Featured Post

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...

Friday, October 4, 2013

Rearranging deck chairs on the Titanic: PSPRS and the bonus controversy

By a unanimous vote of PSPRS' Board of Trustees on September 24, 2013, the payment of bonuses to PSPRS' management and investment staff has been halted until the "next compensation review."    This
article by Craig Harris of the Arizona Republic gives more details about the vote and the controversy leading up to it.

PSPRS Adminstrator Jim Hacking had earlier released this forceful response to recent criticism of PSPRS' management, including the payment of bonuses.  While Mr. Hacking is certainly the most capable person to defend his staff, there is more to this story that Mr. Hacking, given his apolitical position, is not discussing.

It is important to remember that PSPRS' staff manages the pension according to the laws created by the Arizona legislature and signed by the governor.  The PSPRS staff is governed by a seven-member Board of Trustees, serving staggered terms, that is appointed by the governor.  The Board of Governors has the ultimate say on how PSPRS' funds are invested.  Finally, the PSPRS staff has no input into how employers calculate the benefits of their employees.  If one employer allows employees to increase their pensions in an irresponsible way, the PSPRS staff simply figures the employer's unfunded actuarial accrued liability (UAAL) and tells the employer how much it must contribute each year to fund its pension responsibilities.  It has no control over that employer's actions.

While it seems fashionable to pile on the PSPRS staff, there is plenty of blame to go around for PSPRS' current woes.  Shortsighted and  ill-conceived laws and policies created by politicians, lax oversight by past Trustees (or Fund Managers as they used to be called), and pension spiking allowed by employers, of course at the urging of public safety unions, have all contributed to PSPRS underfunding.  Mr. Hacking is dealing with multiple issues that preceded his tenure as PSPRS Administrator.  PSPRS' funding ratio has been eroding for well over a decade and began long before Mr. Hacking or Ryan Parham, the chief investment officer (CIO) began their current tenures.  Yet there is this fixation on bonuses, particularly as they relate to PSPRS' funding ratio and PSPRS' annual return on investment.

The current PSPRS staff is trying to clean up a mess that was created by others.  PSPRS' terrible funding ratio shows how big this mess is.  The current strategy they are using now is based on diversifying into multiple investment vehicles that try to maximize upside during good times but limit losses during bad times.  My understanding is that there are benchmarks for each investment vehicle to determine whether or not the strategy is working, and bonuses are paid based on whether or not these benchmarks are met.  This does not mean that PSPRS makes money every year but that it achieves a proper balance between risk and reward that will eventually bring PSPRS back to full funding.  This is what the PSPRS staff is being awarded bonuses for, not for a short-term focus on annual gains.  The previous post discussed some of the changes Mr. Hacking and Mr. Parham have implemented.

So what of the idea of bonuses in general?  It is certainly understandable that taxpayers are uncomfortable with public employees (i.e. public servants) receiving bonuses, but what about union officials, politicians, and public safety personnel?  Those that lobbied for, created, and have participated in or plan to participate in the Deferred Retirement Option Plan (DROP) have no right to complain about bonuses since, after all, the DROP is nothing but a giant bonus program to public safety personnel.  This Arizona Republic database shows how big some of these bonuses are, with the average DROP payment reaching into five and six figures, depending on the employer.  Do these DROP payments perform any real purpose other than to enrich retiring public safety personnel?  No, and for those who disagree, see the series of posts entitled "The Folly of the DROP" here, here, and here.

So those that wanted to end the bonuses got their way, and an agreement for a promised payment was broken.  In the end, everyone would be well advised to reread Mr. Hacking's response, particularly the part about pending lawsuits against PSPRS.  If you think bonuses are a problem, wait until you see what the Arizona Supreme Court does to PSPRS' funding ratio after it rules on these lawsuits.

No comments:

Post a Comment

Relevant comments are welcome, but please adhere to the following rules:

1. No profanity or vulgarity.
2. No spam or advertising.
3. No copyrighted material may be posted unless you are the copyright owner.
4. Stay on topic.
5. Disagreement is fine, but please avoid ad hominem attacks.

Comments reflect the views of the authors alone, and do not reflect the opinion of this website.