Lies, Damn Lies, & PSPRS’ Press Releases

Pensioners First – It’s soooo simple!  Just quit the media games trustees!  52,000 pensioners and 6.5 million taxpayers need you to man up and communicate what is really going on over there at the retirement system.

If it walks like a duck and quacks like a duck, it’s probably a duck.  If it sounds like a riddle wrapped in an enigma, it’s probably another PSPRS press release.

The Arizona Public Safety Personnel Retirement System (PSPRS) Board of Trustees held their February meeting yesterday on February 26.  On the Board’s agenda was item #27-d:  “Discussion with legal counsel regarding waiver of the attorney-client privilege as to certain privileged communications between the System and its counsel, pursuant to A.R.S. §§ 38-431.03(A) (2), (3) and (4).”

That same day PSPRS Administrator James Hacking released the following lengthy treatise.

If the Board of Trustees was to have an honest debate and an honest vote during the Board meeting, how did they have this long thing ready to go on the same day?  Or had the decision already been made?  Had the Board already decided the outcome of this release of information behind closed doors, away from the public, and away from those pesky reporters at the Arizona Republic?

Read the press release (why do state agencies need press releases?)

This press release appears to reflect two competing reports.  The Majority Report from the Fiduciary Counsel (Kutak Rock – who, according to meeting minutes, has been PSPRS’ counsel for 20+ years – can you say gravy train) and the Minority Report from the internal Investment Counsel (the guy who resigned along with several others, according to the Republic).

If this is simply two differing legal opinions, why is one called the Majority Report and the other the Minority Report?  To Pensioners First it appears as if the outcome was biased from the very beginning!

Why does PSPRS keep hiding behind its experts/ real estate experts?  Every time the Board and management gets themselves into trouble, it parades these people about to prove they did nothing wrong.  Well there are a lot of W.R.O.N.G.S. at PSPRS.

Regarding the Auditor General’s review, is it just us or does PSPRS go out of its way to state over-and-over how incorrect those former employees were.  We can’t speak for the taxpayers, but when we read the Auditor General’s report we saw the AG state several times that PSPRS’ accounting decisions were inconsistent with standards and inconsistent with GASB (go look, the AG says it several times).

Pensioners First thinks the Arizona Auditor General spanked PSPRS pretty hard with its findings.  Giddy up PSPRS!

Pensioners and taxpayers – you really need to be paying attention to this stuff.



Today, February 26, 2014, the PSPRS Board of Trustees voted to waive the attorney-client privilege protecting from disclosure certain legal advice provided by its lawyers to the Board; this advice concerned whether certain real property managed by DTC was properly valued as of December 31, 2011.

The legal advice being released was prepared by the System’s Fiduciary Counsel and Investment Counsel. The advice from these lawyers conflicted, and the competing opinions were presented to the System’s Administrator, who chose to adopt the advice provided by the System’s Fiduciary Counsel over the advice provided by the System’s Investment Counsel. The legal advice was then presented to the Board of Trustees, with the advice provided by Fiduciary Counsel characterized as the Majority Report, and the advice provided by Investment Counsel characterized as the Minority Report. Fiduciary Counsel also provided the Board with a Rebuttal to points raised in the Minority Report. At its meeting on May 22, 2013, the Board of Trustees elected to adopt the recommendations contained in the Majority Report.

The Reports concerned whether the PSPRS had correctly reported the 2012 values of real property portfolios managed by the Desert Troon Companies (“DTC”). DTC had valued the portfolios as worth ($303,562,000) (the “DTC Valuation”), and PSPRS had reported this value in its 2012 financial statements. However, Ernst & Young, LLC (“EY”), an independent accounting firm retained by the PSPRS to confirm the accuracy of the DTC Valuation, opined that the value of the DTC managed portfolio ranged somewhere between $213,661,000 (the “EY Valuation”) and $303,562,000 (the DTC Valuation), depending upon what discount factor was applied to particular assets.

The Majority Report concluded that PSPRS had properly reported the DTC Valuation in the System’s 2012 financial statements. The Minority Report disagreed, arguing that the PSPRS financial statements ought to be written down $90 million to the EY Valuation figure of $213,661,000.

Among other things, the Majority Report concluded that the PSPRS had properly reported the DTC Valuation because:

• The PSPRS expert real estate consultant, ORG Portfolio Management, had specifically concluded that it was appropriate for PSPRS to report the DTC Valuation, and concluded further that the discount rates used to calculate the DTC Valuation were reasonable and consistent with market practices.

• Reporting the EY Valuation would impair the PSPRS’s interests since published reports of lower valuations for the portfolio might invite lower offers for same;

• EY had confirmed that the DTC Valuation was supported by market data and within the expected range of values supported by market data; and

• The PSPRS’s independent Auditor (Heinfeld-Meech) had determined that the methodology used to calculate the DTC Valuation was widely used in the industry and consistent with the requirements of GASB, for financial reporting.

The Majority Opinion also concluded that:

• Unless asset values are based on assumptions that are markedly unreasonable (which PSPRS’ experts had determined was not the case), a limited partner (PSPRS) should defer to the asset values assigned by the General Partner (DTC) since that is standard industry practice, and since DTC has superior market knowledge of the properties it manages.

• PSPRS should not usurp the role of the GP by dictating which property values should be assigned so as to avoid “piercing the corporate veil” and exposing PSPRS to personal liability for portfolio debt or other obligations.

• PSPRS should not report property values lower than those assigned by DTC (as long as the DTC values are reasonable) since that could cause potential buyers to offer lower purchase prices, which could, in turn, undermine DTC’s ability to execute its business plan and impair PSPRS’ ability to preserve and protect its equity in the properties.

The Minority Opinion concluded that:

• PSPRS should use the higher discount rates recommended by EY because those rates produce more “conservative” values and in turn, are more reflective of current market values.

• PSPRS should disregard the recommendations of ORG, its independent real estate consultant, and instead, follow the recommendations of its Investment Counsel, despite the fact counsel acknowledged he is not a “valuation expert or an accountant.”

Despite the Board’s effort to bring to a conclusion the controversy with respect to the DTC property valuations and the reporting of those valuations in the FY’12 financial statements, the controversy continued. In reaction, the Board invited the Arizona Auditor General (AG) to review DTC’s valuation methodologies. The AG agreed to the Board’s request and conducted an exhaustive review.

The AG’s November report concluded that:

• It was entirely appropriate for the PSPRS to report that part of the DTC Valuation pertaining to property jointly owned by the System and DTC. In contrast, the AG concluded that properties wholly-owned by the PSPRS had to be valued using a comparable sales methodology, and as to those properties, the EY Valuation assigned to such properties was a more appropriate valuation than the DTC Valuation assigned to such properties.

• As a result of the AG’s Report, the PSPRS employed E&Y to apply the AG’s recommended methodologies to calculate appropriate values for properties wholly-owned by the PSPRS (these properties are held in a single portfolio managed by DTC called “DTR1C”). E&Y concluded that for FY’12, the DTR1C property values were overstated by $24.7 million, but for FY’12 the portfolio’s property values would be understated by $4.4 million.

• The upshot of the AG’s recommendation was as follows: instead of an overvaluation of $172 million for fiscal years 2012 and 2013, as urged by certain former PSPRS staff, the actual overvaluation was $20.7 million – a result that was due to the application of a new methodology for the DTR1C portfolio alone, and a methodology that no one, other than the AG, had ever recommended.

• PSPRS corrected the FY’12 DTR1C property values in its FY’13 financial statements even though the PSPRS Auditor, Heinfeld-Meech, considered the correction to be immaterial. Had PSPRS relied on its former Investment Counsel’s recommendations, the DTC properties would have been undervalued by $151.6 million over the period FY’12-FY’13, and that would have resulted in higher contribution requirements for the PSPRS contributing employers and their taxpayers.


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