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)

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?

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:

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.

RICWFA opened in July 1990 to fill the void left by sharp reductions in federal aid for local sewer projects. Governor Sundlun expanded its mission in 1993, and Governor Carcieri lowered some of its interest rates in 2004 as part of his push to clean up Narragansett Bay. RICWFA has been growing fast in recent years: its total bond indebtedness jumped from $577 million in 2007 to $707 million in 2012, and as of June 30 it had funded $1.25 billion in low-interest loans.

RICWFA works a bit like a bank. The initial money in its revolving loan funds – its base of capital for lending to municipalities – has come from state bond referendums and federal grants. The R.I. Department of Environmental Management and the R.I. Department of Health each maintain Project Priority Lists, updated annually, that list which local water projects are eligible for RICWFA loans; the departments must also grant Certificates of Approval to specific projects before the agency will fund them. The loan money gets transferred to the communities as they incur project costs and then gets paid back by water ratepayers, usually over 20 years. When money gets paid back with interest, RICWFA can use the proceeds to make new loans – hence “revolving.”

While the details haven’t been released yet, it appears Raimondo and Fox want to turn the Clean Water Finance Agency into more of a state infrastructure bank. If the General Assembly passes legislation to create their proposed Municipal Road and Bridge Revolving Fund by July, presumably RICWFA could quickly go borrow money – perhaps as much as $50 million to $70 million – to capitalize the fund and start making loans. (Like other quasi-publics, RICWFA isn’t required to get voter approval to take on additional debt.) It’s possible the R.I. Department of Transportation could play a similar role to DEM and DoH by creating the Project Priority List that determines eligibility for loans.

It’s easy to see RICWFA’s appeal to Raimondo and Fox.

The agency is lean – its most recent annual report mentioned only seven employees, and it spent less than $2 million on administration and professional fees in the 2010-11 fiscal year. It’s a rare Rhode Island public body with a strong reputation, as evidenced by its AAA bond rating. It hasn’t been hit by the same turnover as organizations like the EDC: Anthony Simeone, RICWFA’s executive director, has been there since 1994, and its longtime board chairman is James Hagerty, a senior banking executive at Washington Trust. Raimondo is represented on the board by Chris Feisthamel, the former Citizens executive who serves as her chief operating officer at Treasury.

The politics are interesting, as well. This looks like another clear sign that Fox trusts Raimondo to come up with innovative policy ideas he can get behind, and with the 2014 campaign around the corner, it won’t be missed that Paiva Weed is joining the two of them for the announcement but Governor Chafee isn’t. Economically, the new fund should be able to get shovel-ready projects going before too long if the proposal moves quickly, which will create badly needed construction jobs that will be popular with private-sector labor unions – all in time for next year’s election. And it’s another way for Raimondo to fulfill her promise to use the dividend from the pension overhaul to support public spending, burnishing her Democratic credentials.

That said, there are lots of questions to be asked about the Raimondo-Fox proposal.

First of all, can local taxpayers afford this? RICWFA loans are usually repaid by a dedicated revenue stream – water bills – while roads and bridges are funded out of property taxes. As always with debt, it’s important to ask whether future income will make debt payments affordable – will Rhode Island’s economy be strong enough in the future to repay the loans? Doing a cost-benefit analysis is also important: will the projects last long enough to make it worth borrowing to fund them now? (Some will certainly answer yes: Providence just borrowed $40 million to fix its streets.)

Another risk is that since the new fund will use state money, it won’t get the same level of oversight the federal government provides for RICWFA’s water funds. And even though RICWFA’s borrowing isn’t legally backed by state taxpayers, we’re seeing in the case of 38 Studios that state leaders are loathe to actually allow a default on any loans connected to state government.

All in all, this should be interesting. To learn more, check out RICWFA’s 2011 annual report [pdf].

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.

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.

The bond sale had been scheduled for Tuesday but was pushed back to today. First Southwest advised the city on the sale, which was handled by a syndicate led by Raymond James that also included Janney Montgomery Scott, Roosevelt & Cross and Siebert Brandford Shank & Co.

Last month Fitch Ratings maintained Providence’s bond rating at BBB, where it’s been for nearly a year, but said the outlook is still negative. The Taveras administration “has made significant progress in eliminating its structural imbalance, but financial pressure still exists,” Fitch said, continuing (emphasis added):

After passing a fiscal 2012 budget that eliminated a $110 million structural deficit, the city ended the fiscal year with a $15.1 million general fund operating deficit after transfers …. This was the fourth year of operating deficits and declines in cash balances. Much of this weak performance was due to cumulative loss of $123 million in state aid since fiscal 2009, weakness in the economy that resulted in a lack of new building activity, and lower than projected local revenues.

Cash flow pressures are less acute than they were a year ago, when depletion of cash was a real concern. Through management of payables/receivables, moving up the property tax billing date, and negotiation of new payment-in-lieu-of-tax (PILOT) payments from its local universities and hospitals, the city was able to retain adequate cash and avoid short-term borrowing.

The primary drivers of the reduction in the structural imbalance were a 5.14% property tax increase, a reduction in staff by 200 (approx. 10% of staff), salary freezes, and the new or increased PILOT payments ($6.25 million). No one-time revenues were included in the budget. A budgeted reduction in retiree healthcare payments for Medicare-eligible retirees was delayed, accounting for approximately $11 million of the $15.1 million fiscal 2012 deficit.

Management has prudently implemented both increased budget monitoring, with monthly cash-flow reports provided to city council, and multi-year financial forecasting. …

According to management, operations are on target to meet budget expectations. The city has adequate liquidity as represented by its $42 million in general fund cash and $24 million in school fund cash as of Nov. 2012. No cash flow borrowing is anticipated.

[ ... ]

The city’s internal auditor has prepared a three year budget forecast which shows annual budget gaps of between $30 million and $40 million (5%-7% of budget) for combined general and school funds. These projections assume no tax base growth, no increase in property taxes and no increase in state school aid. Additionally, management has indicated to Fitch that the additional health care savings realized during this fiscal year of approximately $4 million are not reflected in the projections. The projections account for negotiated salary increases for certain employee groups as well as projected increases in pension ARCs and healthcare costs. Although it has not always done so, the city will be required to fund at least 95% of the pension ARC if the pension reform agreement is approved. …

The city’s debt ratios, net of the state’s reimbursement for school projects, are moderate with debt to market value at 3.2% and debt per capita at $1,700. Amortization is rapid at 69% of principal in ten years and debt service in fiscal 2012 represented a moderate 7.3% of spending.

The city’s pension and OPEB costs continue to be a concern to Fitch as their unfunded levels are very high. Recent pension reform efforts and changes to employee healthcare contribution requirements stand to reduce the burden. … Combined debt service, pension, and OPEB payments made up 23% of combined general and school fund spending.

“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.’”

The R.I. Economic Development Corporation sold $75 million worth of moral obligation bonds in 2010 to finance 38 Studios. They differ from the more familiar general obligation bonds because with moral obligation bonds a state only pledges that its governor will ask lawmakers to use taxpayer money to pay bondholders; with general obligation bonds, the state pledges its full faith and credit toward repayment.

Rhode Island officials including Chafee and Treasurer Gina Raimondo have steadfastly refused to even consider stiffing investors who bought the 38 Studios bonds despite suggestions by former R.I. Supreme Court Justice Robert Flanders, Josh Barro, Gary Sasse and others that they should in light of the state’s fiscal woes.

“Moral obligations should be taken very seriously and not casually dismissed solely on the ground that the taxpayers do not have a legal obligation,” Sasse, who served in the Carcieri administration, told WPRI.com. “Nevertheless, the state should consider both the long and short term costs and benefits of all options.”

State officials should be studying all options, including a negotiated settlement with bondholders, Sasse said. ”It would be equally irresponsible for any official to take a position either to have the taxpayer meet the moral obligation or default or negotiate until evidence-based due diligence is completed,” he said.

State officials are, however, considering asking lawmakers to spend the money next year to refinance the bonds by converting them to general-obligation bonds at lower interest rates, Revenue Director Rosemary Booth Gallogly told Bloomberg News this week.

“We’ve looked at it preliminarily just to see if that’s an option and probably will pursue it,” Gallogly told Bloomberg. “If it were beneficial we would probably be able to sell that to the General Assembly.” She estimates paying off the bonds in full could cost state taxpayers around $100 million.

• Related: RI officials tell Moody’s state will pay off 38 Studios bonds (May 24)

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)

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)

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)

• 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.”

• Dec. 10, 2010 … $9.4 million. ”Upon public announcement by [38 Studios] of a relocation date to RI.”

• April 18, 2011 … $17.2 million. ”Upon relocation of [38 Studios'] headquarters and the current object, Coperncius studio to RI AND the creation of at least 80 full-time jobs in RI with an average annual wage not less than $67,500 per year.”

• April 18, 2011 … $4.2 million. “Upon the creation by [38 Studios] of an additional 45 full-time jobs in RI with an average annual wage not less than $67,500 per year.”

• Aug. 16, 2011 … $4.1 million. ”Upon the entry by [38 Studios] into a satisfactory distribution agreement for its Project Copernicus.”

• Nov. 2, 2011 … $1.6 million. ”Upon the creation by [38 Studios] of at least an additional 125 full-time jobs in RI with an average annual wage of not less than $67,500 per year.”

Total … $49.5 million between Nov. 2, 2010, and Nov. 2, 2011.

When the $75 million worth of bonds were sold on Nov. 1, 2010, the EDC spent $1.9 million of the proceeds on fees, then put the rest into three accounts: $49.5 million went into the Project Fund, $12.8 million went into a Capital Reserve Fund and $10.6 million went into a Capitalized Interest Account.

As of Nov. 2, 2011, a year after the bonds got sold, the Project Fund was empty – that was the source for all the above transfers from EDC to 38 Studios. The company told the state all $49.5 million is gone, but no details have been provided about how the company spent the money.

As of now, the Capitalized Interest Account is down to about $2.7 million – enough for one more interest-only payment, which is due on Nov. 1.

Starting next May 1, 38 Studios itself is supposed to start making the principal and interest payments to bondholders from its own revenue; if it can’t do so, the EDC will tap the Capital Reserve Fund. If that happens, the governor is required to ask state lawmakers to appropriate money in the budget to replenish the fund. However, lawmakers aren’t legally obligated to actually appropriate the money.

As this September 2010 story noted, it’s important to realize that these milestones are different from the job milestones that got most of the attention when the deal was done (i.e., that 38 Studios would create 450 full-time jobs here by 2013). Collecting the bond proceeds only required 250 jobs in Rhode Island; the company will pay minor penalties separartely if it doesn’t reach the 450 mark by November 2013.

• Related: RI taxpayers actually on the hook for $112.6M with 38 Studios (May 15)

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.

The first four interest payments on the actual bonds – due both this year and last year on May 1 and Nov. 1 - are coming out of a Capitalized Interest Account established with $10.6 million of the original loan money. Starting in 2013, 38 Studios is supposed to pay the bondholders from its game sales; if the company can’t, the governor is required to ask lawmakers to instead pony up taxpayer money to pay them back.

EDC spokeswoman Judy Chong told WPRI.com on Monday she could not provide any additional information, and she did not respond to requests for comment on Tuesday. Asked whether the Annual Guaranty Fee was paid, Governor Chafee’s spokeswoman Christine Hunsinger said: “I would have to direct you to EDC on that.”

Chafee has said the state is concerned about 38 Studios’ solvency and is working with the company on the problem. Officials have refused to provide any details about the company’s financial situation despite calls. The Rhode Island Statewide Coalition called on Chafee and the EDC to make information publicly available.

“There should be no Rhode Island taxpayer bailout of what could be emerging as a colossal financial misadventure,” Donna Perry, the coalition’s executive director, said in a statement.

Standard & Poor’s affirmed its A rating on the EDC-38 Studios bonds on April 20 with a stable outlook. A spokesman for the rating agency told WPRI.com its analysts do not comment on rumors. A spokesman for Moody’s Investors Service was not immediately available. The bonds are insured by Assured Guaranty Ltd.

More 38 Studios coverage on WPRI.com:

• Robitaille: 38 Studios lesson is don’t pick winners and losers (May 15)
• RI taxpayers actually on the hook for $112.6M with 38 Studios (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)

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.

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.

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.

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 »

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.”

Taveras spokesman David Ortiz said Raimondo and the mayor “had a brief conversation … at an informal event they both attended late last year,” and staff members in the treasurer’s office have contacted their colleagues at City Hall. “The administration will reach out to the general treasurer and her team should we need assistance,” Ortiz said.

Skeptical of local pension oversight

Raimondo and Taveras are on the new commission created to study the 36 local plans, and she wants to push the panel to explore “creative ways” to transition the plans into MERS, possibly through legislation. Finding a way to do so is “not easy or obvious,” particularly since they’re all in different situations, but “there’s an answer for every one,” she said.

Raimondo’s office organized a well-attended workshop last Tuesday to help municipal officials start tackling their pension problems, and the treasurer said the response was positive. Some cities and towns aren’t sure about who is on their pension boards or whether they’ve ever received fiduciary training, she said.

Suspending COLAs without taking other steps to change their pension systems could leave cities such as Providence more vulnerable to having their decisions overturned by the courts, Raimondo said. “It’s not a comprehensive solution, and it puts you on much shakier ground legally,” she said.

Asked whether there was any reason a city or town should run a pension plan on its own, Raimondo said: ”It’s hard to figure out why they should. There are just so many economies of scale to having the assets managed centrally, to having a single pension system in the state,” including uniform benefits for public workers in all communities.

‘Keep elected officials accountable’

While the local pension plans’ problems are garnering most of the headlines this winter, Raimondo is spending much of her time implementing the sweeping state pension overhaul signed by Governor Chafee in November. She expressed confidence the law won’t be overturned in court, though she acknowledged: “I worry about it.”

“It’s a little early to say” how the implementation of the pension law is going, Raimondo said. “There’s still a certain amount of confusion and lack of information about what the law does.” Many employees incorrectly think they have to work until age 67, which is true only for those with fewer than five years of service.

Raimondo said her office plans to spend the next two months doing outreach to raise awareness about the details of the law among public employees, including regional education sessions, online information, tutorials and an updated pension system handbook.

The other big initiative is selecting a firm to create and manage the law’s new defined-contribution retirement plan, which will receive $100 million to $150 million in funds annually. Raimondo said a transparent process should allay any concerns among voters about whether her staff’s close ties to the finance industry could impact the bidding.

“We’re doing it all out in the open, and anyone that has any questions or wants to come to any meetings or go online and look at many of the information should go online and do that – and I encourage them to do so,” she said. “That’s what the job of the people is, to keep elected officials accountable and honest.”

Rhode Island ‘energized for change’

Pensions are probably Raimondo’s top concern, but they’re not her only one.

The treasurer said she is planning to spend “a lot of time” in February and March ”selling Rhode Island” in meetings with institutional investors who buy the state’s bonds, in the hopes that doing so will raise demand for the bonds and reduce the state’s borrowing costs.

Raimondo is also looking for other ways to support the state’s 39 cities and towns, including by establishing the new Ocean State Investment Pool to centrally manage their cash and other liquid assets, and by having Deputy Treasurer Mark Dingley offer tips on how to improve their bond disclosures, which the state did last year in response to an ongoing SEC investigation.

“In some ways, they have the hardest job in government,” she said. “Running cities and towns in a time of economic slump, combined with these vestiges of pensions and health care, is really hard. … They’re also strapped. That’s what I’m realizing. They don’t have the resources. … I think we have to help cities and towns, no doubt about it.”

On a personal level, Raimondo said she’s gotten used to being recognized on the street over the past year, and often gets a thumbs-up from passers-by. ”I just feel like Rhode Island is energized for change and for a brighter future, and that’s awesome,” she said.

Ted Nesi ( tnesi@wpri.com / @tednesi ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. This is the second of two articles with highlights from the Raimondo interview.

(photo: Ted Nesi/WPRI)

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)

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. …

“People started to look at the political environments of each state and the ability to deal, legislatively, with what are going to be enormously difficult financial situations,” Vogel said.

He describes the earlier period as a time when the market was on autopilot, whereas today’s muni market is “extremely name-specific, almost free-form.” …

In the years leading up to the credit crisis, names like Michigan, Nevada, Rhode Island and New Jersey traded in near-tandem. Since late 2007, each has courted its own path based on specific credit issues.

McGee’s column lends credence warnings from Treasurer Raimondo and others that investors are tracking this fall’s special session on the pension shortfall closely, as well as Governor Chafee’s argument in support of the new law protecting bondholders from losses in local bankruptcies like Central Falls’, which the AFL-CIO opposes.

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%.

Before last April’s vote, the state Retirement Board’s previous votes had been to raise the return target, from 7.5% to 8% in 1990 and then from 8% to 8.25% in 1998. Former Treasurer Frank Caprio suggested last year the board should take another look at whether 8.25% was reasonable, though a vote was never taken.

Pension fund trustees across the country are now reexamining their assumptions, though few have moved as aggressively as Raimondo’s Rhode Island, Emkin told WPRI.com. “If there’s an overall trend, the trend is to go lower,” he said. “How much [lower] is the part of the process that’s very complex and unique to each jurisdiction.”

Most places have moved their return rates by 25 or 50 basis points at a time – from 8.25% to 8% or 7.75%, for example – unlike Rhode Island, which dropped its rate by 75 basis points in one fell swoop last April. “That’s a policy decision,” Emkin said.

Small numbers, big impact

Those seemingly small differences have a massive impact on paper. The combined shortfall in the main pension funds for state employees and teachers totals $4.7 billion using an 8.25% rate; $6.8 billion using the new 7.5% rate; $9 billion using a 6.2% rate; and $11.4 billion using a 4.4% rate, according to Gabriel Roeder Smith & Co.

There is no doubt the change pushed by Raimondo is aggressive. The latest Public Fund Survey shows only 24 of the nation’s 126 largest pension funds use a return forecast of 7.5% or lower. The remaining 102 funds use 7.75% or higher, with the most common investment target being 8%. Massachusetts continues to use 8.25%.

The median public pension fund’s investments earned an average annual return of 8.5% in the 25-year period ended June 30, 2011, according to the National Association of State Retirement Administrators – though, as investment advisors often say, past performance is no guarantee of future results.

William “Flick” Fornia, an independent pension actuary hired by local unions, said the new 7.5% return forecast is “desirable” from an actuary’s perspective but the old 8.25% forecast is more desirable for taxpayers, because it would reduce the size of the deposits they are supposed to put into the pension fund.

Emkin and Pension Consulting Alliance first worked for Rhode Island under former Treasurer Roger Begin, a Democrat who served from 1985 to 1989, and was rehired by Caprio. Emkin said his firm revisits its investment outlook annually, and has revised it downward since 2008 to reflect the record-low yields on bonds and unsettled macroeconomic outlook that have followed the financial crisis.

According to forecasts by Emkin’s firm, the compounded return on different asset classes over the next decade will range from 3% for cash to 8.9% for private equity and venture capital, with inflation averaging 2.75%. Pension Consulting Alliance’s forecasts are in line with those of six other major investment advisers.

(chart: National Association of State Retirement Administrators)

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.

The legislation would slash the state government’s share of the state-run pension system’s unfunded liability in half, from $5.5 billion to $2.8 billion, and reduce the state’s required deposit to the pension fund in 2012-13 from nearly $400 million to about $200 million.

“This cost reduction would provide considerable budgetary relief to the state, whose economic and fiscal challenges pre-date the recent recession,” they said. Reamortizing the state’s pension shortfall over an additional six years mean it “will continue to be poorly funded for an extended period,” not hitting 80% until 2030, they said.

If unions and retirees challenge the changes in court, “Rhode Island will join a host of other states embroiled in litigation over efforts to reduce pension benefits for current employees and retirees,” according to Moody’s. Others include New Jersey, Colorado, Minnesota and South Dakota.

Notably, Moody’s referred to the pension bill as “the governor’s reform package,” a quite different take from The New York Times, which made no mention of Chafee in a 2,500-word story on Rhode Island’s pension debate that ran Sunday.

(chart: Moody’s Investors Service)

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.”

“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 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)

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)

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)

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.”

The SEC contacted the Rhode Island Treasury on Wednesday afternoon and requested a list of all state bond transactions dating back to 2007 that “contained disclosures about state retirement plans,” Joy Fox, a spokeswoman for Treasurer Gina Raimondo, said in an e-mail.

Treasury officials are currently pulling that information together for the SEC, Fox said.

The SEC first contacted Raimondo on Jan. 31 to inform her it has opened an investigation into the state’s bond disclosures, as WPRI.com (and the AP) first reported on Feb. 3. This is the first communication Treasury has had with the SEC since then.

The agency may be looking into the way the state’s calculation of its pension liabilities has jumped around in recent years. That’s one possibility judging by Raimondo’s statements, other published reports and an examination of state bond documents.

Raimondo will be our guest during Friday morning’s taping of WPRI 12′s “Newsmakers,” which will air this weekend and be posted online tomorrow. You can be sure this will be part of the discussion. She’ll also be interviewed on the “PBS NewsHour” this evening.