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Wilson Pushed Third APERS Real Estate Deal.

REAL ESTATE INVESTING BY two multibillion-dollar state pension funds, a practice that would be outlawed under Senate Bill 16, has a short but storied history.

Sen. Cliff Hoofman, D-North Little Rock, who sponsored the bill, is among those concerned about the soundness of the real estate investments by the Arkansas Teacher Retirement System and the Arkansas Public Employees Retirement System.

Thrown into the mix is a state audit that raises concerns about investment decisions by the Arkansas Teacher Retirement System in light of sloppy bookkeeping (see "State Audit" on Page 13).

ATRS continues to add to its real estate portfolio, which is now north of $100 million and numbers more than a dozen properties that include several speculative projects. But APERS ended its investment activity after buying only two office buildings -- both of them controversial purchases the details of which were dragged out in the public corruption case against former state Sen. Nick Wilson of Pocahontas.

What might have been APERS third real estate investment, one involving a familiar cast of characters, apparently fell apart in the chaotic aftermath of Gov. Jim Guy Tucker's forced resignation.

That cast included two men who profited from APERS real estate deals: former state Sen. Nick Wilson of Pocahontas and prominent real estate broker John Flake of Little Rock.

The Lyon Building at 401 W. Capitol Ave., listed and managed by Flake's real estate firm, nearly became the pension fund's third downtown office building purchase.

The late Kie Hall, executive director of the Arkansas Public Employees Retirement System at the time, became interested in buying the 137,000-SF building.

Wilson was behind the scenes, flexing his considerable political muscle to relocate the Arkansas Department of Labor to the Lyon Building as a lead tenant.

Despite Wilson's push to make the move happen, the deal fell apart. Without the state agency to bolster the project's sagging rent roll, Hall lost interest in purchasing the building.

The Department of Labor lease, which totaled 23,500 SF in west Little Rock, was important because the Lyon Building's occupancy rate was a woeful 37 percent in 1997. The agency would have pushed the occupancy to about 54 percent had it relocated from its west Little Rock digs.

The would-be acquisition of the Lyon Building began unraveling with a change of the political guard, as Gov. Mike Huckabee began naming his appointees to various state posts.

Among those appointees was Bob Laman, who was named director of State Building Services on Dec. 10, 1996. Laman replaced Chris Burrow, who resigned at Huckabee's request after having led the agency since July 1987.

Laman was still new to the job when he learned of the push to move the Labor Department to the Lyon Building. He became aware of the situation after a phone call from James Salkeld, the agency director.

Salkeld wanted to know whether the department would be staying put in west Little Rock or moving to the Lyon Building as Wilson wanted.

Early in the 1997 legislative session, Wilson is credited with proposing a $100,000 line item in the appropriation for State Building Services. The money was earmarked to help any state agency with unbudgeted moving expenses.

That measure was crafted with the Labor Department in mind and with the idea of facilitating its move to the Lyon Building.

When Laman received Salkeld's query, State Building Services was on the brink of renewing the agency's lease in the Cone Building I at 10421 W. Markham St. A confused Laman called Wilson to find out what was going on.

"He said he owed Kie Hall a favor and wanted to help him find tenants," Laman said. "I explained to him we had negotiated a great deal to keep the Labor Department where it was.

"I told him we would look at the Lyon Building to see what we could do to help put tenants in the building. Looking at it and doing it are two different things, but I sure didn't want to get crossways with one of the most powerful legislators in Arkansas.

Wilson didn't forget, though. The State Building Services budget was held hostage during the 1997 General Assembly and is remembered as one of the last issues addressed in the session.

Was Wilson's ire with Laman fueled by a lost referral fee on the sale of the Lyon Building? The criminal investigation that led to Wilson's current prison stint revealed that he received $330,000 in illegal referral fees in connection with APERS buying its two other buildings.

That money--$250,000 for the Union Bank Building and $80,000 for the Atkins Building--was paid by John Flake.

It's unclear how much Hall, who died in 1998, was willing to pay for the Lyon Building. In fact, Hall's interest in buying the building came as news to the executive team at the pension fund.

"It's a deal that, if Kie Hall was looking at the building, he never told anyone else here about it," said Gail Stone, assistant director of APERS. "If we were looking at buying the building, I would have been involved. Nothing ever got to us in the way of a formal presentation."

Anne Laidlaw, administrator of real estate services at State Building Services, recalled that Flake & Kelley Management believed the Labor Department lease at the Lyon Building was all but a done deal.

"They thought they had the lease," she said. "They thought they had the inside track. Looking back on everything that went on with this, it makes you wonder how many deals got done that way."

State Audit Reveals Shortcomings at Arkansas Teacher Retirement System

THE 1999 STATE AUDIT OF the Arkansas Public Employees Retirement System revealed no material weaknesses in the pension fund's financial statements.

Not so with Arkansas Teacher Retirement System.

The legislative auditor reported that the pension fund had several compliance and internal control problems.

Public interest in the pension funds' real estate investments has grown, and the legislative auditor is considering taking a closer look at this portion of their portfolios.

The audit findings, dated Oct. 11, 2000, outlined these points of concern:

* "It was again noted that the accounting department did not maintain adequate accounting records and documentation to support differences between the general ledger and their published financial statements.

* "Due to the lack of administrative review, inadequate staff training and absence of written policies and procedures, the general ledger was understated by $1,107,931,345.73.

* "Of this total, security lending investments nor recorded amounted to $875,549,342.90. Inaccurate accounting records could prevent management from making sound business decisions.

* "Investment department management's failure to establish effective controls over investments resulted in inadequate supporting documentation for marker values on alternative [investments], real estate and Arkansas-related investments totaling $581,245,825.67.

* "Furthermore, by not preparing proper investment reconciliations, the agency was precluded from discovering $849,571.89 in omissions and $4,359,344.02 in duplicate entries.

* "Also noted was the failure to report two months of real estate investment transactions totaling $345,413.87 for accounting purposes and failure to detect overpayments of $164,169.46 to money management firms, as well as many other, smaller omissions and errors that required adjustment to the financial report.

* "Inadequate staff training, lack of proper supervision and absence of written policies jeopardizes the accuracy of the financial records."

What is ATRS doing to correct these deficiencies?

"They recognized the need to have some professional accounting people over there," said Ron Burch, deputy legislative auditor. "They had some people who had come through the ranks whose only accounting experience seemed to be on-the-job training.

"They originally used to deal with CDs and basic investments. But over the years, they began dealing with more complicated investments, like derivatives, and their assets grew into billions of dollars," Butch said.

"Before you know it, their effort was substandard, I understand they have some CPAs over there now."

The financial statements regarding real estate investments by the pension funds are not audited by the state.


"The agencies contract with property managers to handle their real estate investments," Burch said. "That's done out of house for the pension fund, which is outside the scope of our audit.

"We do encourage them to get an independent audit of their real estate investments. Neither of the agencies do that."
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Comment:Wilson Pushed Third APERS Real Estate Deal.
Publication:Arkansas Business
Geographic Code:1U7AR
Date:Jan 22, 2001
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