors' Association: $200
Cash balance ending December 31, 2013: $2,508,647.86
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Angel Taveras - Q1 2013

PAC money received: $3,600

Capitol Communications Group, $500
Iron Workers Local 37, $100
IOUE (Intl. Union of Operating Engineers) Local 57: $1000
Moses and Afonso PAC: $1000
Plumbers and Pipefitters Local 51 PAC: $500
RI Carpenters PAC: $250
RI NERCC (NE Regional Council of Carpenters PAC) PAC: $250
Cash balance ending March 31, 2013: $560,779.72
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Angel Taveras - Q2 2013

PAC money received: $6,550

Attorneys Partridge Snow and Hahn: $250
Attorneys Partridge Snow and Hahn: $750
Building Industry PAC: $500
Chartercare Employee PAC: $250
COX PAC: $250
COX PAC: $750
Hinckley, Allen, Snyder PAC: $1000
Hinckley, Allen, Snyder Rhode Island PAC: $1000
IBEW Local 99: $100
Local 791 UCFW PAC: $500
Providence Firefighters Local 799: $200
RI Troopers Association: $1000
Cash balance ending June 30, 2013: $692,590.12
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Angel Taveras - Q3 2013

PAC money received: $1,300

Connecticut Healthcare District 1199: $500
Providence Firefighters Local 799: $800

Cash balance as of September 30, 2013: $759,150.22
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Angel Taveras - Q4 2013

PAC money received:  $6,100

American Association of University Professionals: $1000
Darrow Everett PAC: $500
Enterprise Holdings PAC of RI: $500
Enterprise Holdings PAC of RI: $500
Middletown Firefighters COPE: $100
RI Laborers Public Employees PAC: $1000
RI Medical PAC: $1000
RI State Association of Firefighters: $1000
United Food and Commercial Workers: $500
Cash balance as of December 31, 2013: $1,025,981.62
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Allan Fung -- Q1 2013

PAC money received: $1,550*

Amica PAC: $250
Cox PAC: $200
IBEW Local 99: $250
International Brotherhood of Police: $350
RI Troopers Association: $500
Cash balance as of March 31, 2013: $160,520.12
* A later filing amended the PAC amount to $1,650 and cash balance to $159,520.12.
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Allan Fung - Q2 2013

PAC money received: $1,600 

Amica PAC: $250
International Brotherhood of Police: $650
MetLife PAC D:  $200
Opticians PAC: $500
Cash balance as of June 30, 2013: $256,498.77
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Allan Fung -- Q3 2013

PAC money received: $1,100

CIRI PAC: $100
Darrow Everett: $500
RI Troopers Association: $500
Cash balance as of September 30, 2013: $336,553.93
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Allan Fung -- Q4 2013

PAC money received: $3,800

Amica / RI PAC: $500
Capitol Communications Group $500
Hinckley, Allen, Snyder: $500
MetLife PAC D: $800
Opticians PAC: $500
RI Medical PAC: $1000
Cash balance as of December 31, 2013:  $384,925.44
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Ken Block

Quarter 1:  No PAC $; cash balance   $20,000.07
Quarter 2:  No PAC $; cash balance   $73,987.53
Quarter 3:  No PAC $; cash balance $547,685.26
Quarter 4:  No PAC $; cash balance $634,126.60
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Clay Pell

Quarter 4 (first report filed): No PAC $, cash balance $1,105,152.43 


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