by George Waldon on Monday, Dec. 23, 2002 12:00 am
The state's largest pension fund endured a year of turmoil that included the exodus of its top two executives, criminal referrals, civil litigation and the hiring of a new leader.
David Malone, the term-limited state senator from Fayetteville, will succeed Bill Shirron as executive director on Jan. 1 in what is seen as a critical step in a personality makeover for an agency that made news with yet another painful revelation every few weeks.
The most recent came in November, when number-crunching consultants served up a
dose of actuarial angst: More money is needed to replace millions lost in the stock market and/or pension benefits needed to be lowered.
For the quarter ending Sept. 30 alone, what had been a $7 billion pension fund on June 30 suffered a $792 million loss.
The source of pain was shared by pension funds across the nation. The once-benevolent stock market that had fattened the ATRS balance sheet continued a "correction" that battered virtually all investment portfolios.
An ATRS staff of 62 administers pension funds for about 85,000 members, 17,000 of whom are retired. Public schools dominate the 421 participating employers, which also include 32 state colleges and universities and 25 state education-related agencies.
For years, ATRS operated in relative obscurity. Back at the beginning of 2001, only Arkansas Business reported that a state audit of the fund's 1999 books found that $1.1 billion had been misplaced on the general ledger — an error state auditors blamed on "lack of administrative review, inadequate staff training and absence of written policies and procedures."
But the board of trustees, and the public, got a wake-up call in July 2001, when Arkansas Business broke the news that Little Rock businessman Pat Riley Sr. had defaulted on an $11.5 million loan and would turn over four properties in lieu of foreclosure.
Questions remain whether the settlement with Riley provided a break-even scenario for ATRS to recover the balance on the loan. The pension fund agreed to take possession of Riley's Oak Hill Manor South in Little Rock, Riley's Oak Hill Manor North in North Little Rock and Woodland Heights in Little Rock, as well as the Riley Building in Little Rock. In return, Riley was allowed to walk on a personal guaranty backing the loan.
The workout required for these properties was one more cause for heartburn as the $175.5 million ATRS real estate portfolio began growing in unwelcome ways.
The teacher fund was, suddenly and reluctantly, in the highly regulated business of operating nursing homes. A nursing home manager, Ed Holman, was hired.
The board also hired Little Rock appraiser Tom Ferstl to review and manage the fund's growing real estate portfolio, including a pricey retirement village for which ground had been broken in west Little Rock, and appointed high-profile names to a new real estate advisory committee.
A new level of scrutiny, from the trustees and from local news organizations, accompanied every new decision — and even some previous ones. Thus was the stage set for a year of discovery and change.
New Year, New Problems
With the arrival of 2002 came the results of another state audit, which questioned a number of expenses associated with Deputy Director Angelo Coppola.
Specifically, the audit found that Coppola had been using an ATRS-provided wireless phone for personal calls, using the system's FedEx account to send personal items and, most damning, letting ATRS pay for repeated trips to New Mexico, where he apparently spent most of his time on Boy Scout projects.
Members of the Legislative Audit Committee were not persuaded by Coppola's official reasons for taking five trips to Santa Fe in three years: that he was working on developing a national association for deputy directors of retirement systems. Rep. Terry McMellon, D-Waldron, described it as "a total bogus operation."
Coppola's resignation was effective in February.
Members of the newly formed real estate advisory committee hit the ground running in 2002:
• William H. Bowen, retired former chairman of First Commercial Bank in Little Rock;
• William Goolsby, certified appraiser and dean of the College of Business Administration at the University of Arkansas at Little Rock;
• William G. Roehrenbeck, president of Arvest Bank in Little Rock;
• Wallace Cunningham, retired commercial loan officer for First Commercial;
• Tom Reed, owner of the Springdale appraisal firm of Reed & Associates; and
• Robert Shults, chairman and CEO of Financial Centre Corp. in Little Rock.
Joining them were State Bank Commissioner Frank White, a member of the board of trustees, and Ferstl, who chairs the committee.
In February, antsy ATRS trustees halted work on the retirement village on Rahling Road after spending more than $11 million preparing the site.
The project, to be jointly managed by Flake & Kelley Management Co. of Little Rock and Memphis-based Retirement Communities of America, had been criticized for being too expensive for rank-and-file retirees and for a projected price tag that had ballooned from $82 million to $105 million.
The real estate advisory committee's work came to screeching halt when a moratorium on real estate investing was declared after the biggest blow yet: Bill Shirron resigned during the first week of March.
Trustees apparently had begun to question a particular real estate transaction that had been completed the previous fall.
Shirron eventually admitted that he changed the minutes of an ATRS investment committee meeting in March 2001 to make it appear that the committee had approved the land swap involving two parking lots in downtown Little Rock.
Ferstl's analysis indicated that the land swap itself was probably in the fund's favor but that ATRS in 2000 had paid roughly double the fair market value for the parking lot that it later traded — a purchase brokered by Flake & Kelley Management.
The revelation resulted in a request for an investigation by the Pulaski County prosecuting attorney. Tampering with public records is a class D felony punishable by up to six years in prison and a $10,000 fine.
It wouldn't be the only criminal referral to come out of ATRS. Later in March, nursing home manager Holman sued the pension fund. That was followed by the eruption of allegations that he mishandled project funds.
Holman and the pension fund are locked in a litigation dual, with Holman claiming he is owed money on a management contract ATRS failed to honor.
On the other side of the courtroom, the pension fund said no contract was ever finalized and upped the ante by making a criminal referral to the Pulaski County prosecutor regarding Holman's financial conduct at the projects.
The dispute was further muddled by the fact that Holman had been recommended to the trustees by ATRS' legal counsel, Dover Dixon Horne of Little Rock — the firm that pension fund officials later learned also represented Holman.
In May, a legislative audit revealed that Shirron — with the help of John Flake, a principal in Flake & Kelley — solicited money from other ATRS vendors to pay for a memorial to Shirron's wife.
The firms pledged more than $200,000 to build a classroom wing at Salem United Methodist Church in Benton as a memorial to his wife, Kathy, who died in 2001.
This, too, was referred to Pulaski County Prosecuting Attorney Larry Jegley. He has had little to say about the status of the various ATRS-related referrals, except that the matters remain under investigation.
Return on Investment
Using financial information provided by property managers and compiled by real estate manager Ferstl concluded that only 10 out of ATRS' 23 real estate investments were meeting or exceeding the fund's goal of an 8 percent return on investment.
In May, Cooper Realty Investments Inc. of Bella Vista took exception to Ferstl's position that its three joint ventures with ATRS were all failing to meet the investment goal.
The main point of contention revolved around the "proper" way cash-on-cash return should be calculated on the office developments owned 80-20 by ATRS and Cooper.
For instance, with the Two Financial Centre project in west Little Rock, Cooper Realty insisted the correct figure was an impressive 11.1 percent, while Ferstl had come up with an average of 6.87 percent.
"It's like the famous line from 'Jerry McGuire': 'Show me the money,'" Ferstl said. "If they say there's an 11 percent return on investment, there should be cash distribution to ATRS that matches it. But there's not."
By September, Cooper President Dewitt Smith III found himself in the awkward position of asking ATRS for an additional $3.4 million to shore up two of the three joint projects.
The Crescent Center/Forum I in Memphis required an additional $3 million because Cooper underestimated the full extent of remedial work needed. ATRS/Cooper paid $55 million for the project in May 2001. Cooper also asked ATRS to contribute $400,000 to pay for tenant finishout and associated costs to fill vacant space in Two Financial Centre.
Cooper apparently overestimated its ability to retain tenants or underestimated the costs of operating the project profitability. Two Financial Centre was purchased for $9.75 million in May 2000. (An alternative explanation by some real estate watchers is that Cooper and ATRS simply paid too much money for the two projects.)
Cooper disbursed $800,000 to ATRS from the third joint venture, American Center I & II in Nashville, Tenn. However, this paper windfall was the result of overbudgeting on Cooper's part rather than performance.
ATRS trustees are feeling the crunch of not being able to take advantage of real estate investment opportunities to make up for failing stock returns. Mixed in with that are feelings of hesitancy about real estate investing because of past "good" deals that aren't looking so good now.
They await the arrival of the new year, which will bring David Malone to the job of executive director. Malone brings with him an impressive résumé (see sidebar) that members hope will translate into a return of confidence in decision making and a more fiscally sound pension fund.
David R. Malone
Incoming Executive Director of Arkansas Teacher Retirement System
• Executive director, University of Arkansas Foundation Inc. — 1991-2002
• Assistant dean, University of Arkansas School of Law, Fayetteville — 1976-1990
• Assistant professor in accounting, University of Arkansas — 1972-1976
• Lecturer of business law — University of Arkansas, 1971-1972
• City attorney — City of Fayetteville, 1970-1972
• Arkansas state senator — 1985-2002.
Ineligible for re-election due to term limits.
Member of Senate Education Committee, 1985-present (chairman since 1997); Legislative Audit, 1985-present; Joint Budget Committee, 1991-present; Senate State Agencies Committee, 1992-present; and Senate
Rules and Memorial Committee, 1991-present
• Arkansas state representative — 1981-1984
• Mayor of Fayetteville — 1979-1980
• Director, Fayetteville City Board — 1977-1980
• Master's degree in business administration, University of Arkansas — 1982
• Law degree, University of Arkansas — 1969
• Bachelor's degree in accounting, University of Arkansas — 1965
• Graduate of Hall High School, Little Rock — 1961
• Member of Arkansas Business and Education Alliance board of directors — 1990-present
• Member of Walton Art Center Foundation board of directors — 1994-1998
• Member of Washington County Historical Society board of directors — 1992-1996
• Author of "Hattie and Huey," a history of Hattie Caraway and Huey P. Long published by University of Arkansas Press — 1990
• Member of Arkansas Student Loan guarantee Foundation board of directors — 1986-1990
• Chairman Juvenile Justice Task Force — 1987-1989
• Director at Bank of Elkins (Washington County) — 1976-1998
• President/organizer of Northwest Arkansas Legal Services Corp. — 1976-1979
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