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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:
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.
"This is something we will have to work with them on," Rose said.
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.

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.