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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...

Sunday, February 9, 2020

But wait, there's more! Six months of PSPRS news in a single post

So where were we . . .

The soap opera that is PSPRS has continued for the past 6 months with Administrator Jared Smout being fired over harassment allegations, and two PSPRS Board Trustees, Will Buvidas and Mike Scheidt, were removed from their leadership positions by the other Board Trustees due to a conflict of interest involving Mr. Smout.  Mr. Buvidas had been the chairman and Mr. Scheidt the vice-chairman of the PSPRS Board of Trustees.  Both men remain Trustees.  They were removed from their positions because they had earned commissions on a home purchase made by Mr. Smout before he was terminated as Administrator; see this article by Craig Harris in the January 23, 2020 Arizona Republic.  The February 4, 2020 Republic has another article by Mr. Harris that details another home purchase involving a PSPRS staff member in which Messrs. Buvidas and Scheidt had a financial interest.  Both men deny any conflict of interest or violation of Board policy.  The Board promises a review of its current conflict of interest policy, but any decision on the two men's continued tenure on the Board will have to be made by the Arizona Governor and Legislature.

Of more interest to many people is the December 2019 CPI-U for the Phoenix-Mesa-Scottsdale region.  As most retirees know, cost of living allowances (COLA) are based on a local consumer price index for all urban consumers (CPI-U) with the COLA being the lower of either 2% or the actual local CPI-U at the end of the previous calendar year.  The Phoenix-Mesa CPI-U for 2019 was 3.4%, so retirees can expect a 2% increase to their individual monthly benefits starting in July 2020.

The Arizona State Retirement System (ASRS) again outperformed PSPRS for the fiscal year that ended June 30, 2019 (FY19).  Net of fees, ASRS earned 6.6% versus PSPRS, which earned 5.45%.  Over the past 10 years, net of fees, ASRS earned an annualized rate of 10.4% versus 8.14% for PSPRS.  PSPRS' Cancer Insurance Policy, using a simple portfolio of 50% equity, 40% bonds, and 10% commodities and short-term investments earned 6.02% in FY19 and had a 10-year annualized return of 8.07%, nearly equaling PSPRS' annualized 10-year rate.  On a $10 billion portfolio, the additional 1.45% ASRS returned would have added $145 million to PSPRS assets in FY19.  In ten years, the additional 2.26% in the annualized rate would have earned over $4 billion more on the initial $10 billion portfolio. 

While we are on the subject of money, Jared Smout continues to cost PSPRS, despite his long-overdue removal as Administrator.  Currently, there are three lawsuits against PSPRS relating to Mr. Smout's behavior while employed at PSPRS.  Who knows how much PSPRS (i.e. taxpayers) will end up having to shell out, but it seems likely that the total will be in the seven-figure range.  PSPRS also recently had a forensic audit done on its internal accounting, which found errors that affected the calculation of employer contributions over the past two years.  Some employers may have overpaid, and some unfortunate employers may have underpaid and will have to make up these shortages in the near future.

Problems with ethics, governance, investing, human resources, and accounting, if PSPRS was a minor league prospect, we would call it a five-tool player.  For years PSPRS has been a laboratory of organizational dysfunction that a business school professor could make a career studying and developing case studies about.  The good news is that things seem to finally be improving, starting with a new Administrator in Michael Townsend, a CPA and former assistant city manager with a track record of success in Coconino County, and it sounds like he actually knows something about pensions!  The removal of two public safety members from Board leadership positions is also a good sign.  The two men who replaced Mr. Buvidas and Mr. Scheidt as Chairman and vice-Chairman, Scott McCarty and Harry Papp, respectively, both have backgrounds in finance, management, and/or investing, areas of expertise that are much more relevant to a pension system than what public safety personnel bring.  It is bad enough that 4/9th of the Board of Trustees is made up of public safety personnel, who will never have the training or experience to understand the complexities of pension accounting, actuarial science, budgeting, or institutional investing, but why in the world would they be leading the Board?  Reversing 20 years of insularity, incompetence, and failure will be tough, so best of luck to Mr. Townsend, Mr. McCarty and Mr. Papp.

And thanks again to journalist Craig Harris, the sine qua non of PSPRS accountability, and the Arizona Republic for looking out for PSPRS members and the state's taxpayers.

Ending on a hopeful note, I could get used to this.