PSPRS – Questions Over Desert Troon Values
Public-safety pensions: Questions over funds’ land values
By Craig Harris The Republic | azcentral.com Fri Aug 2, 2013 11:44 PM
The financially troubled pension fund for Arizona police officers and firefighters is seeking the state auditor general’s counsel after senior-level employees accused the trust’s management of inflating the value of key real-estate assets in fiscal 2012 annual reports.
Three employees have resigned in the wake of the conflict.
The question before the auditor general is whether it was “reasonable” for trust managers at the Public Safety Personnel Retirement System to report higher asset values supplied by Scottsdale-based Desert Troon Cos. instead of more conservative values supplied by independent appraiser Ernst & Young.
“Because of the controversy and a high level of criticism from people, we asked for an independent review of the process,” said Brian Tobin, chairman of the trust board, whose seven members are appointees of Gov. Jan Brewer.
Desert Troon manages a portfolio of retail, residential and commercial real-estate properties for the trust and was paid at least $12 million in fees in 2012, according to trust records.
Using the higher real-estate values boosted the trust’s bottom line in fiscal 2012 by roughly $90 million, although the trust still reported a $54.6 million loss that year.
The trust this year again is considering reporting higher property values quoted by Desert Troon, rather than lower valuations recommended by Ernst & Young, according to trust administrator Jim Hacking.
The difference in those values is $82 million.
Ernst & Young did its analysis at the request of the trust and was paid $418,564 for its services.
Using higher land values can enhance bonuses for trust staff. Bonuses are based in part on current year and historical investment performances of the trust.
The trust provided records to The Arizona Republic under the Arizona Public Records Law that appeared to indicate the higher land valuations may have played a role in 2012 bonuses.
But trust attorney Michael Sillyman said those records were in error. He provided other records indicating the land valuations had no influence on bonuses.
Tobin, the trust board chairman, said the difference in land values managed by Desert Troon did not influence $47,303 in staff bonuses paid to nine employees last year.
Tobin and other trust officials also said using the higher land values provided by Desert Troon did not generate additional fees for the company.
The trust said it did not have records readily available to show precisely how Desert Troon earned its fees, and Dan Hammons, the company’s chief financial officer, said the company would not comment.
Outside inquiry sought
In a July 18 letter to Auditor General Debra Davenport, Hacking asked for guidance as to whether trust officials were “reasonable” in determining the value of real-estate assets managed by Desert Troon.
Hacking took action after two portfolio managers and the trust’s chief investment counsel resigned between May 22 and July 15.
Anton Orlich, former lead portfolio manager for public equities, declined to comment for this story. Mark Selfridge, a former lead portfolio manager for real estate, and Andrew Carriker, a former chief investment counsel, could not be reached for comment.
It was not publicly disclosed why the men resigned, but Carriker and Orlich “stridently” maintained that the trust should have used lower property valuations from the independent appraiser that were more conservatively drawn, according to Hacking’s letter.
Hacking’s letter said Ernst & Young valued the properties at $213.6 million for the fiscal 2012 reports, while Desert Troon said the portfolio was worth $303.6 million.
“The trust’s view has been that the manager of such assets is far more knowledgeable about the assets it manages than the trust and, indeed, it is our experience that few managers would allow limited partners to dictate to the manager how it values assets for the purpose of financial reporting,” Hacking wrote in the letter.
Nevertheless, because of the controversy, Hacking wrote that an outside inquiry was requested. Hacking declined to be interviewed for this story.
Jay Zsorey, the auditor general’s financial audit director, said that the investigation is just under way and that it is typical for a state entity to seek advice from the auditor general on financial reporting.
“Public Safety (trust) has its own auditors, but they are asking this question, and we have experts in financial reporting on government entities,” said Zsorey, who declined to speculate on when the inquiry would be completed.
The trust finances the pensions of more than 52,000 people in three state retirement plans: the Public Safety Personnel Retirement System, the Elected Officials Retirement Plan and the Corrections Officer Retirement Plan.
Slightly more than 31,000 members are current, vested or retired police officers and firefighters. The public-safety system’s management oversees the two other pension funds.
The trust’s three pension plans have more than $7 billion in diversified assets, including foreign and U.S. stocks, private equity holdings and real estate.
However, the plans are significantly underfunded in their ability to meet current and future pension obligations.
The trust has relied on larger payments from taxpayer-financed government entities the past few years to cover investment losses, including those managed by Desert Troon.
The Republic in May reported that some communities cannot fill vacant police and firefighting positions because they are required to make such large pension payments to the trust.
In fiscal 2012, the most current year for which records were available, the trust needed $391.6 million in public funds to fulfill its actuarial commitments. In fiscal 2007, it received $213 million in public funds, records show.
Desert Troon assets hit
The trust has done business with Desert Troon since the mid-1990s. Properties currently under its management are located primarily in metro Phoenix, though a few are in Utah, Colorado and Texas, according to trust records.
Assets under Desert Troon’s control have suffered significant losses for the trust since fiscal 2009, records compiled by The Republic show.
The trust’s collective losses from properties managed by Desert Troon from fiscal 2009 to 2012 were at least $284 million, according to annual reports compiled by The Republic.
In fiscal 2012, properties that Desert Troon managed lost at least $131 million in value, according to reports compiled by The Republic. Had the trust followed Ernst & Young’s appraisal, the losses would increase to about $221 million.
Doug Cole, a lobbyist for the trust who is acting as its spokesman, said Desert Troon is managing “legacy” properties that were purchased under a prior trust administration and board. He said those assets, which have depreciated like other Arizona real estate in recent years, will increase in value over time.
“Our consultants’ impressions are that Desert Troon has performed well as the assets continue to recover off the bottom of the recession,” Cole said.
Trust records show that the current administration in fiscal 2009 began shifting real-estate assets from other companies to Desert Troon and that the value of property managed by Desert Troon more than doubled over that period.