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Wednesday, September 30, 2015

Not in the best of hands: The PSPRS Board of Trustees summed up in one revealing passage

In case you missed it, the Arizona Auditor General released its "Performance Audit and Sunset Review of the Public Safety Retirement System" on September 18, 2015.  The Arizona Republic distilled the Auditor General's conclusions in this September 23, 2015 editorial, Public-safety pensions, summed in 1 bad word.

That bad word would be "deteriorating."  I would also like to point out another report from the Arizona League of Cities and Towns ("the League") entitled, "The Yardstick: A Tool to Evaluate Proposed Reforms of Arizona's Public Safety Personnel Retirement System (PSPRS)."  This report was released on August 18, 2015, and like the Auditor General report, does some myth-busting about PSPRS and confronts issues that need to be dealt with if PSPRS is to survive.

If the Arizona Republic would like to summarize the Auditor General report in one word, I would like to point to one particular passage in the League's report that shows one of the roots of PSPRS' problems.  The following appears on page 8 of the League's report:
It is also important to point that prior to FY 2015-16, the cost of the PBI (permanent benefit increase) 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. (boldface mine)
Unfortunately the League does not get into more specifics about why the Board ignored their own actuaries or what internal actions or discussions took place within PSPRS to address (or downplay) the issue.  However, the Republic does give PSPRS Administrator Jared Smout's take on the issue, "By design and structure, that (pay-out formula) depletes money out of the system faster than you can replace it with investment returns.”  The Republic does not give any explanation from PSPRS lifer Jared Smout as to why PSPRS never recognized the huge costs of the PBI's, even though they were told about them several years ago, and knew the damage they were doing to PSPRS' bottom line.

Of course, Mr. Smout is beholden to the Board of Trustees for his job, and it seems unlikely that he would publicly acknowledge mistakes by either the Board or him and his staff. When the Arizona Republic was hyping the alleged improprieties of real estate valuations to enhance staff bonuses and the Arizona Police Association was requesting a criminal probe of PSPRS, the danger was that these bogus charges would divert attention from the actual, serious problems with PSPRS.  PSPRS and its staff were rightfully exonerated of the ridiculous and unfair charges of wrongdoing in its Desert Troon real estate valuations, but now there seems to be little interest now from the same media and labor organization accusers about the general incompetence and lack of oversight by PSPRS' Board of Trustees.

The Board, ostensibly the watchdog of PSPRS, failed to deal with a problem that Mr. Smout now characterizes as a permanent financial drain on PSPRS, despite being aware of the problem "several years ago."  I now see why the League wants to alter the structure and personnel makeup of the PSPRS Board.  The individuals on the Board of Trustees (or Fund Managers, as they used to be called) has changed over the years, but their ability to make horrible decisions has remained consistent.  Approving bad investment choices, whether in individual stocks, real estate, or an underperforming low-risk portfolio, has been their usual modus operandi.  However, ignoring their own actuaries and knowingly excluding the costs of PBI's in contribution calculations is a new low for the Board.

Why would the Board do this?  Were they hoping that a defendant victory in the Fields case would make dealing with the actuaries' disclosure unnecessary since a new PBI structure would then be in place?   I don't know.  Your guess is as good as mine.   The fact that the PBI's were never included in the contribution calculations (which passed them on to future employees and taxpayers) before the disclosure is disturbing enough and makes one lose confidence in the actuaries (see this blog post for more about actuaries), but delaying any action until the 2015-16 fiscal year gives one zero confidence in the current Board of Trustees.  My guess is that a similar situation in a publicly-traded company would generate a queue of law firms at the courthouse filing class action lawsuits against the company.  As I have said before, it looks like it might be time for Governor Ducey to replace some or all of the Trustees.

I hope that the same groups who so breathlessly pursued PSPRS over bogus charges will, at least, do some follow up, on this.  There is a lot more to discuss about both the League's final report and the Auditor General's audit and review.  Please stay tuned.

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