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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 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.


  1. If you retired in 2014 will your overpayment come from psprs or your former employer? Thanks!

  2. I saw a status conference scheduled earlier this week in the Parker case. Any news?


    1. This looks like a paperwork deadline in advance of the 6/6/17 court date. As of now, the court date has not changed.

  4. From the telephonic conference on May 2:

    This matter had been stayed pending the Supreme Court’s decision in the similarly filed Hall case. The parties indicate that the mandate decision from the Supreme Court was issued and that the Hall case is set for oral argument on June 6, 2017. Accordingly, the parties agree that a status conference following the June 6, 2017 oral argument would be appropriate.

    1. Thank you for the update. It looks like there is another status conference set for 7/12/17. I think this would give them 5 weeks or so to get a final decision in Parker, under the same conditions as Hall, though I do not know if this can officially be done in a status conference. Do you know if Parker is going to challenge the constitutionality of the changes to PBI's enacted under Propositiion 124? This issue was not settled under Hall, and the Supreme Court refused to consider the question of the contracts clause in regards to these pension cases. Thanks again for the updates.

  5. This site is totally objective. No opposition allowed here regarding the corrupt behavior of PSPRS. You can't escape the dark passenger!

    1. As critical as I am of PSPRS, I would never call the organization or any of its management corrupt. Corruption implies official duties that are done for personal enrichment, which I have never seen with PSPRS. In fact, as a word in defense of PSPRS, they were very unfairly treated in the past, when some of their staff was accused of manipulating real estate appraisals in order to enhance staff bonuses. This was investigated and that claim was found to be completely untrue. It was an injustice to PSPRS' then-management that this ever even occurred.

      There a plenty of problems with PSPRS, but one crosses a very clear line when one accuses an organization of corruption. Without any proof, this is not something that can be said of PSPRS.

  6. Hey, I'm a columnist for the Tucson Sentinel doing a piece on this. Have a pretty strong readership. The pension system, regardless of it's ranking, is failing to beat index funds and is paying 100 million a year for the privilege. I think people think the system's problems are "greedy cops/firefighters" who gouge the system. Last year fund managers took 70 percent of the winnings.
    Blake Morlock
    520 661 4574.


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