Pension Dumb and Dumber

 

Those who cannot admit making stupid mistakes are destined to repeat them over and over.

-Bill Purdin

Dallas Police And Fire Pension   vs.

Arizona Public Safety Pension

Two Stories, One Dumb Storyline

Real estate losses near $200M for Dallas police, fire pension fund

Published: 18 September 2014

The retirement fund for Dallas’ police officers and firefighters lost $196 million on risky real estate investments in recent years, according to figures given to the fund’s board Thursday.

vs. Arizona Public Safety Personnel Retirement System-

As published in the Arizona Republic on 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.”

As published in the Arizona Republic on 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.”

 

It is the fullest accounting yet of the $3.3 billion fund’s disastrous plunge into speculative development ventures that began in 2005. The failed investments include a luxury resort and vineyard in Napa County, Calif., ultra-luxury homes in Hawaii, and large tracts of land in Arizona and Idaho.

The ventures prompted the fund’s staffers and board members to travel extensively over the years, trips they said were necessary to scope out and protect the investments. They traveled to the Napa area more than any other out-of-state destination — making 45 trips there from 2009 to 2012.

The losses were reported during a presentation by fund staffers and a fund consultant, William Criswell.

vs. Arizona Public Safety Personnel Retirement System-

LINK: Excerpts from the PSPRS.info blog posted September 23, 2014

According to the blog PSPRS.info, as verified by PSPRS consultant New England Pension Consultants, the Desert Troon Companies have lost the Arizona Public Safety Personnel Retirement System’s investment for AT LEAST the past five years based on the one-year, three-year, and five-year performance measurements reported by NEPC to the PSPRS Board of Trustees.

LINK (see page 50): PSPRS 2014 Investment Summary by New England Pension Consultants

Desert Troon’s Verified Performance for PSPRS:

• -16.4% One-year performance
• -3.1% Three-year performance
• -4.7% Five –year performance

 

The presentation did not specify the losses, but The Dallas Morning News tallied them from numbers that were provided and confirmed them afterward with fund officials. Board members, looking grim, commented little but quizzed the presenters on various details.

Of the losses, $96 million was recognized on the fund’s 2013 books, which were completed late this summer.

vs. Arizona Public Safety Personnel Retirement System-

LINK: Excerpts from the PSPRS.info blog posted September 23, 2014

  •  The Desert Troon commitment had a return for the past fiscal year of -16.4% [FY2013-2014].
  • If we do the math, the Desert Troon investment had an annual loss of $58.43 million [FY2013-2014].

 

 

These losses played a major role in bringing down the fund’s 2013 investment return to 4.4 percent. Fund officials earlier had expected a return of 11 percent. Similar public funds had a return of 16 percent for the year, according to the Wilshire Trust Universe Comparison Service.

vs. Arizona Public Safety Personnel Retirement System-

Something happened to affect PSPRS’ investment performance after the end of its fiscal year, between August 4 and August 27.

PSPRS told the Arizona Republic on August 4, 2014, that it was expecting a 15% return on its investments (before expenses).

AZ Republic August 4 – “Arizona’s other statewide retirement program, the Public Safety Personnel Retirement System, had a projected gross investment return of roughly 15 percent, but the system cannot provide a net figure until this fall. That system runs three programs under PSPRS, for police officers and firefighters, elected officials and correctional officers.”

On August 27th, Chief Investment Officer Ryan Parham and his staff reported to the Board of Trustees a fiscal year investment performance of 13.82% (before expenses).

What happened to the missing 1.2%?

 

The 2013 write-downs came from new appraisals of the various properties. The fund undertook these appraisals as it revamped its accounting procedures. The changes came after The News reported that the fund valued many of its real estate ventures by what it had invested, rather than by appraisals or other methods. This was contrary to widely accepted standards.

vs. Arizona Public Safety Personnel Retirement System-

As published by the Appraisal Institute in October 2013

“The Arizona Public Safety Personnel Retirement System allegedly reported increased real estate investment returns by ignoring the market-value appraisals it had commissioned and using instead the higher valuations provided by the firm managing the pension fund’s $7.2 billion portfolio, Pensions & Investments reported Sept. 2.

Pension fund officials allegedly disregarded appraisals from Ernst & Young and let fund manager Desert Troon provide hypothetical values for some two dozen properties that Desert Troon and the pension fund held through a joint venture.

The Arizona PSPRS financial statements showed an $80 million difference between the market and hypothetical values of the properties, Pensions & Investments reported. Fund Administrator James Hacking noted Aug. 8 that the hypothetical values of the properties were listed based on what they would sell for after the real estate recovery.”

 

Incomplete audit

City officials launched an audit of the fund last year but were delayed by its refusal to turn over documents.

 vs. Arizona Public Safety Personnel Retirement System-

Arizona Republic– March 8, 2014-

“The pension system for Arizona police and firefighters has received a federal grand-jury subpoena to turn over “a long list” of documents as part of a criminal investigation into whether pension-trust managers inflated certain real-estate investment values to trigger staff bonuses.

The trust board of the Public Safety Personnel Retirement System voted at a special meeting Friday to hire a criminal defense attorney to handle matters related to the grand-jury investigation.

PSPRS officials refused to release a copy of the subpoena to The Arizona Republic despite an assistant state attorney general’s opinion that it is a public document that should be readily released.”

They reached an agreement on how to proceed with the audit, but a portion of it related to real estate and private equity valuations still is not complete.

vs. Arizona Public Safety Personnel Retirement System-

PENSION and INVESTMENTS – December 6, 2013-

 Arizona Public Safety Personnel Retirement System, Phoenix, needs to change its method of valuing its portfolio with real estate manager Desert Troon Cos. to reflect market assumptions, a report by the Arizona auditor general concludes.

 

The poor 2013 results prompted the board this summer to oust longtime fund administrator Richard Tettamant.

vs. Arizona Public Safety Personnel Retirement System-

Summary:  PSPRS Administrator James Hacking was fired.

  • “Investment analysts and the in-house counsel quit in protest last year amid allegations that the trust used inflated real-estate values”
  • “The [PSPRS] board suspended bonuses last September [2013] after The Republic disclosed in August that PSPRS gave its highest-paid staff members bonuses and guaranteed raises the prior five years even though the trust posted financial losses in 2008, 2009 and 2012
  • “Gov. Brewer doesn’t tolerate state officials turning a blind eye to their statutory responsibility…”
  • PSPRS Administrator James Hacking was fired.

Republic July 25, 2014 –

“[James] Hacking, the system’s administrator since August 2005, was placed on administrative leave July 16 after The Republic uncovered evidence that he had given secret raises to his investment staff without state Department of Administration approval, as required by law. [Board Chairman] Tobin and Hacking have acknowledged the raises of up to 27 percent violated state law.”

“Hacking’s departure comes after a year in which four high-level staff members quit amid allegations that the trust used inflated real-estate values in annual reports to improve its financial performance and trigger bonuses. Hacking denies the allegations.”

“Hacking in November [2013] sought raises for five employees. He told the board the hikes were to replace a controversial bonus program the board had suspended. And, Hacking noted, his staff was doing more work with the exodus of the other employees.”

Republic – July 9, 2014-

Hacking sought the raises last year to replace a controversial bonus program and to compensate shrinking investment staff for additional work they took on following the resignations of four employees.

Three investment analysts and the in-house counsel quit in protest last year amid allegations that the trust used inflated real-estate values to bolster its financial reports. Hacking has denied the allegations and has blamed the criminal probe on disgruntled employees.

The board suspended bonuses last September after The Republic disclosed in August that PSPRS gave its highest-paid staff members bonuses and guaranteed raises the prior five years even though the trust posted financial losses in 2008, 2009 and 2012. The fund required additional tax dollars to stabilize.

The $196 million in losses came from three real estate plays:

vs. Arizona Public Safety Personnel Retirement System-

As published in the Arizona Republic on 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.”

As published in the Arizona Republic on 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.”

 

A set of ventures that included tracts of land in Arizona and Idaho ($90 million loss).

vs. Arizona Public Safety Personnel Retirement System-

 

LINK: PSPRS.info Blog

The effect of Desert Troon on PSPRS’ investment return – September 23, 2014 (excerpts from the blog post)

  • “…if we go to the Desert Troon website, we can see that their properties are heavily concentrated in Arizona…”
  • “…Desert Troon has a grossly disproportionate share of PSPRS’ real estate portfolio…”
  • “In summary, there appears to be an over-weighting of the real estate portfolio in Desert Troon while the portfolio itself has been consistently underperforming over the past five years.”

Luxury resort properties in the wine country of Napa County, Calif. ($46 million loss).

Ultra-luxury homes in Hawaii and elsewhere ($60 million loss).

Tettamant led the fund into these deals with little oversight from outside investment advisers. Instead, he and his staff handled many of them personally. He met developers, who introduced him to other developers.

 vs. Arizona Public Safety Personnel Retirement System-

Pensions and Investments article – June 23, 2014 – (excerpts)

“Overall, PSPRS has made capital commitments and/or investments of more than $550 million with Desert Troon during the 18-year relationship.

The assets managed by Desert Troon in both portfolios represented 55.08% of PSPRS’ overall real estate portfolio at the end of fiscal 2008. That dropped to 36.6% at the end of last year (FY2012-2013].”

 

It began with a pitch from a pair of Las Vegas real estate investors and their company, Land Baron. The two partners, Mike Chernine and Randy Black, filed for personal bankruptcy in 2011.

But back in 2005, they were riding high. During those years of rapidly rising real estate prices, buying properties to quickly resell them for a big profit — “flipping” them — had become an investing rage. Chernine and Black were going to pension funds with proposals involving tracts of land primed for development.

Chernine and Black partnered with the fund on several ventures in Arizona and Idaho. In one land deal, they bought cactus-studded land in Pima County, Ariz., outside Tucson, for many times its appraised value.

Soon, Chernine introduced Tettamant to Criswell, a former Dallasite who was developing properties in the Napa area.

Bubble bursts

In 2006, the pension board approved Criswell’s pitch for a Napa project. Tettamant soon sat on the project’s board alongside big names in the wine industry. They included Michael and Rob Mondavi, son and grandson of the Robert Mondavi Winery founder; Billy Getty, grandson of oil tycoon J. Paul Getty; and Laura Catena of the Bodega Catena Zapata winery in Argentina.

Also on the partnership’s board was a man named K.C. Knudson, who was developing ultra-luxury homes in Hawaii, on the ski slopes of Aspen and elsewhere. Soon after meeting Tettamant, Knudson flew to Dallas to pitch his company. The pension board approved an investment in the homes. Before long, Tettamant and other pension officials traveled to Hawaii.

Then the real estate bubble burst. In 2008, prices tumbled, credit became scarce and many of the pension fund’s partnerships sank into trouble. Rather than cutting its losses, the fund pumped in more money, taking over the partnerships and hoping the market would bounce back.

vs. Arizona Public Safety Personnel Retirement System-

As published by the Appraisal Institute in October 2013

The Arizona Public Safety Personnel Retirement System allegedly reported increased real estate investment returns by ignoring the market-value appraisals it had commissioned and using instead the higher valuations provided by the firm managing the pension fund’s $7.2 billion portfolio, Pensions & Investments reported Sept. 2 [2013].

The Arizona PSPRS financial statements showed an $80 million difference between the market and hypothetical values of the properties, Pensions & Investments reported. Fund Administrator James Hacking noted Aug. 8 [2013] that the hypothetical values of the properties were listed based on what they would sell for after the real estate recovery.

According to Pensions & Investments, real estate investment officials at other pension plans said it is highly unusual for a fund to hire an appraiser and then reject that appraiser’s recommendations.

The PSPRS board voted to use the hypothetical valuations of Desert Troon at a meeting in May 2013, and the fund had represented the hypothetical value on its books as market value.

 

But the recovery came haltingly. The fund, meanwhile, was slow to recognize the losses on its books. Tettamant clung to his view that the investments were “going to come back.”

For years the fund valued its Napa projects at close to $100 million, even while acknowledging that “no sale of the property was possible on any reasonable terms.” In the recent appraisal, the properties’ value was set at about $68 million.

One of the Hawaii homes sold this year for $12.8 million. The asking price earlier had been $22 million.

The pension fund has sunk more than $34 million into the doomed investment in Pima County, Ariz. This week, the fund closed on the sale of the property for $7.5 million.

Lucrative for some

While the retirement fund suffered losses, Tettamant and the developers kept making money.

vs. Arizona Public Safety Personnel Retirement System-

Pension and Investments – June 23, 2014 –

“The two top officials of the $7.8 billion Arizona Public Safety Personnel Retirement System, Phoenix, are the first and third highest-paid employees among 38,884 state workers.”

“Ryan Parham, chief investment officer, ranks first, with a base salary of $268,000 a year. James Hacking, administrator, is third, with a base salary of $234,000 a year [Hacking was subsequently fired].”

“Mr. Parham is scheduled to receive a $75,000 retention bonus on Sept. 19, following completion of his current employment term. That would bring his total compensation to $343,000. Mr. Parham received more than $514,646 in bonuses in the five years ended June 30, 2012, PSPRS documents show. PSPRS canceled bonus payments in 2013.”

The board awarded Tettamant $78,300 in incentive pay and a $25,000 bonus on top of his $270,000 salary in 2012, before board members became aware of the severity of the losses.

Pension officials have kept Knudson’s company on to oversee the ultra-luxury homes as it tries to unload them. The fund has paid him more than $300,000 a year plus percentages of rental income and sales. As part of his job managing the homes, Knudson has lived in them.

The fund has paid Criswell’s company a total of $3.6 million so far to consult on the Napa projects.

vs. Arizona Public Safety Personnel Retirement System-

JudicialWatch.org Blog– March 2014- (excerpts Judicial Watch)-

…Despite the losses, the PSPRS trust paid Desert Troon more than $12 million in fees…

…the Arizona PSPRS manages a $7.7 billion trust to pay for the retirement benefits of 53,000 of the state’s police officers, firefighters, elected officials, and correctional officers. On March 7, The Arizona Republic reported that the U.S. Attorney’s Office had begun investigating PSPRS after its in-house counsel and three high-level investment analysts quit in protest last year over concerns about the way real-estate values were being recorded.

According to the Republic article, the federal investigation focuses on whether PSPRS intentionally cooked the books on its real-estate values in order to pad the pockets of top staffers. In late April, after the story broke, PSPRS conceded that it has now reduced the value of its real estate investment portfolio by nearly $40 million, due to “accounting errors” – which included the double counting of some property values.

At the center of the PSPRS controversy is its real-estate portfolio managed by the Scottsdale-based Desert Troon Companies. According to the Arizona Republic, “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.”

The Republic further reported:

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 …

Despite the losses, the PSPRS trust paid Desert Troon more than $12 million in fees in 2012, according to a January 22 article in the Arizona Republic.

Two years ago, pension board Chairman George Tomasovic, a fire battalion chief, loudly defended the fund’s push into real estate and private equity investments. But lately, he and other longtime board members have been digesting the hard lessons.

vs. Arizona Public Safety Personnel Retirement System-

Arizona Republic – Opinions – Aug. 16, 2011

Published – “Deputy fire chief is blowing smoke”

Phoenix Deputy Fire Chief Brian Tobin’s blaming Wall Street abuses for public-employee pension woes is astonishing (“Wall Street fraud to blame for public-pension woes,” My Turn, Monday).

[Phoenix Deputy Fire Chief Brian Tobin] is chairman of the board of the Arizona Public Safety Personnel Retirement System. Trustees are the people who choose and enable the people who run Wall Street.

Public-employee pension funds are some of the most powerful organizations in the world; their decisions affect all investors, not just their current and future retirees.

Trustees are supposed to monitor and audit the people who do the investing.

It’s a widely known complaint, though, that boards that oversee big corporations and pension funds simply rubber-stamp the decisions of the managers they hire. When we have widespread fraud on a massive scale, it’s hard to say that there isn’t some basis for the complaint. By the way, I wouldn’t hire a CPA to fight a fire.

– James McManus, Phoenix

Now [pension board Chairman George Tomasovic, a fire battalion chief,]… stays mostly quiet at meetings as several City Council members, newcomers to the board, vocally push their colleagues toward more conservative investments.

Pensioners First – Maybe it is time for AZ PSPRS’ Board of Trustees  to learn from the Dallas Police and Fire Pension’s chairman, and “stay mostly quiet.”

 

 

MORE: Complete coverage of public pensions

MORE:  Dust-up in the desert [aka Trustees ignore accounting rules]

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