Practically every month, 85-year-old Edith Christy hightails it down Central Avenue in her Ford Taurus, parks in the underground garage of the Norwest Tower and rides the elevator up to the headquarters of the Arizona State Retirement System just in time for the pension fund's board meetings.

Like dozens of other oldsters who are beneficiaries of the Arizona State Retirement System, which has assets of nearly $13 billion, the former Creighton Elementary School District librarian sees reason to keep careful watch over the pension fund, which is the largest pool of public money in the state. About 45,000 retirees draw pensions from the fund, while another 200,000 state and county employees are contributing to the system for their future retirements.

The pension fund is almost three times larger than the current $4.5 billion budget for the entire State of Arizona.

Which makes it a tempting target, retirees suspect, for politicians wanting to pay back their friends. Or stockbrokers looking for commissions. Or venture capitalists and developers looking for easy sources of money. Or the countless real estate brokers and lawyers who reap hundreds of thousands of dollars in fees on such deals.

The retirees already hold a lingering distrust of board members appointed by Governor J. Fife Symington III. This is because the governor himself failed to pay several pension funds, including the state pension funds, millions of dollars in real estate loans. And, in 1993, the governor appointed John Stiteler, a developer who was linked by news reports to several bankruptcies and six-figure unpaid debts, to one of the boards governing the state retirement system. Stiteler resigned after his record became public.

These days, though, the retirees are more worried than ever.
In April, the two boards that co-manage the pension fund quietly made an unusual decision during an emergency meeting.

The five-member Investment Advisory Council and the seven-member Arizona State Retirement System, all of whose members are appointed by Symington, approved the transfer of $1.06 billion of pension-fund money "in-house."

This means the $1.06 billion that had been managed by the Boston Company, an investment-management firm owned by Pittsburgh-based Mellon bank, will soon be invested only by staffers at the state retirement system.

Activist retirees figure the move was politically motivated, and is risky because it puts their money within easier reach of locals who would like to get their hands on it.

"The weakness in this system is that the boards are made up of political appointees," says Ronald Murphy, a 68-year-old retired administrator for the Glendale High School District who is now a lobbyist for the Arizona Retired Teachers Association.

"We [retirees] don't seem to have any say on who sits on the boards," says Murphy.

Officials from the retirement system deny the move was politically motivated. They say the reasons are practical, safe and economically sound. For every $100 million the system invests in-house, $1 million in management fees will be saved, says LeRoy Gilbertson, director of the retirement system.

Retirement officials like to tout a 1994 state auditor general's report on the retirement system, which notes that most larger funds manage at least a portion of their money in-house.

By 2004, the report says, the system could expect to spend $15 million in fees on the outside investment managers. (This year, the fund paid $11 million in fees.) Internal management could cut those expenses "several million dollars annually," the report says. Sophisticated computer programs could, in part, replace the outside money managers.

But even the auditor's report raises the retirees' suspicions.
The author of the report, Anthony Guarino, was later hired by Gilbertson to be deputy director of the retirement system.

Gilbertson says Guarino's hiring had "nothing to do with the report" Guarino authored while at the Auditor General's Office.

"He was hired because he has ten years' experience in state government," says Gilbertson, adding that Guarino was simply the "most qualified" of perhaps ten candidates he interviewed. And Gilbertson points out that the board approved the hire.

"Most major retirement systems our size manage money internally," says Gilbertson. "This is not anything new in the industry. It's just new in Arizona."
As in-house investing develops a "track record," Gilbertson says, "I would anticipate moving more money internally. But that's going to be a while."

The national trend among public pension funds is going the opposite way of Arizona's fund. Some funds are reducing their internal management portfolios because it hasn't proved cost-effective. A report last year by MDNMthe publication Pensions and Investments noted that of 332 public pension funds surveyed, 39 percent used some form of in-house investing in 1991. But, two years later, only 32 percent of funds utilized in-house investing.

This contradicts the state auditor general's report.
Some pension funds found they simply weren't saving money with in-house investing--the overhead was large and outside money managers were reducing management rates to funds, officials said.