As you are aware, the U.S. Attorney’s Office for the District of Arizona (“USAO”) and the Federal Bureau of Investigation (“FBI”) have been conducting a criminal investigation concerning certain valuation decisions and disclosures made by your client, the Public Safety Personnel Retirement System (“PSPRS”).
I can now confirm, through this letter, that your client is not a subject or target of the investigation. Based upon our joint investigation with the FBI, at this time we do not believe that PSPRS committed any criminal misconduct. This Office takes no position on civil or administrative liability, however, as our review focused exclusively on whether PSPRS engaged in criminal conduct in violation of federal law. Thank you for your assistance and professional courtesy in this matter.
I hope that this finally ends this whole sorry episode. PSPRS had (and still seems to have) a disproportionate share of its real estate portfolio invested with Desert Troon. This never made any financial sense, but neither did PSPRS' former equity-heavy portfolio and appears to be a legacy of past administrations. However, the notion that PSPRS staff knowingly inflated real estate valuations for the express purpose of triggering their own bonuses always seemed absurd to me.
This blog addressed the issue of potential criminal wrongdoing in the January 2014 post, Notes on a (PSPRS) scandal. Readers can see that post for more detail, but in short, PSPRS addressed the problems noted by the Arizona Auditor General and revalued the Desert Troon portfolio accordingly. In the end, the adjusted valuations done per the Auditor General's required standards were closer to the allegedly "inflated" Desert Troon valuations than they were to the "correct" and lower, initial valuations. This hardly makes the case for a criminal conspiracy. What it does make the case for is a more diversified real estate portfolio. A better real estate portfolio would be one in which the investment in a single company would not impact PSPRS' total value to such an extent that staff bonuses could even remotely factor into the choice of a valuation methodology. A better real estate portfolio would be one in which its value can be clearly determined and not be so opaque that a consensus can not be reached even among PSPRS' own in-house personnel and the Board of Trustees.
One final absurdity is that, in addition to all the unnecessary legal costs incurred by PSPRS to defend itself against charges of criminal behavior, the state of Arizona is on the hook for the private legal expenses of the four former PSPRS staffers who accused PSPRS of misconduct. According to the Arizona Republic, Desert Troon is suing the four employees for "engaging in a post-employment conspiracy to defame and falsely disparage senior management at the company and the pension system." Hopefully, for the sake of the former employees and Arizona taxpayers, Desert Troon will drop the lawsuit now that the U.S. Attorney has exonerated PSPRS of any wrongdoing, but who knows what they will do, especially if these accusations led to lost business for their company. Some expressed outrage that former PSPRS Administrator Jim Hacking had a stipulation in his severance package that PSPRS would pay any legal costs "relating to actions taken in the course and scope of his employment" with PSPRS, but now it appears that PSPRS' accusers could end up costing taxpayers more.
Now that the sideshow is over maybe the misplaced outrage can be redirected where it should have gone in the first place. Issues like pension spiking, unsustainable COLA's, intergenerational inequities, and the fragility of PSPRS in the face of future financial crises are the real problems that plague PSPRS. People got their investigation and they got Mr. Hacking's job, now can we end the collective tantrum and move on to more important things?