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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...

Wednesday, May 31, 2017

The lastest on refunds of excess contributions in the Hall v. EORP and Parker v. PSPRS cases

In case you have not seen this, PSPRS posted this to their website today:

Board of Trustees takes action on Hall-Parker payments
PSPRS to pay PBIs and provide refund amounts
The PSPRS Board of Trustees today voted to recommend that employers begin refunding employee contributions related to the Hall and Parker lawsuits. The decision impacts certain active and retired members of EORP and PSPRS, but does not settle what interest will be owed to members of either plan.

Per federal regulations, the refunds cannot be paid back by PSPRS to members, but instead must be done by the employers. However, PSPRS will allow for employer contribution credits in the amount to be paid back to help employers who need to use that method to free up funds. PSPRS will soon provide employers with the names of impacted employees and retirees, as well as itemized lists of contribution amounts owed to each individual. When determined, pre-judgment interest will be allowed in the employer contribution credits, but post-judgment interest will not.

In the interim until individual contribution amounts are provided, the PSPRS Board of Trustees also strongly recommended that employers work closely with their Local Boards to decide on the method and manner of repayment that is in the best interest of the employees and employers.

Additionally, all contributions being returned are considered wages and must be taxed as such. However, the forthcoming interest payments are not considered wages and do not need to be taxed by the employer, provided the employer receives a Form W-9 for each affected employee. Therefore, it is strongly recommended that employees be given the opportunity to adjust their tax withholdings and deferred compensation arrangements.

Furthermore, the Board directed staff to pay out the retroactive permanent benefit increases for those PSPRS, CORP and EORP retirees entitled to increased benefits before the end of June. Again, these retroactive increases will not include any interest at this time.

PSPRS will continue to provide pertinent updates to members, employers and local boards. Interest rates to be applied to Hall-Parker lawsuit contribution refunds and retroactive permanent benefit increase may or may not be settled through a June 6 Maricopa County Superior Court hearing.
Please see the following document for the in-depth report provided to the PSPRS Board of Trustees on this issue.
There is a 22-page report linked to this message, so there will be more to talk about this after we all have a chance to take a closer look at it.  My immediate takeaway is that this is a recommendation to employers and, based on the steps PSPRS is encouraging employers to take during this process, there still seems to be a lot more work to do before money can even begin to start coming back to effected PSPRS members.  While the PSPRS Board of Trustees crows that they are taking "action on Hall-Parker payments," this seems like another case of PSPRS blindsiding employers and local employee representatives with a sudden decision that leaves them scrambling to get this completed.

Wednesday, May 3, 2017

Smouting off: The PSPRS Administrator shows Arizona how arrogant and out of touch he is

PSPRS Adminstrator Jared Smout has taken his crybaby act public with his May 1, 2017 editorial in the Arizona Republic.  Mr. Smout is again complaining about the Pew Charitable Trust's April 12, 2017 report on state pensions' use of alternative investments, and in particular, the Arizona Republic's article about the Pew report.  He takes issue with how the Republic interpreted data in the Pew Report and feels that this gave a misleading impression of PSPRS' investment performance.  This is funny coming from the leader of an organization that routinely cherry-picks data to make its performance look good and self-selects which peers to compare itself against and what date ranges to assess its returns.  Mr. Smout apparently got upset when a news organization took what an independent organization found and reported it to its readers, rather than taking what PSPRS says as the only "real" version of the facts.

However, we should be fair to Mr. Smout and PSPRS and look a little closer at the data in the Pew Report.  If we go to the Public Pension Investment Metrics table ("the metrics table") on pages 4-10 of the report, we see what are the most important numbers, the 10-year annualized returns through FY 2015.  These returns allow us to see how the 73 state pension funds, which represent 95% of all state pension fund investments, compare to each other on the most objective metric.  The only problem with the metric table is that not all of the returns are reported net of fees.  Mr. Smout makes a big deal about this problem in his editorial writing, "A full one-third of the 73 pensions examined didn’t even bother to report their fees," so I wanted to see how much this affected PSPRS' ranking among the 73 funds.

The Republic appears to get its third-worst ranking from Figure 11 on page 22 of the report, which ranks those plans that reported returns, net of fees.  Figure 12 on the next page ranks plans that reported returns, gross of fees.  Using the metrics table, irrespective of whether 10-year annualized returns were gross or net of fees, we can see that there are actually five state pension funds that performed worse than PSPRS.  27 state pension funds reported returns gross of fees, including the Retirement Systems of Alabama, which was one of the five that did worse than PSPRS.  11 of the 27 had returns at 7.00% or higher, 12 of the 27 had returns between 6.00% and 6.99%, and 4 of the 27 had returns between 5.00% and 5.99%.  PSPRS' 10-year annualized return, net of fees, was 5.22%

Since we cannot determine from the Pew report how fees affected each of these 27 state pensions' returns, we will have to utilize our own method.  Since PSPRS has the highest percentage of alternative investments and likely the highest percentage of returns paid out in fees, we can look at PSPRS' fees to get a number we can use.  In FY 2014, 2015, and 2016, the difference between PSPRS' gross and net returns was 0.54%, 0.53%, and 0.43%, respectively.  To be safe, let's use 0.60% as the percentage in aggregate fees paid by those state pensions that did not report returns, net of fees.

Using this 0.60% fee percentage, 23 of the 27 of the pension funds reporting returns, gross of fees, still outperformed PSPRS, as they earned at least 6.00%.  Of the remaining four pension funds that reported returns, gross of fees, three had returns lower than PSPRS' 5.22%, one of which was the aforementioned Retirement System of Alabama.  In total, regardless of whether returns were reported gross or net of fees, a total of seven state pension funds performed worse than PSPRS in 10-year annualized returns.  Two state pension funds, the Pennsylvania State Employees Retirement System and the Vermont Teacher Retirement System, were just barely being beaten by PSPRS by 0.02% and 0.05%, respectively.  (In reality, though it is likely my 0.60% fee percentage estimate is too high and means they almost certainly outperformed PSPRS as well.)  So, using the Public Pension Investment Metrics table, if we want to correct the Arizona Republic, we can see that PSPRS is actually the eighth-worst performing state pension fund, although I did not see Mr. Smout mention this in his editorial.  

By my count, 53 of the 73 state pension funds had, at least, a 10-year annualized return of 6.00%, net of fees.  (As earlier, subtracting 0.60% from any pension fund that reported returns, gross of fees)  Of the 65 state pension funds that outperformed PSPRS, 53 outperformed PSPRS by over 0.78%.  For some perspective, if that additional 0.78% was compounded annually over 10 years on PSPRS' $9 billion fund, it would have earned PSPRS an additional $650 million.  If PSPRS had earned the 6.90% 10-year annualized returns of the Arizona State Retirement System, PSPRS would have earned an extra $1.045 billion.  Once again, Mr. Smout fails to bring this up in his editorial.

I think we can all see the bigger problem here.  Despite all his indignation and outrage, Mr. Smout can only criticize the Republic for its different interpretations of parts of the Pew report, not any deliberate falsehoods or misrepresentations, and make more tired excuses for PSPRS' poor returns.  At best, he can now proclaim that PSPRS is actually only the eighth-worst state pension fund in America, not the third-worst as the Arizona Republic reported.  In his own whiny way, Mr. Smout shows the neutral stance of the Pew report, which made no conclusions about the efficacy of alternative investments or what, if any, amount of alternative investments was ideal.  It gave recommendations and objective data for readers to interpret and draw conclusions.  It is from this objective data that we get the negative picture of PSPRS, and that is what the Republic reported.
When we see the arrogant, defensive, and hair-splitting reaction of the leader of PSPRS, we can get a window into the culture of PSPRS management.  The editorial written by Mr. Smout did nothing to prove anything, except that the writers and staff of the Republic should question the credibility Mr. Smout, other members of the PSPRS administration, and its Board of Trustees.  If you want another peek into that culture, look at the reaction the Republic got when they initially questioned PSPRS spokesman Christian Palmer about the Pew Report:
When Republic reporter Craig Harris asked Palmer about higher fees and more specifically which company gets the highest fee for its performance for the trust, Palmer said the reporter’s question “ignores a fundamental of alternative investments” and referred The Arizona Republic to an online tutorial on investing.
The reality is that PSPRS' managment is failing PSPRS members, taxpayers, and employers.  The Pew report is just more evidence of that.  Yet, according to Mr. Smout, "Great things are happening at PSPRS as we leave the past behind and move forward. We invite you to join us."  I suppose if I was completely out of touch and made $200,000+ a year, regardless of my job performance, things would look pretty great to me as well.  I guess he was told by someone to try to end to his editorial on a positive note.  Maybe it was the ghost of Marie Antoinette.