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Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, November 9, 2017

Injunction, injunction, what's your function: Some speculation as to why there is not a final judgment in Parker v. PSPRS

PSPRS had its annual information seminar on November 7, 2017. The only update given on the Parker case were these bullet points on a Powerpoint slide:
  • Two of the three parties have informally agreed as to the form of judgment, the ball is in the third party’s court.
  • Formal agreement is done through legal documents and court filings, which have not happened yet.
PSPRS does not say which party has not agreed to the form of judgment.  The minute entry of the last status conference on September 22, 2017 said this:
The plaintiffs in the Hall case have decided not to appeal the trial court’s ruling regarding prejudgment interest.  Phoenix Law Enforcement Association (PLEA) has also decided to abide by the same prejudgment interest rate.  PSPRS has already paid members for the permanent benefit increases (PBI), except to the few members  ho are deceased.  PSPRS is also working with each employer to return the excess contributions to their employees.  There are many employers, each with its own issues. The parties will be discussing whether the issuance of a declaratory judgment will be sufficient to resolve the case.
So it certainly appeared at that time that a final judgment was imminent, as neither the plaintiffs nor PLEA were going to challenge the interest rates already set in the Hall case.  The only other outstanding issue would be attorneys' fees, and that issue would have no bearing on a final judgment on interest rates.  However, not being an attorney, I did not note the significance of the term "declaratory judgment."

I am speculating here, but it appears that one party does not agree with the final decision being in the form of a declaratory judgment alone, and not including an injunction.  You can follow the links if you are interested in reading more about those legal terms, but an injunction (i.e. injunctive relief) legally requires some type of action pertaining to the resolution delivered by the declaratory judgment.  You can get a little insight into this issue from this minute entry from Hall.  So in this case, the declaratory judgment would legally settle the interest rate question, as no parties object to the 4.25% pre-judgment/5.25% post-judgment interest rates set in Hall, but an injunction would be a further legal mandate on PSPRS to achieve final resolution.

Based on our experience of PSPRS' deliberate slow walking of the excess contribution refunds, my guess is that the third party (most likely PLEA) wants a definite deadline this time around when it comes to the payment of interest, which would include a penalty if PSPRS does not meet that deadline.  PSPRS spent months continuing to withdraw excess contributions after it was already declared unconstitutional by the Arizona Supreme Court, then they dragged out the process of paying refunds.  All the while PSPRS was earning interest well in excess of the 4.25% pre-judgment interest rate assigned in Hall.  It has been exactly a full year since the Hall case was decided on November 10, 2017 and the Russell 3000 has returned 21.80% in that time.  Even PSPRS' own annualized rate over the five years ending June 30, 2017 was 7.95%.

I suppose someone might ask why continue to litigate when the litigation itself is acting to prolong the delay in paying interest, but the response to that is why would there be any objection to setting an exact date on when the interest will be paid.  PSPRS has known that these payments were required for a year now, and it seems unlikely that there are anymore outstanding excess contribution refunds to be made.  This means interest is ready to be paid today, but of course, why should PSPRS be in a hurry to pay members if PSPRS benefits financially from dragging its feet?  Only a strict deadline with a penalty for non-compliance will force PSPRS to act ethically and for the benefit of its members.

The next status conference in Parker v. PSPRS is January 22, 2018.

Sunday, September 24, 2017

The continuing tragedy of PSPRS' investment returns

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through June 2017, the final month of the current fiscal year (FY), with the FY end 2014, 2015, and 2016 returns included for comparison:

Report PSPRS PSPRS Russell 3000 Russell 3000
Date Month End Fiscal YTD Month End Fiscal YTD
6/30/2014 0.78% 13.82% 2.51% 25.22%
6/30/2015 -0.73% 4.21% -1.67% 7.29%
6/30/2016 -0.32% 1.06% 0.21% 2.14%





7/31/2016 1.62% 1.62% 3.97% 3.97%
8/30/2016 1.76% 3.40% 0.26% 4.23%
9/30/2016 0.71% 4.14% 0.16% 4.40%
10/31/2016 -0.27% 3.86% -2.16% 2.14%
11/30/2016 1.17% 5.07% 4.48% 6.71%
12/31/2016 1.30% 6.43% 1.95% 8.79%
1/31/2017 1.03% 7.52% 1.88% 10.84%
2/28/2017 1.17% 8.78% 3.72% 14.96%
3/31/2017 1.06% 9.93% 0.07% 15.04%
4/30/2017 0.75% 10.76% 1.06% 16.26%
5/31/2017 1.33% 12.24% 1.02% 17.45%
6/30/2017 0.22% 12.48% 0.90% 18.51%

There is usually about a two-month lag in PSPRS reporting its investment returns.  PSPRS' August 2017 Board of Trustees meeting included returns from both May and June 2017 because PSPRS did not have a meeting in July 2017.

PSPRS' FY 2017 return, net of fees, was 11.85%.  For comparison, PSPRS' own Cancer Insurance Plan (CIP) earned 10.12%, net of fees.  The CIP is a simple mix of approximately 25% US equity, 25% non-US equity, 30% fixed income, 10% inflation-linked bonds, 5% commodities, and 5% short-term investments.  The Arizona State Retirement System (ASRS) has not given its FY 2017 returns yet, but an Arizona Republic article from July 19, 2017 stated that it will be around 13.6%, net of fees.  We should keep in mind, though, that this same article also said that PSPRS' FY 2017 returns, net of fees, were going to be 12.5%, so the ASRS estimate might be inaccurate as well.

PSPRS is already crowing about the FY 2017 return and are again using their own particular data set to make their returns look like something special.  However, if we go here to ASRS' page on its rates of return, we can see PSPRS' true mediocrity in comparison to ASRS.  The numbers presented by ASRS do not even do ASRS justice as they do not include the most recent FY return of 13.6%, and yet ASRS still beats PSPRS by 2% (6% to 4%) in the 10-year annualized rate.  On a $9 billion fund, the additional 2% annualized returns over 10 years would generate nearly $2 billion in additional earnings.  PSPRS also lags the CIP by 1.40% in the 10-year annualized rate.

Even more telling is ASRS' historic rates of return, which go back over 35 years.  This is data, by the way, that PSPRS conspicuously does not provide on their webpage.  I suspect that this is because similar PSPRS data would make past PSPRS Administrator Jim Cross look too good in comparison to the succession of mediocrities that have run PSPRS since his departure.  Mr. Cross is the favorite scapegoat of PSPRS' current administration and Board of Trustees, as well as state union leaders, because of some bad investment choices he made during the dot.com bust, but these same people conveniently fail to mention the years of stellar returns he produced prior to those last couple of years of his career as PSPRS Administrator.  I believe that his good years were just in line with the overall markets at the time and not the sign of any particular investing acumen, but it is unfair to look at only his last couple of bad years and not give him credit for his many prosperous years.

ASRS' historic rates of return show that in 37 years, dating back to FY 1981, ASRS had only five years of negative returns.  One negative year was way back in FY 1984 (-5.2%).  The other four were in FY 2001 (-6.7%), FY 2002 (-8.2%), FY 2008 (-7.6%), and FY 2009 (-18.1%), and we all know what happened during those years.  During that same period, PSPRS had negative returns in eight years in FY's 1984 (-2.45%), 1988 (-1.10%), 1994 (-0.71%), 2001 (-16.86%), 2002 (-15.07%), 2008 (-7.27%), 2009 (-17.72%), and 2012 (-0.79%).  This PSPRS data had to be gleaned from annual reports and is not openly available like it is on ASRS' webpage.

We can see that PSPRS had losses that were nearly double what ASRS had during the dot.com bust.  This makes sense because of the individual stock investment strategy that was being followed at that time by Mr. Cross.  An index-based approach would not have produced such large losses, though some type of market crash was unavoidable when the internet bubble finally popped.  During the Great Recession ASRS' and PSPRS' losses are not much different with ASRS' losses only about 33 basis points greater than PSPRS' losses.  This is because that crisis was systemic and took down everything.  It would not have mattered where one was invested, except strictly in cash or in Big Short-type bets on the housing crash.  You were going to suffer some type of loss.  There was virtually no way to avoid that. 

The point here is that we now have the brain trust at PSPRS trying to develop a strategy for two recent past events that were either caused and/or exacerbated by bad policy (i.e. stock picking during a bubble) or major market downturns (i.e. an investment bubble popping and/or a global liquidity crisis).  This is why they continually highlight data about how the current portfolio would have done in the past during specific crises, but, of course, anyone could retroactively design a better strategy when they know what the markets actually did.  Bad investment policies are easy to deal with by simply getting rid of them, but what about market crashes?

PSPRS is selling the idea that they have found a strategy for mitigating market crashes with its Modern Pension Diversification, but the strategy has yet to be put to the test in an actual market downturn.  Even if we buy into PSPRS' theory, there is the other side of the coin: how much would PSPRS have foregone in higher returns during the past had it utilized this investment strategy? PSPRS, of course, do not provide this information, and we are left with an incomplete picture, as if PSPRS' only goal was to mitigate the effects of market downturns.

The goal for PSPRS should be to produce steady gains over the long term.  ASRS has done this over the past 37 years, absorbing losses during the inevitable market downturns but more than making the losses during the subsequent bull markets.  This has been a success for ASRS, and if PSPRS wants to implement an effective investment strategy all they need to do is study and mimic what ASRS has done.  Or better yet, place PSPRS' investment portfolio in the hands of ASRS.

What is even more unsettling is that PSPRS does not see the policy pitfalls in its own strategy.  By my count, PSPRS has 74 private equity investments, 53 real asset investments, and 39 real estate investments listed its 2016 Consolidated Annual Financial Report (CAFR).  This compares to only a total of 22 US and non-US equity investments listed.  At what point does their strategy become just another form of individual asset picking, especially with private equity (PE), which makes up about 14% of  PSPRS' total portfolio?  While I do not know exactly how PSPRS may be invested with each PE firm, we can see that the PE firms themselves have a multitude of investments.  Just looking at the first three PE firms listed in the CAFR, Abry Partners, Avalon Ventures, Baring PE Asia, we can see each has numerous companies in their PE portfolios.  So you have PSPRS picking dozens of PE firms which each have dozens of companies in their portfolios.  What will happen to all these companies, and PSPRS's stake in them, if there is another market crash?

It has never made sense for PSPRS to invest separately from ASRS, just based on economies of scale alone, and when PSPRS decided last decade to move away from one-man rule over its investment portfolio, its Board should have looked to the established, proven team that had already been successfully running ASRS to take over its investments, or at the very least, for guidance in getting PSPRS back on track.  Instead of PSPRS turning things around after 15 years, we still have second-raters like Jared Smout, Ryan Parham, and Brian Tobin whining and making excuses about PSPRS' failings in both its management and investment performance.  What a tragedy it is that PSPRS, which is not even five miles distant from ASRS, was so incompetently led down such a different and broken financial road, a road from which there seems no exit.

* Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year.  Returns, gross of fees, are used in the table for consistency.  The past two years fees have reduced the final annual reported return by about a half percent.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, and 11.85% in FY 2017.

Friday, September 22, 2017

The end is near! Final interest rates have been decided in Parker v. PSPRS

The end is nigh for Parker v. PSPRS.  Here is the latest minute entry in the case from September 20, 2017 says:
The plaintiffs in the Hall case have decided not to appeal the trial court’s ruling regarding prejudgment interest.  Phoenix Law Enforcement Association (PLEA) has also decided to abide by the same prejudgment interest rate.  PSPRS has already paid members for the permanent benefit increases (PBI), except to the few members who are deceased.  PSPRS is also working with each employer to return the excess contributions to their employees.  There are many employers, each with its own issues.  The parties will be discussing whether the issuance of a declaratory judgment will be sufficient to resolve the case.
IT IS ORDERED setting a Telephonic Status Conference regarding case status on January 22, 2018 at 9:00 a.m. (time allotted: 15 minutes) in this Division . . .
PLEA had asked the judge in this case to consider an interest rate separate from what was awarded in Hall, but it appears that this was not going to happen and they have dropped this request.  PLEA may have also been hoping that the plaintiffs in Hall were going to challenge the rate in their case and piggy-backed onto that challenge, but that did not come to pass.  So it looks like litigation over SB 1609 is finally over for PSPRS members.

The final interest rates set in Hall were 4.25% pre-judgment and 5.25% post-judgment.  You can read more about in this notice dated July 18, 2017 on PSPRS' website.  Pre-judgment interest will come from employers, just like the excess contributions refunds did, and they will again be allowed to credit the interest payments against their current employer contributions.  Post-judgment interest will have to come from employers' own funds.

The final rates set in Hall were from a court decision dated June 8, 2017.  The cutoff date that separated the pre- and post-judgment periods was June 28, 2017.  It appears that there are still some legal procedures that need to be completed for a formal judgment to be lodged in Parker, but it appears that this should go through unchallenged.  If the same timeframe is followed as it was in Hall, we should see a cutoff date in Parker  of somewhere around October 10, 2017.  The post-judgment period does not go all the way back to the Supreme Court decision.  While I cannot say for certain, I would assume that all excess contribution refunds have been completed by employers, which means the only possible post-judgment interest payment that could accrue would be on any delayed pre-judgment interest payments.  I do not see any reason why employers would delay these interest payments if they can just credit them against their current contributions.

As we have discussed in the past, 4.25% is low and does not represent what PSPRS actually earned on members' money they never should have possessed in the first place.  The Supreme Court decision in Hall came down just after the 2016 election, and we know how much the markets have gone up since then.  In the end, the Duke brothers carry on in spirit within the ranks of PSPRS management and Board of Trustees.  If you want to see some speculation of what the interest payment might be, this post may interest you.

Thursday, August 17, 2017

How the House Ad Hoc Committee on PSPRS can begin fixing PSPRS (UPDATED)

***I have updated this post to correct an error about how contributions will be determined for Tier 3 members.  I have used strikethroughs for incorrect parts and italicized the corrected passages.  I apologize for these errors.***

In the last post, I made the suggestion to the House Ad Hoc Committee on PSPRS (“the Committee”) that they use their influence to press for the removal of PSPRS Administrator Jared Smout.  While this would be an overdue and important change, long-term it will have minimal effect on PSPRS, and long-term fixes are what the Committee is trying to find.

In Craig Harris’ article, “Arizona mayors call on Ducey to push overhaul of financially fragile public-safety pension system,” from the July 19, 2017 Arizona Republic, two reform ideas mentioned by State Senator Noel Campbell, Bisbee Mayor David Smith, and Prescott Mayor Harry Oberg were “the abolition of the PSPRS board and management, and . . . placing the fund's operation under the state treasurer,” and “ask voters to amend the state Constitution, which now dictates that a pension benefit given to a public employee cannot subsequently be taken away.”

The first idea could be accomplished more simply by changing the makeup of the Board of Trustees so that it was more representative of employers and taxpayers.  As far as I know, the Arizona legislature can staff the Board in any way it sees fit.  It is up to them to decide if employee representatives need to be voting members of the Board or what value and expertise firefighters and law enforcement officers contribute in the fields of actuarial science, finance, and investing.  PSPRS has four active members, two fire and two law enforcement, on its nine-person Board.  If this is excessive, they can change it.  There is no need to turn over the management of PSPRS to the Treasurer, just create a Board that knows what it is doing, and have these individuals hire a competent Administrator and other staff.

As to the second proposal, repealing or altering Article 29 of the Arizona Constitution, which prohibits the diminishment or impairment of pension benefits, would not affect the unfunded liabilities that already plague employers.  The excess contributions portion of the Hall case was decided in favor of the plaintiffs on the basis of case law (Yeazell) and did not rely on Article 29.  The contribution rate was deemed a binding contract between employees and employers that could not be changed unilaterally in favor of the employers.  Existing pension benefits also constitute a binding contract.  [Oddly, 2016’s PSPRS reform used Article 29 to accomplish the very thing it was meant to prevent.  Proposition 124 used a voter-approved amendment to Article 29 of the Arizona Constitution to eliminate the contractual and heretofore constitutionally protected permanent benefit increase (PBI) and replace it with a capped 2% cost of living allowance (COLA).]  Any change in benefits would still have to contend with case law, and most likely, the contract clauses of the Arizona and United States Constitutions, so repealing Article 29 is not the solution to the unfunded liabilities that already exist.

Currently, it seems virtually impossible to decrease any existing pension benefit, except through constitutional amendment (assuming Proposition 124 was constitutional) or the bankruptcy of an employer.  Any changes to PSPRS have to be prospective, affecting only those yet to be hired, administrative, or in line with existing pension benefits.  If the House Ad Hoc Committee on PSPRS wants to make some administrative, here are some suggestions:
Amend Article 29 of the Arizona Constitution to mandate equal contributions toward normal costs "the normal costs and the actuarially determined amount required to amortize the total unfunded accrued liability within the public safety pool" from employers and employees in any state pension that already has this requirement and for all future hires.  This is one of the most important changes that state legislators could make.  This would make cost sharing of normal costs all costs permanent and immutable.  The long game played by the state public safety union has always been to continually push for new or enhanced benefits like the PBI and DROP because the unions knew they were protected from any financial consequences by a fixed employee contribution rate.  This meant that no matter how costly the benefit became, it would never affect employees.  The cost would be borne by employers and taxpayers.  Splitting normal all costs would force any financial costs to fall equally on employers and employees and eliminate the perverse incentive state public safety unions have to push for unfunded enhancements of their pension benefits.  If the unions want to convince Arizona’s House and Senate to create a new or enhanced benefit, they will have to pay their fair share for it.

This amendment should not be controversial.  The state public safety unions already agreed to this condition for Tier 3 PSPRS members, and the Arizona State Retirement System (ASRS) and Corrections Officer Retirement Plan (CORP) already split normal all costs.  The Elected Officials’ Retirement (EORP) no longer has a defined benefit plan for new members.  Because of the Hall decision, nothing can be done about those PSPRS, EORP, and CORP members grandfathered into their respective systems with a fixed employee contribution rate.  This amendment would be simple to write and understand, and hopefully, the state’s voters would overwhelmingly approve.

Allow another state government entity to choose PSPRS’ actuaries, accountants, and outside investment consultants.  This goes hand-in-hand with the previous idea.  A neutral, objective party must give all stakeholders a realistic assessment of PSPRS’ financial condition.  As was seen with accounting firms and bond rating agencies, problems can arise when the organization being scrutinized is the one paying the company scrutinizing it.  I suspect it is only a matter of time before some major actuarial firm is sued for malpractice over a public pension that fails.

The Treasurer or Auditor General should set the engagement standards, choose, contract with, and pay (out of PSPRS' budget) the actuaries, accountants, and outside investment consultants.  The Treasurer or Auditor General should also receive the actuarial reports and financial statements before PSPRS does so that any problems identified cannot be covered up by PSPRS’ staff or Board of Trustees.  In Mr. Harris’ article, PSPRS Board of Trustees Chairman Brian Tobin boasts, “. . . that he has supported since 2011 legislation that would reform cost-of-living adjustments for retirees and have employees make higher contributions for their pensions.”  That’s the kind of bold, determined spirit you get from someone who will get nearly $1 million dollars his first year of retirement.  The funny thing is that page 8 of the Arizona League of Cities and Towns’ Pension Task Force Report says this:
. . . prior to FY 2015-16, the cost of the PBI was not included in the employer contribution rate.  Excluding the PBI from the calculation effectively underestimated the normal cost of the pension plan, causing it to manifest itself in the unfunded liability.  This issue  was  identified  by  PSPRS  actuaries several  years  ago,  but  the  PSPRS  Board  did  not  take  action to address it.
Keep in mind that Brian Tobin became Chairman of the PSPRS Board of Trustees sometime during fiscal year 2010.  He knew the PBI was a problem, yet in his official capacity as the Chairman, he did not require PSPRS to account for it in the normal cost, despite being informed of this problem by PSPRS’ own actuary.  This alone would argue for Mr. Tobin’s removal from the Board, and it is further evidence of Jared Smout’s unfitness to be PSPRS’ administrator.  What a duo we have leading PSPRS.

If the Arizona Treasurer or Auditor General had received a report from an actuary saying that PSPRS had, for years, not been accounting for a major driver of PSPRS’ underfunding, I think the problem would have been addressed much sooner and those responsible for this “oversight” would no longer be working at PSPRS.  As we see in this case, even when we have an ethical actuary raising a red flag, we still cannot trust PSPRS to take the proper action to address it.  With normal costs now split evenly between employees and employers, there will be even more incentive to lowball normal costs, as any normal costs not properly accounted in the present will appear later as unfunded liabilities.  Unfunded liabilities will be the sole responsibility of employers and taxpayers.  For the sake of Tier 3 members and employers who will have to foot the bill for any of PSRPS' chicanery, this is why someone other than PSPRS must choose its actuary, accountants, and investment consultants.

Subject PSPRS to a more comprehensive analysis of its investments, fees, and how PSPRS' investment strategy compares with those of other funds.  This report, of course, would have to be produced by an outside entity hired by another state agency.  The Panglossian world of the PSPRS office is one where whether PSPRS makes money, loses money, or underperforms, it is always doing great.  PSPRS is always in some top segment of some subset of funds, but it underperforms its own Cancer Insurance Plan and ASRS.  What of all its investments in private equity and real estate?  These are notoriously hard to value.  What methodology is used to value these?  Furthermore, as of last fiscal year, PSPRS had, by my count, 74 private equity investments, but only 11 of these investments accounted for 83% of its gain in its private equity portfolio.  It is great that this asset class is earning good (paper) returns, but how is this different than picking individual stocks.  When your portfolio gets big enough, when do your picks become luck rather than any display of skill?  What would PSPRS have done if it had used other strategies, paid lower fees, or simply invested in the S&P 500 since 2000?  We already know we cannot trust Mr. Tobin or Mr. Smout to accurately account for normal all costs.  Why would we trust them to provide accurate investment figures or assessments?

The Arizona Legislature must get other political subdivisions involved in any penson benefit legislation they pass in the future.   The legislature and state public safety unions have always negotiated pension benefits over the heads of the cities, towns, counties, fire districts, and tribal nations who have to pay for them.  These groups must get a seat at the table whenever changes in benefits are considered.  Outside of the Department of Public Safety, the state has no large employee group in PSPRS, and the state has much deeper pockets than other political subdivisions.  Unfortunately, I am not sure of a way that this can be mandated
.
I personally think that the Legislature should not determine PSPRS benefits.  They farmed out negotiations for 2016’s pension reform to Reason Foundation, a private, public policy research group, so I don’t know why they don’t allow the Arizona League of Cities and Towns or some other group acceptable to the political subdivisions to negotiate with the state public safety unions.  I suppose the League could also use Reason Foundation as a consultant to help them out.  The political subdivisions and the unions are the two parties most affected by pension legislation, and they should be able to come to some agreement about what is best for both of them.  This is routine business at the local level w here these groups negotiate over wages and benefits.  The Legislature has to realize by now that the status quo cannot continue, and political subdivisions must have some part in determining pension benefits.  This is what Mayors Oberg and Smith should really be advocating for if they want to stop the pension debt monster from coming back to ravage their cities in 25 or 30 years.
The bottom line is that too many elements inside and outside of PSPRS have been allowed to run unchecked for too many years.  While it appears that nothing can be done about pension benefits already promised, these are some easy, non-litigatable steps to rein in those who cannot control their own myopia, greed, selfishness, and stupidity.

Saturday, August 12, 2017

Out with Smout: It's time to get rid of PSPRS Administrator Jared Smout

I hope most PSPRS members have read this article, "Pension executive defends six-figure retirement payouts for police, firefighters," by Craig Harris in the August 10, 2017 Arizona Republic.  If not, please take the time to read it because it goes a long way in showing why PSPRS is in the mess it is today.

The pension executive to whom the article is referring is PSPRS Administrator Jared Smout. What he was shamelessly defending before the Arizona House Ad Hoc Committee on PSPRS was the Deferred Retirement Option Plan (DROP).  Keep in mind that Mr. Smout is the person in charge of PSPRS, not a spokesperson or a self-interested individual like PSPRS Board of Trustees Chairman Brian Tobin, a man who will get nearly $1 million in pension and DROP payments during his first year of retirement.  The one individual from whom we should expect an honest appraisal is the  PSPRS Adminstrator.

I have had the misfortune of hearing Mr. Smout speak publicly.  If you did not believe that someone could be both arrogant and banal, go see Mr. Smout speak.  If you ever saw former Federal Reserve Chairman Alan Greenspan speak before Congress, you will get a sense of Mr. Smout's style of delivery.  Of course, this is the only similarity between those men--Alan Greenspan has a much more varied and accomplished background than PSPRS lifer Jared Smout, but perhaps Mr. Smout thinks that if he talks like Mr. Greenspan, his words will be accorded the same gravity and credibility.  Why else would he say that "there was a perception problem with the Deferred Retirement Option Plan — or DROP — and that it was a "myth" that the program has cost the pension trust a 'huge' amount of money" unless he thought the Committee would just believe him out of hand because he speaks his  financial jargon in such a condescending tone.

Mr. Smout has to be ignorant, incompetent, and/or deceitful to make a statement like that in front of a congressional committee.  The DROP is indefensible.  It was a blatant money grab from the pension perpetrated during a brief period when PSPRS was overfunded.  Among problems with the DROP are:
  1. For many years it paid a guaranteed interest rate of up to 9%, even when PSPRS was losing money. 
  2. It robs PSPRS of funding.  A pension relies on a constant stream of funding to stay solvent.  These funds must compound over time, and if the actuarials are correct, a BIG if, the pension can stay solvent in perpetuity.  The DROP interrupts this funding stream.  If five members all DROP for the full five years at 25 years of service , the pension will lose 25 years of funding from employees who are likely to be at their highest pay.  That's an entire career of payments into the pension that will never be paid.
  3. It slows the replacement of higher paid Tier 1 employees with Tier 3 employees.
In case Mr. Smout truly is ignorant, let's explain it to him as simply as possible: An employee cannot be active and retired at the same time.  This is common sense.  You can either have a longer career and get a higher pension for fewer years or you can have a shorter career and have a smaller pension for more years.  This is Pensions 101.  This is why no other retirement systems allow the DROP, with the exception of other well-managed public safety pensions like the Dallas Police and Fire Pension Plan.  PSPRS' own policy states that "at ANY time following retirement, if you are re-employed in the same, or substantially similar position by the employer from which you retired, your retirement benefits will be suspended."  This policy prevents employers from hiring back their own public safety retirees, at a lower cost as they would no longer have to pay pension contributions for these employees, in place of new employees for whom contributions would have to be paid.  The obvious reason for this policy is to prevent employers from starving PSPRS of the consistent funding stream it needs to stay financially viable.  This PSPRS policy prevents an employer from doing the very thing the DROP permits.  Yet, Mr. Smout defends the DROP and says that "his organization concluded it was largely cost-neutral."

I know nothing of Arizona State Senator Noel Campbell's background, but he seems to understand the DROP better than Mr. Smout.  Mr. Harris writes:
Campbell also said he didn't believe Smout's assertion about DROP's cost. The lawmaker said his examination of PSPRS records suggested DROP is "a very expensive drain on the fund," and he believes the benefit should be terminated for all current employees.
Campbell also characterized DROP's guaranteed rate of return as too generous, noting it would be nearly impossible to find in the private sector. He said DROP prevents local governments from hiring new, less costly employees to replace "retired" officers in DROP for five years. Unlike many officers in DROP, those new employees also would be making individual contributions to the retirement system.
Senator Campbell does not believe Mr. Smout, and neither should anyone else.  If there are still any defenders of the DROP, PSPRS, or Mr. Smout, here is more from Mr. Harris' article:
. . . the Arizona State Retirement System, which is in better financial health, ended DROP because of major cost concerns.
Paul Matson, chief executive of the ASRS since 2003, said in an earlier interview that the ASRS, the much larger pension system, never implemented DROP because it would have significantly increased trust payments for members and their government employers. 
Matson had lawmakers revoke DROP for ASRS members in 2006.
"We didn't implement it because we didn't want contribution rates to increase," Matson said. 
The ASRS trust is in better financial health than the PSPRS. The pension system for teachers and state and local government employees has a funded ratio of 76 percent, meaning it has about three-fourths of the money it needs to pay all current and future liabilities.
ASRS is 76% funded.  PSPRS is about 47% funded.  ASRS has a contribution rate of 11.50% apiece for employers and employees.  PSPRS has an aggregate employer contribution rate of 52%, with much higher employer contribution rates for some employers.   ASRS has needed only limited adjustments, while PSPRS is continually in need of major reforms.  Paul Matson, who has worked for ASRS since 1995 and been its Executive Director since 2003, says that the DROP is a bad policy that would have caused contribution rates to increase for ASRS employees and employers, and he had it revoked in 2006 well before the financial downturn of 2008-09.  Mr. Smout says the DROP is just fine and dandy.  Should you believe Mr. Matson or Mr. Smout about the DROP? 

One man works proactively to reverse a harmful policy to the benefit of all stakeholders.  Another man continues to defend an obviously deleterious policy that benefits only one group of employees at the expense of all other stakeholders.  Sadly, what stands out most in this article is the utter cravenness of Mr. Smout.  His statement before the committee was his chance to do the right thing and, at the very least, admit that the DROP was a costly error on the part of Arizona's legislature.  As an administrator, he was not responsible for the statute that created the DROP, but
I would say he has a responsibility to speak the truth when a state law is enacted that negatively affects the system he administers.  Mr. Matson did.  Why wouldn't Mr. Smout do the same?

I suppose Mr. Smout is lucky to still be employed by PSPRS, much less working as its Administrator.  When former Administrator James Hacking was caught giving illegal raises to some PSPRS employees, Mr. Smout, the Deputy Administrator at the time, turned out to be the person who authorized payroll to process the illegal raises.  Mr. Hacking agreed to resign after negotiations with the Board of Trustees, but Mr. Smout remained with PSPRS and was eventually tapped to lead it.  It would seem that the Deputy Administrator should have known that what he was authorizing was illegal and should have taken a stand against it.  However, he did not and, in the end, this act actually helped to move Mr. Smout up the PSPRS ladder.  I guess Million Dollar Man Brian Tobin and the other Trustees saw something in Mr. Smout's weak-willed behavior during that episode that made them think he was the best person to run PSPRS for them. 

If the House Ad Hoc Committee on PSPRS wants to begin the process of administrative reform at PSPRS, they should press for the removal of Jared Smout as PSPRS Administrator.  A man with neither the will nor the backbone to do what is right should not have the future of so many hard-working people in his hand.

Tuesday, July 18, 2017

Final interest rates for the Hall case: 4.25% for pre-judgment interest; 5.25% for post-judgment interest

This information about the Hall case came out this afternoon
IMPORTANT HALL LAWSUIT NOTICE

PSPRS was informed last week that the Hall lawsuit impacting Tier 1 EORP members has finally come to a conclusion. As such, prejudgment interest was awarded at 4.25% up through June 28, 2017. Those interest amounts have been calculated and updated to the Employer and Local Board portals today. As a reminder, the prejudgment interest amounts will be included in the credit amounts available for employer use.  These individual amounts will be available in the Members Only portal within the coming days.
The post-judgment interest rate has been determined to be 5.25% where each employer will need to calculate those individual amounts. As a reminder, the post-judgment interest amounts will not be included in the credits available to employers.
To calculate the post-judgment interest, you may use the following formula:
Post-judgment Interest Amount = Total of Contributions and Pre-judgment Interest x .0525 x Number of Days Between June 29 and Payout /365 
This should be calculated on an individual basis for each of your members. Also, this formula assumes you will pay out the contributions and the interest on the same day. If you are planning to pay them out separately, then apply the same formula to the separate amounts (the only difference will be the entry for the “number of days between June 29 and payout.")

Now that the Hall case is officially over, the courts have begun to address the Parker case for PSPRS members. While the remedies will be similar as to the statutory reference for the amount of interest, the actual rate applied to pre-judgment interest could be different. Therefore, we appreciate your patience as this case is adjudicated to completion.
Before I comment further, I need to see an actual pre-judgment interest calculation as I do not know how they will apply this rate to the excess contributions.  4.25% seems low to me, and it appears that they used the prime rate in effect at the time SB 1609 was implemented in 2011 (3.25%) and added 1%.  The current prime rate is 4.25%.  I checked my own PSPRS account and found no pre-judgment interest total displayed, but PSPRS is updating its member portal and does not appear to be posting any new information there.  The new member portal is supposed to go live on July 21, 2017, but it has already missed a previous deadline.  While I suspect that PSPRS members are being cheated, I need to see more information first.