Jay D. Franklin

CALPERS Arizona Land Speculation: The Taxpayer’s Dollars Are Just Dust in the Wind

A recent article in Bloomberg reveals the gory details of how the California Public Employees’ Retirement System (CALPERS) bought a piece of land in Goodyear, Arizona with the hope that it would be developed into a residential community. CALPERS (along with a couple of partners) paid $400 million for the land in 2006 (using $150 million cash and a $250 million loan), at the height of the real estate bubble. Recently, the land sold for $32.5 million (8% of the original purchase price), which is a loss of $367.5 million!

If CALPERS had simply invested in the IFA Real Estate Securities Index on June 1, 2006, the $400 million would be worth $457.4 million as of May 31, 2011 (www.ifacalc.com), instead of the $32.5 million, less the interest cost on the $250 million loan in both cases. This error of concentration risk cost CALPERS (and its partners) about $424.9 million.

Terry McDonnell of the Real Estate Weekly of Arizona in Scottsdale commented, “Of all the speculative deals I’ve seen here, this was right at the top. It’s hard for me to think of a more speculative deal of this magnitude in Maricopa County.”

As repeated so often throughout the IFA Website, the expected return of speculation is zero before costs and negative after costs. It has no place in the management of public funds. In fact, one could argue that such an irresponsible deployment of funds is in direct conflict with the responsibilities of a fiduciary. One can only imagine what was said at the meeting between the gatekeepers of CALPERS and the purveyors of this deal. It most definitely was not a contest of equals.

CALPERS may have other real estates acquisitions that were wildly successful and may offset this loss. However, if this were one isolated incident among an otherwise sterling overall track record of performance, we would have no grounds for complaint. Unfortunately for the taxpayers, however, the management of public pension funds is rife with problems. For example, over the past decade, CALPERS has paid $56.6 million of unnecessary costs to State Street Bank in connection with currency trading, according to the California attorney general’s office. The long-term performance of CALPERS shows that it has fallen short of a risk-appropriate, globally diversified portfolio of index funds. There can be no doubt that taxpayers are bearing the costs of hyper-active management, and in this case, they are enormous. Echoing the great John Bogle, IFA says, “Enough!”