Taxpayer Trick Or Treat Redux

One year ago –

The Appraisal Institute

Professionals Providing Real Estate Solutions

October 2013 – – Residential Update

Arizona Investments Allegedly Ignored Market-value Appraisals

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].

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 [2013] that the hypothetical values of the properties were listed based on what they would sell for after the real estate recovery.

Desert Troon manages $344.3 million in real estate assets for the Arizona fund, which accounts for about a third of the fund’s real estate portfolio and 4.5 percent of total assets, Pensions & Investments reported. The portfolio holds an assortment of housing developments, commercial buildings, strip malls and vacant land, mostly all are in the Phoenix area, which saw a deep drop in prices during the financial crisis.

Since the pension fund came into the spotlight, two lead portfolio managers and the fund’s investment counsel have resigned in protest, and the state auditor general is investigating.

An analysis by Pensions & Investments showed that the difference in valuation between Ernst & Young and Desert Troon allowed the Arizona retirement fund to claim a -0.79 percent return instead of a -2.15 percent return for the fiscal year ending June 30, 2012. The valuation difference resulted in an 11.48 percent return for fiscal year 2013, rather than 10.35 percent had Ernst & Young’s valuation been used.

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.

Doug Cole, a spokesman for PSPRS, told Pensions & Investments that the fund will make it clear in its upcoming annual fiscal report that manager assessments of fair value are synonymous with investment methodologies.


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