A.G. Gancarski
The term “forensic audit” is appropriate given the long-awaited deep dive into the Jacksonville Police and Fire Pension Fund, as more than a few people would like to bury the whole thing.
Appropriately released in Halloween week, it is a frightful compendium of the ghosts of a bad deal made decades ago, combined with a cobbled together investment strategy that Dr. Frankenstein would have approved, if only his monsters were created in equity markets.
And vampires? You bet. Implicit in the critiques of the pension deal: the argument that to facilitate deals made on the behalf of people who have left city employ, the lifeblood is being sucked from city infrastructural budgets, ability to sufficiently staff departments, and on and on.
While most people aren’t going to take this monstrous document and read it at the beach during Florida/Georgia weekend, there are many points in it worthy of note. And a considerable amount of them follow.
Here’s one that’s certain to be a crowd pleaser:
“Board poor investment decision-making has resulted in at least $370 million in underperformance losses. Board failure to scrutinize investment management fees has resulted in excess fees of $6 million annually or $36 million over the past six years… a significant factor contributing to the underfunding of the pension appears to have been poor investment decision-making by the Board.”
Of course, the fund was (up until recently) administered by retired firefighter John Keane, the embodiment of the good ol’ boy network in Jacksonville, where firemen sit atop investment funds, and (presumably) where investment fund managers should be enlisted to put out fires.
Keane, now a consultant for that same fund, likely doesn’t have enough fire extinguishers to douse this conflagration, summed up neatly farther into the document:
On the one hand, the Board has delegated exceptionally broad responsibilities to the Fund Administrator, encompassing various portfolio investment matters. On the other, the Fund Administrator lacks any meaningful investment credentials.
More money, more problems: “Board’s recent $27 million loss in Energy Master Limited Partnerships was imprudent due to lack of diversification, lack of transparency, and high fees—an avoidable loss.”
But what’s $27 million between friends?
And then there’s this:
Board failed to heed credible warnings of conflicts of interest at former investment consultant, eventually settling with firm for $273,696 without analysis or evaluation of any harm caused to the pension. Such conflicts (according to a U.S. Government Accountability Office analysis) may have cost the pension almost 30 percent of its value—$300- $500 million over two decades.
That sum would have bought the Jaguars eight new scoreboards. Or it would have paid off the courthouse, a project fraught with extravagant design and cost overruns related to everything from planning to the escalating costs of commodities.
The unfunded liability: $1.65 billion. A big root cause of that: “the Fund’s funded ratio dropped from 87 percent in 2000 to 39 percent in 2013—the lowest and most precipitous drop in funded ratio for any of Florida’s large cities.”
A bit more detail:
[I]n FY 2000, the Fund’s deficit was approximately $124 million. In FY 2008, it increased to $798 million and in FY 2012 to $1.7 billion. At the same time, the Fund’s funded ratio dropped from 87 percent in FY 2000 to 39 percent in FY 2013.
These numbers are truly astounding. In FY 2000, the Fund was 87% funded; in FY 2008, 53% funded; and in FY 2012, 39% funded. That is the lowest and most precipitous drop in funded ratio for any of Florida’s large cities, despite the fact that every city in Florida – and for that matter in the country – experienced the same turbulent market conditions over that period of time.
The audit makes it clear, also, that Gov. Rick Scott punted when asked for intercession, “noting that such ‘concerns would be more appropriately handled at the local level.’ Any specific criminal violations should be referred to local law enforcement or the state attorney’s office, said Scott.”
Expecting the JSO to investigate its own pension fund, or having the same expectation of the State Attorney, who works very closely with the sheriff’s office, is like a Franz Kafka dreamscape.
The audit throws some shade at Slick Rick the Ruler a bit farther in: “It may be advisable for the City Council to ask the Governor to reconsider an investigation and, at the very least read this report before dismissing the matter as a local issue.
Auditors can’t point fingers at people and call them liars. There are ways to make that point on the slant, however:
The Fund Administrator repeatedly claimed to have no documents disclosing the dollar amount of fees the General Counsel actually earned in connection with specific class action litigations the General Counsel recommended the Fund initiate against publicly traded companies— despite the fact that the General Counsel himself stated in a letter to the Board that the final percentage, amounts and names of firms receiving such fees are always reported to the Board.
Perhaps there’s a reasonable explanation. Maybe Keane was a recycling freak and didn’t want to keep excess paper around? Keep Jacksonville green?
The historic investment performance information provided for the period from 1988 to 2015? A sham. It was “neither prepared, nor confirmed, by the master custodian bank actually holding the assets—the most reliable source for such information.”
And “two decades of investment performance information was prepared by a former pension consultant to the Fund who was terminated as a result of an investigation” by the SEC.
Such anomalies render the data used in the audit “clearly wrong,” which establishes that the PFPF couldn’t even be bothered to cook its own books properly.
The audit takes issue with the PFPF stonewalling legitimate public records requests, spending hundreds of thousands of dollars on the effort, noting that the audit team’s own requests were substantially rebuffed.
“In connection with this investigation on behalf of the City Council, although we submitted our first document request on June 29, 2015, not a single record requested was provided to us by the Board or Fund Administrator for almost two months,” the auditors said, adding that their request wasn’t even a “public records” request, but one made by City Council.
In the context of a forensic investigation into a highly controversial, severely underfunded, underperforming public pension—a very public investigation commissioned by the City Council—the delays, incomplete and inconsistent responses, as well as failures to produce documents we experienced amount to a profound “red flag,” in our opinion.
Indeed.
The law firm the PFPF used: laden with “numerous conflicts of interest.” Bond insurance? No need. Not when taxpayers can just assume the potential risk. If the PFPF were a car on the road, it would be a 35 year old muscle car with bad brakes, driven by a blind old man with anger issues.
And City Council takes a hit as well, related to the Senior Staff Voluntary Retirement Fund:
In 2012, the City Council voted unanimously to file a lawsuit regarding the plan but, for whatever reasons, never did. While the City General Counsel had gone so far as to tell the Fund to stop putting money into the account, a large cash infusion of more than $250,000 reportedly went into the account subsequently and effectively placed the account at over-funded status.
On September 21, 2015, the Jacksonville City Council voted 18-1 to take legal action regarding the specially created pension.
It appears that neither the City General Counsel nor the Fund General Counsel reviewed whether, in connection with the staff pension, the Board discharged its responsibilities consistent with the heightened fiduciary standards of ERISA.
Even a casual reader would note, here, that City Council wasn’t willing to butt heads with the Police and Fire Pension Fund and the powerful police and fire unions, with some honorable exceptions, until the crisis was undeniable.
This has been a scathing write-up of a scathing document thus far, so let’s imbue it with some positivity.
Keane was willing to travel to the ends of the earth, literally, to learn best practices regarding fund administration.
He slogged to Waikiki, a remote outpost in a frontier known as Hawaii, for the 2013 National Conference on Public Employee Retirement Systems. But that’s not the only sacrifice this tireless public servant made.
Most recently, the Fund Administrator’s travel, including 31 trips since 2010—to destinations including Scotland and Canada and staying at hotels such as Caesars Palace, Hotel Frontenac, Four Seasons, and Trump Tower—has emerged as an issue in connection with the Forensic Investigation of the Jacksonville Police and Fire Pension Fund.
The real tragedy? Apparently the wine list at Trump Tower is neither huge nor classy. And the caviar at Hotel Frontenac? Not the best.
Shady deals. Conflicts of interest. Every corner that could be cut, serrated with a chainsaw, with the subtlety of an encore at a GWAR concert.
That leads the auditors to close their executive summary with language like this: “the Board has failed to provide oversight, consistent with its fiduciary duties, with respect to matters as fundamental as recording, evaluating and reporting investment performance of the Fund over time; investment manager and other vendor compliance with state and federal heightened ERISA fiduciary standards adopted by the Fund; monitoring conflicts of interest and establishing corresponding safeguards; and reviewing, as well as assessing, the reasonableness of investment management and other fees paid by the Fund.”
