Today, both Geddes and Stiteler serve on West's Treasury Advisory Board. Stiteler is chairman of that board, which provides the treasurer with policy advice on the $400 million to $600 million in state money that he is responsible for investing.

Jack Cross has been administrator of the three Little Funds since 1986. That was the year the funds decided to buy an office building.

From Fife Symington.
Cross says he just happened on then-developer Symington's office complex on Missouri Avenue, known as Ten Mo. He says no one told him about the complex--the discovery was purely coincidence.

The Little Funds paid $634,923 for one of the three office buildings in the complex.

As governor, Symington has been delighted with the Little Funds.
In 1994, Symington sent aide Kit Mehrtens to a Little Funds board meeting, where, the board's minutes say, the aide expressed his "willingness to help the Fund Manager with anything within his power with the exception of money."

Symington likes state agencies that run like businesses.
And for nearly ten years, Cross has run the Little Funds like a private enterprise. That's one of the attractions of his job, he says.

"We are not a state agency," he says. "We are a retirement fund. Our customers are the retirees and employers who pay into the account."

Today, 25,000 workers pay nearly 8 percent of their salaries into the system, and their employers kick in a like amount. About 5,500 retirees receive retirement benefits from the funds.

The funds have grown by 200 percent in the past decade. Cross likes to point out that total administrative costs are about $1 million, far less than 1 percent of the funds' assets. The retirement systems are also fully funded, which means there is enough money for current and future retirees.

The funds grew largely because they made conservative investments--stocks and bonds recommended by a professional adviser. Despite this proven success, the board decided to put up to 5 percent of its investments in real estate ventures in the 1990s. The decision was based in part on the contention that Geddes, a real estate investor, had the expertise necessary to help choose property investments, says Cross.

"I do not want people to think this is some sort of evil conspiracy over here and that we're trying to exclude anybody [from the real estate business]," Cross says.

He points out that the real estate deals are backed by first liens on land that is appraised for more than the loan amount. Which means that if the loans go sour, the retirement funds get the land. And the terms are good--for the retirement system. But he does admit that friends--"people we can trust"--get a lot of business from the funds.

For instance, the broker who brings most of the real estate loans through the funds' door is Bruce Francis, a friend who played basketball with Cross at Coronado High School. Francis is a broker with Kennelly Mortgage and Investment, a Scottsdale firm. Neither Francis nor Cross recalls who first called whom about doing a deal. But Francis and his firm brought one of the very first non-stock-or-bond deals to the board in 1990.

And it proved to be disastrous.
And far-fetched.
Think corn, alfatoxin and the Mexican government.

The deal required a five-year, $195,000 "Venture Capital Investment" in Alfatec, an Arizona company claiming to have machines that could remove the fungus alfatoxin from corn. Alfatoxin is a natural fungus. When animals eat food laced with alfatoxin, it is released into animal by-products--like milk and meat. If alfatoxin levels are high enough, the animal products are not fit for human consumption.

Walker Cottonseed, a Casa Grande company affiliated with Alfatec, was to get another $355,000. The return for both loans was to be five or six times the original investment, the brokers predicted.

The reason: The cotton companies were just on the verge of signing lucrative contracts to clean corn for the Mexican government, Francis and Cross said.

Walker and Alfatec had been checked out by Kennelly, which considered them a good risk.

Board members Geddes and Moroney expressed concern about the deal. It just didn't smell right. At the time, state retirement systems were being pressured by the Legislature and state Representative Mark Killian to invest in risky venture capital. The chairman of the Little Fund board, a business professor named John Cochran, said he was feeling that pressure.

So the board voted that very day to approve the deal.
But the Mexican corn contract never came through. And there was significant confusion over the financial statements submitted by the Walker family and its companies.

By 1992, Alfatec was broke. The Walkers filed for protection under Chapter 11 of the Bankruptcy Code. The retirement funds wrote off the $195,000 Alfatec loan, and the Walkers are slowly paying off the $355,000--without interest. They still owe the funds $259,542.

The deal did not sour the board on Kennelly or Francis. They've brokered $25.5 million worth of loans to the retirement system. Francis says the borrowers paid his firm a maximum of 2 percent for obtaining the loans. Among the Kennelly deals is the $10 million PebbleCreek loan.

The 1991 loan went to PebbleCreek developer and Valley power broker Ed Robson and his family, along with their developing partner SunCor, which is affiliated with Pinnacle West, the parent company of Arizona Public Service Company.

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