Arizona Public Safety Personnel Retirement System, Phoenix, needs to change its method of valuing its portfolio with real estate manager Desert Troon Cos. to reflect market assumptions, a report by the Arizona auditor general concludes.
The report, released Nov. 13 and posted Nov. 21, on the $7.3 billion pension fund's website, is the latest twist in a dispute that has put the Arizona pension fund in the spotlight.
Three staffers in the pension fund's eight-person investment office and the chief counsel for the investment office resigned earlier this year amid a controversy over whether pension fund officials overstated the value of the joint venture portfolio with Desert Troon between 2011 and 2013.
The report by Auditor General Debra K. Davenport said Desert Troon used a 5% discount rate to value income-producing retail and lifestyle properties, while outside auditor Ernst & Young determined in its own earlier report that a more appropriate discount rate would be between 7.75% and 20.5%, depending on the properties.
Ernst & Young's rates “were more appropriate as they considered assumptions that market participants would consider when valuing a property, as required by” federal accounting standards, the report said.
“In the future, the system should ensure that the valuations reported in its financial statements for properties with established cash flows use discount rates that reflect the assumptions of market participants,” the report continued.
The report also found that Desert Troon did not follow accounting standards for real estate properties without an income stream, finding the properties' values were based on Desert Troon's and pension fund administrators' views of future worth.
Desert Troon is the Arizona pension fund's largest real estate manager, handling $344.3 million (using the valuation calculated by the firm as of June 30). That's about one-third of the pension fund's real estate portfolio and around 4.5% of total assets.
Pension fund spokesman Doug Cole said the fund, as a state agency, will follow the recommendations.
In a statement posted on the website, James Hacking, the pension fund's administrator, said the pension fund would restate its financial statements.