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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, July 2, 2020

PSPRS investment returns through April 2020

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through April 2020, the tenth month of fiscal year (FY) 2020, with the past six FY end 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%
6/30/2017 0.22% 12.48% 0.90% 18.51%
6/30/2018 -0.66% 7.76% 0.66% 14.78%
6/30/2019 2.48% 6.05% 7.02% 8.98%

7/31/2019 0.58% 0.58% 1.62% 1.62%
8/30/2019** -0.77% -0.19% -2.04% -0.58%
9/30/2019 1.32% 1.13% 1.76% 1.16%
10/31/2019 1.14% 2.28% 2.15% 3.34%
11/30/2019 1.27% 3.58% 3.80% 7.27%
12/31/2019 1.56% 5.20% 2.89% 10.37%
1/31/2020** -0.32% 4.88% -0.11% 10.25%
2/29/2020 -3.05% 1.83% -8.19% 1.22%
3/31/2020 -6.17% -4.46% -13.75% -12.70%
4/30/2020 3.54% -1.07% 13.24% -1.14%

There is usually a two-month lag in PSPRS reporting its investment returns.

Fiscal year 2020 is mercifully over.  What initially looked like a repeat of 2009 just a few months ago appears to have stabilized, and the market gains of the first six months of the fiscal year will lessen the impact of the second six months.  Based on the FTSE Russell Index Calculator, the FY 2020 return for the the Russell 3000 was 6.53%, with 5.35% earned in May and 2.29% earned in June.  If PSPRS holds to its past pattern, I suspect it will end the year with a return of 3.25% to 4.25%, well below its expected rate of return of 7.3%, which for actuarial purposes means it lost money for the year.

I am sure many of you are noticing the same thing I am.  As of April 30, 2020, there is virtually no difference between PSPRS and the Russell 3000 in FY 2020 returns.  The brain trust that had run PSPRS for many years (Jared Smout, Ryan Parham, Mark Steed, Christian Palmer, Brian Tobin, Will Buvidas, et. al.) have told us for years to trust the process, that the years of lagging returns were the price we all had to pay to protect PSPRS from the next big crisis.  Well, guess what?  The crisis came, and PSPRS did no better than the Russell 3000.

But, but, but their research paper, "Modern Pension Fund Diversification," was in the peer-reviewed academic journal, Journal of Asset Management.  They won awards and had magazine profiles.  Their Chief Investment Officer was honored by Insitutional Investor magazine.  In fact, their whole staff has been honored for their crackerjack performance.  It's not their fault that reality didn't cooperate.

Here's some insight from a man with an actual history of success, Bill Parcells, who said, "You are what your record says you are."  And what is PSPRS' record?  It has an annualized ten-year return of 6.58% versus the Russell 3000's 11.29%.  That extra 4.71% compounded over ten years on a $10 billon portfolio amounts to over $5.8 billion dollars in increased earnings.  Remember also that the 6.58% should be a half-percent less when fees are subtracted, costing PSPRS another $800 million in earnings.  The additional annualized 2.27% Arizona State Retirement System (ASRS) earned compared to PSPRS (10.40% versus 8.16%, net of fees) through FY 2019 would bring and additional $2.5 billion in earnins on that $10 billion portfolio.  Even the PSPRS' Cancer Insurance Policy (CIP) has a FY-to-date return of -0.98%, bettering PSPRS, and an annulized ten-year return of 6.10%, net of fees, virtually identical to PSPRS when we subtract the half-percent in fees from PSPRS' annualizecd ten-year return.  Keep in mind that the CIP is invested much like the average individual investor: 25% in US stocks, 25% in international stocks, 30% in fixed income, 10% in inflation-protected bonds, 5% in gold, and 5% in cash.

There is simply no metric under which we can call PSPRS' investment strategy a success.  It fails against the Russell 3000, ASRS, and its own CIP.  The strategy is a loser, and any of its remaining proponents should be demoted or forced out of PSPRS.  I note all this with a hope that new PSPRS Administrator Michael Townsend  and the new Board of Trustees Chairman and vice-Chariman are going to change things.  The rotten root of PSPRS, Jared Smout, is long gone, and the bumbling leadership of past public safety Trustees should no longer be a hindrance to real reform.

You won't hear this from PSPRS' spokesman Christian Palmer, but PSPRS has another accolade.  According to Center for Retirement Research at Boston College (CRR), PSPRS has the distinction of being one of the 20 lowest-funded pension in the US.  According to the CRR's May 2020 brief "2020 Update: Market Decline Worsens the Outlook for Public Plans," PSPRS is the 16th worst-funded pension in the US at 47.2%.  The paper goes into detail about what the potential effect on these 20 pensions if the market does not recover quickly.  While PSPRS is better off than the others listed with positive cash flow and the third-highest asset to benefit ratio, this is cold comfort when we consider that this PSPRS' situation after a 10-year long bull market.

On a lighter note is this June 4, 2020 story you might have missed by Vince Barone in the New York Post, "Last person to receive pension from American Civil War dead at 90."  While Irene Triplett received only $73.13 a month, that monthly benefit for a war that ended 155 years ago shows the long-term costs of a pension system.  You can read more about her and her family in this May 9,2014 article in the Wall Street Journal by Michael M. Phillips.

To all PSPRS members, please look out for yourselves and each other.

* 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.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, 11.85% in FY 2017, 7.07% in FY 2018, and 5.50% in FY 2019.

** No monthly returns were reported for these months.  PSPRS returns for these months were estimated using the preceding and following months' returns. The FTSE Russell Index Calculator was used to obtain Russell 3000 returns for these months.

Tuesday, May 26, 2020

PSPRS investment returns through March 2020

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through March 2020, the ninth month of fiscal year (FY) 2020, with the past six FY end 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%
6/30/2017 0.22% 12.48% 0.90% 18.51%
6/30/2018 -0.66% 7.76% 0.66% 14.78%
6/30/2019 2.48% 6.05% 7.02% 8.98%

7/31/2019 0.58% 0.58% 1.62% 1.62%
8/30/2019** -0.77% -0.19% -2.04% -0.58%
9/30/2019 1.32% 1.13% 1.76% 1.16%
10/31/2019 1.14% 2.28% 2.15% 3.34%
11/30/2019 1.27% 3.58% 3.80% 7.27%
12/31/2019 1.56% 5.20% 2.89% 10.37%
1/31/2020** -0.32% 4.88% -0.11% 10.25%
2/29/2020 -3.05% 1.83% -8.19% 1.22%
3/31/2020 -6.17% -4.46% -13.75% -12.70%

There is usually about a two-month lag in PSPRS reporting its investment returns. 

It is past time to look again at PSPRS' investment returns, if only because the Wuhan coronavirus pandemic has finally afforded PSPRS a real crisis to test its vaunted investment strategy.  As we can see, February and March 2020 the Russell 3000 suffered losses that were more than double that of PSPRS.  The markets had an extremely volatile period for a few weeks in which the Dow Jones Industrial Average (DJIA) was experiencing some daily changes of over 1,000 points.

The market seems to have stabilized and indices have steadily risen since the end of March.  As of May 26, 2020, the Russell 3000 has shifted into positive territory with a FY 2020 return of 2.42%, meaning it has recouped a significant portion of the losses incurred in February and March but is still down from where it was at the end of January.

I will be interested to see what April and May 2020 returns are for PSPRS.  While it is great that PSPRS limited its losses in February and March 2020, PSPRS' return as of January 31, 2020 was less than half of the Russell 3000. This has always been the problem for PSPRS.  It simply does not capture enough of the market upside to justify its downside protection.  If the markets continue to recover, all this downside protection will be meaningless if PSPRS again lags other indices when the markets rise.

PSPRS tends to earn, net of fees, about 50-60% of the Russell 3000 each FY: FY14 52.65%, FY15 50.05%, FY16 29.40%; FY17 64.02%, FY18 47.83%, and FY19 61.25%.  For PSPRS to achieve its assumed rate of return (ARR) of 7.30%, the Russell 3000 will need to have average returns of 12.17-14.60%.  In the past six FY's, this has happened only half the time with PSPRS achieving its ARR only two out of the six years.

In comparison, the Arizona State Retirement System (ASRS) achieved its ARR in three of the last six FY's, and this table of FY-end returns, net of fees, shows us the numbers that really matter:

Fiscal Year PSPRS ASRS
2014 13.28% 18.60%
2015 3.68% 3.20%
2016 0.63% 0.60%
2017 11.85% 13.90%
2018 7.07% 9.40%
2019 5.50% 6.60%

3-year 8.09% 9.90%
5-year 5.67% 6.60%
10-year 8.14% 10.40%

During the years of higher returns, ASRS earned significantly more than PSPRS, while ASRS essentially equaled or slightly lagged PSPRS in years of lower returns.  This difference is even more stark when we look at annualized returns, where ASRS has higher returns in each period, including a whopping 2.26% per year more than PSPRS over the past ten years.  Those  extra points of return in good years are extremely important for the long-term term health of a pension

Looking at ASRS' latest investment returns through March 25, 2020, ASRS is down around 6% for FY 2020, about 1% behind PSPRS, net of fees, but based on past results, it is likely that ASRS will greatly outperform PSPRS as the markets continue to recover and grow.

Of course we still have the rest of the fiscal year to see what will happen, but I still see no reason to change my opinion that PSPRS would be much better off if it turned its investment portfolio over to the more successful team of investment professionals at ASRS.

* 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.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, 11.85% in FY 2017, 7.07% in FY 2018, and 5.50% in FY 2019.

** No monthly returns were reported for these months.  PSPRS returns for these months were estimated using the preceding and following months' returns. The FTSE Russell Index Calculator was used to obtain Russell 3000 returns for these months.

Sunday, February 9, 2020

But wait, there's more! Six months of PSPRS news in a single post

So where were we . . .

The soap opera that is PSPRS has continued for the past 6 months with Administrator Jared Smout being fired over harassment allegations, and two PSPRS Board Trustees, Will Buvidas and Mike Scheidt, were removed from their leadership positions by the other Board Trustees due to a conflict of interest involving Mr. Smout.  Mr. Buvidas had been the chairman and Mr. Scheidt the vice-chairman of the PSPRS Board of Trustees.  Both men remain Trustees.  They were removed from their positions because they had earned commissions on a home purchase made by Mr. Smout before he was terminated as Administrator; see this article by Craig Harris in the January 23, 2020 Arizona Republic.  The February 4, 2020 Republic has another article by Mr. Harris that details another home purchase involving a PSPRS staff member in which Messrs. Buvidas and Scheidt had a financial interest.  Both men deny any conflict of interest or violation of Board policy.  The Board promises a review of its current conflict of interest policy, but any decision on the two men's continued tenure on the Board will have to be made by the Arizona Governor and Legislature.

Of more interest to many people is the December 2019 CPI-U for the Phoenix-Mesa-Scottsdale region.  As most retirees know, cost of living allowances (COLA) are based on a local consumer price index for all urban consumers (CPI-U) with the COLA being the lower of either 2% or the actual local CPI-U at the end of the previous calendar year.  The Phoenix-Mesa CPI-U for 2019 was 3.4%, so retirees can expect a 2% increase to their individual monthly benefits starting in July 2020.

The Arizona State Retirement System (ASRS) again outperformed PSPRS for the fiscal year that ended June 30, 2019 (FY19).  Net of fees, ASRS earned 6.6% versus PSPRS, which earned 5.45%.  Over the past 10 years, net of fees, ASRS earned an annualized rate of 10.4% versus 8.14% for PSPRS.  PSPRS' Cancer Insurance Policy, using a simple portfolio of 50% equity, 40% bonds, and 10% commodities and short-term investments earned 6.02% in FY19 and had a 10-year annualized return of 8.07%, nearly equaling PSPRS' annualized 10-year rate.  On a $10 billion portfolio, the additional 1.45% ASRS returned would have added $145 million to PSPRS assets in FY19.  In ten years, the additional 2.26% in the annualized rate would have earned over $4 billion more on the initial $10 billion portfolio. 

While we are on the subject of money, Jared Smout continues to cost PSPRS, despite his long-overdue removal as Administrator.  Currently, there are three lawsuits against PSPRS relating to Mr. Smout's behavior while employed at PSPRS.  Who knows how much PSPRS (i.e. taxpayers) will end up having to shell out, but it seems likely that the total will be in the seven-figure range.  PSPRS also recently had a forensic audit done on its internal accounting, which found errors that affected the calculation of employer contributions over the past two years.  Some employers may have overpaid, and some unfortunate employers may have underpaid and will have to make up these shortages in the near future.

Problems with ethics, governance, investing, human resources, and accounting, if PSPRS was a minor league prospect, we would call it a five-tool player.  For years PSPRS has been a laboratory of organizational dysfunction that a business school professor could make a career studying and developing case studies about.  The good news is that things seem to finally be improving, starting with a new Administrator in Michael Townsend, a CPA and former assistant city manager with a track record of success in Coconino County, and it sounds like he actually knows something about pensions!  The removal of two public safety members from Board leadership positions is also a good sign.  The two men who replaced Mr. Buvidas and Mr. Scheidt as Chairman and vice-Chairman, Scott McCarty and Harry Papp, respectively, both have backgrounds in finance, management, and/or investing, areas of expertise that are much more relevant to a pension system than what public safety personnel bring.  It is bad enough that 4/9th of the Board of Trustees is made up of public safety personnel, who will never have the training or experience to understand the complexities of pension accounting, actuarial science, budgeting, or institutional investing, but why in the world would they be leading the Board?  Reversing 20 years of insularity, incompetence, and failure will be tough, so best of luck to Mr. Townsend, Mr. McCarty and Mr. Papp.

And thanks again to journalist Craig Harris, the sine qua non of PSPRS accountability, and the Arizona Republic for looking out for PSPRS members and the state's taxpayers.

Ending on a hopeful note, I could get used to this.

Wednesday, July 17, 2019

Smout's out: Jared Smout to be fired as PSPRS Administrator

I hope everyone has had a chance to read the latest news out of PSPRS world. If not, you are going to love these two new stories by Craig Harris of the Arizona Republic:
State recommends PSPRS administrator Smout be fired for sexual harassment

PSPRS delays decision on Administrator Jared Smout after sexual harassment investigation

It turns out that Jared Smout, the arrogant, ethically-challenged, and incompetent soon-to-be ex-PSPRS Administrator is also a voyeur and sexual harasser, who spent over a year harassing another PSPRS employee and hours watching live workplace surveillance videos of another (or maybe the same?) PSPRS employee.  As we have discussed multiple times here, Mr. Smout should have been forced to resign years ago, at the same time as former Administrator James Hacking, as he also signed off on the illegal raises that cost Mr. Hacking his job.  Somehow, though, he has remained at PSPRS and was promoted to Administrator.  Today should be his last day at PSPRS, as the PSPRS Board of Trustees is meeting today to terminate him.

While it is easy to focus on the weird, disturbing behavior of Mr. Smout, we should not let it distract us from the bigger picture.  PSPRS is an extremely dysfunctional organization.  A toothless Board of Trustees made up of clueless cheerleaders like longtime former Chairman Brian Tobin or current Chairman Will Buvidas obviously has no control over PSPRS' management.  While they have vociferously sung the praises of Mr. Smout and former Chief Investment Officer Ryan Parham despite years of management issues and poor financial results, they now sheepishly profess their complete ignorance of this latest PSPRS fiasco. 

PSPRS is crying our for some type of radical overhaul following a more broad-ranging investigation into PSPRS structure, culture, and internal controls.  Here are some of the questions I have:

1. What did no one on the Board of Trustees have any idea what was going on?  The Board acts as just a rubber stamp of PSPRS with oversight only in name.  Obviously, none of the victim(s) of Mr. Smout's actions felt comfortable going to the Board.  Why?  One can only assume that they believed that Board would not do anything.  This is especially damning as the current makeup of the Board includes two law enforcement members and four public safety members in total.  As it always has in the past, the Board works for PSPRS' management, not the other way around.  The Board neither knows or understands what PSPRS is doing and simply parrots what management tells them.  It's no wonder employees would not trust Board members with a sensitive matter.
 2. Why does PSPRS need an internal video security system that is capable of real-time surveillance of employees, and why would the Administrator have access to it?  PSPRS is not a casino, and as far as I know, there is no cash, precious metals, or diamonds being handled there, like in a bank or a coin or jewelry store.  I guess in an office setting like PSPRS it would be a deterrent to anyone planning on stealing a stapler or a pad of Post-Its.  More likely, it would be an effective way to intimidate employees, especially if they thought their supervisor(s) were capable of watching them at any time.  Why would the Board allow a system like this to even exist?

3.  Who among PSPRS management knew about Mr. Smout's behavior and what did they do about it?  This is the most important question.  According to the articles, Mr. Hacking knew about Mr. Smout watching videos of the employee but did nothing about it.  It is not clear who gave the evidence of Mr. Smout's surveillance to Mr. Hacking, but obviously at least one other person knew of it.  But who else knew?  Mr. Tobin denies any knowledge of it.  As for the more recent sexual harassment, there is no information about who did or did not know of Mr. Smout's behavior.  Hopefully, we will find out more later.

Of course, this gives a new perspective on the retroactive bonuses paid out last year.  These were initially approved by Mr. Smout without the Board's consideration or approval.  Remember that these were classified as legal claims against PSPRS as a way to hide the payment of retroactive bonuses.  This certainly seems fishy in light of everything we know now.  Once again, we can only hope we find out more later.

4.  Who will replace Mr. Smout?  I suspect that anyone will be better than Mr. Smout.  However, PSPRS is in desperate need of an outsider to clean it up.  It is the only way to effectively change the culture and put in place the necessary checks and balance so that no one like Mr. Smout ever becomes head of PSPRS again.

5. How much is this going to cost PSPRS (i.e. taxpayers)?  Lawsuits are coming.

Until a full accounting is complete, there are few things that can be immediately done:

1. Give the Arizona State Retirement System (ASRS) control of PSPRS' investment portfolio.  How can PSPRS' management be trusted with $10 billion and the retirements of thousands of PSPRS members?  While I would like to see this be a permanent change, it in necessary in the interim until some stability and a level of professionalism is restored in PSPRS' management.

2.  Remove Chairman Will Buvidas from the Board, or at least remove him from the Charimanship.  He has proven that he is not up for the job, and having served as Vice-Chairman under former Chairman Brian Tobin, he is ill-prepared to provide oversight of PSPRS going forward.  A non-public safety member would probably be better suited for the chairmanship in light of Mssrs. Tobin and Buvidas' tenures.

3.  Fire PSPRS communications director Christian Palmer.  A smarmy, petulant man temperamentally unsuited as a spokesman for PSPRS, Mr. Palmer is an embarrassment to PSPRS and will hinder efforts to reform it.

It will be interesting to see where this all ends.  Stay tuned.

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 grown 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.

Wednesday, April 24, 2019

Above the law and beyond the pale: Another mess brought to us by Jared Smout and the PSPRS Board of Trustees

I had not posted anything recently due to other commitments.  Plus, there really has not been much to write about other than monthly investment returns. However, a couple of recent stories by Craig Harris in the Arizona Republic deserve some discussion.

First, let me express my thanks to Mr. Harris, an excellent reporter who oftentimes seems to be the only public advocate PSPRS members have.  Like all of us, at the end of the day, I am just another PSPRS member at the mercy of PSPRS' administration, its Board of Trustees, and the state public safety unions, all of whom have shown themselves to be insular, incompetent, dishonest, and selfish.  Without Mr. Harris' diligent work exposing PSPRS' repeated failures, who knows how much worse PSPRS might be.

Mr. Harris' first article in the April 16, 2019 Republic, "Public-safety pension system places administrator on paid leave amid workplace allegations," is brief and very well summarized in the headline.  The workplace allegations regard "unfair treatment," a broad and vague characterization of what PSPRS Jared Smout is being accused.  However, after "reviewing the preliminary findings of an independent investigation," PSPRS' Board of Trustees thought enough of the allegations to put Mr. Smout on paid leave until a full investigation is complete.  The Board said it could not say anymore as it involves a personnel matter.  On first glance, I did not think much of this for several reasons.

First, Mr. Smout is entitled to a presumption of innocence, and as a head of the organization, he has to be given a lot of deference in how he manages personnel as he is ultimately responsible for the success or failure of the organization.  There would have to be a pretty high burden of proof on any accuser that what Mr. Smout may have done was not a necessary and correct course of action for PSPRS.  Second, unless you work alone as your own boss, you know that there is always someone in an organization who is going to think he is being treated unfairly.  You can see this all the way back to Cain and Abel.  This is not to say that no one ever had a legitimate beef about how he was being treated, but unfairness is open to very wide interpretation. 

Finally, PSPRS had an ugly episode several years ago that appears to have begun over accusations of retaliatory behavior against investment staff members and ended in a federal investigation of PSPRS and a very expensive lawsuit.  PSPRS was accused of over-reporting real estate investment returns in order to trigger bonuses for staff members.  One former staff member was accused by PSPRS of illegally taking files from PSPRS's office.  PSPRS was completely exonerated in the federal investigation, and the staff members who originally accused PSPRS of wrongdoing were sued by an investment company for defamation.  As the former PSPRS staff members were employees at the time, the states of Arizona is responsible for their legal bills.  As of August 2017, this lawsuit had cost Arizona taxpayers nearly $500,000, and the lawsuit still appears active today.  You can read more about it here in another article by Mr. Harris.  I mention this episode because, despite all its drama and legal machinations, it was a big zero in terms of actual wrongdoing by PSPRS.

Mr. Harris's second article in the April 23, 2019 Republic, "Public safety pension gave top boss $43K raise. Officials warn it may have been illegal," is a lot more intriguing, if not simply for the utter stupidity and arrogance of PSPRS' Board of Trustees ("the Board"), but in how it relates to the first article from April 16th.  The Board voted on November 28, 2018 to give Mr. Smout a retroactive raise of $43,147, which was paid to him on December 31, 2018.  The Arizona Department of Administration (ADOA) warned PSPRS that the raise possibly violated Arizona's ban on gifts.  Furthermore, Bret Parke, PSPRS general counsel and interim administrator while Mr. Smout is on leave, was given a $39,500 raise a day after ADOA warned them about the possible impropriety of Mr. Smout's retroactive raise.

So where do we start?  I guess we should start with the fact that PSPRS is required BY LAW to consult with ADOA before awarding raises.  Let's let that sink in for a minute before we get into some history.  Mr. Smout gets a retroactive raise that was not approved by ADOA and may also be unconstitutional.  Mr. Smout's predecessor as PSPRS Administrator, James Hacking, was forced out because he gave out illegal raises to PSPRS staff, and Mr. Smout, as Deputy Administrator, signed off on the illegal raises that cost Mr. Hacking his job.  So now Mr. Smout accepts his retroactive raise, knowing that it would be illegal without the approval of ADOA.  What will be his defense: that he thought the Board was supposed to get approval from ADOA, despite his own experience with the required procedure for awarding raises?  Or are he and the Board so arrogant and dismissive of Arizona law that they awarded this raise knowing full well they were violating the law?  Either one looks bad for PSPRS.

As for Mr. Parke's raise, we have the Board, chaired by Will Buvidas, a Phoenix police officer, awarding a raise to PSPRS' general counsel.  So we have a Board chaired by an Arizona law enforcement officer giving an illegal raise to PSPRS' own lawyer in violation of Arizona law.  This is my favorite part of Mr. Harris' 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.
"This is something we will have to work with them on," Rose said.
Really?  Isn't following the law day one stuff for aspiring cops and lawyers?  You will have to work with them on this?  I hate to say this, Ms. Rose, but by awarding this second raise, PSPRS and its Board just told ADOA to go f--- themselves.  I am not sure how you work them on that.

Mr. Harris' second article puts the first article in a different light.  As I wrote earlier, I had not thought too much about Mr. Smout being placed on leave as it might turn out to be nothing.  However, the second article raises a lot of new questions about the seriousness of the accusations against Mr. Smout.

Is the claim of unfair treatment the raise itself?  I could see how another staff member might find a retroactive raise for the boss, and the boss alone, offensive and unfair, especially if Mr. Smout never took up for the rest of PSPRS' staff, who were working just as hard as him.  However, if this is the case, would it be necessary to place Mr. Smout on administrative leave since it does not involve the treatment of other employees?

Why was PSPRS' information technology operations manager also placed on administrative leave?  This prompts all kinds of speculation about what might have happened when the possibility that information was compromised or misused.

Why would the Board give another illegal raise to Mr. Parke after just being warned about Mr. Smout's illegal raise?  If we disregard the possibility that the Board is really that stupid and arrogant, what could be the reason they did this?  The only thing I can think of is that they believe that by so brazenly flouting ADOA they will lessen their culpability in the first instance by doubling down on feigned ignorance with a second instance.

Why did the Board feel the need to give Mr. Smout a retroactive raise?  Why did the raise have to be retroactive?  They could have just given him raise starting in 2019 or even in December of last year and gotten the proper clearance from ADOA to do so.  Retroactive pay or large lump sum payments always stinks of pension spiking.  Mr. Parke, who just joined PSPRS in October 2018, had previously been the interim director for Arizona State Parks when its director became embroiled in legal issues that eventually cost her her job.  Was Mr. Smout expecting, voluntarily or involuntarily, to depart PSPRS soon?

Is Mr. Parke being unfairly involved in this mess?  As previously stated, Mr Parke just joined PSPRS last October.  He was made interim PSPRS Administrator on April 16, 2019.  It is unclear from Mr. Harris' April 23rd article if Mr. Parke was given his raise on April 16th or April 23rd.  The Board of Trustees meeting materials show no vote on a raise for Mr. Parke on April 16th.  Was it done on April 23rd during the Board's monthly meeting?  Was Mr. Parke even aware that the Board had given him a raise?  I don't know, but regardless this all appears very suspect.  Why give him a raise, other than to hobble him in his new role as Administrator by embroiling him in the same controversy that Mr. Smout and the Board are now involved.

While these questions will hopefully be answered in time, we still must marvel once again at the dysfunction of PSPRS.  You never hear about issues like this at the Arizona State Retirement System, which plods along without fanfare, outperforming PSPRS year in and year out.  The Board of Trustees is responsible for billions of dollars, yet shows less governing ability than a high school student council.  As for Mr. Smout, what does it take to get rid of this guy?  If he isn't approving illegal raises, he's getting them.  How can he be trusted with the futures of thousands of fire and law enforcement personnel, all of whom would lose their jobs and pensions if they broke the law while on duty, when he will follow neither the spirit nor the letter of state law that governs his own department?  The terrible performance of PSPRS alone should preclude Mr. Smout from ever getting a raise.  Mr. Smout has been the one constant at PSPRS through all its problems.  I truly believe that PSPRS will never be successful as long as he remains employed there.