FBI Investigation – Arizona PSPRS’ Press Release Fact Check



http://www.psprs.com/Temporary%20Announcements/PSPRS%20Statement%20on%20January%202014%20AZ%20Republic%20Story.pdf

http://www.psprs.com/Temporary%20Announcements/Auditor%20General’s%20Letter%20Final%20Version%2011-13-2013.pdf

www.psprswrongs.com

PRESS RELEASE FACT CHECK – Arizona PSPRS’ Response to the FBI’s Inquiry

Pensioners First – a grassroots coalition of pension constituents, and labor and union representatives – have created the news website http://www.psprsWRONGS.wordpress.com, to chronicle the many concerns associated with the Arizona Public Safety Personnel Retirement System (PSPRS).

The following is PSPRS’ press release to the public, posted on its website in response to an Arizona Republic article published on January 22, 2014, disclosing that an FBI and U.S. Attorney’s office inquiry into PSPRS’ practices had begun.  Based on many articles and news videos published in 2013, this is most likely an investigation of real estate appraisal problems associated with the Desert Troon Companies, a Scottsdale-based real estate manager.

It is rather apparent that the public safety pension plan’s management and Board of Trustees find it acceptable to liberally omit inconvenient facts from their public statements.

What follows is PSPRS’ letter to the public (and to the Arizona politicians the Trustees need to help save their bacon), with rebuttal provided by PSPRS’ own previous statements and quotes from news articles (note the contradictions)-

Wednesday, 22 January 2014

PSPRS Statement to Members

You may be aware that recent media reports have once again brought to question PSPRS’s investment and valuation practices. We want to assure you that our fund management and asset valuation practices are sound as was recently confirmed by the Arizona Auditor General’s Office.

ü  Pensioners First – Regarding the PSPRS asset valuation practices, the Arizona Auditor General recommended that real estate assets be written down by $24.7 million (PSPRS’ Press Release dated November 21, 2013).

ü  Auditor General’s Letter to PSPRS on November 13, 2013 (AG) – “…we noted that the discount rate used to value the properties may not be consistent with accounting standards.

ü  AG – “In the future, the System should ensure that the valuations reported in its financial statements for properties with established cash flows use discount rates that reflect the assumptions of market participants.”

ü  AG – “DTC placed emphasis on unobservable inputs, which is not consistent with FASB accounting standards.”

ü  AG – “In addition, by considering future business plans for the properties, Desert Troon Companies’ valuations relied on assumptions that were not necessarily consistent with the assumptions that market participants would use to value the properties.”

ü  AG – “Although these properties will not be sold until some future date, Financial Accounting Standards Board standards are clear that the intent to hold an asset for a period of time is not relevant when determining fair value.”

ü  AG – “If the valuations reported were significantly impacted, the System should consider restating the values reported in the 2012 financial statements.”

ü  Pensioners First – The Auditor General did not confirm the soundness of PSPRS’ real estate valuations.  An error was made, PSPRS was wrong, but the AG didn’t specifically tell PSPRS how to correct its accounting.  PSPRS chose how it corrected its books and, since PSPRS has little oversight from the legislature or ADOA, it may still not be reporting the valuations correctly.

PSPRS – While it is unfortunate that these false accusations continue to gain media attention, Arizona’s Public Safety Personnel Retirement System (PSPRS or “the System”) stands by its investment practices and welcomes a full review by federal officials.

ü  Pensioners First – A Federal investigation – welcomed.  Anyone else’s concern, including the legislature’s – not welcomed?

ü  Arizona Republic, September 30, 2013 – “Jared Smout, the trust’s deputy administrator, said all citizens are entitled to ask for an investigation and ‘PSPRS will cooperate fully in any inquiry that might ensue.’”

ü  Arizona Republic, September 30, 2013 –“Smout, in an e-mail to The Republic, said the trust has been forced to waste time and taxpayer money to ‘defend these spurious claims made by previous staff whose only agenda is personal.’ He said they were ‘using this valuation issue as a vehicle to mask’ their agenda.”

ü  Pensioners First – Per Smout, “All citizens are entitled to ask for an investigation.” Except those with spurious claims?  Who decides which claims, accusations, or concerns are false?  Or maybe even legitimate?

ü  Pensioners First – Why would PSPRS welcome a full review by federal officials, but “file a motion to quash the grand-jury subpoena” (per the Arizona Republic, January 22, 2014), the purpose of which was to start that full review by federal officials?

ü  Pensioners First – Apparently the Arizona Auditor General was also in on that spurious valuation agenda.

PSPRS – We are confident any such [Federal] review will result in the same findings reported by the Arizona Auditor General’s office in late 2013, which, after a very thorough investigation, reported no wrong doing by the Board of Trustees or management.

ü  Arizona Republic, January 22, 2014 – “However, the Auditor General’s Office did not interview Orlich as part of its investigation, according to his attorney.”

ü  Pensioners First – Yes, a very thorough AG investigation, indeed…

ü  Arizona Republic, November 21, 2013 – “The Public Safety Personnel Retirement System will restate its financial books for 2012, following advice from the Auditor General’s Office on a controversy regarding the reported value of real-estate assets.”

ü  Pensioners First – Regarding the PSPRS asset valuation practices, the Arizona Auditor General recommended that real estate assets be written down by $24.7 million (PSPRS’ Press Release dated November 21, 2013).

ü  Arizona Republic, November 21, 2013 – “Administrator Jim Hacking said the system would correct the error…”

ü  Pensioners First – Errors… wrongdoing… you say tomato, I say tomahto…

ü  Pensioners First – Yes, let’s see if the Feds determine there are issues, just like the Auditor General determined there were items “not consistent with standards” (Auditor General’s Letter to PSPRS on November 13, 2013).

PSPRS – To recap, the Auditor General’s review of the System was a direct result of a request made by PSPRS to rebut accusations made by former employees. The Auditor General’s office conducted a full examination of our real estate valuation methods. After a thorough audit the Auditor General’s report acknowledged that, contrary to media reports at the time, the Board of Trustees properly valued assets and effectively managed the funds and requested only minor changes to valuations for the future.

ü  Pensioners First – Accusations (according to this letter from PSPRS)… legitimate employee concerns (according to the Republic)… what’s the diff?

ü  Arizona Republic, January 22, 2014 – “However, the Auditor General’s Office did not interview Orlich as part of its investigation, according to his attorney.”

ü  Pensioners First – Yes, a full AG examination, indeed… (note the sarcasm).

ü  Pensioners First – Regarding the PSPRS asset valuation practices, the Arizona Auditor General recommended that real estate assets be written down by $24.7 million (PSPRS’ Press Release dated November 21, 2013).

ü  Pensioners First – $24.7 million is a minor change?

ü  Pensioners First – We didn’t know the Board of Trustees was qualified to “properly value assets”?  We thought appraisers, probably Arizona-licensed appraisers, were qualified to “properly value assets.”  So assuming the members of the Board of Trustees are not licensed appraisers, they must be relying on external professionals who are licensed experienced professional appraisers?

ü  Pensions and Investments, September 11, 2013 – “In a July interview, James Hacking, the pension fund’s administrator, said he believed Desert Troon executives were in the best position to value the assets because they were dealing with the properties on a daily basis.”

ü  Pensions and Investments, September 11, 2013 – “An appraiser hired by the pension fund, Ernst & Young, using market value, had calculated the portfolio was worth $89.9 million less than Desert Troon had calculated in the fiscal year ended June 30, 2012, and $82.2 million less for the fiscal year ended June 30, 2013.”

ü  Pensioners First – So the national appraisal firm of Ernst & Young thought the June 30, 2012, valuation was worth $89.9 million less than Desert Troon had determined?

ü  Pensions and Investments, September 11, 2013 – “Mr. Hacking has asked the state auditor general to review the pension fund’s decision to allow Desert Troon to use the valuation. Mr. Hacking, pension fund managers, consultants and lawyers, contend the valuation approach was accurate.”

ü  Pensioners First – So the Board of Trustees, Administrator Hacking, pension fund managers, consultants, and lawyers all contended the valuation approach was accurate?  And they chose not to accept Ernst & Young’s lower values because…why?  And yet the Auditor General determined that the Board of Trustees, Administrator Hacking, pension fund managers, consultants, and lawyers where not using an accurate valuation approach?  Well, they were only $24.7 million off the Auditor General’s “very thorough investigation,” which did not interview Anton Orlich, one of the employees who resigned (note the sarcasm).

ü  Pensions and Investments, September 11, 2013 – “Using the valuation calculated by Desert Troon allowed the Arizona pension fund to lessen its losses from a -2.15% return to a -0.79% return in the 2012 fiscal year ended June 30, 2012, a Pensions & Investments analysis shows.”

ü  Pensioners First – Oops.

PSPRS – Further, it is important to clarify that the managers of the PSPRS do NOT assign values to portfolio properties, as this is the responsibility of the portfolio general partner.

ü  Pensions and Investments, September 11, 2013 – “In a July interview, James Hacking, the pension fund’s administrator, said he believed Desert Troon executives were in the best position to value the assets because they were dealing with the properties on a daily basis.”

ü  Pensioners First – Yes, we know the Desert Troon executives are in the best position to value the assets because they were dealing with the properties on a daily basis.

ü  Pensioners First – Err… wait…maybe not…

ü  Arizona Republic, November 21, 2013 – “The Public Safety Personnel Retirement System will restate its financial books for 2012, following advice from the Auditor General’s Office on a controversy regarding the reported value of real-estate assets.”

ü  Pensioners First – Regarding the PSPRS asset valuation practices, the Arizona Auditor General recommended that real estate assets be written down by $24.7 million (PSPRS’ Press Release dated November 21, 2013).

ü  Pensions and Investments, September 11, 2013 – “Mr. Hacking has asked the state auditor general to review the pension fund’s decision to allow Desert Troon to use the valuation. Mr. Hacking, pension fund managers, consultants and lawyers, contend the valuation approach was accurate.”

ü  Pensioners First – The valuations were obviously not accurate, according to the Auditor General. 

ü  Pensioners First – So does the Board of Trustees value the assets or does the Desert Troon Companies?  Or is it the managers, consultants, and lawyers who all contended the valuation approach was accurate? Who makes the final decision?  Who is held responsible?  Hint – nobody so far.

ü  Pensioners First – Maybe instead of looking for who has been disciplined, we should look for who has been rewarded.  CIO Ryan Parham received a retention bonus last fall in the midst of this mess (according to the Arizona Republic).  Public records show that CIO Parham is the highest paid agency employee in the State of Arizona, out of 38,000 state agency employees, and makes $254,000 a year, plus performance bonuses, plus retention bonuses.  Administrator Hacking is the third highest paid state agency employee, out of 38,000 state agency employees, he makes $234,000 a year, and had his contract unanimously renewed and extended by the Board of Trustees (according to public records).  CIO Parham also had his contract renewed and extended in January 2014 (according to public records).

ü  Pensioners First – Hmmmmm?  Keep your friends close any anyone who could punch holes in PSPRS press releases closer?

PSPRS – The values of the properties managed by Desert Troon Companies (DTC), one of PSPRS’ general partners, are determined by DTC and are then reviewed by the System’s independent consultants at Ernst & Young (E&Y) and at ORG Portfolio Management.

ü  Pensioners First – We assume that both Ernst & Young and ORG Portfolio Management are both licensed appraisers in Arizona and; therefore, qualified to opine on and determine the most correct real estate valuation numbers for the Desert Troon Companies?  Because it is a violation of Arizona law to knowing use unlicensed valuation professionals.

ü  Auditor General’s Letter to PSPRS on November 13, 2013 – “In the future, the System should ensure that the valuations reported in its financial statements…reflect the assumptions of market participants.”

ü  Auditor General’s Letter to PSPRS on November 13, 2013 – “If the valuations reported were significantly impacted, the System should consider restating the values reported in the 2012 financial statements.”

ü  Pensioners First – It sounds to us like the pension system is responsible for its financial reporting.  One would assume that means the Board of Trustees and the Administrator are responsible for financial reporting and any errors?.  Not the managers, not the consultants, and not the lawyers, but the Board and the Administrator.  This must be true, because according to the Arizona Republic’s article of November 21, 2013, “Administrator Jim Hacking said the system would correct the error…”

PSPRS – These reviews ensure that the methodology used by the general partner complies with industry standards and that the results produced are reasonable.

ü  Arizona Republic, August 2, 2013 – “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.”

ü  Pensioners First – Regarding the PSPRS asset valuation practices, the Arizona Auditor General recommended that real estate assets be written down by $24.7 million (PSPRS’ Press Release dated November 21, 2013).

ü  Auditor General’s Letter to PSPRS on November 13, 2013 (AG) – “…we noted that the discount rate used to value the properties may not be consistent with accounting standards.”

ü  Pensioners First – The AG’s review so thorough they didn’t take the time to determine if PSPRS was or was not following standards?  Can you say additional oversight needed?

ü  AG – “In the future, the System should ensure that the valuations reported in its financial statements for properties with established cash flows use discount rates that reflect the assumptions of market participants.”

ü  AG – “DTC placed emphasis on unobservable inputs, which is not consistent with FASB accounting standards.”

ü  AG – “In addition, by considering future business plans for the properties, Desert Troon Companies’ valuations relied on assumptions that were not necessarily consistent with the assumptions that market participants would use to value the properties.”

ü  AG – “Although these properties will not be sold until some future date, Financial Accounting Standards Board standards are clear that the intent to hold an asset for a period of time is not relevant when determining fair value.”

ü  AG – “If the valuations reported were significantly impacted, the System should consider restating the values reported in the 2012 financial statements.”

ü  Pensioners First – The AG is either incapable or unwilling to tell PSPRS publicly what the accounting standards require or, if there is a range of options, which option is best.  This is state politics at its worst.

ü  Pensioners First – Regarding “industry standards,” the Auditor General stated PSPRS’ and Desert Troon Companies’ methods “may not be consistent with accounting standards”; “is not consistent with FASB accounting standards”; and “were not necessarily consistent with the assumptions that market participants would use to value the properties.”

ü  Pensioners First – Based on the AG’s commentary consisting of “not consistent,” “not consistent,” and “not necessarily consistent,” and the fact that PSPRS subsequently took a $24.7 million write down, do you think Desert Troon complied with industry standards and provided a reasonable appraisal?

 

 PSPRS – In addition, asset values disclosed in the System’s financial reports are audited by the System’s independent, external auditors at Heinfeld Meech & Co. This methodology was part of the Auditor General’s review and was validated in the report.

ü  Pensions and Investments, September 11, 2013 – “Mr. Hacking has asked the state auditor general to review the pension fund’s decision to allow Desert Troon to use the valuation.”

ü  Pensioners First – Heinfield Meech’s audit(s), according to the Auditor General, missed the following:

o   Auditor General’s Letter to PSPRS on November 13, 2013 (AG) – “…we noted that the discount rate used to value the properties may not be consistent with accounting standards.”

o   AG – “In the future, the System should ensure that the valuations reported in its financial statements for properties with established cash flows use discount rates that reflect the assumptions of market participants.”

o   AG – “DTC placed emphasis on unobservable inputs, which is not consistent with FASB accounting standards.”

o   AG – “In addition, by considering future business plans for the properties, Desert Troon Companies’ valuations relied on assumptions that were not necessarily consistent with the assumptions that market participants would use to value the properties.”

o   AG – “although these properties will not be sold until some future date, Financial Accounting Standards Board standards are clear that the intent to hold an asset for a period of time is not relevant when determining fair value.”

o   AG – “If the valuations reported were significantly impacted, the System should consider restating the values reported in the 2012 financial statements.”

ü  Pensioners First wonders if Heinfeld Meech & Co. is asleep at the wheel, unqualified, or simply bending to pressure from PSPRS to deliver an audit report acceptable to PSPRS?  Maybe ADOA should begin paying for and selecting the auditor for Arizona state pension funds.  It least the auditor would not have conflicting loyalties.

PSPRS – Finally, contrary to recent media reports, our investment staff did not receive any incentive payments in 2012 as a result of the System’s investment performance, which would have been tied to the December 31, 2011, real estate valuations.

ü  Pensioners First –

o   According the Arizona Republic articles, no bonuses were granted for the government’s fiscal year of 2012-2013, because the Board voted to deny any performance bonuses that may have been earned.

o   According to Deputy Administrator Jared Smout, “Investment staff did not receive any incentive payments in 2012.”  Presumably Smout’s statement was in regards to fiscal year 2011-2012 and presumably means that investment performance did not achieve the minimum threshold for bonuses to be paid (aka bonuses were not paid because they were not earned).

o   Ok, so how about inconsistent real estate appraisal effects on bonuses paid in fiscal years 2010-2011, or 2009-2010, or 2008-2009, etc., etc., etc.?

o   When did the valuation problems begin?  How many years has this compounded? 

o   How does this affect the beneficiaries?  Hint – not good.  Any write downs or losses eventually require that pensioners, employers, and/ or taxpayers must contribute millions of additional dollars to prop up pension funding levels.

o   Why are the many issues not being clearly stated by PSPRS?

 

PSPRS – A full copy of the Auditor General Letter, Auditor General Official Response and Auditor General Letter News Release is available online at http://www.psprs.com, as well as contact information for our office should you have further questions.

ü  Pensioners First –

o   Of course what you will not find at www.psprs.com is the Arizona Republic’s research showing that:

§  Arizona Republic, January 22, 2014 – “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. The company, which reported at least $103 million in losses on trust investments in fiscal 2013, did not return a call seeking comment.”

§  Arizona Republic, August 2, 2013 – “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.”

§  Arizona Republic, September 30, 2013 – “The trust’s collective losses from properties managed by Desert Troon from fiscal 2009 to 2012 were at least $284 million, according to reports compiled by The Republic.”

§  Pensioners First – In case you are bad at math, that’s at least $387 million in losses from Desert Troon from 2009-2013 (according The Arizona Republic).

 

§  Arizona Republic, September 24, 2013 – “Taxpayers, through various governments that employ pension-system members, have been required the past few years to cover financial losses. Communities across the state also have not been filling vacant police and fire department positions recently because their payments to the public-safety pension trust escalated during the past few years.”

·         “Taxpayers contribute more when the pension plan’s funding ratio is low. The ratio measures the amount of money on hand against the amount needed to pay off all existing and future pension liabilities.”

·         “The funding ratios for the three plans sat between 58 and 68 percent in fiscal 2012, the most recent year for which figures were available.”

§  Pensioner’s First –

·         So monkeying with the real estate appraisals affects the funding status of 52,000 pensioners?

·         Does this mean the funded ratios could be even worse?  Requiring more taxpayer bailouts?

·         So the taxpayers will eventually be required to cover financial losses, such as the $387 million in losses incurred by Desert Troon?

 

o   You will not find Pension and Investment’s research on PSPRS’ website showing that:

§  Pensions and Investments, September 11, 2013 – “An appraiser hired by the pension fund, Ernst & Young, using market value, had calculated the portfolio was worth $89.9 million less than Desert Troon had calculated in the fiscal year ended June 30, 2012, and $82.2 million less for the fiscal year ended June 30, 2013.”

§  “Using the valuation calculated by Desert Troon allowed the Arizona pension fund to lessen its losses from a -2.15% return to a -0.79% return in the 2012 fiscal year ended June 30, 2012, a Pensions & Investments analysis shows.”

 

o   And you will not find that PSPRS uses multiple lobbyists (per Webster’s dictionary, a lobbyist is a person who solicits members of a legislature for the purpose of influencing legislation), including Doug Cole of the lobbying firm HighGround, to “peddle its influence” (also from Webster’s).  Why does PSPRS need to “peddle its influence”? 

 

 

Don’t change the benefits! Change the decision makers! 52,000 pensioners and 6.5 million taxpayers are watching!

What is the Governor watching?

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One response to “FBI Investigation – Arizona PSPRS’ Press Release Fact Check”

  1. Private says :

    There is a special Board meeting Friday March 7 that has just been announced. Reason? I looks like PSPRS is hiring a criminal lawyer. This is an acknowledgement by PSPRS’ law firm Kutak Rock that its partner Marc Lieberman is under investigation. Also, the Board is trying to reverse its decision from last week to release the Valuation Report, because Chairman Brian Tobin now fears the report could be used as evidence against him, James Hacking, and Ryan Parham. Will the Board vote for cover-up or transparency? Stay tuned.

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