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

Wednesday, May 15, 2019

The Desolation of Smout: The rotten root of PSPRS' many troubles

So the hits just keep on coming.  If you have not been following along at the Arizona Republic since the last post, there have been three other articles about the pay practices at PSPRS: "State pension fund delivered subpar returns. Then it gave executives an extra $120,000" by Craig Harris and Anne Ryman on May 9, 2019, "Taxpayer giveaway or settlement? Questions on $120,000 bonuses at state pension system" by Mr. Harris on May 12, 2019, and "Arizona public safety pension board approves retroactive bonuses to executives"  by Mr. Harris on May 14, 2019.  Also, Arizona Republic columnist Laurie Roberts has published three editorials on PSPRS over the past three weeks: "Suspended Arizona pension boss should lose that outrageous $43,000 pay raise," "Arizona pension system gave out bonuses? What it needs is Pine Sol and pink slips," and "Jackpot! Pension staff bonuses approved while Arizona cities go broke."

First, I must highlight a part of this that is a bit confusing when it comes to the legality of raises at PSPRS.  Mr. Harris wrote in his April 23rd article:
Megan Rose, ADOA's spokeswoman, said she was surprised to learn PSPRS had given Parke a raise following the warning on Smout's raise. Rose reiterated that state law requires PSPRS to consult with ADOA before giving raises.
However, in the May 9th article it says:
In summer 2015, then-Administrator Jim Hacking was forced out after The Republic uncovered he had given secret raises of up to 27% to his investment staff without state Department of Administration's approval, which then was required by law. 
The Department of Administration no longer approves raises at PSPRS, but the state's personnel office has voiced concerns about Smout's retroactive raise, contending it may have been illegal.
Rose, the ADOA spokeswoman, said while ADOA has raised concerns that Smout's raise was illegal, it does not have the authority to revoke it. 
"We are not law enforcement," she said.
She added that PSPRS does not currently need ADOA's approval from raises because it's not an agency that reports to the governor.
PSPRS is overseen by a volunteer board, whose members are appointed by Gov. Doug Ducey, the House speaker and Senate president.
As I read this, PSPRS, by law, must consult with the Arizona Department of Administration (ADOA) before giving raises, but the PSPRS Board is under no legal obligation to follow their "consultation"and can pay whatever it wants.  Why is ADOA involved at all then?  This seems like an odd requirement.

So since the last post, it has come out that PSPRS not only gave Administrator Jared Smout a retroactive raise at the end of 2018 but also paid out another $120,000 in bonuses to three other PSPRS executives.  One of the three bonuses was $72,000 paid to PSPRS' former Chief Investment Officer (CIO) Ryan Parham, four days after he retired.  Mr. Parham already was, for many years, the state's second-highest paid non-University system employee, behind only Paul Matson, the Director of the better-managed and higher-earning Arizona State Retirement System (ASRS).  Mr. Parham also received "at least a half-million dollars in bonuses and additional compensation" over the prior ten years and is currently drawing an annual ASRS pension of almost $129,000.  Under Mr. Parham's watch, PSPRS achieved the distinction of being one of the worst-performing public pensions in the country.  I guess that type of stellar performance doesn't come cheap.

The bonuses given in 2018 to the three employees, Mr. Parham, senior portfolio manager Shan Chen ($28,000), and current CIO and former executive assistant Mark Steed ($20,000), were paid out as "settlements" to allegedly compensate them for bonuses not received when PSPRS' bonus policy was suspended in 2013.  There are several problems with these bonuses/settlements:

1. They were never approved by the Board of Trustees at the time they were given.  The Board convened meetings this month only after being questioned about them by The RepublicThe Republic discovered the bonuses after filing a public records request with ADOA.  The Board of Trustees retroactively approved the three payments on May 13, 2019, as well as another $51,000 to the estate of a deceased employee.
2. The settlements should actually classified as bonuses because there were taxed as compensation, and per ADOA spokesperson Megan Rose, ADOA classified them as "additional pay or  bonuses."
3. There was never a known legal claim made at the time the bonus program was suspended in 2013 or any time since.  There are strict deadlines and procedures for filing and negotiating a claim against the government, yet a settlement was paid when there was no underlying claim that had to be settled.
4. The three employees were each given $1,000 to sign the settlements.
5. The state Attorney General's office knew nothing of these settlements, though it is the agency that normally handles financial claims against state agencies.  On all three of the confidential settlement and release agreements linked in the article, Jared Smout is the only signatory representing the state of Arizona and obligating its taxpayers to this settlement.
So what does this look like?  Do we believe PSPRS' petulant communications director Christian Palmer when he says:
PSPRS has consistently stated that these are legal settlements for a simple reason — that's what they are. They are a settlement of potential claims against the system."
Or do we believe our own eyes which tell us that Jared Smout was trying to hide these payments from the public, ADOA, and PSPRS members.  Did the Board of Trustees secretly allow these payments so that it would not have to make a public vote on them?  I don't know, but based on, the Board's later award of a retroactive raise to Mr. Smout. I would not put this past them to try and hide these payments, particularly the one to the departing Mr. Parham.

Mr. Palmer sees nothing questionable here.  If Mr. Smout can independently and secretly "settle claims," doesn't he have sovereign-like power to give away taxpayers' money to those people he favors and withhold payments from those he does not?  Doesn't Mr. Palmer, who according to LinkedIn once worked as a journalist for the Arizona Capitol Times, see anything unethical here?  Of course, Mr. Palmer got a 7% raise and $2,500 bonus last year as well, so why mess up a good thing.

Columnist Laurie Roberts, in her April 25, 2019 editorial, does a good job expressing a lot of the anger most of us are probably feeling.  Before these latest revelations, she highlighted possibly the most insulting part of this whole fiasco:
PSPRS board members justified Smout’s 20 percent raise as his first since 2015. I'm sure rank-and-file state employees – who generally have enjoyed pay raises closer to 2 to 3 percent in that same time period – feel his considerable pain.
Poor Jared Smout hadn't gotten a raise in 3 years!  I don't know how he managed to live on a paltry $209,000 a year.  Where I work, pay increases were deferred for nearly ten years with furlough days and higher costs for medical insurance piled on.  This was on top of increased call loads and deferred maintenance and delays in replacing worn equipment.  I suspect this is a similar situation for many of you out there who are active PSPRS members.  How does the PSPRS Board of Trustees say this with a straight face, especially Chairman Will Buvidas, a Phoenix police officer, and the other public safety Board members (although not all of the current public safety Board members were on the Board when Mr. Smout's retroactive raise was approved)?

As for the other settlement/bonuses, Mr. Palmer whines:
These settlements amount to a fraction of a fraction of the value contributed by these employees who have grown the PSPRS trust to more than $10.3 billion while taking less investment risk than the vast majority of peer pensions.
Really?  They haven't grow anything; they have horribly underperformed.  As Ms. Roberts writes in her May 9, 2019 editorial, ". . . PSPRS posted a 7.1 percent return on investments last year while the Arizona State Retirement System enjoyed a 9.4 percent return," and ". . . PSRPS ranked 37 out of 41 major public pension trusts on investment returns last year, according to the Pew Charitable Trusts."

Finally, Ms. Roberts' May 14, 2019 editorial does a good summation of all this, and if you read only one piece, read that one.  She has an excellent list of "five nagging questions about PSPRS."  Her fifth question even brings up a point that we have repeatedly discussed in this blog:
Why not disband this irresponsible agency?
Why not turn over administration of public safety pensions to the Arizona State Retirement System, an agency that knows how to make money and is transparent in the way it spends money?
Or even better, to the state Treasurer’s Office, which already handles the state’s $16 billion in investments. The Treasurer's Office has an in-house investment team, something that could save us a few bucks on outside management fees paid by the pension trust. And it could boost the pension fund. The Treasurer's return on investment in the Permanent Land Endowment Trust Fund, for example, was 9.09 percent, according to spokeswoman Shaandiin Parrish.
Of course, I would add a sixth question: Why has Jared Smout not been fired yet?

Mr. Smout was not some hired gun brought in to fix PSPRS after coming from another public pension job(s).  He is a PSPRS lifer, whose LinkedIn profile shows PSPRS being virtually his only employer between 1997 and now.  Except for four years in Utah obtaining a masters degree in public administration and working three months as a finance director for the Salt Lake City public library, Mr. Smout has worked only for PSPRS, a period of time that just happens to coincide with PSPRS financial decline. Now, once again, we see him front and center in another episode of questionable ethics and possibly even illegal behavior.

Mr. Smout has had ample opportunity to prove himself as a competent, transparent, trustworthy, and ethical Administrator.  He has failed, yet taxpayers and PSPRS members have had to pay the price while Mr. Smout grows fatter on their hard-earned money.  A fish rots from the head down.  It's way past time to get rid of this rotten head.