By Randy Diamond | Pensions and Investments.com
The $7.2 billion Arizona Public Safety Personnel Retirement System boosted its investment returns twice in two years by disregarding market-value real estate appraisals it commissioned and, instead, using higher hypothetical valuations from the firm managing the portfolio, PSPRS documents show.
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Pension officials ignored the appraisals by Ernst & Young, allowing Desert Troon Cos. — little known in institutional investor circles but with a two-decades-long relationship with PSPRS — to use hypothetical values for the approximately two dozen properties it holds in a joint venture with the Phoenix-based pension fund.
The difference between the hypothetical and market values in each of the last two years was more than $80 million, according to PSPRS financial statements.
The valuation dispute has put the Arizona public safety pension fund in the spotlight. At the request of trustees, the state auditor general is reviewing whether it was reasonable to let Desert Troon use the hypothetical valuations. Also, two lead portfolio managers and the fund’s investment counsel have resigned, and the fund hired a law firm to investigate complaints by investment staff who alleged harassment over their questioning of the Desert Troon valuations and other issues.
Doug Cole, a spokesman for the retirement system, said in an e-mailed response to questions that the fund’s outside actuary determined the use of the Desert Troon valuation instead of that by Ernst & Young would have “no material effect” on the pension fund.
Desert Troon manages the most real estate assets for the Arizona fund — $344.3 million (using the hypothetical valuation calculated by the firm as of June 30). That’s about one-third of the system’s real estate portfolio and around 4.5% of total assets.
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