Elliot Blair Smith of Bloomberg reports, Runaway Public Pensions Betrayed by Fraud, Abuse:
The deal came together behind the doors of a Louisiana psychiatric ward. John Skannal, 74, signed a document in October 2003 authorizing the sale of land handed down through eight generations of his family.
The buyer was a statewide pension plan for municipal law officers. The fund assembled golf and real estate holdings that lost 84 cents on each dollar the police spent on them over 10 years. The losses are emblematic of a decade in which the $1.2 billion program went from fully funded to $836.3 million short of meeting future retirement obligations.
The nine trustees of the Municipal Police Employees’ Retirement System made a series of decisions that taxpayers and 10,748 active and retired cops are now paying for. The board embraced bad investments, ignored warnings of weak financial controls that enabled its attorney to steal $1.2 million and set up conflicts of interest among its advisers, according to a review of thousands of pages of documents obtained under the state public records act and more than 50 interviews.
“It was like a gigantic playhouse,” says Nick Congemi, 68, chief of the Greater New Orleans Expressway Police in Metairie, who for years criticized the system’s leadership and investments. “These people have taken the futures away of good, decent law-enforcement officers who thought they could depend on this for the rest of their lives.”
$479.6 Billion Deficit
The irregularities in the Louisiana police plan show how trustees and employees of U.S. public pensions, operating with little or no oversight or transparency, can cost taxpayers and threaten the retirement income of government workers. Assets held by state systems are $479.6 billion less than what is needed to fund estimated obligations, according to official financial reports compiled by Bloomberg.
“The failure to govern public pensions appropriately inevitably hurts those who can least afford it: retirees, workers and taxpayers,” says Eleanor Bloxham, chief executive officer of Value Alliance, a Westerville, Ohio, governance consulting firm. “Such lapses can produce even greater harm than traditional financial crimes prosecuted by law enforcement.”
In California, Democratic Governor Jerry Brown brought civil charges last year when he was attorney general against a former CEO and a former board member of the $233.5 billion California Public Employees Retirement System, the largest in the U.S. State and federal proceedings are continuing. In March, Calpers documented six years of unreported gifts by members of the board and employees, and improper awarding of investment contracts that paid excessive fees.
Cuomo Probe
Before becoming New York’s Democratic governor, Andrew Cuomo probed corruption at the state’s $140.6 billion pension fund when he was attorney general, leading to eight guilty pleas and the payment to the state of more than $170 million.
Alan G. Hevesi, the former Democratic state comptroller who was the program’s sole trustee, was sentenced today to a minimum of one year in state prison after admitting he approved pension- fund investments in exchange for almost $1 million in gifts.
“I publicly disgraced myself,” Hevesi told a Manhattan judge at his sentencing hearing. “I have only myself to blame.”
Randy P. Zinna, 53, the former attorney for the Louisiana police fund, pleaded guilty last year to mail fraud after state and federal investigators accused him of embezzling to pay sports-gambling debts.
Louisiana’s 13 statewide plans had unfunded liabilities for fiscal 2010 of $20 billion, with enough assets to cover 65 percent of estimated obligations, according to their latest financial statements.
Funding-Review Panel
Among 45 U.S. states reporting data for fiscal 2009, Louisiana ranked 41st based on proportion of future pensions covered by assets, according to data compiled by Bloomberg. The Legislature next month will consider recommendations by a funding-review panel to increase mandatory contributions and require governance changes.
The law-enforcement fund, known as MPERS, was the fourth- worst funded among statewide plans. The program’s assets were 2 percent lower last June 30 than a decade earlier. Kelly Gibson, a Lafayette police lieutenant who is the board chairman, declined to discuss previous decisions.
“The only comment I will make is that the current board is working to correct any problems that face MPERS,” Gibson said in an e-mail.
Over the U.S. Independence Day holiday in July 1999, three police-retirement board members spent four days at a golf resort on Monterey Bay in California at the pension fund’s expense. It was a “due diligence” investigation of a potential “real estate investment,” according to their expense reports.
Former Pawn Shop Owner
The trustees were led by Bossier City Police Captain Bill Fields, a Corvette-driving former pawn shop owner who chaired the pension’s golf-course committee, and its vice chairman, Willie Joe Greene, a retired captain from nearby Keithville. Fields, now 58 and retired, and Greene, 73, declined requests to comment for this story.
The third member of the West Coast trip was retired New Orleans police Sergeant Larry Reech, 62, who says the trio visited golf courses on a former military base in which the New Orleans Firefighters’ Pension and Relief Funds had invested.
“We were looking at how they were being run, what kind of draw they had -- what kind of clientele -- where they were coming from, the demographics,” Reech says.
As for the stewardship of the board, “oversight was lacking,” he says. “There were mistakes made.”
Cotton Plantation
The committee was in the hunt for golfing properties near the homes of Fields and Greene in northern Louisiana, pension records show. It was close to the peak of the U.S. golf boom.
At the time, Fields cited the success of golfing investments by the Alabama Retirement System, the records show. He zeroed in on the Olde Oaks Golf Club in Haughton, Louisiana. With fairways lined by oak and cypress trees, the course was built on rolling hills carved out of a former cotton plantation owned since 1846 by the family of John Skannal, the man who later sold the officers’ fund an adjacent piece of land.
The course was designed by the professional golfer Hal Sutton, a Shreveport celebrity known for having defeated golfing legends Jack Nicklaus and Tiger Woods. Even after a consultant’s report said that construction was incomplete and some cart paths were damaged, the police fund paid $6.8 million to buy the property in July 2000, $400,000 more than recommended by GVI Consulting of Santa Ana, California, according to the police system’s records.
Playing Olde Oaks
Fields and Greene frequently played at Olde Oaks, enjoying a 50 percent police discount and riding a reserved cart, according to Ben Chavarria, the course manager. Even as the business generated losses, the pension poured $2 million more into upgrades. In the years since, the retirement system has spent $15.3 million to own and manage a property with an appraised value of $3.2 million, pension records show.
“If we bought a golf course, you would think that it would be a moneymaking venture,” says Congemi of Metairie, whose department patrols the 24-mile (39-kilometer) causeway across Lake Pontchartrain.
The Olde Oaks investment was a departure from the conventional blend of stocks and bonds that defined the pension program’s strategy for most of its 37-year history, based on plan records. The system’s holdings came to include undeveloped real estate, foreign currencies, hedge funds and high-yield fixed-income instruments known as junk bonds.
Surplus in 2001
The system had a $14.1 million surplus in the fiscal year ended June 30, 2001. Until the following year, trustees authorized annual cost-of-living increases to retirees. The average yearly pension in the program is $23,183. Under the plan, officers contribute 7.5 percent of their pay and qualify for benefits about equal to their salary after 30 years.
As pension reserves slipped to a $195.2 million deficit in 2002, the trustees
revised their investment guidelines to allow greater risks in pursuit of increased returns, board minutes show. The new policies included exemptions for investments in raw land and below-investment-grade debt.
The retirement system also doubled the payback period for its unfunded liability to 30 years beginning in 2003 and raised the assumed rate of returns in 2006 to shrink the growing deficit. It was akin to refinancing a mortgage by extending the term of the loan and paying only interest without reducing the principal.
‘Poor Investment Choices’
In July 2004, three police chiefs, including William Landry of Gonzalez, sued the fund’s trustees in state court. The complaint sought a restraining order to halt “glaringly poor investment choices” that included golf courses, a $3 million headquarters building in Baton Rouge for the program’s staff of six and business trips by the board and consultants to Monterey, Las Vegas, San Diego and San Francisco.
“It was like see no evil, hear no evil, speak no evil,” says Landry, who has since retired. “It was cops ripping off cops. That, to me, was the biggest slap in the face.”
Less visible to members and state overseers, the board also eroded internal checks and balances by undercutting the independence of two professional advisers, according to the records and interviews.
With no public discussion of potential conflicts of interest, the trustees in August 2006 hired their independent actuary as chief investment officer. This gave him the dual responsibility of selecting the investments he had a duty to independently evaluate.
The actuary, Charles Hall, insisted on working at his Baton Rouge home and set his pay at $40,000, with the board’s consent. No other candidate was considered for the job, according to board minutes.
Hall’s Dual Role
With Hall as CIO until January 2007, the board bought $2.1 million in Lehman Brothers Holdings Inc. uncollateralized debt that has since lost 75 percent, as well as $201,916 in Goldman Sachs Group Inc. home-equity loans that have lost 49 percent, pension records show. Lehman entered bankruptcy proceedings in September 2008.
“To be completely independent, you cannot be the investment officer and serve as the actuary,” says John Sondergaard, retired actuary for the state’s fiscal watchdog, the Louisiana Legislative Auditor. After the agency informed the board it was concerned about Hall’s dual role, the trustees dropped the CIO position in January 2007 and retained him as actuary. Hall wasn’t accused of any wrongdoing.
“I think they were right. It was a conflict,” Hall says, adding that he was only trying to assist the board. He says he doesn’t recall the Lehman and Goldman investments.
‘Just Looks Bad’
In March 2006, trustees voted to buy hedge fund investments through Summit Strategies Group of St. Louis, which would collect commissions on the transactions. The board was also paying Summit $250,000 a year to independently screen money managers and provide advice on hiring them. The $70 million that the trustees agreed to pour into hedge funds would double Summit’s compensation. It took the board 19 months to address the double role it created.
“It’s not illegal; it just looks bad,” Bossier City Police Chief Mike Halphen, the board chairman at the time, told Dan Holmes, a Summit managing director, at a meeting in September 2007, according to a recording. The trustees began unwinding the investments.
Holmes, who consulted for the board and presented the hedge fund investment, said in a voicemail that the relationship didn’t constitute a conflict.
The use of independent consultants as money managers drew criticism in the internal investigation of Calpers, the California retirement program.
‘Could Raise Questions’
“It is difficult to see how an external manager could objectively advise Calpers on appropriate levels of management and other fees for its peers and competitors when that advice could raise questions about the level of its own asset- management fees,” the Steptoe & Johnson LLP law firm in Washington said it its board-commissioned report.
The Skannal family, who owned the Sligo Plantation underlying the Olde Oaks golf course, was land rich and cash poor. John
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