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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...

Monday, August 31, 2015

Meet the new PSPRS boss, same as the old PSPRS boss

In the latest missive from the bunker comes this underwhelming news:

         August 27, 2015
PSPRS veteran tapped to run $8 billion trust
Board Chairman: Smout ‘exemplary’ during uncertainty 
PHOENIX – The state’s Public Safety Personnel Retirement System Board of Trustees appointed Jared Smout to lead the state’s multi-billion dollar trust that invests and provides retirement benefits to public safety employees, corrections officers, judges and elected officials.
Smout, who has served as interim system administrator since July 2014 and has served PSPRS for more than 18 years, was appointed on Aug. 26 by a vote of the seven-member board led by Chairman Brian Tobin.
Tobin, a veteran City of Phoenix firefighter, praised Smout’s performance and dedication displayed during an era marked by unjustified accusations against the system, legal uncertainty and the added diplomatic task of encouraging reforms aimed at providing financial stability to the trust.
“I think he’s done an exemplary job under very difficult circumstances,” Tobin said. “He has the experience, the education and the skills, and he will serve this state and its public safety employees well in this vitally important position.”
During his tenure as deputy system administrator and acting system administrator, Smout has continued to oversee PSPRS’ nationally recognized investment strategy that seeks steady returns coupled with resistance to market volatility.
“I deeply appreciate the Board’s confidence in allowing me to continue in this role. I absolutely love my job and am grateful every day for the opportunity to serve those who serve this state,” Smout said. “We have a lot to be proud of and we will continue to improve the system, our relationships and our ability to deliver long-term pension stability.”
The risk-averse strategy implemented by PSPRS seeks to diversify assets and reduce exposure to publicly-traded equities, the greatest driver of market fluctuations. The trust performed admirably in fiscal years 2013 and 2014, posting net gains of 11 percent and 13.3 percent, respectively, despite assuming far less risk than the vast majority of public pension plans.
Additionally, PSPRS is expected to outperform more than 80 percent of 66 comparably sized pension trusts for fiscal year 2015, a year marked by low returns for trusts with stock-heavy portfolios.
The PSPRS trust combined with the Corrections Officers Retirement Plan (CORP) and the Elected Officials Retirement Plan (EORP) is valued at roughly $8.3 billion and provides retirement, disability and survivor benefits to approximately 50,000 retired and active members.
While I believe that former PSPRS Administrator James Hacking was unfairly scapegoated for PSPRS' problems and forced to fall on his sword and resign to appease some PSPRS critics, his departure was an opportunity to bring in someone new with a better track record at another pension system or financial organization.  I thought we would have that when in March 2015 PSPRS announced that Kevin Olineck, a vice-president with the British Columbia Pension Corporation (BCPC), was chosen to be the new PSPRS Administrator.  The BCPC is in much, much better financial shape than PSPRS, and no doubt has many good practices that Mr. Olineck could have brought with him to PSPRS.

Unfortunately, this was not to be as Mr. Olineck strangely could not get a visa to work in the United States, and the Board of Trustees' choice went from international to inter-office.  While the press release touts Mr. Smout's 18-year tenure as a plus, a look at his resume shows that with the exception of a three-month stint as acting finance director for the Salt Lake City Public Library, he has worked almost exclusively for PSPRS, starting as an administrative assistant in 1997 and working his way up to Deputy Administrator in 2011.  While he has an admirable record of career advancement in PSPRS, the bulk of his time with PSPRS coincides with its worst financial performance and most problematic management.  Also, according to the August 27, 2015 Arizona Republic article, Arizona public-safety pension trust picks insider as new leader, by Craig Harris, Mr. Smout signed off on the illegal raises that cost Mr. Hacking his job.

Compared to Mr. Olineck or Deric Righter, a former CEO of ThyssenKrupp USA, the other finalist for the Administrator job and another person with a more varied and successful career in finance and management, Mr. Smout appears, far and away, the least likely of the three to implement change at PSPRS.  Closer to home, we can compare Mr. Smout to Paul Matson, Director of the much better managed and much better performing Arizona State Retirement System (ASRS).  Mr. Matson's ASRS biography shows he worked six years for the Alberta, Canada Treasury before joining ASRS, then spent eight years as ASRS Chief Investment Officer before becoming Director.  ASRS' Trustees obviously saw the value in a more well-rounded career with exposure to other systems when they hired and promoted Mr. Matson.  It is unfortunate the PSPRS Board of Trustees did not see things the same way once they knew that Mr. Olineck was unable to take the job.

Trustees Lauren Kingry and Bill Davis, to their credit, voted against Mr. Smout's selection, with Mr. Kingry stating that he wanted to "to examine the available candidate pool."  Unfortunately, the other five Trustees voted to select Mr. Smout without even that cursory amount of due diligence.  Of course, the Board already bungled a months-long hiring process by offering the job to someone who could not work in the United States, a piece of information which was conspicuously omitted from the press release.  They also see fit to boast about their fiscal year 2015 performance, despite the fact that it will only be about half the assumed rate of return, another piece of information missing from the press release.  If this is the mindset of the Board of Trustees, maybe the next thing to be replaced should be some of the Trustees.


  1. Could it be that nobody else wanted a job where their objective was to obtain not just market gains above 7%, but returns precisely between 7% and 9%, and not above? It's hard enough to make above 7%, but to have to hit that exact window? Whoever took that job was going to be doomed to failure, and reliant on either the PFFA or LOCAT to enact reforms to save their job. If I was in the hunt for work, I'd look elsewhere. As it is, I sincerely doubt that I'll see a pension at this point, and I'm looking for work elsewhere too. Is Smout confirmed, or might I still apply for that job too?

  2. PSPRS has to administer the plans according to the Arizona Revised Statutes, as does ASRS. Those statutes have required PSPRS to pay out permanent benefit increases almost every year of 4%, and to sweep half of all returns over 9% into a reserve for future increases. This serves to increase liabilities even when the return does not exceed 9%. The statutes allow ASRS to have not paid a benefit increase in 10 years, and retain all returns to strengthen the funding status. Paul Matson is very good at his job, but he does get a little bit of help from more favorable statutes.


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