PROVIDENCE, R.I. (WPRI) – The race for Rhode Island general treasurer is getting feisty, with the campaign of Democrat Stefan Pryor attacking rival James Diossa over a controversial pension fund decision made four years ago.

With less than two weeks to go before the Sept. 13 primary election, Pryor is arguing the former mayor of Central Falls mismanaged parts of the local pension system at the same time the city was recovering from bankruptcy.  

“Once Mr. Diossa regained budgetary control, he made major miscalculations,” Pryor spokesperson Anthony Cherry wrote in a press release this week.

One of the Pryor team’s accusations is focused on $500,000 that was transferred out of the city’s pension fund to its general fund in fiscal year 2017-2018. Such transfers can get governments in trouble, since pension money is only supposed to pay for retiree benefits; if moved into a general fund, the money could be used for other expenses such as roads or trash collection.

On Wednesday, Diossa’s campaign acknowledged the transfer happened, but insisted the decision was made unilaterally by a rogue state-appointed financial adviser, and that Diossa addressed it immediately after finding out.

“James was not informed of the decision, and – upon learning of it – James directed the funds to be returned and relieved the financial adviser of his responsibilities,” Diossa spokesperson Alisha Pina said in a statement.

Pina also fired back at the Pryor campaign, arguing the former commerce secretary’s team is just trying to make political hay in the run-up to the election.  

“This is a purely political attack leveled in the midst of an overwhelming show of municipal support for James this morning and is a distraction from Mr. Pryor’s own lackluster record,” Pina said, referring to a news conference Diossa held earlier this week with other mayors.

The exchange of fire comes amid a tight primary for treasurer. A 12 News/Roger Williams University poll last month showed the two Democrats running neck and neck, with 61% of primary voters undecided. Pryor has established a financial advantage over Diossa, in part due to outside groups’ support.

The winner of the Democratic primary for treasurer will face Republican James Lathrop in November.

Politics aside, however, the 2018 pension transfer shines an unflattering light on a city that had to claw its way back from bankruptcy — in part after local leaders cheated the city’s pension fund.

Diossa’s campaign has declined to provide specifics about why the transfer happened. But a 2018 memo obtained by Target 12 shows the financial adviser, Leonard Morganis, made the transfer because the city’s general fund had been paying millions toward retiree benefits in the wake of the bankruptcy. He argued the money should have been repaid by the pension fund.

“Without informing the Mayor, or consulting anyone else … I made the fiduciary decision to recoup a small portion of this money [$500K] [sic] in the form of a withdrawal to the city in late fiscal year 2018 since I’ve always believed its rightful owner was the city of Central Falls,” Morganis wrote in the memo dated Aug. 30, 2018.

“In hindsight, I obviously should have communicated my actions and for not doing so, I sincerely apologize,” he added.

Morganis did not immediately respond a phone call seeking comment Thursday, but he wrote at the time that the money would be returned to the pension fund. That transaction was reflected in a fiscal 2017-2018 audit of the city’s finances reviewed by Target 12.

Diossa tried to distance himself from Morganis this week. In her statement, Pina described Morganis as a “financial advisor appointed by and subservient to the Director of the State Department of Revenue.”

R.I. Department of Revenue spokesperson Paul Grimaldi said his department – which oversees the Division of Municipal Finance – was unaware of the $500,000 transfer and never gave anyone instructions to make it. He also distanced the department from Morganis.

“Morganis was not a Department of Revenue employee,” Grimaldi said. “He was an employee of the city. If he did transfer funds from the pension to the general fund, we doubt the instruction came from us. The city’s chief executive officer (i.e., mayor) would have had authority over Len’s actions, not the department.”

It’s unclear whether the transfer – now that it’s been made public – could have any negative repercussions for Central Falls. Pina was adamant that “there was no – I repeat, no – impact on the pension fund.”

But the IRS has previously penalized state or local governments that tried to use pension money for other purposes. That was made clear after Rhode Island’s banking crisis in the early 1990s, when the IRS came down on the state for trying to use retirement money for other budgetary items.

The man both Pryor and Diossa are seeking to replace — outgoing General Treasurer Seth Magaziner, now a Democratic candidate for Congress — avoided weighing in.

Asked by Target 12 whether Central Falls’ 2018 pension transfer was unlawful or otherwise prohibited, Magaziner spokesperson Ben Smith responded with one sentence: “This is a municipal matter.”

Smith did not respond to any follow-up calls or text messages.

Eli Sherman (esherman@wpri.com) is a Target 12 investigative reporter for 12 News. Connect with him on Twitter and on Facebook.