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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...

Saturday, August 12, 2017

Out with Smout: It's time to get rid of PSPRS Administrator Jared Smout

I hope most PSPRS members have read this article, "Pension executive defends six-figure retirement payouts for police, firefighters," by Craig Harris in the August 10, 2017 Arizona Republic.  If not, please take the time to read it because it goes a long way in showing why PSPRS is in the mess it is today.

The pension executive to whom the article is referring is PSPRS Administrator Jared Smout. What he was shamelessly defending before the Arizona House Ad Hoc Committee on PSPRS was the Deferred Retirement Option Plan (DROP).  Keep in mind that Mr. Smout is the person in charge of PSPRS, not a spokesperson or a self-interested individual like PSPRS Board of Trustees Chairman Brian Tobin, a man who will get nearly $1 million in pension and DROP payments during his first year of retirement.  The one individual from whom we should expect an honest appraisal is the  PSPRS Adminstrator.

I have had the misfortune of hearing Mr. Smout speak publicly.  If you did not believe that someone could be both arrogant and banal, go see Mr. Smout speak.  If you ever saw former Federal Reserve Chairman Alan Greenspan speak before Congress, you will get a sense of Mr. Smout's style of delivery.  Of course, this is the only similarity between those men--Alan Greenspan has a much more varied and accomplished background than PSPRS lifer Jared Smout, but perhaps Mr. Smout thinks that if he talks like Mr. Greenspan, his words will be accorded the same gravity and credibility.  Why else would he say that "there was a perception problem with the Deferred Retirement Option Plan — or DROP — and that it was a "myth" that the program has cost the pension trust a 'huge' amount of money" unless he thought the Committee would just believe him out of hand because he speaks his  financial jargon in such a condescending tone.

Mr. Smout has to be ignorant, incompetent, and/or deceitful to make a statement like that in front of a congressional committee.  The DROP is indefensible.  It was a blatant money grab from the pension perpetrated during a brief period when PSPRS was overfunded.  Among problems with the DROP are:
  1. For many years it paid a guaranteed interest rate of up to 9%, even when PSPRS was losing money. 
  2. It robs PSPRS of funding.  A pension relies on a constant stream of funding to stay solvent.  These funds must compound over time, and if the actuarials are correct, a BIG if, the pension can stay solvent in perpetuity.  The DROP interrupts this funding stream.  If five members all DROP for the full five years at 25 years of service , the pension will lose 25 years of funding from employees who are likely to be at their highest pay.  That's an entire career of payments into the pension that will never be paid.
  3. It slows the replacement of higher paid Tier 1 employees with Tier 3 employees.
In case Mr. Smout truly is ignorant, let's explain it to him as simply as possible: An employee cannot be active and retired at the same time.  This is common sense.  You can either have a longer career and get a higher pension for fewer years or you can have a shorter career and have a smaller pension for more years.  This is Pensions 101.  This is why no other retirement systems allow the DROP, with the exception of other well-managed public safety pensions like the Dallas Police and Fire Pension Plan.  PSPRS' own policy states that "at ANY time following retirement, if you are re-employed in the same, or substantially similar position by the employer from which you retired, your retirement benefits will be suspended."  This policy prevents employers from hiring back their own public safety retirees, at a lower cost as they would no longer have to pay pension contributions for these employees, in place of new employees for whom contributions would have to be paid.  The obvious reason for this policy is to prevent employers from starving PSPRS of the consistent funding stream it needs to stay financially viable.  This PSPRS policy prevents an employer from doing the very thing the DROP permits.  Yet, Mr. Smout defends the DROP and says that "his organization concluded it was largely cost-neutral."

I know nothing of Arizona State Senator Noel Campbell's background, but he seems to understand the DROP better than Mr. Smout.  Mr. Harris writes:
Campbell also said he didn't believe Smout's assertion about DROP's cost. The lawmaker said his examination of PSPRS records suggested DROP is "a very expensive drain on the fund," and he believes the benefit should be terminated for all current employees.
Campbell also characterized DROP's guaranteed rate of return as too generous, noting it would be nearly impossible to find in the private sector. He said DROP prevents local governments from hiring new, less costly employees to replace "retired" officers in DROP for five years. Unlike many officers in DROP, those new employees also would be making individual contributions to the retirement system.
Senator Campbell does not believe Mr. Smout, and neither should anyone else.  If there are still any defenders of the DROP, PSPRS, or Mr. Smout, here is more from Mr. Harris' article:
. . . the Arizona State Retirement System, which is in better financial health, ended DROP because of major cost concerns.
Paul Matson, chief executive of the ASRS since 2003, said in an earlier interview that the ASRS, the much larger pension system, never implemented DROP because it would have significantly increased trust payments for members and their government employers. 
Matson had lawmakers revoke DROP for ASRS members in 2006.
"We didn't implement it because we didn't want contribution rates to increase," Matson said. 
The ASRS trust is in better financial health than the PSPRS. The pension system for teachers and state and local government employees has a funded ratio of 76 percent, meaning it has about three-fourths of the money it needs to pay all current and future liabilities.
ASRS is 76% funded.  PSPRS is about 47% funded.  ASRS has a contribution rate of 11.50% apiece for employers and employees.  PSPRS has an aggregate employer contribution rate of 52%, with much higher employer contribution rates for some employers.   ASRS has needed only limited adjustments, while PSPRS is continually in need of major reforms.  Paul Matson, who has worked for ASRS since 1995 and been its Executive Director since 2003, says that the DROP is a bad policy that would have caused contribution rates to increase for ASRS employees and employers, and he had it revoked in 2006 well before the financial downturn of 2008-09.  Mr. Smout says the DROP is just fine and dandy.  Should you believe Mr. Matson or Mr. Smout about the DROP? 

One man works proactively to reverse a harmful policy to the benefit of all stakeholders.  Another man continues to defend an obviously deleterious policy that benefits only one group of employees at the expense of all other stakeholders.  Sadly, what stands out most in this article is the utter cravenness of Mr. Smout.  His statement before the committee was his chance to do the right thing and, at the very least, admit that the DROP was a costly error on the part of Arizona's legislature.  As an administrator, he was not responsible for the statute that created the DROP, but
I would say he has a responsibility to speak the truth when a state law is enacted that negatively affects the system he administers.  Mr. Matson did.  Why wouldn't Mr. Smout do the same?

I suppose Mr. Smout is lucky to still be employed by PSPRS, much less working as its Administrator.  When former Administrator James Hacking was caught giving illegal raises to some PSPRS employees, Mr. Smout, the Deputy Administrator at the time, turned out to be the person who authorized payroll to process the illegal raises.  Mr. Hacking agreed to resign after negotiations with the Board of Trustees, but Mr. Smout remained with PSPRS and was eventually tapped to lead it.  It would seem that the Deputy Administrator should have known that what he was authorizing was illegal and should have taken a stand against it.  However, he did not and, in the end, this act actually helped to move Mr. Smout up the PSPRS ladder.  I guess Million Dollar Man Brian Tobin and the other Trustees saw something in Mr. Smout's weak-willed behavior during that episode that made them think he was the best person to run PSPRS for them. 

If the House Ad Hoc Committee on PSPRS wants to begin the process of administrative reform at PSPRS, they should press for the removal of Jared Smout as PSPRS Administrator.  A man with neither the will nor the backbone to do what is right should not have the future of so many hard-working people in his hand.


  1. Very aggressive article. I agree the DROP cost was very high.
    Maybe it is time for a full leadership change, including replacing the entire board.

  2. Don't forget pension spiking from so many employees who never-in-their-lives worked more hours to get the "high three".

    Or pension spiking by employees whose employers treated vacation and sick time payouts as ordinary income...

    The pension formula should exclude any income above a modest 5 percent over base salary...cap it.

    Return to the days of the 20 years of service and 50 percent, but not to the 2.5 percent per year beyond 25 years of service. 2 percent is good enough. Cap the percentage payout at 60 percent. That's for 25 years...long enough in this line of work.

    Keep DROP where it is for employees who still qualify, and simply do not restart it for others.

    The percentage of interest for DROP throughout the market calamity of 2008-2011 was truly a shameful thing, but no one who grabbed it and ran may be blamed...give away money? Working people aren't in the business of giving refunds. No one is.

    It is high time for us to pay more attention to administrators, city managers (who feather their nests at prodigious rates, too) and their ilk.

    And Dark Money interests who treat Arizona as a Republican petri dish. News flash...your days are numbered.

  3. I swear the person running this blog likes to pick and choose which laws to follow. A few posts ago you discuss how you think the old PBI is constitutionally protected and if someone sued you think they would win. This is no different. Yes I agree that I would rather see more tier 3 hired but the bottom line is you can't take drop away. Anyone hired prior to 1/1/2012 has a protect right to DROP. It is what it is. I'm sure some of the people commenting here also benefiting from drop but now that they got theres they don't care about the rest of us.

    On a side note. For most people drop is a bad deal from the finance side. If u are old and going to die drop is good. If you can't manage your finances drop is good. But for everyone else working those 5 years and getting a higher pension which then gets compounded each year with the COLA is better in the long run.

    1. Constitutionality and fiscal soundness are two different concepts. The PBI and the DROP are BOTH bad fiscal policy that are harmful to PSPRS, regardless of how a court might rule on the constitutionality of either policy. It is possible to understand and discuss both concepts independently. It might be a better idea if we did not implement such bad financial policies in the first place, then we wouldn’t ever have to argue about their constitutionality later when they start to damage PSPRS.


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