R.I. House Finance Committee Chairman Helio Melo has a unique definition of “neutral.”

In a news advisory issued Tuesday, House leadership announced Melo’s panel will hear a presentation Thursday afternoon from Matt Fabian, managing director of Municipal Market Advisors, about whether taxpayers should repay the 38 Studios bonds. “The presentation is intended to provide insight that a neutral, expert third party can bring to the topic,” the statement said.

But Fabian – the only witness the committee is scheduled to hear from – isn’t necessarily neutral.

Last July, Fabian predicted doom for Rhode Island if taxpayers fail to pay the 38 Studios bondholders, who include USAA and Transamerica. “The market would treat it as tantamount to defaulting,” Fabian told Stateline. Rhode Island, he warned, “would be ostracized.”

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Reuters’ Felix Salmon, one of the most influential finance bloggers in the nation, jumped into the discussion Josh Barro and yours truly were having about Rhode Island officials’ justification for refusing to default on the 38 Studios bonds. While Salmon agrees the state’s pensioners would seem more deserving of repayment than the bondholders, he gently chides Josh and me for a bit of “faux naïveté” regarding what’s going on:

The answer is that yes, moral obligation bonds are effectively general obligations bonds in all but name. The state has found a way of issuing bonds without having to get the approval of the legislature, but they’re still obligations of the state, and the state doesn’t distinguish the two types of obligation. And yes, Rhode Island should be paying the lower interest rate rather than the higher interest rate. But that doesn’t mean that voters should have to approve moral obligation bonds: it could equally mean that voters should stop having to approve general obligation bonds.

That is what all governors really want: to have the legislature and voters stop interfering in their borrowing strategy. And that is the real reason why Chafee is staying current on his moral obligation bonds. He wants the world to see voter approval as an anachronism, and in an ideal world he would love it if moral obligation bonds had the same legal backing — and therefore the same lower yield — as general obligation bonds. That way he’d never need to issue a general obligation bond, or get voter approval for such a thing, ever again. It’s a very attractive vision — and it’s not one he’s going to give up just because Rhode Island is suffering a fiscal nightmare these days.

As someone who spends a lot of time listening to Lincoln Chafee, I’m skeptical that the governor has truly thought through the reasons for drawing a distinction between moral-obligation and general-obligation bonds (or not drawing one). But as Salmon makes clear, this debate has demonstrated that there’s no real difference between the two types of debt when it comes to whether taxpayers will have to cover the liability.

• Related: Chafee reveals RI’s confusion about the 38 Studios bonds (May 1)

My friend Josh Barro of Bloomberg View, who spends a happily inordinate amount of time writing about Rhode Island, interviewed Governor Chafee this week during the governor’s media roadshow in Connecticut and New York City. Josh pressed the governor on why he’s flatly ruled out defaulting on the 38 Studios bonds yet signed a law that reneged on promises made to state retirees – and Chafee’s reply was not convincing:

That raises a question that many state residents – especially retired employees – would like to see answered: If Rhode Island can’t afford to keep its promises to retirees, how can it afford to keep its promise to the 38 Studios bondholders? Chafee isn’t prepared to answer. …

And when it came to 38 Studios, Chafee couldn’t even answer a simple question: Is it ever appropriate for the state to issue moral obligation bonds?

“I’m not an expert on that issue,” he responded. After a year of dealing with the fallout from 38 Studios’ collapse, you would think he would be.

As the interview ended, Chafee remarked, “I’ll have to think a little more about Josh’s question” — the one about why you can freeze COLAs but can’t default on 38 Studios.

Local officials are fearful that the bond market won’t differentiate between a default on the moral-obligation bonds issued for 38 Studios and the general-obligation bonds backed by the state’s full faith and credit, particularly since Rhode Island is a municipal minnow compared with, say, California. A top policymaker once asked me to imagine a Wall Street Journal headline the day after: “Rhode Island defaults on bonds.”

While that’s certainly possible, it’s worth scrutinizing.

First of all, if any state officials in the country should be able to go to Wall Street and soothingly explain why the 38 Studios case is a unique one and the default won’t set a precedent, wouldn’t they be Gina Raimondo – a former venture capitalist beloved by financiers who crafted a landmark law slashing pension liabilities – and Rosemary Booth Gallogly – a veteran policymaker who’s overseen the successful restructuring of municipal budgets in Central Falls and elsewhere, all while explicitly protecting bondholders?

Maybe, maybe not. (And maybe Raimondo and Gallogly aren’t interested in trying.) But if that’s the case, a moral-obligation bond is effectively a general-obligation bond in all but name, with full repayment by Rhode Island taxpayers promised no matter what. If so, shouldn’t voters have to approve moral-obligation bonds at the ballot box as they already do with general-obligation bonds – and shouldn’t Rhode Island be paying the lower interest rate investors get on a lower-risk general-obligation bond?

Treasurer Gina Raimondo has a message for members of Congress: don’t tax municipal bonds.

Raimondo and 41 of her fellow state treasurers sent a letter [pdf] last week to the top Republican and Democrat on the U.S. House Ways and Means Committee, emphasizing “the importance of maintaining the current tax exemption for municipal bond interest” as they consider plans to overhaul the U.S. tax code.

The letter was organized by the National Association of State Treasurers, which describes itself as “a bipartisan organization of state treasurers and other finance officials with similar duties.” The group said tax-free municipal bonds save states and municipalities an average of 25% to 30% on interest costs.

“The tax-exempt bond market has worked effectively for over a century,” Virginia State Treasurer Manju Ganeriwala, the association’s president, said in a statement. “Let’s not dismantle something that works.”

Raimondo, a Democrat, is considering a run for governor in 2014. Here’s her signature on the letter:

• Update: Fox, Raimondo pitch $70M loan fund for repairs (March 21)

The Rhode Island Clean Water Finance Agency’s motto declares, “Clean Water for Rhode Island is Our Only Business.” But that won’t be true for much longer if Treasurer Gina Raimondo and House Speaker Gordon Fox have their way.

Raimondo and Fox will hold a press conference Thursday morning where they’ll propose adding a new Municipal Road and Bridge Revolving Fund to the water agency’s portfolio of programs. They’ll be joined by Senate President Teresa Paiva Weed and municipal leaders, making this as close to a sure thing as any new legislative proposal can be.

So, you ask, what is the R.I. Clean Water Finance Agency?

The short answer: RICWFA is a quasi-public state agency, similar to better-known entities like the R.I. Economic Development Corporation and the R.I. Airport Corporation. While the Clean Water Finance Agency has a relatively low profile, it plays a key part in financing the maintenance of Rhode Island’s water system. Its basic role is to provide subsidized and low-interest loans to local governments that they use to fund water-infrastructure projects of all sizes.

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The U.S. Securities and Exchange Commission is still investigating Rhode Island’s pension disclosures to bond investors, Treasurer Gina Raimondo’s office confirmed Tuesday after the agency settled a similar case.

Raimondo spokeswoman Joy Fox told WPRI.com the SEC probe, which the treasurer disclosed shortly after she took office in early 2011, isn’t complete despite the passage of more than two years. The treasurer’s office has said it’s barred from discussing details about the investigation.

On Monday, Illinois agreed to a settlement with the SEC over allegations the state misled investors about the health of its underfunded pension system. Illinois admitted no wrongdoing and was not fined or penalized. A similar outcome was reached in a 2010 SEC case against New Jersey.

In Illinois’ case, the SEC praised steps the state’s government has taken in recent years to improve the way it discloses its pension liabilities – suggesting Rhode Island could benefit from the dramatic actions local leaders have taken on pensions since 2011, as well.

Governor Chafee’s 2012-13 budget request estimated the entire cost of the SEC investigation to Rhode Island at $276,000, shared between the treasurer’s and governor’s offices.

Mayor Angel Taveras got a vote of confidence from Wall Street on Wednesday.

Providence sold $40 million in road bonds and the market reaction was positive. Demand for the bonds was two to seven times higher than supply for different maturities, and the final interest rate was about 3.66%, below their original projections, Taveras spokesman David Ortiz told WPRI.com. The city was able to reduce the yields below the initial price set this morning, he said.

The lower interest rate will save Providence taxpayers about $200,000 a year on debt payments and is a sign of confidence that Taveras has “put the city on a sustainable fiscal path,” Ortiz said. The road repairs that the borrowed money will fund will start this spring. Voters approved the proposal last fall.

Robert Cusack, a portfolio manager at the Providence investment firm WhaleRock Point Partners, said Providence’s borrowing costs were consistent with what others who have similar credit ratings are paying. “The important thing is that despite all of its troubles, the city retains access to the credit markets to do the borrowing it needs to do at a reasonable cost,” Cusack told WPRI.com.

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Gov. Lincoln Chafee won’t consider defaulting on the 38 Studios bonds.

“I take ‘moral obligation’ to the fullest extent of those words,” Chafee told WPRI.com in a State House interview this week. “We made a moral obligation and I’m going to live up to it.”

Asked how he reconciles that with his support for last year’s pension cuts, Chafee said: “I don’t think the words were as strongly associated as the exact words ‘moral obligation.’”

“I think we – to the Rhode Island state workers, teachers, public safety employees, we want to look out for their future,” he said. “But this is selling bonds based on those words – ‘moral obligation.’”

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Stateline’s Jake Grovum was among the reporters who attended last week’s 38 Studios bankruptcy hearing, and today he’s out with an extended article about what went wrong. Some highlights (emphasis mine):

The state’s first error, economic development experts say, was placing so much of its economic development fund in one venture, especially a risky video game company.

“It’s the first time I’ve heard of a government giving away almost the entire store to one company,” says Anthony Figliola, the vice president of Empire Government Strategies and a familiar figure in economic development policy. “The state gave away most of its money to a start-up company. That’s alarming.” …

Since they’re moral obligation bonds, there’d be little standing for bondholders to recoup their losses should the state walk away. The wild card is the market’s reaction, and some say the backlash would be swift. “The market would treat it as tantamount to defaulting,” says Matt Fabian, managing director of Municipal Market Advisors. “They would be ostracized.”

But others say that’s overstated. With more debtors facing accumulated red ink, the market could be more forgiving. “Bondholders knew what they were getting into,” argues Craig Chilton, an adviser with BondView. “If I were a taxpayer in Rhode Island, I’d be hard-pressed to want to make good on the obligation.”

(photo: Ted Nesi/WPRI)

The Stephen Hopkins Center for Civil Rights will hold a panel Wednesday at noon at The Old Statehouse (150 Benefit St., Providence) to discuss something that has been largely off the table in the state so far – whether Rhode Island should default on the moral obligation bonds it sold to benefit 38 Studios.

Revenue Director Rosemary Booth Gallogly criticized that idea on Newsmakers earlier this month, saying the state can’t afford to risk its bond rating even though the 38 Studios bonds aren’t general obligation bonds. The panel will hear a countervailing view from Bloomberg View’s Josh Barro, who previews his thinking today:

Performing on the 38 Studios guarantee will cost nearly $100 million, a nontrivial amount in a state with just more than a million residents. Rhode Island lawmakers owe taxpayers an explanation of why the state issues moral-obligation bonds. If the answer is in order to preserve the option of default, they should provide guidance as to what kind of circumstances would lead the state to consider defaulting — and how that guidance relates to 38 Studios.

If the answer is that the state uses moral obligations to create general obligations, lawmakers should admit that’s an invalid reason, and stop issuing moral-obligation bonds.

Joining Barro on the panel are former R.I. Supreme Court Justice Robert Flanders and Roger Williams University Law Professor John Chung. The Hopkins Center is a libertarian legal-aid group organized last year that has taken a number of stands, including siding with Governor Chafee in the dispute over Jason Pleau.

• Related: Josh Barro: Rhode Island should default on 38 Studios bonds (May 29)

Investors are getting a little more skittish about the 38 Studios deal.

The yield on the first tranche of 38 Studios bonds sold by the EDC jumped last week in the first trade that took place since the company’s solvency crisis burst into public view.

EDC bonds backed by 38 Studios that mature in November 2015 traded on May 23 with a yield of 4.852%, according to data compiled by Bloomberg’s Boston bureau, which first reported the trade. That’s up sharply from the roughly 3% yield the bonds fetched in a previous trade on April 10, according to Bloomberg.

Wells Fargo and Barclays handled the $75 million bond transaction for the EDC and 38 Studios by selling three tranches of bonds on Nov. 2, 2010, to a group of investors that included insurance companies, asset managers, money managers and a community bank, according to the agency.

The $23.685 million first bond tranche matures in November 2015 at a 6% interest rate; the $8.86 million second bond tranche matures in November 2016 at a 6.75% interest rate; and the $42.455 million third bond tranche matures in November 2020 at a 7.75% interest rate.

• Related: Josh Barro: Rhode Island should default on 38 Studios bonds (May 29)

38 Studios laid off all its employees on Thursday, and in the subsequent coverage there’s been some confusion about how much cash the company actually got out of the $75 million loan Rhode Island’s EDC took out on its behalf. Here’s an outline of exactly when (and why) the EDC says it transferred the money to Curt Schilling and company.

• Nov. 2, 2010 … $10.9 million. “Upon delivery and the Date of Issuance of the Bonds AND after the date when [38 Studios], or a letter of credit bank selected by [38 Studios], presents reasonable documentary evidence to the [EDC] that the letter of credit required in connection with [38 Studios'] execution of that Lease dated Sept. 20, 2010 is to be issued subject only to the funding of a deposit account at such letter of credit.”

• Nov. 2, 2010 … $2.1 million. ”Collateralization for letter of credit that serves as the security deposit on Empire Street lease.”

(more…)

Update: House Speaker Gordon Fox just confirmed to WPRI 12′s Sean Daly that 38 Studios defaulted on May 1 when it failed to make the $1.125 million payment to the EDC that I discussed below. More to come.

Update #2: Sean Daly and I have posted a full report on WPRI.com.

Curt Schilling’s video-game company 38 Studios was supposed to make a major payment to the R.I. Economic Development Corporation on May 1, and now the quasi-public state agency won’t say whether it ever received the money it was owed.

Under the terms of the 2010 deal between 38 Studios and the EDC, the company agreed to pay the agency an “Annual Guaranty Fee” on May 1 each year. Documents obtained by WPRI.com say the fee is equal to 1.5% of the average amount of outstanding bonds, minus any amount in a prepayment account.

Based on that description it’s unclear exactly how much 38 Studios was supposed to pay the EDC at the start of this month. But with $75 million in bonds still outstanding, 1.5% of that total would be $1.125 million. The documents say failing to make the required payment to the EDC would be a technical default by 38 Studios.

Somewhat confusingly, the Annual Guaranty Fee that 38 Studios owes the EDC each May 1 is separate from the twice-a-year payments made to investors who purchased the $75 million in bonds.

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It’s unclear right now exactly what’s going on with 38 Studios’ finances and how serious the problems there are. But considering the headlines, it’s worth taking a look at how the original $75 million deal was structured.

In November 2010, the EDC borrowed $75 million from private investors on behalf of 38 Studios. The quasi-public agency agreed to pay back the bondholders with money 38 Studios pledged to provide from sales of its games. The interest rates on the bonds range from 6% to 7.75%.

Because the EDC technically sold “moral obligation bonds,” the governor is required to ask the General Assembly to appropriate money to repay the bondholders if 38 Studios can’t pay up – but the lawmakers are not required to pony up the money. It’s assumed they probably wouldn’t default, however.

So how much money could taxpayers be looking at spending? When you add together principal and interest payments, the total cost of paying off the 38 Studios bonds is projected to be $112.6 million through 2020, according to bond documents reviewed by WPRI.com. Here’s how much the payments are annually:

It’s worth noting that about $23.4 million from the original $75 million loan was set aside as a reserve to pay the bonds back, so there’s some money available in addition to whatever taxpayers fork over.

Standard & Poor’s affirmed its A rating on the 38 Studios bonds, with a stable outlook, on April 20. Asked about this week’s developments, a spokesman for the rating agency told WPRI.com its analysts do not comment on rumors. The bonds are insured by Assured Guaranty Ltd.

Update: Just to clarify, Rhode Islanders are on the hook for $112.6 million in principal and interest payments on the 38 Studios bonds between now and 2020, but not every dime will need to come from taxpayers. As I mentioned above, $23.4 million was set aside in case something went wrong. Subtracting the $23.4 million from the $112.6 million total bill would put Rhode Island taxpayers’ direct tab at around $89.2 million.

More 38 Studios coverage on WPRI.com:

• GOP’s Robitaille: 38 Studios lesson is don’t pick winners and losers (May 15)
• 38 Studios’ finances under scrutiny; RI taxpayers’ $75M at risk (May 14)
• 38 Studios debut ‘Reckoning’ sells 80,000 in March; out of top 10 (April 18)
• Schilling praises ‘pure motives’ of RI pols to Fox News’ Hannity (March 21)
• Schilling game backed by RI taxpayers is high-risk, high-reward (Aug. 3, 2010)
• Rhode Island EDC OK’d $75M Schilling deal without final rules (July 27, 2010)

This post has been updated and expanded.

The Rhode Island Housing and Mortgage Finance Corporation – better known as Rhode Island Housing – plans to sell $61.1 million worth of bonds this week to take advantage of low interest rates.

Richard Hartley, the quasi-public state agency’s treasurer, told WPRI.com most of the proceeds from the homeownership opportunity bonds will be used to refund older bonds that carry higher rates. Morgan Stanley is handling the transaction.

The General Assembly created Rhode Island Housing in 1973 to stimulate the housing market. As of Dec. 31 its outstanding bonds totaled $1.55 billion. They are not legally guaranteed by state taxpayers.

The agency says its delinquency rate is “below average when compared to industry data for all Rhode Island mortgage liens” because it does not offer subprime or second mortgages and uses conservative loan standards.

Rhode Island Housing’s current commissioners are Jim DeRentis, Denis Barge, Steven Costantino, Paul Dimeo, Paul McGreevy, John Monteiro and Treasurer Gina Raimondo. Its longtime executive director is Richard Godfrey, a lawyer who’s led the agency since 1993.

The state is planning to sell $118 million in general-obligation bonds to refinance existing debt next week, and apparently all the bad publicity we’re getting won’t be a problem thanks to the pension overhaul, the bondholders-first law (details here and here) and relatively cautious budgeting.

That’s according to Mike Cherney, reporting for Dow Jones Newswires. The comments he got from investors are fascinating, on the one hand for what they say about how the state’s image is getting battered and on the other hand for how little concern they seem to have about it overall (emphasis mine):

Rhode Island’s investor-friendly attitude should attract buyers to its $118 million bond sale next week, market participants said, despite the state’s well-known problems with high unemployment and wide budget gaps. …

“You want a state that’s going to have policies that are bondholder friendly, that recognize the importance of the market and the importance of contract law,” said Robert Miller, senior portfolio manager at Wells Capital Management. “Rhode Island does fit the bill pretty well.”

Miller contrasted that with Alabama, where the state ultimately failed to act before Jefferson County, Ala., filed the largest municipal bankruptcy ever in November. Moody’s rates Alabama Aa1, a notch above Rhode Island, which it assigned Aa2.

“I’d still rather own Rhode Island,” Miller said ….

“It’s a matter of price, but there’s plenty of demand out there,” [Dan Solender, director of municipal bond management at Lord Abbett & Co.,] said. “Clearly the state’s been in the headlines, but it’s more for their local issues.”

Adam Mackey, senior portfolio manager at PNC Capital Advisors, said institutional investors will focus on the state’s finances, keeping the negative headlines about Rhode Island’s cities separate.

Read the rest here.

By Ted Nesi

WARWICK, R.I. (WPRI) – Rhode Island’s bondholders are nervous about Providence’s shaky finances and the wider municipal financial crisis roiling the state, Treasurer Gina Raimondo said Tuesday.

“They all ask about the capital city,” Raimondo told WPRI.com. “There’s concern of course. … I don’t sugarcoat it. There are a lot of municipal problems. So I say, you’re right, we have them, but I believe we’re going to make them better.”

Raimondo’s comments came as she left a meeting at CCRI’s Warwick campus where Treasury staffers offered guidance to leaders from the municipalities that operate the state’s 36 locally run pension plans.

Read the rest of this story »

It looks like the nation’s largest public pension fund will follow the example set by Rhode Island, the L.A. Times reports:

A key committee of the board of the California Public Employees’ Retirement System on Tuesday voted 6 to 2 to cut its benchmark assumed rate of return on its investments to 7.5% from a two-decade-old target of 7.75%. …

Alan Milligan, CalPERS’ chief actuary, recommended that the pension fund’s discount rate, which forecasts assumed rates of return on its $236-billion investment portfolio, be lowered to 7.25%.

The bigger change, Milligan said, “is the best course of action for this fund in the long term.” He predicted that CalPERS had a 54% of reaching the 7.25% goal, but only a 1-in-2 possibility of hitting 7.5% in any given year.

The committee, after hearing testimony from local government officials and public sector labor union representatives, voted to take the more conservative approach.

In practice, this change is less dramatic than what happened in Rhode Island – since CalPERS starts at 7.75%, this would be a decrease of 25 basis points, compared with Rhode Island’s one-time decrease of 75 basis points. But it does make Rhode Island’s outlook seem like less of an outlier.

Rhode Island’s 36 independent city and town pension funds set their own investment return forecasts, which range from 8.5% to 7%. Providence recently lowered its forecast from 8.5% to 8.25%.

It’s worth noting, too, that changing the investment forecast was only one of the changes made on paper that ballooned Rhode Island’s pension liability last spring. New longevity forecasts that predict longer lifespans for pensioners also had a major impact, as Paul Valletta memorably noted.

• Related: Investment expert: ‘Getting 7.5% … is going to be a challenge’ (Oct. 28)

By Ted Nesi

PROVIDENCE, R.I. (WPRI) – Treasurer Gina Raimondo thinks the best way to fix the state’s 36 locally run pension plans is to move them into the state-run system. But making that happen will be easier said than done.

“I believe that, ultimately, the long-run answer is get everybody in MERS,” Raimondo told WPRI.com last week during a half-hour interview in her State House office, using the acronym for the state-run Municipal Employees Retirement System. “The question is, how exactly do you that?”

The 36 local plans have a combined unfunded liability of $2.1 billion, but about 40% of that shortfall is in one city: Providence, where Mayor Angel Taveras has clashed with Raimondo over whether the General Assembly should pass legislation giving communities the green light to freeze pension cost-of-living adjustments (COLAs).

“I would be delighted to sit down with Providence if they would like any help,” Raimondo said. “I’ve offered. They say they have it under control. That’s great. I hope they do.”

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Back in October, Chicago columnist James Warren wrote that on the subject of pensions, Illinois’ “solace is that hapless Rhode Island is in even worse shape.”

Since Warren penned those words, Rhode Island has passed the most sweeping pension overhaul in the nation, boosting its funded ratio from 48% to 60%. Illinois’ funded level, meanwhile, has dropped to 43%, and Bloomberg moved this story Monday (emphasis mine):

Illinois had its general-obligation bond rating reduced by Moody’s Investors Service to A2 from A1, making it the company’s lowest-graded U.S. state.

The downgrade to the sixth-highest rating came after a legislative session that “took no steps to implement lasting solutions to its severe pension under-funding or to its chronic bill payment delays,” Moody’s said in a report. Illinois, it said, has “weak management practices.”

Looks like Warren will have to seek solace somewhere else.

(photo: Alexander Gardner, via Wikipedia)

Patrick McGee, a columnist at The Bond Buyer, has an interesting piece today that includes some noteworthy insight into the post-Lehman views of municipal bond investors, whose potential displeasure scares the bejeezus out of state and local officials here in Rhode Island.

The good news for the state is that a chart McGee put together (click at right for Bond Buyer’s larger version) shows Rhode Island’s bond yields have never widened as much as those of other states such as Michigan and Nevada.

The bad news – or what could be bad news, depending on how things play out – is investors are paying much closer attention now:

With the downfall of the bond insurers in 2008, the muni market underwent a permanent shift as investors realized they could no longer ignore underlying credit fundamentals. Soft metrics like political will and hard metrics like debt-service coverage ratios or unfunded pension liabilities have become more important than they had been before. …

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It’s one of the most controversial – and arcane – parts of the entire pension debate: How much can Rhode Island reasonably expect its pension fund’s investments to earn over the coming years?

In April, Treasurer Gina Raimondo got the Retirement Board to lower the fund’s expected return from 8.25% to 7.5%, which helped cause this year’s huge increase in the unfunded pension liability. The board raised lifespan forecasts, too.

Paul Valletta of the firefighters union said Thursday Raimondo “cooked the books” with those changes to create a crisis, and Robert Walsh of teachers union NEA Rhode Island – who helps manage his union’s pension fund – testified that it could be responsibly bumped to 7.75% as a way to help alleviate the pressure.

But Allan Emkin of Pension Consulting Alliance, the state’s investment adviser, said even the new hoped-for return of 7.5% is “optimistic, not pessimistic.” His analysts say the pension fund’s diversified investment portfolio has only a 42% chance of achieving 7.5% over the next 10 years, and a 50-50 shot at achieving 6.75%.

Raimondo sees ‘lofty goal’

“Getting 7.5% in today’s world is going to be a challenge,” Emkin told WPRI.com after Thursday’s hearing. “It’s a different world now.” Raimondo herself has called the 7.5% target “a lofty goal” and said she’s designed the proposed new hybrid retirement plan to reduce the risk to taxpayers if 7.5% isn’t achieved.

That raises concerns not only for the state but for cities and towns, as well. Providence, East Providence and Smithfield are all banking on their locally run pension plans earning 8.5% returns over the next 10 years, and a number of others are expecting 8.25% and 8%.

(more…)

The Raimondo-Chafee pension bill is winning support on Wall Street.

Passage of the proposed retirement overhaul “would be credit positive for Rhode Island,” Marcia Van Wagner and Baye Larsen, senior analysts at Moody’s Investors Service in New York, wrote Monday in a research note. In June, the agency kept its rating on the state at Aa2 but lowered its outlook to negative.

“The reforms are more far-reaching than those recently adopted by many states that change benefits [only] for new members and increase employee contributions,” Wagner and Larsen wrote.

(more…)

Gov. Lincoln Chafee will work to block efforts by the state’s top labor leader to repeal a new law that protects bondholders from incurring losses if they loaned money to Central Falls and other bankrupt cities.

The Rhode Island AFL-CIO will submit legislation when the General Assembly returns in January that would scrap the law, union president George Nee said Wednesday at a Greater Providence Chamber of Commerce breakfast.

The law – which The Wall Street Journal said makes Rhode Island “a bondholder’s dream” – guarantees investors will get paid back even if a community files for Chapter 9, giving them a right to tax revenue that other creditors, like pensioners, don’t have. Chafee signed the first-of-its-kind legislation on June 12.

Nee said the law is fundamentally unfair because it requires workers and retirees to bear the burden of restructuring insolvent municipalities without making investors who placed bad bets share in the pain. But Chafee spokeswoman Christine Hunsinger said the governor “is still incredibly supportive” of the policy.

“The governor does not feel that it only protects bondholders – he feels it protects the citizens of Rhode Island,” she said.

“What it does is protect the bond rating of the state by allowing bondholders to have that extra confidence that they will get paid,” Hunsinger said. “It’s a stopgap to keep the lowering of a municipal bond rating from affecting Rhode Island as a whole. The governor feels that it is a greater good, and would work to oppose repeal.”

The debate continues over whether Rhode Island is “a bondholder’s dream,” as The Wall Street Journal argued last week, or just a haven for slap-dash lawmaking.

“A new Rhode Island law that guarantees municipal bondholders will be paid back even if the cities and towns in which they invest go bankrupt could spur a nationwide trend – if courts allow it to stand,” Reuters’ Nick Brown writes in a new analysis piece.

The argument over whether the new law will pass muster in the courts is an interesting one since it could have national implications. But it may take a long time before the question is settled, Brown writes:

Central Falls’ leaders will look to apply the new law as it tries to restructure the city’s debt.

Legal experts said nothing in federal bankruptcy law appears to stop them from doing so. …

But the law is the first to apply retroactively to agreements with vendors owed money under pre-existing contracts with the city, said Karen Grande, Rhode Island’s municipal finance counsel.

[David Skeel, a bankruptcy and corporate law professor at the University of Pennsylvania Law School,] said retroactively protecting bondholders at the expense of other creditors could violate the Contracts Clause of the U.S. Constitution. He said the matter could wind up being appealed, possibly to the U.S. Supreme Court.

If the law gets challenged in federal court, it’s going to be up to the state to send lawyers to defend it. That possibility is already on the mind of Attorney General Peter Kilmartin, who mentioned it Thursday while discussing Central Falls during a taping of WPRI 12′s “Newsmakers.”

That also raises another question – will investors take comfort in the new law if its constitutionality is in doubt? Officials have said the point of passing the legislation was to reassure the bond market so that other local cities and towns, as well as the state, could continue borrowing money. But it may be a long time before doubts about the law are put to rest.

This issue of making laws retroactive has been a recurring one during the Central Falls crisis. The act that was hurriedly passed after the city’s leaders filed for judicial receivership last year was also written so it would apply to the days before they went to court. State leaders have been largely reactive, not proactive, in Central Falls.

The full Reuters article is here. Thanks to a savvy reader for sending it my way.

(photo: CoinCircuit.com)

The Wall Street Journal has an eye-opening story in today’s paper about Rhode Island’s new law protecting investors from losing money when a city or town goes belly up. Central Falls, the paper declares, “is a bondholder’s dream.”

The bankrupt city owes bondholders $635,000 in October, and plans to pay them in full. By contrast, it owes its retirees $296,000 in pension checks next month – but plans to pay them just $196,000, or 34% less.

The Journal goes on to explain the significance of the law, which Governor Chafee signed on July 11 and which was made retroactive to before Central Falls’ receivership:

Municipal-bond lawyers believe Rhode Island’s law is the first of its kind in the U.S. As municipalities in other states grapple with overwhelming pension obligations and debts, similar laws could catch on, partly because they will help even shaky cities and counties keep borrowing money, experts say. …

Under the law, city officials who intentionally fail to pay bondholders can be removed from office or held personally liable for the payments.

One money manager in New York is so bullish on the new law that he told the WSJ his firm wants to buy Central Falls bonds if he can find somebody who wants to sell them. No surprise, then, that Council 94′s J. Michael Downey thinks the law is an outrage. “Wall Street investors are being treated with more dignity than public workers,” he told the paper.

Central Falls’ bankruptcy attorney, Theodore Orson, said in court Wednesday that the pro-bondholder law was enacted because “the capital markets must remain accessible and affordable to our other 38 cities and towns and our states.” He said one of the authors of the municipal bankruptcy code expects the financial sector will lobby the other 49 states to pass their owns laws modeled on Rhode Island’s to protect bondholders.

Update: Not everyone thinks Rhode Island’s law is such a great innovation. Here’s Cate Long, who writes about municipal bonds for Reuters:

The Rhode Island General Assembly’s action flies in the the face of common bond market practice, which is that bondholders get in line with everyone else and a judge overseeing bankruptcy proceedings gives a fair resolution to all the creditors. …

Because a state is asserting privileges beyond current law, this issue could be litigated for a decade. It will probably go before the U.S. Supreme Court and provide lots of billings for the legal profession. But what about the moral issue of denying a retired policeman half of his annual $30,000 pension to pay a bond holder 100 cents on the dollar? Has our country enshrined creditors’ rights at so many levels above pension rights?

(photo: CoinCircuit.com)

Flanders, left, talks to the press

This morning’s tense meeting between Central Falls receiver Robert Flanders and police and fire retirees made plenty of news, but that wasn’t all. Afterwards Flanders and his aides held a briefing for reporters, where they offered a few more interesting details about the potential bankruptcy filing there.

• The concessions proposed by Flanders today would reduce Central Falls’ unfunded pension and retiree health liability by about half, from $80 million to roughly $40 million, according to Buck Consultants, its actuarial firm. For a breakdown of where the $80 million number comes from, check out this post.

• Central Falls’ workers are basically being polled by mail to see if they’ll accept Flanders’ proposals. All the retirees and employees who would be affected have been sent a package outlining them and asked to reply before the end of the month saying whether they agree to them or not. While Flanders said he doesn’t need every single retiree to agree to move forward, if a “substantial number” say no, bankruptcy will be more likely. And the deal they’re offered in bankruptcy court would likely mirror this one, he said.

• One unhappy retiree suggested he would rather see what kind of deal they’d get in a Chapter 9 proceeding from Judge Arthur Votolato, the U.S. Bankruptcy Court judge for the District of Rhode Island, rather than accept the deep pension cuts proposed by Flanders.

But it turns out Votolato wouldn’t necessarily handle the city’s Chapter 9 case, should it come to pass – the presiding judge would be picked by Chief Judge Sandra Lynch of the 1st U.S. Circuit Court of Appeals in Boston, according to Central Falls’ bankruptcy attorney. So there’s no way to know for sure who would be making the decisions about Central Falls’ future in Chapter 9.

• One group that’s not being asked to sacrifice for Central Falls? The city’s bondholders. Flanders said that’s because of the new law signed by Governor Chafee that makes repaying them a city’s top priority in the event of a bankruptcy filing – everyone else, including pensioners, are unsecured creditors. The city owes $31 million in principal and interest payments on its debts through 2028, according to a report last December.

(photo: Ted Nesi/WPRI)

With less than three weeks to go before the deadline for raising the federal debt limit, the rating agencies are issuing increasingly gloomy reports about what will happen if Washington fails to reach an agreement.

And now Moody’s is warning that the federal government won’t be the only entity affected, Bloomberg reports:

At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action. …

It didn’t provide a total value for other state and local credits that may be affected, including housing authorities and nonprofits. …

Issuers that are partially dependent on the federal government, such as states receiving Medicaid matching funds, also will be reviewed for vulnerability.

Rhode Island isn’t rated Aaa by Moody’s, so it’s not clear to me whether the state’s rating would be lowered in the event of a U.S. downgrade. The quasi-public agencies could be affected – the Rhode Island Clean Water Finance Agency is rated Aaa, for example.

No city or town in Rhode Island was rated Aaa as of March 17, according to a Treasurer Raimondo’s office. The municipalities with the best ratings were Barrington, Middletown and South Kingstown, all rated Aa1 (one notch below Aaa).

On a brighter note, Dow Jones Newswires reported earlier this week that the bond market has shown no signs of concern in response to the latest reports of financial distress in Central Falls and elsewhere here:

So far, no significant trades have taken place in any Rhode Island debt, both from the state itself as well as its cities and towns, said Dan Berger, senior market strategist at Thomson Reuters Municipal Market Data. …

The state’s 10-year debt trades at yields around 3.17%, 47 basis points above triple-A rated state debt, Berger said. The latest trading levels are little changed from the state’s year-average spread of 46.1 basis points. The state has the ninth largest spread of all states tracked by MMD.

Rhode Island bonds haven’t moved much because there’s very little debt outstanding, both on a state and local level. Fewer bonds usually means less trading, and therefore less volatility in prices.

Rhode Island has about $2 billion of tax-supported debt outstanding, according to MMD data, a pittance compared to California’s roughly $90 billion in general obligation bonds and New York’s approximately $60 billion in debt.

(photo: CoinCircuit.com)

Uncle Sam, we feel your pain.

Markets trembled on Monday (or did they?) when Standard & Poor’s, one of the big three ratings agencies, lowered the federal government’s credit outlook to “negative” out of concern that policymakers won’t reach agreement on how to stop the national debt from increasing.

Such a forecast is old news around here. S&P cut Rhode Island’s credit outlook from stable to negative way back in March 2009, more than two years ago.

Eleven states have the same first-class AAA credit rating as the federal government, at least in S&P’s judgment, but Rhode Island isn’t one of them, according to a Treasury roundup from Dec. 31.

Fitch Ratings, like S&P, has a negative outlook on Rhode Island. Moody’s is a bit more optimistic, putting the state’s outlook at stable. And it appears both Moody’s and Fitch raised the state’s rating one notch sometime in the past year, though I don’t remember when that happened. (I asked Treasury for more information.)

Here’s how the three agencies judge Rhode Island’s creditworthiness on their 10-point scales for investment-grade bonds.

- Standard & Poor’s. Rating: AA (#3). Outlook: Negative.

- Moody’s. Rating: Aa2 (#3). Outlook: Stable.

- Fitch. Rating: AA (#3). Outlook: Negative.

Update: Treasurer Gina Raimondo’s spokeswoman, Joy Fox, says Rhode Island’s credit ratings went higher because of a technical change at Moody’s and Fitch. “Last year, Moody’s and Fitch recalibrated to a ‘universal’ rating system applicable to all debt (public and private) and readjusted Rhode Island’s ratings accordingly,” Fox said in an e-mail.

(logos via ERM Strategies)

The Projo reports this surprising comment from General Treasurer Gina Raimondo:

She said she hoped to have a more accurate financial picture by the time the state sells its next round of general-obligation bonds, in April or May.

Well, yes – I’ll bet investors and the SEC are also hoping Rhode Island’s treasurer will present an accurate financial picture when the state tries to borrow millions of dollars from muni buyers.

In fact, if memory serves, the treasurer herself has to sign off on all the documents that go along with a bond sale, and in doing so pledge that they’re accurate. So she’d better have a more accurate financial picture by then.

In an e-mail, Raimondo spokeswoman Joy Fox clarified that the treasurer is more than hoping to have a clear picture of the state’s finances by the time she taps the bond market – she is promising that will be the case.

“By the time the state puts out its next general obligation bond offering, Treasury will have accurate numbers and will make sure that the picture provided to potential bond holders is complete and accurate,” she said. “Presenting an updated disclosure should in fact enhance the state’s ability to access the bond market on favorable terms.”