July 26, 2012 at 2:32 pm

Bad Wayne Co. pension bets take toll

County retirement fund suffers investment losses of $340M since 2008

Detroit— Wayne County's pension system is among the nation's worst performing public funds, and some officials blame its largely volunteer board for putting millions of dollars of retirees' money into risky investments.

Valued at $1 billion a few years ago, the fund has lost $340 million since 2008. Its investments have been stagnant for years, performing worse than 97 percent of similar public funds, according to a recent report. The system is doing so poorly that taxpayers will have to sink another $35 million into the fund next year to plug a growing gap.

Unlike other public systems, the Wayne County Employees Retirement System lacks a full-time investment consultant and instead allows money managers and entrepreneurs to make direct pitches to its eight-member board for retirees' money. That shocked Hugh Macdonald, who joined the board last year.

"When we asked for a rule book, there wasn't a rule book," said Macdonald, who is now working on reforms with other members.

County commissioners grilled pension officials Wednesday on the finances of the system that oversees pensions of 5,500 former county employees. It's only 50 percent funded, and there's plenty of blame to go around.

Pension board members said the system is strained because County Executive Robert Ficano's retirement incentives allowed workers as young as 37 to retiree with a $42,000 pension. In the last five years, the average annual pension has increased 30 percent to $23,145.

Ficano's staff blames the fund's poor run in the markets. Some investments worked, including $15 million in a fund that helped bankroll Hugh Hefner's takeover of majority interest in Playboy Enterprises.

Many others failed miserably. The Wayne County pension fund could be out $11 million it invested in three Florida office buildings. In 2010, it wrote off the last of a $21 million failed investment in Everest Energy, a Warren-based natural gas exploration company that fizzled. Those followed a loss of roughly $6 million of the pension fund's $12 million investment in the Big Buck Brewery & Steakhouse in Auburn Hills and Gaylord.

"That was the worst," said Bob Murphy, a former pension board member and retired county worker.

The system's investments lost 2.99 percent last year. Comparable funds nationwide averaged gains of 4.4 percent.

June West, a spokeswoman for Ficano, said the recent performance "should be a wake-up call for the board to finally hire an independent financial adviser."

"Clearly they need a professional who looks at the overall performance on a daily basis, someone who can help them make smarter investment decisions," West said in a statement.

She noted that Ficano has one representative on the board and has opposed many of the fund's poorest investments: "Unfortunately, that member has often been on the minority," West said.

Some of the fund's losses since 2008 have been recovered, but the system is $800 million underfunded, nearly quadruple of what it was five years ago.

Patrick Melton, chairman of the board, acknowledged the losses but said the system is also hurt by Ficano early-out offers. Some 380 county employees have left since 2008 to collect pensions.

"It's not just investment losses, it's from benefits … ," he said. "We didn't do it all ourselves."

The pension fund's top two officials, Director Robert Grden and Deputy Director Gerard Grysko, did not return multiple calls.

Slump upped risk-taking

A decade ago, investing was easier. Government and corporate bonds in the pension fund's portfolio paid in excess of 7 percent.Now, bond funds are providing a fraction of those returns, putting far more pressure on money managers to make up the difference. And the board has turned to "alternative investments" in hopes of getting better returns.

Melton, who joined the board eight years ago, said board members were regularly bombarded with investment offers.

"These guys would just show up at the board meetings and get money," said Melton, the director of law enforcement for the Sheriff's Office.

"It was just crazy."

Among the recipients: Paul Angott, a Bloomfield Hills entrepreneur who got $1 million for a screening machine he's developing to detect breast cancer. He got the money by a 5-3 vote in 2010 after a year of presentations, meetings and lunches with board members.

"One of the guys I knew, knew people there," said Angott, president of Angott Medical Products, who declined to identify the person who put him in touch with the board.

Angott, who holds 40 patents and has started several businesses, got the idea after his mother suffered from breast cancer.

He said it could do a better job of detecting potentially cancerous lumps and be cheap — $20 a test. He's working with Wayne State University researchers and said he is about 18 months from market on the $2.6 million venture.

Angott called the decision wise — his machine could save lives, create jobs and bring a healthy return for the pension fund.

Melton opposed the deal.

"It's a long-term investment that could require additional funding," Melton said. "It just seemed too risky at this time for us."

Other pension funds, including Livonia's, avoid those types of investments.

"We are tried and true stocks and bonds," said Bob Biga, who oversees the pension fund for the city.

It is 99 percent funded and has averaged a 7 percent return over the last decade, compared to 4.4 percent for Wayne County.

New safeguards explored

The board sometimes hires ad hoc consultants, but Melton and others said investment managers could apply for consideration and, with no screening from professional investment consultants, appear before the board.

Melton and Macdonald want to craft new policies to end that practice.

"I could not tolerate an undisciplined environment when you're dealing with $700 million," said Macdonald.

The atmosphere led to deals like the one in 2003 with CAPROC, a real estate partnership that included Oakland County businessman Joseph Capozzoli, who sold the board on investing in three office buildings in Florida. After initially anteing up $5 million, the pension board picked up another $6 million in 2009 when the Pontiac pension fund opted out.

Pontiac officials didn't return calls.

The returns never materialized and the board had to bring in lawyers to dump Capozzoli as manager in 2011. That's because the 2003 deal — written by attorneys hired by Wayne County's pension system — gave Capozzoli veto power over his own removal from the partnership that also included municipal pension funds in Detroit and Southfield.

"The way the documents were set up was a fortress," Melton said. "We couldn't do anything unless he wanted us to."

Capozzoli later told a grand jury investigating former Detroit City Councilwoman Monica Conyers, who was on the Detroit pension board, that he paid for a $200 Burberry sweater for her when she was on a "due diligence" trip to Florida to check out CAPROC. She was later convicted of bribery for switching her vote on the council on an unrelated issue.

Melton said he suspects the board has lost nearly all of its $11 million investment in the deal.

"I said we've got to get out of this stuff," Melton said.

Macdonald and Melton said they hope to hire a permanent investment consultant by year's end and toughen ethics rules.

The changes include tougher ethics rules to cut down on free dinners and entertainment and add more scrutiny of the money managers who are retained.

A current ethics policy limits meals and entertainment, but Melton said his interpretation — and the practice of the board — is to accept meals from money managers when considering investments.

"If you're responsible for a billion dollars, I hope you are doing whatever you can to make the right decisions," said Melton, who added he meets less frequently with money managers than he did when he joined the board.

Murphy, though, wants to cut down on the meetings altogether.

"As far as I was concerned, you have to keep an arm's distance from these people, so you could make the tough decision if they're not performing," he said. "You have to replace them."

mwilkinson@detnews.com

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