Breaking News

Aetna First-Quarter Operating Earnings $1.98 per Share, vs. Estimate for $1.55
Tweet TWEET

Losing 84 Cents on Dollar Reveals Runaway Pensions

(Corrects to show Summit’s compensation was fee-based in paragraph after ‘Just Looks Bad,’ in story published April 15.)

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 hire their independent investment consultant, Summit Strategies Group of St. Louis, to help assemble a hedge fund portfolio. The board was already paying Summit $250,000 a year to screen money managers and provide advice on hiring them. The $70 million the trustees agreed to pour into hedge funds would almost double Summit’s fee-based compensation. It took the board more than 19 months to unwind 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 cashing out 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 C. Skannal once worked as a state trooper and drove Governor Earl Long home from a mental institution during his final term in office in 1960, according to his son A.C. Skannal.

Just before the elder Skannal’s 75th birthday in October 2003, a business partner named Dennis Bamburg visited him in the psychiatric ward of a Shreveport hospital where Skannal was being treated for dementia and alcoholism, according to a 2005 lawsuit the family brought against Bamburg in state court.

Witnessing a Signature

Bamburg obtained Skannal’s signature authorizing him to sell a piece of land next to the golf course, according to the lawsuit. Bamburg was negotiating with Fields of the police pension and a local representative of the fund, James Harris, 53, according to trial testimony. The police wanted to develop the land as a residential community.

In December 2003, the police board approved the purchase of 208 acres (81 hectares) and 70 lots from Skannal and Bamburg in three transactions that totaled $5.9 million, according to pension fund auditor’s records. That same month, the trustees hired Harris as property manager for its planned Olde Oaks development, a job that paid his firm, Twin Peaks LLC, almost $2 million over six years, not including five lots that he received as additional compensation, pension records show.

At the closing in February 2004, four representatives of the police fund -- Fields, Greene, Harris and Zinna -- witnessed Skannal’s signature and later testified he appeared to be of sound mind, in the family’s lawsuit against Bamburg. Skannal had been hospitalized for 112 of the previous 189 days, and his medical records ran to 8,000 pages, Skannal’s lawyer, John Odom of Shreveport told a state judge.

‘Grossly Impaired’

After the elder Skannal died in November 2005, his heirs carried on a suit he had filed eight months earlier in state court against Bamburg to overturn the deal. In March 2008, Judge Ford E. Stinson Jr. ruled that Skannal had been “grossly impaired” and that Bamburg had committed civil fraud in obtaining the signature. Zinna, Fields and Greene never told the pension board they testified at the trial, according to former chairman Halphen and other board representatives. Fields retired from the board in December 2004.

Bamburg, 63, declined to comment for this story. In the trial, he argued that Skannal had been of sound mind in the transaction. A state appeals panel partly overturned the lower court decision, and Bamburg remains in control of much of the former plantation.

As the residential development got under way, Zinna diverted pension-fund money from lot sales and payments to contractors to pay for his sports-gambling addiction, according to subsequent state and federal investigations.

Accountants’ Warnings

The police board already had evidence of financial irregularities in Olde Oaks-related investments from its independent accountants, New Orleans-based Duplantier, Hrapmann, Hogan & Maher LLP, board documents show. In a 2002 audit, the firm reported that unexplained discrepancies included $105,000 the pension plan transferred to the golf course that didn’t show up on the club’s ledger and $26,125 in “undeposited funds” that no employee could explain.

Duplantier, Hrapmann issued warnings each year even as trustees compounded the money-losing investment by buying another golf course in the Bossier City-Shreveport area -- at a sheriff’s auction -- and an undeveloped golf course community near Fredericksburg, Texas.

The board spent $73.4 million on three properties that are now worth $11.7 million to the plan, according to the system’s auditors. Homeowners and businesses may also have been cheated.

‘Zinna Took the Money’

Chester Pitts, a 61-year-old heavy-equipment contractor who lives at Olde Oaks, wrote two checks to the pension system totaling $158,612 in March and April 2005 for an option to buy 48 undeveloped lots, according to copies of the checks and a one-page contract prepared by Twin Peaks.

While Zinna endorsed the checks, bank copies show, the pension fund never received the money and Pitts never got the lots, according to both parties.

“The problem is that Zinna took the money,” Pitts says. Zinna denies that and says Pitts is owed nothing.

The trustees removed Zinna from managing Olde Oaks in April 2009 and asked another attorney, Randy Roche, to investigate. A title search at the county courthouse revealed that Zinna never deposited $725,563 in proceeds from as many as 22 Olde Oaks lot sales or even reported the transactions to the retirement system, Roche says. In addition, court records show, Harris signed for the police pension as the seller and for himself as the buyer in one $15,000 cash sale.

Checks for hundreds of thousands of dollars that the staff wrote for contractors were never delivered, Roche says. Zinna endorsed the checks and deposited them into his firm’s trust account, doling out slow and partial payments, Roche says.

Widow’s Savings

In September 2009, Zinna took most of the $570,000 entrusted to him by an unidentified 83-year-old widow and applied it toward what he owed the police, according to the federal criminal investigation. A month later, Greg Phares, chief investigator for the state Inspector General, served a subpoena and seized records at Zinna’s red bungalow office.

Zinna resigned from the pension system that month. He had diverted $5.1 million of police funds to himself, most of which he repaid, while also misappropriating $1.5 million from the police board and two other Louisiana public retirement systems, according to his plea agreement unsealed in January.

The Legislature plans next month to take up recommendations from the funding-review panel to increase taxpayer contributions that have almost tripled in less than a decade to pay for pension benefits, losses and expenses, according to the police plan’s most recent actuarial report.

Baton Rouge Budget

In Baton Rouge, the jump in pension costs amounted to $5 million last year, according to the city’s budget report. That is equal to 100 officers’ salaries, according to salary.com, a unit of Wayne, Pennsylvania-based human resources consultant Kenexa Corp. The city has frozen staff positions and is budgeting no raises.

Individual police officers also face the likelihood of paying more for their pensions. The state panel suggested raising their contributions to as much as 10 percent from 7.5 percent. Municipal authorities pay an amount equal to 25 percent of police payrolls into the pension system, up from 11 percent last year. They would pay 28 percent in the fiscal year beginning July 1 under state actuarial guidelines.

The state review panel also proposed restructuring the police pension board to include two mayors, an appointee from the Treasurer’s office and a representative of the state’s chief budget officer, giving taxpayers a direct voice for the first time. While two state legislators have been designated honorary trustees, neither has attended a board meeting in about a decade, board minutes show.

Awaiting Sentencing

As for Zinna, he still goes to work as he awaits sentencing, setting out bowls of food and water for the stray cats that visit him on his law office’s stoop. He faces as many as 20 years in federal prison. The state Supreme Court suspended his law license in July, and in December he allowed his state accounting certificate to lapse.

Stephen Street, the state inspector general who led the investigation with U.S. authorities, says that criminal law fell short of addressing all of the police pension system’s shortcomings.

“Randy Zinna is a symptom of a larger problem over there, which is a lack of oversight, a lack of accountability,” Street says. “You can’t conclude anything other than that.”

To contact the reporter on this story: Elliot Blair Smith in Haughton, Louisiana at esmith29@bloomberg.net.

To contact the editor responsible for this story: Robert Blau at rblau1@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.