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To you, money may be green. But the mayor of New Orleans says money comes in all different colors for the New Orleans Firefighters Pension and Relief Fund, just like in the game Monopoly. And the hotels are bright red -- every once in a while the parking is free, too.
"They think they're playing with Monopoly money," says Mayor Mitch Landrieu, "and I can't let them do it anymore."
Landrieu says the Firefighters Pension Board has been rolling the dice on some investments. "I don't think anybody who would look at this, evenly objectively, would say that these monies have been invested wisely," he tells us.
Like Monopoly, the Firefighters Pension Board prefers to invest in real estate.
"Their investments over the past five or six years seem to indicate an inordinate amount of risk," says financial analyst George Pennacchi.
Pennacchi is a University of Illinois professor who has published papers on public pensions. He's a Brown University- and MIT-educated professor of finance. He reviewed the firefighters' investments and discussed them with us.
He says it's a bit of an anomaly that the Firefighters Pension Fund invests 45 percent of its assets in real estate. "Looking at other state and local pension funds, I could find only one other instance where there was anything close to that, and that was a pension fund that had 28 percent of their investments in real estate," says Pennacchi. "The average was about five and a half percent."
And when we say real estate investments, we're not talking about investments in such choice properties as Park Place or Boardwalk. According to a recent audit, a large chunk of money invested in real estate is in default -- about $20 million, 10 percent of the fund's total assets.
The fund took chances on many real estate investments, such as a $2.3 million loan to the owner of the Days Inn hotel in Metairie. Meeting minutes show the hotel has performed below budget projections and its cash flow was not sufficient to provide loan repayments to the Firefighters Pension Fund, though the pension fund says the mortgage is now current. The property is for sale with no potential buyers.
By the way, that hotel owes $80,000 in delinquent property taxes in Jefferson Parish.
"That is for management to take care of," says fund CEO and Secretary-Treasurer Richard Hampton. "We're not in control of managing the day-to-day operations of that hotel."
The fund also owns Lakewood Country Club on the West Bank and Falconhead Golf Club in Austin, Texas. January minutes from this year show both investments may not produce sufficient cash flow to cover interest payments on their outstanding debts.
"The real estate investments brought a very unique opportunity," says Hampton. "We saw it as less risk, because it's collateral underneath all the real estate investments. We had mortgages on all the properties that we had real estate investments with, and there was an extra level of risk mitigation that we were able to accomplish."
The fund's real estate investments include a hotel, a water park, a parking garage and other properties in such places as Mexico, Idaho and the Mississippi towns of Biloxi and Natchez.
From 2005 to 2010, the fund's investments produced a return of 0.1 percent, though the Illinois professor says it's likely lower than that.
"Our return is not that much different than the returns that other public pension plans have had in the last 10 years," claims Hampton.
Pennacchi says most other funds did better. "There is risk and it's probably not of the type that a pension fund would want to take," he tells us.
That's true with this fund. The board voted that the target rate of real estate investment would be 25 percent – again, the fund puts at least 45 percent in real estate.
The fund assumes it will get an average rate of return on its investments of 7.5 percent -- it hasn't reached that in years.
"We needed to find other ways to get that seven and a half percent," says Hampton. "Real estate was one of them. Hedge funds were another. Alternatives were another."
But it's difficult to tell just how poorly these investments have been performing. The fund's recent portfolio performance summary doesn't give a year-to-date summary of each real estate investment -- we don't know if they're losing or making money.
One of the only ways to tell is by looking at board minutes -- that's how we found out that a piece of property in Arizona has lost 4.1 percent since its inception. The minutes point out that it's rather impressive, considering the large decline in the real estate market.
The mayor wonders why the fund relies so heavily on such a high risk area. "The portfolio should be diverse, says Mayor Landrieu. "It should have all the things in it that everybody else that's doing these things around the country has, and I'm not sure there are many others like this in America."
And that's what brings us back to the popular board game. The mayor calls their cash Monopoly money because, if they lose it, they face no consequences. The city and the taxpayers have to cover the loss.
What this means for you is more money that could go to streets or streetlight repairs instead goes to plugging holes in the fund. A few years ago, the city gave about $10 million to the fund. That has grown to $30 million this past year.
The city says some of the blame has to go on poor investment decisions that one expert calls a roll of the dice – one that may never let New Orleans taxpayers pass go.
"Perhaps the high risk that's being taken by the pension fund is an attempt to do what some economists call gambling for resurrection," says Pennacchi. "They're really rolling the dice to try to make up for the huge amount of pension underfunding."
Tuesday, September 2 2014 10:07 AM EDT2014-09-02 14:07:52 GMT
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