I hope everyone has had a chance to read the latest news out of PSPRS world. If not, you are going to love these two new stories by Craig Harris of the Arizona Republic:
State recommends PSPRS administrator Smout be fired for sexual harassment
PSPRS delays decision on Administrator Jared Smout after sexual harassment investigation
It turns out that Jared Smout, the arrogant, ethically-challenged, and incompetent soon-to-be ex-PSPRS Administrator is also a voyeur and sexual harasser, who spent over a year harassing another PSPRS employee and hours watching live workplace surveillance videos of another (or maybe the same?) PSPRS employee. As we have discussed multiple times here, Mr. Smout should have been forced to resign years ago, at the same time as former Administrator James Hacking, as he also signed off on the illegal raises that cost Mr. Hacking his job. Somehow, though, he has remained at PSPRS and was promoted to Administrator. Today should be his last day at PSPRS, as the PSPRS Board of Trustees is meeting today to terminate him.
While it is easy to focus on the weird, disturbing behavior of Mr. Smout, we should not let it distract us from the bigger picture. PSPRS is an extremely dysfunctional organization. A toothless Board of Trustees made up of clueless cheerleaders like longtime former Chairman Brian Tobin or current Chairman Will Buvidas obviously has no control over PSPRS' management. While they have vociferously sung the praises of Mr. Smout and former Chief Investment Officer Ryan Parham despite years of management issues and poor financial results, they now sheepishly profess their complete ignorance of this latest PSPRS fiasco.
PSPRS is crying our for some type of radical overhaul following a more broad-ranging investigation into PSPRS structure, culture, and internal controls. Here are some of the questions I have:
1. What did no one on the Board of Trustees have any idea what was going on? The Board acts as just a rubber stamp of PSPRS with oversight only in name. Obviously, none of the victim(s) of Mr. Smout's actions felt comfortable going to the Board. Why? One can only assume that they believed that Board would not do anything. This is especially damning as the current makeup of the Board includes two law enforcement members and four public safety members in total. As it always has in the past, the Board works for PSPRS' management, not the other way around. The Board neither knows or understands what PSPRS is doing and simply parrots what management tells them. It's no wonder employees would not trust Board members with a sensitive matter.
2. Why does PSPRS need an internal video security system that is capable of real-time surveillance of employees, and why would the Administrator have access to it? PSPRS is not a casino, and as far as I know, there is no cash, precious metals, or diamonds being handled there, like in a bank or a coin or jewelry store. I guess in an office setting like PSPRS it would be a deterrent to anyone planning on stealing a stapler or a pad of Post-Its. More likely, it would be an effective way to intimidate employees, especially if they thought their supervisor(s) were capable of watching them at any time. Why would the Board allow a system like this to even exist?
3. Who among PSPRS management knew about Mr. Smout's behavior and what did they do about it? This is the most important question. According to the articles, Mr. Hacking knew about Mr. Smout watching videos of the employee but did nothing about it. It is not clear who gave the evidence of Mr. Smout's surveillance to Mr. Hacking, but obviously at least one other person knew of it. But who else knew? Mr. Tobin denies any knowledge of it. As for the more recent sexual harassment, there is no information about who did or did not know of Mr. Smout's behavior. Hopefully, we will find out more later.
Of course, this gives a new perspective on the retroactive bonuses paid out last year. These were initially approved by Mr. Smout without the Board's consideration or approval. Remember that these were classified as legal claims against PSPRS as a way to hide the payment of retroactive bonuses. This certainly seems fishy in light of everything we know now. Once again, we can only hope we find out more later.
4. Who will replace Mr. Smout? I suspect that anyone will be better than Mr. Smout. However, PSPRS is in desperate need of an outsider to clean it up. It is the only way to effectively change the culture and put in place the necessary checks and balance so that no one like Mr. Smout ever becomes head of PSPRS again.
5. How much is this going to cost PSPRS (i.e. taxpayers)? Lawsuits are coming.
Until a full accounting is complete, there are few things that can be immediately done:
1. Give the Arizona State Retirement System (ASRS) control of PSPRS' investment portfolio. How can PSPRS' management be trusted with $10 billion and the retirements of thousands of PSPRS members? While I would like to see this be a permanent change, it in necessary in the interim until some stability and a level of professionalism is restored in PSPRS' management.
2. Remove Chairman Will Buvidas from the Board, or at least remove him from the Charimanship. He has proven that he is not up for the job, and having served as Vice-Chairman under former Chairman Brian Tobin, he is ill-prepared to provide oversight of PSPRS going forward. A non-public safety member would probably be better suited for the chairmanship in light of Mssrs. Tobin and Buvidas' tenures.
3. Fire PSPRS communications director Christian Palmer. A smarmy, petulant man temperamentally unsuited as a spokesman for PSPRS, Mr. Palmer is an embarrassment to PSPRS and will hinder efforts to reform it.
It will be interesting to see where this all ends. Stay tuned.
Information and analysis of the Arizona Public Safety Personnel Retirement System (PSPRS) and issues that affect public defined benefit pensions.
Featured Post
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, July 17, 2019
Wednesday, May 15, 2019
The Desolation of Smout: The rotten root of PSPRS' many troubles
So the hits just keep on coming. If you have not been following along at the Arizona Republic since the last post, there have been three other articles about the pay practices at PSPRS: "State pension fund delivered subpar returns. Then it gave executives an extra $120,000" by Craig Harris and Anne Ryman on May 9, 2019, "Taxpayer giveaway or settlement? Questions on $120,000 bonuses at state pension system" by Mr. Harris on May 12, 2019, and "Arizona public safety pension board approves retroactive bonuses to executives" by Mr. Harris on May 14, 2019. Also, Arizona Republic columnist Laurie Roberts has published three editorials on PSPRS over the past three weeks: "Suspended Arizona pension boss should lose that outrageous $43,000 pay raise," "Arizona pension system gave out bonuses? What it needs is Pine Sol and pink slips," and "Jackpot! Pension staff bonuses approved while Arizona cities go broke."
First, I must highlight a part of this that is a bit confusing when it comes to the legality of raises at PSPRS. Mr. Harris wrote in his April 23rd article:
So since the last post, it has come out that PSPRS not only gave Administrator Jared Smout a retroactive raise at the end of 2018 but also paid out another $120,000 in bonuses to three other PSPRS executives. One of the three bonuses was $72,000 paid to PSPRS' former Chief Investment Officer (CIO) Ryan Parham, four days after he retired. Mr. Parham already was, for many years, the state's second-highest paid non-University system employee, behind only Paul Matson, the Director of the better-managed and higher-earning Arizona State Retirement System (ASRS). Mr. Parham also received "at least a half-million dollars in bonuses and additional compensation" over the prior ten years and is currently drawing an annual ASRS pension of almost $129,000. Under Mr. Parham's watch, PSPRS achieved the distinction of being one of the worst-performing public pensions in the country. I guess that type of stellar performance doesn't come cheap.
The bonuses given in 2018 to the three employees, Mr. Parham, senior portfolio manager Shan Chen ($28,000), and current CIO and former executive assistant Mark Steed ($20,000), were paid out as "settlements" to allegedly compensate them for bonuses not received when PSPRS' bonus policy was suspended in 2013. There are several problems with these bonuses/settlements:
Mr. Palmer sees nothing questionable here. If Mr. Smout can independently and secretly "settle claims," doesn't he have sovereign-like power to give away taxpayers' money to those people he favors and withhold payments from those he does not? Doesn't Mr. Palmer, who according to LinkedIn once worked as a journalist for the Arizona Capitol Times, see anything unethical here? Of course, Mr. Palmer got a 7% raise and $2,500 bonus last year as well, so why mess up a good thing.
Columnist Laurie Roberts, in her April 25, 2019 editorial, does a good job expressing a lot of the anger most of us are probably feeling. Before these latest revelations, she highlighted possibly the most insulting part of this whole fiasco:
As for the other settlement/bonuses, Mr. Palmer whines:
Finally, Ms. Roberts' May 14, 2019 editorial does a good summation of all this, and if you read only one piece, read that one. She has an excellent list of "five nagging questions about PSPRS." Her fifth question even brings up a point that we have repeatedly discussed in this blog:
Mr. Smout was not some hired gun brought in to fix PSPRS after coming from another public pension job(s). He is a PSPRS lifer, whose LinkedIn profile shows PSPRS being virtually his only employer between 1997 and now. Except for four years in Utah obtaining a masters degree in public administration and working three months as a finance director for the Salt Lake City public library, Mr. Smout has worked only for PSPRS, a period of time that just happens to coincide with PSPRS financial decline. Now, once again, we see him front and center in another episode of questionable ethics and possibly even illegal behavior.
Mr. Smout has had ample opportunity to prove himself as a competent, transparent, trustworthy, and ethical Administrator. He has failed, yet taxpayers and PSPRS members have had to pay the price while Mr. Smout grows fatter on their hard-earned money. A fish rots from the head down. It's way past time to get rid of this rotten head.
First, I must highlight a part of this that is a bit confusing when it comes to the legality of raises at PSPRS. Mr. Harris wrote in his April 23rd article:
Megan Rose, ADOA's spokeswoman, said she was surprised to learn PSPRS had given Parke a raise following the warning on Smout's raise. Rose reiterated that state law requires PSPRS to consult with ADOA before giving raises.However, in the May 9th article it says:
In summer 2015, then-Administrator Jim Hacking was forced out after The Republic uncovered he had given secret raises of up to 27% to his investment staff without state Department of Administration's approval, which then was required by law.
The Department of Administration no longer approves raises at PSPRS, but the state's personnel office has voiced concerns about Smout's retroactive raise, contending it may have been illegal.
Rose, the ADOA spokeswoman, said while ADOA has raised concerns that Smout's raise was illegal, it does not have the authority to revoke it.
"We are not law enforcement," she said.
She added that PSPRS does not currently need ADOA's approval from raises because it's not an agency that reports to the governor.
As I read this, PSPRS, by law, must consult with the Arizona Department of Administration (ADOA) before giving raises, but the PSPRS Board is under no legal obligation to follow their "consultation"and can pay whatever it wants. Why is ADOA involved at all then? This seems like an odd requirement.PSPRS is overseen by a volunteer board, whose members are appointed by Gov. Doug Ducey, the House speaker and Senate president.
So since the last post, it has come out that PSPRS not only gave Administrator Jared Smout a retroactive raise at the end of 2018 but also paid out another $120,000 in bonuses to three other PSPRS executives. One of the three bonuses was $72,000 paid to PSPRS' former Chief Investment Officer (CIO) Ryan Parham, four days after he retired. Mr. Parham already was, for many years, the state's second-highest paid non-University system employee, behind only Paul Matson, the Director of the better-managed and higher-earning Arizona State Retirement System (ASRS). Mr. Parham also received "at least a half-million dollars in bonuses and additional compensation" over the prior ten years and is currently drawing an annual ASRS pension of almost $129,000. Under Mr. Parham's watch, PSPRS achieved the distinction of being one of the worst-performing public pensions in the country. I guess that type of stellar performance doesn't come cheap.
The bonuses given in 2018 to the three employees, Mr. Parham, senior portfolio manager Shan Chen ($28,000), and current CIO and former executive assistant Mark Steed ($20,000), were paid out as "settlements" to allegedly compensate them for bonuses not received when PSPRS' bonus policy was suspended in 2013. There are several problems with these bonuses/settlements:
1. They were never approved by the Board of Trustees at the time they were given. The Board convened meetings this month only after being questioned about them by The Republic. The Republic discovered the bonuses after filing a public records request with ADOA. The Board of Trustees retroactively approved the three payments on May 13, 2019, as well as another $51,000 to the estate of a deceased employee.
2. The settlements should actually classified as bonuses because there were taxed as compensation, and per ADOA spokesperson Megan Rose, ADOA classified them as "additional pay or bonuses."
3. There was never a known legal claim made at the time the bonus program was suspended in 2013 or any time since. There are strict deadlines and procedures for filing and negotiating a claim against the government, yet a settlement was paid when there was no underlying claim that had to be settled.
4. The three employees were each given $1,000 to sign the settlements.
5. The state Attorney General's office knew nothing of these settlements, though it is the agency that normally handles financial claims against state agencies. On all three of the confidential settlement and release agreements linked in the article, Jared Smout is the only signatory representing the state of Arizona and obligating its taxpayers to this settlement.So what does this look like? Do we believe PSPRS' petulant communications director Christian Palmer when he says:
PSPRS has consistently stated that these are legal settlements for a simple reason — that's what they are. They are a settlement of potential claims against the system."Or do we believe our own eyes which tell us that Jared Smout was trying to hide these payments from the public, ADOA, and PSPRS members. Did the Board of Trustees secretly allow these payments so that it would not have to make a public vote on them? I don't know, but based on, the Board's later award of a retroactive raise to Mr. Smout. I would not put this past them to try and hide these payments, particularly the one to the departing Mr. Parham.
Mr. Palmer sees nothing questionable here. If Mr. Smout can independently and secretly "settle claims," doesn't he have sovereign-like power to give away taxpayers' money to those people he favors and withhold payments from those he does not? Doesn't Mr. Palmer, who according to LinkedIn once worked as a journalist for the Arizona Capitol Times, see anything unethical here? Of course, Mr. Palmer got a 7% raise and $2,500 bonus last year as well, so why mess up a good thing.
Columnist Laurie Roberts, in her April 25, 2019 editorial, does a good job expressing a lot of the anger most of us are probably feeling. Before these latest revelations, she highlighted possibly the most insulting part of this whole fiasco:
PSPRS board members justified Smout’s 20 percent raise as his first since 2015. I'm sure rank-and-file state employees – who generally have enjoyed pay raises closer to 2 to 3 percent in that same time period – feel his considerable pain.Poor Jared Smout hadn't gotten a raise in 3 years! I don't know how he managed to live on a paltry $209,000 a year. Where I work, pay increases were deferred for nearly ten years with furlough days and higher costs for medical insurance piled on. This was on top of increased call loads and deferred maintenance and delays in replacing worn equipment. I suspect this is a similar situation for many of you out there who are active PSPRS members. How does the PSPRS Board of Trustees say this with a straight face, especially Chairman Will Buvidas, a Phoenix police officer, and the other public safety Board members (although not all of the current public safety Board members were on the Board when Mr. Smout's retroactive raise was approved)?
As for the other settlement/bonuses, Mr. Palmer whines:
These settlements amount to a fraction of a fraction of the value contributed by these employees who have grown the PSPRS trust to more than $10.3 billion while taking less investment risk than the vast majority of peer pensions.Really? They haven't grown anything; they have horribly underperformed. As Ms. Roberts writes in her May 9, 2019 editorial, ". . . PSPRS posted a 7.1 percent return on investments last year while the Arizona State Retirement System enjoyed a 9.4 percent return," and ". . . PSRPS ranked 37 out of 41 major public pension trusts on investment returns last year, according to the Pew Charitable Trusts."
Finally, Ms. Roberts' May 14, 2019 editorial does a good summation of all this, and if you read only one piece, read that one. She has an excellent list of "five nagging questions about PSPRS." Her fifth question even brings up a point that we have repeatedly discussed in this blog:
Why not disband this irresponsible agency?
Why not turn over administration of public safety pensions to the Arizona State Retirement System, an agency that knows how to make money and is transparent in the way it spends money?
Of course, I would add a sixth question: Why has Jared Smout not been fired yet?Or even better, to the state Treasurer’s Office, which already handles the state’s $16 billion in investments. The Treasurer's Office has an in-house investment team, something that could save us a few bucks on outside management fees paid by the pension trust. And it could boost the pension fund. The Treasurer's return on investment in the Permanent Land Endowment Trust Fund, for example, was 9.09 percent, according to spokeswoman Shaandiin Parrish.
Mr. Smout was not some hired gun brought in to fix PSPRS after coming from another public pension job(s). He is a PSPRS lifer, whose LinkedIn profile shows PSPRS being virtually his only employer between 1997 and now. Except for four years in Utah obtaining a masters degree in public administration and working three months as a finance director for the Salt Lake City public library, Mr. Smout has worked only for PSPRS, a period of time that just happens to coincide with PSPRS financial decline. Now, once again, we see him front and center in another episode of questionable ethics and possibly even illegal behavior.
Mr. Smout has had ample opportunity to prove himself as a competent, transparent, trustworthy, and ethical Administrator. He has failed, yet taxpayers and PSPRS members have had to pay the price while Mr. Smout grows fatter on their hard-earned money. A fish rots from the head down. It's way past time to get rid of this rotten head.
Wednesday, April 24, 2019
Above the law and beyond the pale: Another mess brought to us by Jared Smout and the PSPRS Board of Trustees
I had not posted anything recently due to other commitments. Plus, there really has not been much to write about other than monthly investment returns. However, a couple of recent stories by Craig Harris in the Arizona Republic deserve some discussion.
First, let me express my thanks to Mr. Harris, an excellent reporter who oftentimes seems to be the only public advocate PSPRS members have. Like all of us, at the end of the day, I am just another PSPRS member at the mercy of PSPRS' administration, its Board of Trustees, and the state public safety unions, all of whom have shown themselves to be insular, incompetent, dishonest, and selfish. Without Mr. Harris' diligent work exposing PSPRS' repeated failures, who knows how much worse PSPRS might be.
Mr. Harris' first article in the April 16, 2019 Republic, "Public-safety pension system places administrator on paid leave amid workplace allegations," is brief and very well summarized in the headline. The workplace allegations regard "unfair treatment," a broad and vague characterization of what PSPRS Jared Smout is being accused. However, after "reviewing the preliminary findings of an independent investigation," PSPRS' Board of Trustees thought enough of the allegations to put Mr. Smout on paid leave until a full investigation is complete. The Board said it could not say anymore as it involves a personnel matter. On first glance, I did not think much of this for several reasons.
First, Mr. Smout is entitled to a presumption of innocence, and as a head of the organization, he has to be given a lot of deference in how he manages personnel as he is ultimately responsible for the success or failure of the organization. There would have to be a pretty high burden of proof on any accuser that what Mr. Smout may have done was not a necessary and correct course of action for PSPRS. Second, unless you work alone as your own boss, you know that there is always someone in an organization who is going to think he is being treated unfairly. You can see this all the way back to Cain and Abel. This is not to say that no one ever had a legitimate beef about how he was being treated, but unfairness is open to very wide interpretation.
Finally, PSPRS had an ugly episode several years ago that appears to have begun over accusations of retaliatory behavior against investment staff members and ended in a federal investigation of PSPRS and a very expensive lawsuit. PSPRS was accused of over-reporting real estate investment returns in order to trigger bonuses for staff members. One former staff member was accused by PSPRS of illegally taking files from PSPRS's office. PSPRS was completely exonerated in the federal investigation, and the staff members who originally accused PSPRS of wrongdoing were sued by an investment company for defamation. As the former PSPRS staff members were employees at the time, the states of Arizona is responsible for their legal bills. As of August 2017, this lawsuit had cost Arizona taxpayers nearly $500,000, and the lawsuit still appears active today. You can read more about it here in another article by Mr. Harris. I mention this episode because, despite all its drama and legal machinations, it was a big zero in terms of actual wrongdoing by PSPRS.
Mr. Harris's second article in the April 23, 2019 Republic, "Public safety pension gave top boss $43K raise. Officials warn it may have been illegal," is a lot more intriguing, if not simply for the utter stupidity and arrogance of PSPRS' Board of Trustees ("the Board"), but in how it relates to the first article from April 16th. The Board voted on November 28, 2018 to give Mr. Smout a retroactive raise of $43,147, which was paid to him on December 31, 2018. The Arizona Department of Administration (ADOA) warned PSPRS that the raise possibly violated Arizona's ban on gifts. Furthermore, Bret Parke, PSPRS general counsel and interim administrator while Mr. Smout is on leave, was given a $39,500 raise a day after ADOA warned them about the possible impropriety of Mr. Smout's retroactive raise.
So where do we start? I guess we should start with the fact that PSPRS is required BY LAW to consult with ADOA before awarding raises. Let's let that sink in for a minute before we get into some history. Mr. Smout gets a retroactive raise that was not approved by ADOA and may also be unconstitutional. Mr. Smout's predecessor as PSPRS Administrator, James Hacking, was forced out because he gave out illegal raises to PSPRS staff, and Mr. Smout, as Deputy Administrator, signed off on the illegal raises that cost Mr. Hacking his job. So now Mr. Smout accepts his retroactive raise, knowing that it would be illegal without the approval of ADOA. What will be his defense: that he thought the Board was supposed to get approval from ADOA, despite his own experience with the required procedure for awarding raises? Or are he and the Board so arrogant and dismissive of Arizona law that they awarded this raise knowing full well they were violating the law? Either one looks bad for PSPRS.
As for Mr. Parke's raise, we have the Board, chaired by Will Buvidas, a Phoenix police officer, awarding a raise to PSPRS' general counsel. So we have a Board chaired by an Arizona law enforcement officer giving an illegal raise to PSPRS' own lawyer in violation of Arizona law. This is my favorite part of Mr. Harris' article:
Mr. Harris' second article puts the first article in a different light. As I wrote earlier, I had not thought too much about Mr. Smout being placed on leave as it might turn out to be nothing. However, the second article raises a lot of new questions about the seriousness of the accusations against Mr. Smout.
Is the claim of unfair treatment the raise itself? I could see how another staff member might find a retroactive raise for the boss, and the boss alone, offensive and unfair, especially if Mr. Smout never took up for the rest of PSPRS' staff, who were working just as hard as him. However, if this is the case, would it be necessary to place Mr. Smout on administrative leave since it does not involve the treatment of other employees?
Why was PSPRS' information technology operations manager also placed on administrative leave? This prompts all kinds of speculation about what might have happened when the possibility that information was compromised or misused.
Why would the Board give another illegal raise to Mr. Parke after just being warned about Mr. Smout's illegal raise? If we disregard the possibility that the Board is really that stupid and arrogant, what could be the reason they did this? The only thing I can think of is that they believe that by so brazenly flouting ADOA they will lessen their culpability in the first instance by doubling down on feigned ignorance with a second instance.
Why did the Board feel the need to give Mr. Smout a retroactive raise? Why did the raise have to be retroactive? They could have just given him raise starting in 2019 or even in December of last year and gotten the proper clearance from ADOA to do so. Retroactive pay or large lump sum payments always stinks of pension spiking. Mr. Parke, who just joined PSPRS in October 2018, had previously been the interim director for Arizona State Parks when its director became embroiled in legal issues that eventually cost her her job. Was Mr. Smout expecting, voluntarily or involuntarily, to depart PSPRS soon?
Is Mr. Parke being unfairly involved in this mess? As previously stated, Mr Parke just joined PSPRS last October. He was made interim PSPRS Administrator on April 16, 2019. It is unclear from Mr. Harris' April 23rd article if Mr. Parke was given his raise on April 16th or April 23rd. The Board of Trustees meeting materials show no vote on a raise for Mr. Parke on April 16th. Was it done on April 23rd during the Board's monthly meeting? Was Mr. Parke even aware that the Board had given him a raise? I don't know, but regardless this all appears very suspect. Why give him a raise, other than to hobble him in his new role as Administrator by embroiling him in the same controversy that Mr. Smout and the Board are now involved.
While these questions will hopefully be answered in time, we still must marvel once again at the dysfunction of PSPRS. You never hear about issues like this at the Arizona State Retirement System, which plods along without fanfare, outperforming PSPRS year in and year out. The Board of Trustees is responsible for billions of dollars, yet shows less governing ability than a high school student council. As for Mr. Smout, what does it take to get rid of this guy? If he isn't approving illegal raises, he's getting them. How can he be trusted with the futures of thousands of fire and law enforcement personnel, all of whom would lose their jobs and pensions if they broke the law while on duty, when he will follow neither the spirit nor the letter of state law that governs his own department? The terrible performance of PSPRS alone should preclude Mr. Smout from ever getting a raise. Mr. Smout has been the one constant at PSPRS through all its problems. I truly believe that PSPRS will never be successful as long as he remains employed there.
First, let me express my thanks to Mr. Harris, an excellent reporter who oftentimes seems to be the only public advocate PSPRS members have. Like all of us, at the end of the day, I am just another PSPRS member at the mercy of PSPRS' administration, its Board of Trustees, and the state public safety unions, all of whom have shown themselves to be insular, incompetent, dishonest, and selfish. Without Mr. Harris' diligent work exposing PSPRS' repeated failures, who knows how much worse PSPRS might be.
Mr. Harris' first article in the April 16, 2019 Republic, "Public-safety pension system places administrator on paid leave amid workplace allegations," is brief and very well summarized in the headline. The workplace allegations regard "unfair treatment," a broad and vague characterization of what PSPRS Jared Smout is being accused. However, after "reviewing the preliminary findings of an independent investigation," PSPRS' Board of Trustees thought enough of the allegations to put Mr. Smout on paid leave until a full investigation is complete. The Board said it could not say anymore as it involves a personnel matter. On first glance, I did not think much of this for several reasons.
First, Mr. Smout is entitled to a presumption of innocence, and as a head of the organization, he has to be given a lot of deference in how he manages personnel as he is ultimately responsible for the success or failure of the organization. There would have to be a pretty high burden of proof on any accuser that what Mr. Smout may have done was not a necessary and correct course of action for PSPRS. Second, unless you work alone as your own boss, you know that there is always someone in an organization who is going to think he is being treated unfairly. You can see this all the way back to Cain and Abel. This is not to say that no one ever had a legitimate beef about how he was being treated, but unfairness is open to very wide interpretation.
Finally, PSPRS had an ugly episode several years ago that appears to have begun over accusations of retaliatory behavior against investment staff members and ended in a federal investigation of PSPRS and a very expensive lawsuit. PSPRS was accused of over-reporting real estate investment returns in order to trigger bonuses for staff members. One former staff member was accused by PSPRS of illegally taking files from PSPRS's office. PSPRS was completely exonerated in the federal investigation, and the staff members who originally accused PSPRS of wrongdoing were sued by an investment company for defamation. As the former PSPRS staff members were employees at the time, the states of Arizona is responsible for their legal bills. As of August 2017, this lawsuit had cost Arizona taxpayers nearly $500,000, and the lawsuit still appears active today. You can read more about it here in another article by Mr. Harris. I mention this episode because, despite all its drama and legal machinations, it was a big zero in terms of actual wrongdoing by PSPRS.
Mr. Harris's second article in the April 23, 2019 Republic, "Public safety pension gave top boss $43K raise. Officials warn it may have been illegal," is a lot more intriguing, if not simply for the utter stupidity and arrogance of PSPRS' Board of Trustees ("the Board"), but in how it relates to the first article from April 16th. The Board voted on November 28, 2018 to give Mr. Smout a retroactive raise of $43,147, which was paid to him on December 31, 2018. The Arizona Department of Administration (ADOA) warned PSPRS that the raise possibly violated Arizona's ban on gifts. Furthermore, Bret Parke, PSPRS general counsel and interim administrator while Mr. Smout is on leave, was given a $39,500 raise a day after ADOA warned them about the possible impropriety of Mr. Smout's retroactive raise.
So where do we start? I guess we should start with the fact that PSPRS is required BY LAW to consult with ADOA before awarding raises. Let's let that sink in for a minute before we get into some history. Mr. Smout gets a retroactive raise that was not approved by ADOA and may also be unconstitutional. Mr. Smout's predecessor as PSPRS Administrator, James Hacking, was forced out because he gave out illegal raises to PSPRS staff, and Mr. Smout, as Deputy Administrator, signed off on the illegal raises that cost Mr. Hacking his job. So now Mr. Smout accepts his retroactive raise, knowing that it would be illegal without the approval of ADOA. What will be his defense: that he thought the Board was supposed to get approval from ADOA, despite his own experience with the required procedure for awarding raises? Or are he and the Board so arrogant and dismissive of Arizona law that they awarded this raise knowing full well they were violating the law? Either one looks bad for PSPRS.
As for Mr. Parke's raise, we have the Board, chaired by Will Buvidas, a Phoenix police officer, awarding a raise to PSPRS' general counsel. So we have a Board chaired by an Arizona law enforcement officer giving an illegal raise to PSPRS' own lawyer in violation of Arizona law. This is my favorite part of Mr. Harris' article:
Megan Rose, ADOA's spokeswoman, said she was surprised to learn PSPRS had given Parke a raise following the warning on Smout's raise. Rose reiterated that state law requires PSPRS to consult with ADOA before giving raises.
Really? Isn't following the law day one stuff for aspiring cops and lawyers? You will have to work with them on this? I hate to say this, Ms. Rose, but by awarding this second raise, PSPRS and its Board just told ADOA to go f--- themselves. I am not sure how you work them on that."This is something we will have to work with them on," Rose said.
Mr. Harris' second article puts the first article in a different light. As I wrote earlier, I had not thought too much about Mr. Smout being placed on leave as it might turn out to be nothing. However, the second article raises a lot of new questions about the seriousness of the accusations against Mr. Smout.
Is the claim of unfair treatment the raise itself? I could see how another staff member might find a retroactive raise for the boss, and the boss alone, offensive and unfair, especially if Mr. Smout never took up for the rest of PSPRS' staff, who were working just as hard as him. However, if this is the case, would it be necessary to place Mr. Smout on administrative leave since it does not involve the treatment of other employees?
Why was PSPRS' information technology operations manager also placed on administrative leave? This prompts all kinds of speculation about what might have happened when the possibility that information was compromised or misused.
Why would the Board give another illegal raise to Mr. Parke after just being warned about Mr. Smout's illegal raise? If we disregard the possibility that the Board is really that stupid and arrogant, what could be the reason they did this? The only thing I can think of is that they believe that by so brazenly flouting ADOA they will lessen their culpability in the first instance by doubling down on feigned ignorance with a second instance.
Why did the Board feel the need to give Mr. Smout a retroactive raise? Why did the raise have to be retroactive? They could have just given him raise starting in 2019 or even in December of last year and gotten the proper clearance from ADOA to do so. Retroactive pay or large lump sum payments always stinks of pension spiking. Mr. Parke, who just joined PSPRS in October 2018, had previously been the interim director for Arizona State Parks when its director became embroiled in legal issues that eventually cost her her job. Was Mr. Smout expecting, voluntarily or involuntarily, to depart PSPRS soon?
Is Mr. Parke being unfairly involved in this mess? As previously stated, Mr Parke just joined PSPRS last October. He was made interim PSPRS Administrator on April 16, 2019. It is unclear from Mr. Harris' April 23rd article if Mr. Parke was given his raise on April 16th or April 23rd. The Board of Trustees meeting materials show no vote on a raise for Mr. Parke on April 16th. Was it done on April 23rd during the Board's monthly meeting? Was Mr. Parke even aware that the Board had given him a raise? I don't know, but regardless this all appears very suspect. Why give him a raise, other than to hobble him in his new role as Administrator by embroiling him in the same controversy that Mr. Smout and the Board are now involved.
While these questions will hopefully be answered in time, we still must marvel once again at the dysfunction of PSPRS. You never hear about issues like this at the Arizona State Retirement System, which plods along without fanfare, outperforming PSPRS year in and year out. The Board of Trustees is responsible for billions of dollars, yet shows less governing ability than a high school student council. As for Mr. Smout, what does it take to get rid of this guy? If he isn't approving illegal raises, he's getting them. How can he be trusted with the futures of thousands of fire and law enforcement personnel, all of whom would lose their jobs and pensions if they broke the law while on duty, when he will follow neither the spirit nor the letter of state law that governs his own department? The terrible performance of PSPRS alone should preclude Mr. Smout from ever getting a raise. Mr. Smout has been the one constant at PSPRS through all its problems. I truly believe that PSPRS will never be successful as long as he remains employed there.
Monday, February 18, 2019
Will to power: New year, new chairman, and a PSPRS update for February 2019
Inflation and COLA's
Let's start with the topic that will interest retirees the most. The Phoenix-Mesa CPI-U showed an annual average inflation for 2018 of 4.2%, 3.9% for the first half and 4.4% for the second half. This well exceeds the 2% cap, so eligible retirees can expect a 2% increase in their monthly benefit starting in July 2019. The 2017 average annual inflation for the Phoenix-Mesa area was 2.5%.
I was interested to see what the inflation rates were in other cities, and while the Bureau of Labor Statistics (BLS) does not appear to have a standard reporting schedule, it did have the average annual 2018 inflation the following places: San Diego - 3.4%, San Francisco - 3.9%, Los Angeles - 3.8%, Honolulu - 1.9%, Seattle - 3.2%, as well as the entire West Region - 3.3%. I found it remarkable that the inflation in the Phoenix-Mesa is higher than traditionally expensive cities like San Francisco and Honolulu.
Regardless, we have another year in which retirees will see their purchasing power diminished. This is especially harmful to recent retirees, who will see their purchasing power immediately decreased. Someone in his mid to late 50's does not want to see his purchasing power decreased by 10-20% over the next 5-10 years when he is trying to remain active in retirement. Those who had benefit increases under the old permanent benefit (PBI) formula had increases that were greater than the actual inflation rate, so as of now, they should have some protection of their purchasing power.
Board of Trustees departures
The PSPRS Board of Trustees has seen three recent departures. The best news is the departure of Chairman Brian Tobin. Mr. Tobin, an assistant chief with the Phoenix Fire Department (PFD), is retiring from PFD in 2019 after a long and accomplished career there. He has been on the Board since 2009 and been Chairman since 2010. His current term was scheduled to end in January 2019.
To say that Mr. Tobin's tenure on the PSPRS Board of Trustees was a disappointment would be an understatement. Defending the poorly performing management of PSPRS was always seemed his first priority. Those like current PSPRS Administrator Jared Smout, who should have been forced out of PSPRS at the same time his former boss James Hacking was, and former Chief Investment Officer Ryan Parham, got fat off PSPRS members and taxpayers as some of the highest-paid non-University system employees in Arizona, while year in and year out underperforming the Arizona State Retirement System. As one of the fire and law enforcement representative members on the Board, Mr. Tobin's role was to hold the likes of Mr. Smout, Mr. Parham, and the rest of the PSPRS management, who had no skin in the PSPRS game, accountable to the rest of us who did. Sadly, Mr. Tobin failed to do this. Even when Mr. Parham, PSPRS' Chief INVESTMENT Officer, publicly confessed in 2014 to low-balling PSPRS' returns to prevent paying permanent benefit increases (PBI's) to retirees, Mr. Tobin did nothing and even called Mr. Parham ". . . one of the best in the business for more than a decade," after he retired last year.
Alas, Mr. Tobin may be just be representative of many a public employee representative that sits on Trustee pension boards throughout the country. See Step 2 in Ben Carlson's February 12, 2019 article, "How to Wreck a Pension Plan in 3 Easy Steps." at his website A Wealth of Common Sense, which says to "invest heavily in things you don't understand." Modern Pension Diversification is the research paper on PSPRS' investment strategy. Did Mr. Tobin understand this? Does Will Buvidas, a Phoenix police officer, who replaced Mr. Tobin as Board Chairman? Do any of the the other three public safety Trustees? I don't. It could be complete and utter nonsense, but how would Mr. Tobin or Mr. Buvidas know if it was? They know how to fight fires and enforce the law, not theoretical finance, much less how to discern whether a complex investment plan is feasible for PSPRS. Who knows if even the authors or the peer review board members actually understand what they are proposing or reviewing? (For some perspective, see here and here.)
I suspect, like many public employees who serve as trustees boards like PSPRS', Mr. Tobin, Mr. Buvidas, and the other two public safety representatives were chosen for their union ties. I do not know Mr. Buvidas' background, but Mr. Tobin is a former president of the Professional Fire Fighters of Arizona. He also has the added advantage of being the brother of Andy Tobin, a former Speaker of the Arizona House of Representatives, former Director of the Arizona Department of Insurance, and current Arizona Corporation Commissioner. Union or political ties do not make one conversant, much less an expert, in finance, management, or actuarial science. The Arizona State Retirement System (ASRS), due to the number and diversity of employers it covers, has a much broader pool of members from which to choose for its Board of Trustees, and even more important, this pool includes individuals with extensive professional and academic backgrounds in finance and management.
Four of the nine members of the PSPRS Board of Trustees are public safety personnel, which means nearly half the Board is beholden to PSPRS' management for clarification and assurance that PSPRS is being managed properly and its investments are sound. Any time an investment firm, which likely knows down to the last penny how much of its own money it is risking in a deal, tries to sell the Board on a particular fund or other risky investment, say like Arizona shopping malls and housing developments, can these four public safety members make an informed decision, or do they simply rubber stamp the choices of PSPRS' management? I fear that it is the later and will continue to be that way in the future.
Investment Returns through November 2018
The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through November 2018, the fourth month of fiscal year (FY) 2019, with the past five FY end returns included for comparison:
There is usually about a two-month lag in PSPRS reporting its investment returns. The PSPRS Board of Trustees did not hold meetings in October 2018 or December 2018. The total return for the September/October period are extrapolated from the August and Novemer figures.
As I am sure most of us remember, October 2018 began a period of extreme volatility in financial markets. September was the last period of relative calm. The Russell 3000 lost about 9.3% in December 2018 and ended the 2018 calendar year down about 5.25%. However, the markets have shown a gradual increase from the lows of December and, as of last Friday, the markets have recouped much of the loss suffered in December. PSPRS still lags the Russell 3000 as of November 2018, but it will be interesting to see what the numbers show for December 2018 and January 2019.
Individual Employer Actuarials
PSPRS has individual employer actuarials available here. PSPRS' consolidated annual financial reports and actuarial reports give an aggregate contribution rate and funded level, but if you want to know how your own employer is doing, follow the link. The important thing to remember is that many employers chose to reamortize their unfunded actuarial accrued liability (UAAL). The UAAL is the unfunded portion of their pension liabilities for pensions that are less than 100% funded. PSPRS allowed employers an opportunity to reset the existing amortization period back to 30 years. I believe the existing amortization period had 19 years remaining of the original 30 years. If your employer did this, just like refinancing a house to another 30 year loan, it lowered the current payments but increased the total cost that will need to be paid over the life of the loan.
This is important to keep in mind if you see a reduction in your employer's contribution rate, as it likely is due to the reamortization and not any change in your UAAL.
PSPRS Newsletter and CAFR
If you have not seen it yet, the PSPRS third quarter newsletter is available. The FY 2018 Consolidated Annual Financial Report is also available. While the entire CAFR is 156 pages long, readers may find PDF pages 10-14 and 70-71 of interest.
Tier 1b DROP and Service Purchases
According to the January 13, 2019 PSPRS Board of Trustee meeting notes, there are 900 active Tier 1b DROP participants and "roughly 450" Tier 1b DROP members who have left employment and already been paid their accumulated DROP benefits and employee contributions. The active Tier 1b members need to be refunded any employee contributions they made during their time in the DROP with interest, and those Tier 1b members who participated in the DROP and have already retired are owed a higher interest rate on their DROP benefits. PSPRS is supposed to be calculating these payments and asks anyone affected to be patient, but there is no timeline for payments or updating eligible members.
In the same notes, it states that 97 members purchased service at the incorrect discount rate, meaning they paid more for their service time than the should have. If you purchased service time after July 1, 2017, you may be due a refund. Once again, there is no timeline for refunds or updating eligible members.
Needless to say, no one should trust PSPRS to look out for them. It appears that PSPRS has not updated its DROP calculator nor its service purchase estimator. I am not sure how members are supposed to verify what they may be owed or even if they are eligible for a refund. This seems like a perfect opportunity for PSPRS new Chairman to let PSPRS' management know he is going to take his oversight responsibilities seriously. We can only hope.
* Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year. Returns, gross of fees, are used in the table for consistency. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, 11.85% in FY 2017, and 7.07% in FY 20
Let's start with the topic that will interest retirees the most. The Phoenix-Mesa CPI-U showed an annual average inflation for 2018 of 4.2%, 3.9% for the first half and 4.4% for the second half. This well exceeds the 2% cap, so eligible retirees can expect a 2% increase in their monthly benefit starting in July 2019. The 2017 average annual inflation for the Phoenix-Mesa area was 2.5%.
I was interested to see what the inflation rates were in other cities, and while the Bureau of Labor Statistics (BLS) does not appear to have a standard reporting schedule, it did have the average annual 2018 inflation the following places: San Diego - 3.4%, San Francisco - 3.9%, Los Angeles - 3.8%, Honolulu - 1.9%, Seattle - 3.2%, as well as the entire West Region - 3.3%. I found it remarkable that the inflation in the Phoenix-Mesa is higher than traditionally expensive cities like San Francisco and Honolulu.
Regardless, we have another year in which retirees will see their purchasing power diminished. This is especially harmful to recent retirees, who will see their purchasing power immediately decreased. Someone in his mid to late 50's does not want to see his purchasing power decreased by 10-20% over the next 5-10 years when he is trying to remain active in retirement. Those who had benefit increases under the old permanent benefit (PBI) formula had increases that were greater than the actual inflation rate, so as of now, they should have some protection of their purchasing power.
Board of Trustees departures
The PSPRS Board of Trustees has seen three recent departures. The best news is the departure of Chairman Brian Tobin. Mr. Tobin, an assistant chief with the Phoenix Fire Department (PFD), is retiring from PFD in 2019 after a long and accomplished career there. He has been on the Board since 2009 and been Chairman since 2010. His current term was scheduled to end in January 2019.
To say that Mr. Tobin's tenure on the PSPRS Board of Trustees was a disappointment would be an understatement. Defending the poorly performing management of PSPRS was always seemed his first priority. Those like current PSPRS Administrator Jared Smout, who should have been forced out of PSPRS at the same time his former boss James Hacking was, and former Chief Investment Officer Ryan Parham, got fat off PSPRS members and taxpayers as some of the highest-paid non-University system employees in Arizona, while year in and year out underperforming the Arizona State Retirement System. As one of the fire and law enforcement representative members on the Board, Mr. Tobin's role was to hold the likes of Mr. Smout, Mr. Parham, and the rest of the PSPRS management, who had no skin in the PSPRS game, accountable to the rest of us who did. Sadly, Mr. Tobin failed to do this. Even when Mr. Parham, PSPRS' Chief INVESTMENT Officer, publicly confessed in 2014 to low-balling PSPRS' returns to prevent paying permanent benefit increases (PBI's) to retirees, Mr. Tobin did nothing and even called Mr. Parham ". . . one of the best in the business for more than a decade," after he retired last year.
Alas, Mr. Tobin may be just be representative of many a public employee representative that sits on Trustee pension boards throughout the country. See Step 2 in Ben Carlson's February 12, 2019 article, "How to Wreck a Pension Plan in 3 Easy Steps." at his website A Wealth of Common Sense, which says to "invest heavily in things you don't understand." Modern Pension Diversification is the research paper on PSPRS' investment strategy. Did Mr. Tobin understand this? Does Will Buvidas, a Phoenix police officer, who replaced Mr. Tobin as Board Chairman? Do any of the the other three public safety Trustees? I don't. It could be complete and utter nonsense, but how would Mr. Tobin or Mr. Buvidas know if it was? They know how to fight fires and enforce the law, not theoretical finance, much less how to discern whether a complex investment plan is feasible for PSPRS. Who knows if even the authors or the peer review board members actually understand what they are proposing or reviewing? (For some perspective, see here and here.)
I suspect, like many public employees who serve as trustees boards like PSPRS', Mr. Tobin, Mr. Buvidas, and the other two public safety representatives were chosen for their union ties. I do not know Mr. Buvidas' background, but Mr. Tobin is a former president of the Professional Fire Fighters of Arizona. He also has the added advantage of being the brother of Andy Tobin, a former Speaker of the Arizona House of Representatives, former Director of the Arizona Department of Insurance, and current Arizona Corporation Commissioner. Union or political ties do not make one conversant, much less an expert, in finance, management, or actuarial science. The Arizona State Retirement System (ASRS), due to the number and diversity of employers it covers, has a much broader pool of members from which to choose for its Board of Trustees, and even more important, this pool includes individuals with extensive professional and academic backgrounds in finance and management.
Four of the nine members of the PSPRS Board of Trustees are public safety personnel, which means nearly half the Board is beholden to PSPRS' management for clarification and assurance that PSPRS is being managed properly and its investments are sound. Any time an investment firm, which likely knows down to the last penny how much of its own money it is risking in a deal, tries to sell the Board on a particular fund or other risky investment, say like Arizona shopping malls and housing developments, can these four public safety members make an informed decision, or do they simply rubber stamp the choices of PSPRS' management? I fear that it is the later and will continue to be that way in the future.
Investment Returns through November 2018
The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through November 2018, the fourth month of fiscal year (FY) 2019, with the past five FY end returns included for comparison:
Report | PSPRS | PSPRS | Russell 3000 | Russell 3000 |
Date | Month End | Fiscal YTD | Month End | Fiscal YTD |
6/30/2014 | 0.78% | 13.82% | 2.51% | 25.22% |
6/30/2015 | -0.73% | 4.21% | -1.67% | 7.29% |
6/30/2016 | -0.32% | 1.06% | 0.21% | 2.14% |
6/30/2017 | 0.22% | 12.48% | 0.90% | 18.51% |
6/30/2018 | -0.66% | 7.76% | 0.66% | 14.78% |
7/31/2018 | 1.03% | 1.03% | 3.32% | 3.32% |
8/31/2018 | 0.94% | 1.98% | 3.51% | 6.95% |
9+10/2018 | -2.57% | -0.59% | -7.63% | -0.68% |
11/30/2018 | 0.95% | 0.36% | 2.00% | 1.32% |
There is usually about a two-month lag in PSPRS reporting its investment returns. The PSPRS Board of Trustees did not hold meetings in October 2018 or December 2018. The total return for the September/October period are extrapolated from the August and Novemer figures.
As I am sure most of us remember, October 2018 began a period of extreme volatility in financial markets. September was the last period of relative calm. The Russell 3000 lost about 9.3% in December 2018 and ended the 2018 calendar year down about 5.25%. However, the markets have shown a gradual increase from the lows of December and, as of last Friday, the markets have recouped much of the loss suffered in December. PSPRS still lags the Russell 3000 as of November 2018, but it will be interesting to see what the numbers show for December 2018 and January 2019.
Individual Employer Actuarials
PSPRS has individual employer actuarials available here. PSPRS' consolidated annual financial reports and actuarial reports give an aggregate contribution rate and funded level, but if you want to know how your own employer is doing, follow the link. The important thing to remember is that many employers chose to reamortize their unfunded actuarial accrued liability (UAAL). The UAAL is the unfunded portion of their pension liabilities for pensions that are less than 100% funded. PSPRS allowed employers an opportunity to reset the existing amortization period back to 30 years. I believe the existing amortization period had 19 years remaining of the original 30 years. If your employer did this, just like refinancing a house to another 30 year loan, it lowered the current payments but increased the total cost that will need to be paid over the life of the loan.
This is important to keep in mind if you see a reduction in your employer's contribution rate, as it likely is due to the reamortization and not any change in your UAAL.
PSPRS Newsletter and CAFR
If you have not seen it yet, the PSPRS third quarter newsletter is available. The FY 2018 Consolidated Annual Financial Report is also available. While the entire CAFR is 156 pages long, readers may find PDF pages 10-14 and 70-71 of interest.
Tier 1b DROP and Service Purchases
According to the January 13, 2019 PSPRS Board of Trustee meeting notes, there are 900 active Tier 1b DROP participants and "roughly 450" Tier 1b DROP members who have left employment and already been paid their accumulated DROP benefits and employee contributions. The active Tier 1b members need to be refunded any employee contributions they made during their time in the DROP with interest, and those Tier 1b members who participated in the DROP and have already retired are owed a higher interest rate on their DROP benefits. PSPRS is supposed to be calculating these payments and asks anyone affected to be patient, but there is no timeline for payments or updating eligible members.
In the same notes, it states that 97 members purchased service at the incorrect discount rate, meaning they paid more for their service time than the should have. If you purchased service time after July 1, 2017, you may be due a refund. Once again, there is no timeline for refunds or updating eligible members.
Needless to say, no one should trust PSPRS to look out for them. It appears that PSPRS has not updated its DROP calculator nor its service purchase estimator. I am not sure how members are supposed to verify what they may be owed or even if they are eligible for a refund. This seems like a perfect opportunity for PSPRS new Chairman to let PSPRS' management know he is going to take his oversight responsibilities seriously. We can only hope.
* Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year. Returns, gross of fees, are used in the table for consistency. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, 11.85% in FY 2017, and 7.07% in FY 20
Subscribe to:
Posts (Atom)