Wednesday, March 26, 2014

Raging Fire at Tampa's Hot Pension Fund?

In my last comment, I wrote about the pension fund that broke all rules, praising the Tampa firefighters and police officers pension fund for their stellar outperformance using one investment manager. Turns out, they may indeed be breaking a lot more rules than I first thought.

Chris Tobe, author of Kentucky Fried Pensions and now senior consultant at the Hackett Group, alerted me to two articles written by Ted Siedle, raising some disturbing red flags on the Tampa firefighters and police pension fund:
I have two words of advice for firefighters and cops who participate in the City of Tampa Firefighters and Police Pension: Watch Out. While I cannot say for certain that your pension’s assets are being mishandled without further investigation, there are ample “red flags” present and I believe an independent forensic review should be undertaken of the fund.

Based upon the documents that I have reviewed, in my opinion, it is impossible for participants in the fund to assess the integrity of the plan’s investments or the plan’s ability to pay benefits. The financial statements of the municipal pension available on its website say as much:

“Management has elected to omit substantially all of the disclsoures required by accounting principles generally accepted in the United States of America. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the Tampa Firefighters & Police Officers Pension Fund’s statements of net assets available for benefits, and the related statements of changes in net assets available for benefits. Accordingly the financial statements are not designed for those who are not informed about such matters (emphasis added).”

If the financial statements are not designed to provide assurances to pensioners regarding the fund’s ability to pay benefits, then what are the financial statements designed to do?

If you’re a participant in the fund, a taxpayer contributing to the fund, or an investor in City of Tampa municipal bonds for that matter, in my opinion, you need to know how the $1.6 billion pension is being managed. Your money is at risk.

If you’re looking for audited financials for the fund, you’re out of luck. In the financial statements the accountants state, “We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the United States of America.”

The accountant for the Tampa pension is the local firm of Nobles, Decker, Lenker & Cardoso. Why would a $1.6 billion municipal pension contract with a local accounting firm to provide a mere “compilation” and financial statements that are “not designed” to inform participants, as opposed to using a nationally recognized firm to do a true audit consistent with generally accepted accounting principles– audited financials that would be comprehensible to all? (According to guidelines applicable to CPAs, “compilations” are often prepared for privately-held entities that do not need a higher level of assurance expressed by the accountant. That hardly describes a $1.6 billion public pension.) I don’t know the answer to even that question but it gets worse.

In the 30 years I have been involved with public funds, I have never seen financial statements of a public fund wherein the accountants admit, “We are not independent with respect to Tampa Firefighters & Police Officers Pension Fund.” If the accounting firm is not independent, i.e., it is conflicted for some reason and is not actually auditing the fund, then what is the value, or indeed purpose, of the financial statements it has prepared? I believe stakeholders in the pension deserve an explanation as to why the accountants to the fund are not considered independent so they may assess whether that lack of independence is fatal. Further, why, out of all the accounting firms in the world, did the pension choose an accountant that was not independent?

There are more red flags here. 100% of the assets of the $1.6 billion pension are now and have for the past 39 years been managed by a single investment advisor, Bowen, Hanes & Company, based in Atlanta, Georgia. According to the firm’s SEC registration, Bowen, Hanes & Company manages a total of approximately $2 billion. That is, a single client, the Tampa pension, represents approximately 80% of the money management firm’s assets under advisory. So much for diversification of manager risk.

In my decades of professional experience, I have never seen a public pension fund with investment guidelines that would permit it to invest more than a limited amount of its assets, say 10%, with a single money manager. Further, the investment guidelines of public funds generally limit the percentage of a manager’s assets the fund’s assets may represent. Both of these investment restrictions are prudent.

In my experience, if a money manager has impressive investment performance, he will be able to attract additional clients—especially when a large public pension invests with him. It is a red flag, in my opinion, when a manager seemingly fails to attract additional clients over decades and remains dependent upon a single public pension.

So how have the Tampa pension’s investments performed over time? No one can know the answer to that question for two reasons. First, as mentioned earlier, there are no audited financials of the fund to rely upon. Second, the limited performance summary and investment history provided by Bowen, Hanes & Company on the fund’s website, in my opinion, raises at least as many questions as it answers. A forensic review is required to determine with certainty just how the fund’s investments have fared.

Tampa firefighters and police officers deserve better than abundant red flags and a paucity of reliable financial information related to their retirement savings plan.
Siedle followed up that article with another, New Red Flags Related to Tampa Firefighters and Police Pension "Audited" Financials:
$1.6 billion Tampa Firefighters and Police Pension expects to dramatically out-perform legendary investor Warren Buffett’s Berkshire Hathaway pension plan.

Last week I wrote about the many red flags I had spotted relating to the $1.6 billion Tampa Firefighters and Police Pension and the need for a forensic investigation. Among other issues I identified concerning the management and performance of the fund, I indicated that the pension displayed on its website financial statements that were unaudited– mere “compilations” prepared by a local accounting firm that was not independent of the fund.

Someone at the Tampa Firefighters and Police Pension must have read my Forbes posting because miraculously this week audited, as well as so-called audited, financial statements appeared on the website. Now visitors to the website can choose between viewing “financial statements” that are unaudited, or what the fund believes are “audited financial statements.”

Why a public pension would present to the public on its website unaudited financials omitting “substantially all of the disclosures required by accounting principles generally accepted in the United States of America”—financial statements that are “not designed to inform” pension participants about such matters when audited financials existed, is hard enough to understand and should, in my opinion, be investigated. However, the audited and so-called audited financial statements presented on the website raise far more troubling questions about the management of the billion-plus public pension.

Take a look at the September 30, 2004 so-called audited financial statements posted on the fund’s website. Look like audited financials to you? They’re not. In the upper-left corner is typed DRAFT 5/14/2004. You’ll find no auditor named in, or signing, the draft. Looks to me like the pension either didn’t get audited that year, or misplaced the audit. Either way, be concerned. It’s scary when a billion-plus pension is so sloppy.

(Author’s addendum: When this article was written on Friday, January 25th, the 2004 so-called audited financials, to which there was a link, were an unsigned draft by an unknown person or firm. Monday, January 28th, the unsigned draft was replaced with a different document. Better late than never.)

In the past ten years, the Tampa Firefighters and Police Pension has changed auditors from Ernst & Young in 2001-2002, to no-named auditor of a draft in 2002-2003, to KPMG for a few years, then back to Ernst & Young for a spell and, most recently, to the firm of Moore Stephens Lovelace, P.A. What does that tell you?

When companies change auditors frequently, or without explanation, it is considered a major red flag by investors and regulators alike. I’ve never seen a pension whip through auditors as quickly as this one. This public pension fund is exceptional both in having zero turnover of investment advisors, using a single money manager to oversee 100% of its assets for the past 40 years, and in changing auditors every couple of years.

Auditor changes have been a growing concern as regulators scrutinize the reasons behind such changes and what they might portend about a company’s financial well-being. A change in auditors can result from either a dismissal by the client, or the auditor’s resignation. Auditor resignations often occur when a company is in real financial trouble, and the resignation can be accompanied by a significant drop in the price of the company’s stock. For such reasons, the SEC must be notified when a public company changes auditors.

Investors and regulators view auditor resignations and dismissals differently. Resignations are more common when litigation is in the wind and dismissals more frequently result from disagreements about issues such as internal control weaknesses and the reliability of financial reporting.

I don’t know the reasons behind the Tampa Firefighters and Police Pension frequent change in auditors, e.g. whether the changes result from resignations, or dismissals. I do note that the most recent auditors do not express an opinion on the effectiveness of the fund’s internal control over financial reporting.

But there are more red flags here.

The 10% assumed rate of return on investments disclosed in the pension’s financials is absurdly high. It’s bad enough that most public pensions today assume an unrealistic rate of return around 7.5%– in excess of the rate deemed achievable by legendary investor Warren Buffett . Berkshire Hathaway’s pension projects a paltry 7.1% overall return.

According to the performance summary and investment history of the pension, the longstanding investment manager’s stock picks have nearly tripled the S&P 500. Why other public pensions haven’t retained this Buffett of Atlanta to manage 100% of their assets remains a mystery.

As I said before, if you’re a participant in the fund, a taxpayer contributing to the fund, or an investor in City of Tampa municipal bonds for that matter, in my opinion, you need to know how the $1.6 billion pension is being managed. Your money is at risk.
I am glad Chris Tobe brought these articles to my attention. Ted Siedle, the Pension Proctologist, raises many disturbing red flags. As I stated in my last comment, "I don't know much about Bowen, Hanes, based in Atlanta, but they're doing an outstanding job managing the pension assets of this Tampa pension fund." Boy, was I way off! (and so was the New York Times!)

Let me blunt, I question any investment manager whose assets basically comprise the entire assets of a single public pension fund from Tampa. If Mr. Bowen is that great, how come I and many others I asked have never heard of the "Buffett from Atlanta"? Is there collusion? Are there bribes and kickbacks going on here between Mr. Bowen and Mr. Griner? Sure looks shady.

Below, a report from last summer on how the Tampa police department's DUI squad is under fire. I think the FBI should get involved and start digging deeper into the red flags raised above and investigate any possible fraud or crime involving the Tampa firefighters and police officers pension fund. There is definitely something shady going on there and it really stinks.