Public Pensions Betrayed by Fraud and Abuse?

Leo Kolivakis's picture

Via Pension Pulse.

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 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.”

That
last sentence pretty much sums it up, lack of oversight and lack of
accountability. It makes me angry reading about fraud and abuse at
public pension funds, but it doesn't surprise me. It's a subject I've
covered many times before. Unfortunately, many small and large US plans
lack proper governance and internal controls which leaves them
vulnerable to flagrant abuse.

The Association of Public Pension Fund Auditors has excellent references and links, including a link to the Association of Certified Fraud Examiners. I highly recommend consulting with certified fraud examiners to help prevent fraud and abuse at public pension funds. Prevention,
internal controls, proper oversight and accountability are necessary to
combat fraud and make sure pensioners don't pay the price for
mismanaged public pensions.