tag:blogger.com,1999:blog-76093537265650000722024-03-14T03:30:30.205-07:00PSPRS Pension WatchInformation and analysis of the Arizona Public Safety Personnel Retirement System (PSPRS) and issues that affect public defined benefit pensions.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.comBlogger239125tag:blogger.com,1999:blog-7609353726565000072.post-36515676446533419862020-07-02T13:07:00.000-07:002020-07-02T13:07:09.528-07:00PSPRS investment returns through April 2020The following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through April 2020, the tenth month of fiscal year (FY) 2020, with the past six FY end returns included for comparison:<br />
<br />
<table border="0" cellspacing="0">
<colgroup width="94"></colgroup>
<colgroup width="99"></colgroup>
<colgroup span="2" width="106"></colgroup>
<colgroup width="111"></colgroup>
<tbody>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">Report</span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;">PSPRS</span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;">PSPRS</span></td>
<td align="left" valign="bottom"><span style="color: black;">Russell 3000</span></td>
<td align="left" valign="bottom"><span style="color: black;">Russell 3000</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">Date</span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;">Month End</span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;">Fiscal YTD</span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;">Month End</span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;">Fiscal YTD</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="41820" valign="bottom"><span style="color: black;">6/30/2014</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0078" valign="bottom"><span style="color: black;">0.78%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.1382" valign="bottom"><span style="color: black;">13.82%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0251" valign="bottom"><span style="color: black;">2.51%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.2522" valign="bottom"><span style="color: black;">25.22%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="42185" valign="bottom"><span style="color: black;">6/30/2015</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0073" valign="bottom"><span style="color: black;">-0.73%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0421" valign="bottom"><span style="color: black;">4.21%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0167" valign="bottom"><span style="color: black;">-1.67%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0729" valign="bottom"><span style="color: black;">7.29%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="42551" valign="bottom"><span style="color: black;">6/30/2016</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0032" valign="bottom"><span style="color: black;">-0.32%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0106" valign="bottom"><span style="color: black;">1.06%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0021" valign="bottom"><span style="color: black;">0.21%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0214" valign="bottom"><span style="color: black;">2.14%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="42916" valign="bottom"><span style="color: black;">6/30/2017</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0022" valign="bottom"><span style="color: black;">0.22%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.1248" valign="bottom"><span style="color: black;">12.48%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.009" valign="bottom"><span style="color: black;">0.90%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.1851" valign="bottom"><span style="color: black;">18.51%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43281" valign="bottom"><span style="color: black;">6/30/2018</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0066" valign="bottom"><span style="color: black;">-0.66%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0776" valign="bottom"><span style="color: black;">7.76%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0066" valign="bottom"><span style="color: black;">0.66%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.1478" valign="bottom"><span style="color: black;">14.78%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;0;MM/DD/YY" sdval="43646" valign="bottom"><span style="color: black;">6/30/2019</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0248" valign="bottom"><span style="color: black;">2.48%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0605" valign="bottom"><span style="color: black;">6.05%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0702" valign="bottom"><span style="color: black;">7.02%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0898" valign="bottom"><span style="color: black;">8.98%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" sdnum="1033;0;0.00%" valign="bottom"><span style="color: black;"><br /></span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43677" valign="bottom"><span style="color: black;">7/31/2019</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0058" valign="bottom"><span style="color: black;">0.58%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0058" valign="bottom"><span style="color: black;">0.58%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0162" valign="bottom"><span style="color: black;">1.62%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0162" valign="bottom"><span style="color: black;">1.62%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" valign="bottom"><span style="color: black;">8/30/2019**</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0077" valign="bottom"><span style="color: black;">-0.77%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0019" valign="bottom"><span style="color: black;">-0.19%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0204" valign="bottom"><span style="color: black;">-2.04%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0058" valign="bottom"><span style="color: black;">-0.58%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43738" valign="bottom"><span style="color: black;">9/30/2019</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0132" valign="bottom"><span style="color: black;">1.32%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0113" valign="bottom"><span style="color: black;">1.13%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0176" valign="bottom"><span style="color: black;">1.76%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0116" valign="bottom"><span style="color: black;">1.16%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43769" valign="bottom"><span style="color: black;">10/31/2019</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0114" valign="bottom"><span style="color: black;">1.14%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0228" valign="bottom"><span style="color: black;">2.28%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0215" valign="bottom"><span style="color: black;">2.15%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0334" valign="bottom"><span style="color: black;">3.34%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43799" valign="bottom"><span style="color: black;">11/30/2019</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0127" valign="bottom"><span style="color: black;">1.27%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0358" valign="bottom"><span style="color: black;">3.58%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.038" valign="bottom"><span style="color: black;">3.80%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0727" valign="bottom"><span style="color: black;">7.27%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43830" valign="bottom"><span style="color: black;">12/31/2019</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0156" valign="bottom"><span style="color: black;">1.56%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.052" valign="bottom"><span style="color: black;">5.20%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0289" valign="bottom"><span style="color: black;">2.89%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.1037" valign="bottom"><span style="color: black;">10.37%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" valign="bottom"><span style="color: black;">1/31/2020**</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0032" valign="bottom"><span style="color: black;">-0.32%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0488" valign="bottom"><span style="color: black;">4.88%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0011" valign="bottom"><span style="color: black;">-0.11%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.1025" valign="bottom"><span style="color: black;">10.25%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43890" valign="bottom"><span style="color: black;">2/29/2020</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0305" valign="bottom"><span style="color: black;">-3.05%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0183" valign="bottom"><span style="color: black;">1.83%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0819" valign="bottom"><span style="color: black;">-8.19%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0122" valign="bottom"><span style="color: black;">1.22%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43921" valign="bottom"><span style="color: black;">3/31/2020</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0617" valign="bottom"><span style="color: black;">-6.17%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0446" valign="bottom"><span style="color: black;">-4.46%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.1375" valign="bottom"><span style="color: black;">-13.75%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.127" valign="bottom"><span style="color: black;">-12.70%</span></td>
</tr>
<tr>
<td align="left" height="18" sdnum="1033;1033;M/D/YYYY" sdval="43951" valign="bottom"><span style="color: black;">4/30/2020</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.0354" valign="bottom"><span style="color: black;">3.54%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0107" valign="bottom"><span style="color: black;">-1.07%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="0.1324" valign="bottom"><span style="color: black;">13.24%</span></td>
<td align="left" sdnum="1033;0;0.00%" sdval="-0.0114" valign="bottom"><span style="color: black;">-1.14%</span></td>
</tr>
</tbody></table>
<br />
There is usually a two-month lag in PSPRS reporting its investment returns.<br />
<br />
Fiscal year 2020 is mercifully over. What initially looked like a repeat of 2009 just a few months ago appears to have stabilized, and the market gains of the first six months of the fiscal year will lessen the impact of the second six months. Based on the <a href="https://indexcalculator.ftserussell.com/icstep1.aspx">FTSE Russell Index Calculator</a>, the FY 2020 return for the the Russell 3000 was 6.53%, with 5.35% earned in May and 2.29% earned in June. If PSPRS holds to its past pattern, I suspect it will end the year with a return of 3.25% to 4.25%, well below its expected rate of return of 7.3%, which for actuarial purposes means it lost money for the year.<br />
<br />
I am sure many of you are noticing the same thing I am. As of April 30, 2020, there is virtually no difference between PSPRS and the Russell 3000 in FY 2020 returns. The brain trust that had run PSPRS for many years (Jared Smout, Ryan Parham, Mark Steed, Christian Palmer, Brian Tobin, Will Buvidas, et. al.) have told us for years to trust the process, that the years of lagging returns were the price we all had to pay to protect PSPRS from the next big crisis. Well, guess what? The crisis came, and PSPRS did no better than the Russell 3000.<br />
<br />
But, but, but their research paper, "<a href="https://link.springer.com/article/10.1057/jam.2014.23">Modern Pension Fund Diversification</a>," was in the peer-reviewed academic journal, <i>Journal of Asset Management</i>. They won <a href="http://www.psprs.com/article/psprs-wins-investment-strategy-award--">awards</a> and had <a href="http://www.psprs.com/article/psprs-featured-in-private-equity-analyst-magazine">magazine profiles</a>. Their Chief Investment Officer <a href="http://www.psprs.com/article/chief-investment-officer-earns-consecutive-honors">was honored</a> by <i>Insitutional Investor </i>magazine. In fact, <a href="http://www.psprs.com/article/psprs-staff-among-top-pension-investors">their whole staff has been honored</a> for their crackerjack performance. It's not their fault that reality didn't cooperate.<br />
<br />
Here's some insight from a man with an actual history of success, Bill Parcells, who said, "You are what your record says you are." And what is PSPRS' record? It has an annualized ten-year return of 6.58% versus the Russell 3000's 11.29%. That extra 4.71% compounded over ten years on a $10 billon portfolio amounts to over $5.8 billion dollars in increased earnings. Remember also that the 6.58% should be a half-percent less when fees are subtracted, costing PSPRS another $800 million in earnings. The additional annualized 2.27% Arizona State Retirement System (ASRS) earned compared to PSPRS (10.40% versus 8.16%, net of fees) through FY 2019 would bring and additional $2.5 billion in earnins on that $10 billion portfolio. Even the PSPRS' Cancer Insurance Policy (CIP) has a FY-to-date return of -0.98%, bettering PSPRS, and an annulized ten-year return of 6.10%, net of fees, virtually identical to PSPRS when we subtract the half-percent in fees from PSPRS' annualizecd ten-year return. Keep in mind that the CIP is invested much like the average individual investor: 25% in US stocks, 25% in international stocks, 30% in fixed income, 10% in inflation-protected bonds, 5% in gold, and 5% in cash.<br />
<br />
There is simply no metric under which we can call PSPRS' investment strategy a success. It fails against the Russell 3000, ASRS, and its own CIP. The strategy is a loser, and any of its remaining proponents should be demoted or forced out of PSPRS. I note all this with a hope that new PSPRS Administrator Michael Townsend and the new Board of Trustees Chairman and vice-Chariman are going to change things. The rotten root of PSPRS, Jared Smout, is long gone, and the bumbling leadership of past public safety Trustees should no longer be a hindrance to real reform.<br />
<br />
You won't hear this from PSPRS' spokesman Christian Palmer, but PSPRS has another accolade. According to Center for Retirement Research at Boston College (CRR), PSPRS has the distinction of being one of the 20 lowest-funded pension in the US. According to the CRR's May 2020 brief "<a href="https://publicplansdata.org/2020/05/12/2020-update-market-decline-worsens-the-outlook-for-public-plans/">2020 Update: Market Decline Worsens the Outlook for Public Plans</a>," PSPRS is the 16th worst-funded pension in the US at 47.2%. The paper goes into detail about what the potential effect on these 20 pensions if the market does not recover quickly. While PSPRS is better off than the others listed with positive cash flow and the third-highest asset to benefit ratio, this is cold comfort when we consider that this PSPRS' situation after a 10-year long bull market.<br />
<br />
On a lighter note is this June 4, 2020 story you might have missed by Vince Barone in the <i>New York Post</i>, "<a href="https://nypost.com/2020/06/04/last-person-to-receive-pension-from-us-civil-war-dead-at-90/">Last person to receive pension from American Civil War dead at 90</a>." While Irene Triplett received only $73.13 a month, that monthly benefit for a war that ended 155 years ago shows the long-term costs of a pension system. You can read more about her and her family in <a href="https://www.wsj.com/articles/veterans-benefits-live-on-long-after-bullets-stop-1399640525?tesla=y">this May 9,2014 article</a> in the <i>Wall Street Journal</i> by Michael M. Phillips.<br />
<br />
To all PSPRS members, please look out for yourselves and each other.<br />
<br />
* 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, 7.07% in FY 2018, and 5.50% in FY 2019.<br />
<br />
** No monthly returns were reported for these months. PSPRS returns for these months were estimated using the preceding and following months' returns. The <a href="https://indexcalculator.ftserussell.com/icstep1.aspx">FTSE Russell Index Calculator</a> was used to obtain Russell 3000 returns for these months.<br />
<br />
<br />Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com0tag:blogger.com,1999:blog-7609353726565000072.post-73749876108129380142020-05-26T20:35:00.000-07:002020-05-26T20:35:32.401-07:00PSPRS investment returns through March 2020The following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through March 2020, the ninth month of fiscal year (FY) 2020, with
the past six FY end returns included for comparison:<br />
<br />
<table border="0" cellspacing="0">
<colgroup width="94"></colgroup>
<colgroup width="99"></colgroup>
<colgroup span="2" width="106"></colgroup>
<colgroup width="111"></colgroup>
<tbody>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">Report</span></td>
<td align="left" valign="bottom"><span style="color: black;">PSPRS</span></td>
<td align="left" valign="bottom"><span style="color: black;">PSPRS</span></td>
<td align="left" valign="bottom"><span style="color: black;">Russell 3000</span></td>
<td align="left" valign="bottom"><span style="color: black;">Russell 3000</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><u><span style="color: black;">Date</span></u></td>
<td align="left" valign="bottom"><u><span style="color: black;">Month End</span></u></td>
<td align="left" valign="bottom"><u><span style="color: black;">Fiscal YTD</span></u></td>
<td align="left" valign="bottom"><u><span style="color: black;">Month End</span></u></td>
<td align="left" valign="bottom"><u><span style="color: black;">Fiscal YTD</span></u></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">6/30/2014</span></td>
<td align="left" valign="bottom"><span style="color: black;">0.78%</span></td>
<td align="left" valign="bottom"><span style="color: black;">13.82%</span></td>
<td align="left" valign="bottom"><span style="color: black;">2.51%</span></td>
<td align="left" valign="bottom"><span style="color: black;">25.22%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">6/30/2015</span></td>
<td align="left" valign="bottom"><span style="color: black;">-0.73%</span></td>
<td align="left" valign="bottom"><span style="color: black;">4.21%</span></td>
<td align="left" valign="bottom"><span style="color: black;">-1.67%</span></td>
<td align="left" valign="bottom"><span style="color: black;">7.29%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">6/30/2016</span></td>
<td align="left" valign="bottom"><span style="color: black;">-0.32%</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.06%</span></td>
<td align="left" valign="bottom"><span style="color: black;">0.21%</span></td>
<td align="left" valign="bottom"><span style="color: black;">2.14%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">6/30/2017</span></td>
<td align="left" valign="bottom"><span style="color: black;">0.22%</span></td>
<td align="left" valign="bottom"><span style="color: black;">12.48%</span></td>
<td align="left" valign="bottom"><span style="color: black;">0.90%</span></td>
<td align="left" valign="bottom"><span style="color: black;">18.51%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">6/30/2018</span></td>
<td align="left" valign="bottom"><span style="color: black;">-0.66%</span></td>
<td align="left" valign="bottom"><span style="color: black;">7.76%</span></td>
<td align="left" valign="bottom"><span style="color: black;">0.66%</span></td>
<td align="left" valign="bottom"><span style="color: black;">14.78%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">6/30/2019</span></td>
<td align="left" valign="bottom"><span style="color: black;">2.48%</span></td>
<td align="left" valign="bottom"><span style="color: black;">6.05%</span></td>
<td align="left" valign="bottom"><span style="color: black;">7.02%</span></td>
<td align="left" valign="bottom"><span style="color: black;">8.98%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" valign="bottom"><span style="color: black;"><br /></span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">7/31/2019</span></td>
<td align="left" valign="bottom"><span style="color: black;">0.58%</span></td>
<td align="left" valign="bottom"><span style="color: black;">0.58%</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.62%</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.62%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">8/30/2019**</span></td>
<td align="left" valign="bottom"><span style="color: black;">-0.77%</span></td>
<td align="left" valign="bottom"><span style="color: black;">-0.19%</span></td>
<td align="left" valign="bottom"><span style="color: black;">-2.04%</span></td>
<td align="left" valign="bottom"><span style="color: black;">-0.58%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">9/30/2019</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.32%</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.13%</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.76%</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.16%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">10/31/2019</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.14%</span></td>
<td align="left" valign="bottom"><span style="color: black;">2.28%</span></td>
<td align="left" valign="bottom"><span style="color: black;">2.15%</span></td>
<td align="left" valign="bottom"><span style="color: black;">3.34%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">11/30/2019</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.27%</span></td>
<td align="left" valign="bottom"><span style="color: black;">3.58%</span></td>
<td align="left" valign="bottom"><span style="color: black;">3.80%</span></td>
<td align="left" valign="bottom"><span style="color: black;">7.27%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">12/31/2019</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.56%</span></td>
<td align="left" valign="bottom"><span style="color: black;">5.20%</span></td>
<td align="left" valign="bottom"><span style="color: black;">2.89%</span></td>
<td align="left" valign="bottom"><span style="color: black;">10.37%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">1/31/2020**</span></td>
<td align="left" valign="bottom"><span style="color: black;">-0.32%</span></td>
<td align="left" valign="bottom"><span style="color: black;">4.88%</span></td>
<td align="left" valign="bottom"><span style="color: black;">-0.11%</span></td>
<td align="left" valign="bottom"><span style="color: black;">10.25%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><span style="color: black;">2/29/2020</span></td>
<td align="left" valign="bottom"><span style="color: black;">-3.05%</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.83%</span></td>
<td align="left" valign="bottom"><span style="color: black;">-8.19%</span></td>
<td align="left" valign="bottom"><span style="color: black;">1.22%</span></td>
</tr>
<tr>
<td align="left" height="18" valign="bottom"><b><span style="color: black;">3/31/2020</span></b></td>
<td align="left" valign="bottom"><b><span style="color: black;">-6.17%</span></b></td>
<td align="left" valign="bottom"><b><span style="color: black;">-4.46%</span></b></td>
<td align="left" valign="bottom"><b><span style="color: black;">-13.75%</span></b></td>
<td align="left" valign="bottom"><b><span style="color: black;">-12.70%</span></b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns. <br />
<br />
It is past time to look again at PSPRS' investment returns, if only because the Wuhan coronavirus pandemic has finally afforded PSPRS a real crisis to test its vaunted investment strategy. As we can see, February and March 2020 the Russell 3000 suffered losses that were more than double that of PSPRS. The markets had an extremely volatile period for a few weeks in which the Dow Jones Industrial Average (DJIA) was experiencing some daily changes of over 1,000 points.<br />
<br />
The market seems to have stabilized and indices have steadily risen since the end of March. As
of May 26, 2020, the Russell 3000 has shifted into positive territory
with a FY 2020 return of 2.42%, meaning it has recouped a significant
portion of the losses incurred in February and March but is still down from where it was at the end of January.<br />
<br />
I will be interested to see what April and May 2020 returns are for PSPRS. While it is great that PSPRS limited its losses in February and March 2020, PSPRS' return as of January 31, 2020 was less than half of the Russell 3000. This has always been the problem for PSPRS. It simply does not capture enough of the market upside to justify its downside protection. If the markets continue to recover, all this downside protection will be meaningless if PSPRS again lags other indices when the markets rise.<br />
<br />
PSPRS tends to earn, net of fees, about 50-60% of the Russell 3000 each FY: FY14 52.65%, FY15 50.05%, FY16 29.40%; FY17 64.02%, FY18 47.83%, and FY19 61.25%. For PSPRS to achieve its assumed rate of return (ARR) of 7.30%, the Russell 3000 will need to have average returns of 12.17-14.60%. In the past six FY's, this has happened only half the time with PSPRS achieving its ARR only two out of the six years.<br />
<br />
In comparison, the Arizona State Retirement System (ASRS) achieved its ARR in three of the last six FY's, and this table of FY-end returns, net of fees, shows us the numbers that really matter:<br />
<br />
<table border="0" cellspacing="0">
<colgroup span="3" width="85"></colgroup>
<tbody>
<tr>
<td align="right" height="18" valign="bottom"><u><span style="color: black;">Fiscal Year</span></u></td>
<td align="right" valign="bottom"><u><span style="color: black;">PSPRS</span></u></td>
<td align="right" valign="bottom"><u><span style="color: black;">ASRS</span></u></td>
</tr>
<tr>
<td align="right" height="17" valign="bottom"><span style="color: black;">2014</span></td>
<td align="right" valign="bottom"><span style="color: black;">13.28%</span></td>
<td align="right" valign="bottom"><span style="color: black;">18.60%</span></td>
</tr>
<tr>
<td align="right" height="17" valign="bottom"><span style="color: black;">2015</span></td>
<td align="right" valign="bottom"><span style="color: black;">3.68%</span></td>
<td align="right" valign="bottom"><span style="color: black;">3.20%</span></td>
</tr>
<tr>
<td align="right" height="17" valign="bottom"><span style="color: black;">2016</span></td>
<td align="right" valign="bottom"><span style="color: black;">0.63%</span></td>
<td align="right" valign="bottom"><span style="color: black;">0.60%</span></td>
</tr>
<tr>
<td align="right" height="17" valign="bottom"><span style="color: black;">2017</span></td>
<td align="right" valign="bottom"><span style="color: black;">11.85%</span></td>
<td align="right" valign="bottom"><span style="color: black;">13.90%</span></td>
</tr>
<tr>
<td align="right" height="17" valign="bottom"><span style="color: black;">2018</span></td>
<td align="right" valign="bottom"><span style="color: black;">7.07%</span></td>
<td align="right" valign="bottom"><span style="color: black;">9.40%</span></td>
</tr>
<tr>
<td align="right" height="17" valign="bottom"><span style="color: black;">2019</span></td>
<td align="right" valign="bottom"><span style="color: black;">5.50%</span></td>
<td align="right" valign="bottom"><span style="color: black;">6.60%</span></td>
</tr>
<tr>
<td align="right" height="18" valign="bottom"><u>Annualized</u></td>
<td align="left" valign="bottom"><span style="color: black;"><br /></span></td>
<td align="left" valign="bottom"><span style="color: black;"><br /></span></td>
</tr>
<tr>
<td align="right" height="18" valign="bottom"><span style="color: black;">3-year</span></td>
<td align="right" valign="bottom"><span style="color: black;">8.09%</span></td>
<td align="right" valign="bottom"><span style="color: black;">9.90%</span></td>
</tr>
<tr>
<td align="right" height="18" valign="bottom"><span style="color: black;">5-year</span></td>
<td align="right" valign="bottom"><span style="color: black;">5.67%</span></td>
<td align="right" valign="bottom"><span style="color: black;">6.60%</span></td>
</tr>
<tr>
<td align="right" height="18" valign="bottom"><span style="color: black;">10-year</span></td>
<td align="right" valign="bottom"><span style="color: black;">8.14%</span></td>
<td align="right" valign="bottom"><span style="color: black;">10.40%</span></td>
</tr>
</tbody></table>
<br />
During the years of higher returns, ASRS earned significantly more than PSPRS, while ASRS essentially equaled or slightly lagged PSPRS in years of lower returns. This difference is even more stark when we look at annualized returns, where ASRS has higher returns in each period, including a whopping 2.26% per year more than PSPRS over the past ten years. Those extra points of return in good years are extremely important for the long-term term health of a pension<br />
<br />
Looking at ASRS' latest investment returns through March 25, 2020, ASRS is down around 6% for FY 2020, about 1% behind PSPRS, net of fees, but based on past results, it is likely that ASRS will greatly outperform PSPRS as the markets continue to recover and grow.<br />
<br />
Of course we still have the rest of the fiscal year to see what will happen, but I still see no reason to change my opinion that PSPRS would be much better off if it turned its investment portfolio over to the more successful team of investment professionals at ASRS. <br />
<br />
* 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, 7.07% in FY 2018, and 5.50% in FY 2019.<br />
<br />
** No monthly returns were reported for these months. PSPRS returns for
these months were estimated using the preceding and following months'
returns. The <a href="https://indexcalculator.ftserussell.com/icstep1.aspx">FTSE Russell Index Calculator</a> was used to obtain Russell 3000 returns for these months.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com0tag:blogger.com,1999:blog-7609353726565000072.post-50931257127280556362020-02-09T16:09:00.001-07:002020-02-09T16:09:27.269-07:00But wait, there's more! Six months of PSPRS news in a single postSo where were we . . .<br />
<br />
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 <a href="https://www.azcentral.com/story/news/local/phoenix/2020/01/23/phoenix-police-retirees-call-resignation-public-safety-personnel-retirement-system-buividas-scheidt/4554161002/">this article by Craig Harris in the January 23, 2020 <i>Arizona Republic</i></a>. The <a href="https://www.azcentral.com/story/news/local/arizona-investigations/2020/02/04/arizona-psprs-trustees-handled-another-real-estate-deal-pension-staffer/4656461002/">February 4, 2020 Republic has another article by Mr. Harris</a> 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.<br />
<br />
Of more interest to many people is the <a href="https://www.bls.gov/regions/west/news-release/consumerpriceindex_phoenix.htm">December 2019 CPI-U for the Phoenix-Mesa-Scottsdale region</a>. 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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
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 <a href="http://www.psprs.com/article/michael-townsend-appointed-as-new-administrator">Michael Townsend, a CPA and former assistant city manager with a track record of success in Coconino County</a>, 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.<br />
<br />
And thanks again to journalist Craig Harris, the <i>sine qua non</i> of PSPRS accountability, and the <i>Arizona Republic</i> for looking out for PSPRS members and the state's taxpayers.<br />
<br />
Ending on a hopeful note, I could get used to this.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com1tag:blogger.com,1999:blog-7609353726565000072.post-87622263656154762752019-07-17T15:36:00.000-07:002019-07-17T15:36:09.851-07:00Smout's out: Jared Smout to be fired as PSPRS AdministratorI 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 <i>Arizona Republic</i>:<br />
<br />
<a href="https://www.azcentral.com/story/news/local/arizona-investigations/2019/07/15/arizona-pension-fund-administrator-jared-smout-sexual-harassment/1740785001/">State recommends PSPRS administrator Smout be fired for sexual harassment</a><br />
<br />
<a href="https://www.azcentral.com/story/news/local/arizona-investigations/2019/07/16/psprs-delays-vote-administrator-jared-smout-following-investigation/1741101001/">PSPRS delays decision on Administrator Jared Smout after sexual harassment investigation</a><br />
<br />
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.<br />
<br />
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. <br />
<br />
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:<br />
<br />
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. <br />
<br />
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?<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
5. How much is this going to cost PSPRS (i.e. taxpayers)? Lawsuits are coming.<br />
<br />
Until a full accounting is complete, there are few things that can be immediately done:<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
It will be interesting to see where this all ends. Stay tuned.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com1tag:blogger.com,1999:blog-7609353726565000072.post-41656300356160153922019-05-15T17:01:00.002-07:002020-05-24T19:43:52.648-07:00The Desolation of Smout: The rotten root of PSPRS' many troublesSo the hits just keep on coming. If you have not been following along at the <i>Arizona Republic</i> since the last post, there have been three other articles about the pay practices at PSPRS: "<a href="https://www.azcentral.com/story/news/local/arizona-investigations/2019/05/09/arizona-public-safety-pension-fund-gives-3-executives-bonuses-amid-subpar-results/1089885001/">State pension fund delivered subpar returns. Then it gave executives an extra $120,000</a>" by Craig Harris and Anne Ryman on May 9, 2019, "<a href="https://www.azcentral.com/story/news/local/arizona-investigations/2019/05/12/questions-raised-legality-arizona-public-safety-pension-fund-bonus-13-work/1177702001/">Taxpayer giveaway or settlement? Questions on $120,000 bonuses at state pension system</a>" by Mr. Harris on May 12, 2019, and "<a href="https://www.azcentral.com/story/news/local/arizona-investigations/2019/05/13/phoenix-public-safety-personnel-retirement-board-approves-past-executive-bonuses/1166573001/">Arizona public safety pension board approves retroactive bonuses to executives</a>" by Mr. Harris on May 14, 2019. Also, <i>Arizona Republic</i> columnist Laurie Roberts has published three editorials on PSPRS over the past three weeks: "<a href="https://www.azcentral.com/story/opinion/op-ed/laurieroberts/2019/04/24/arizona-pension-psprs-jared-smout-raise-pay-back/3568394002/">Suspended Arizona pension boss should lose that outrageous $43,000 pay raise</a>," "<a href="https://www.azcentral.com/story/opinion/op-ed/laurieroberts/2019/05/09/arizona-pension-board-psprs-needs-pink-slips-not-bonuses/1155051001/">Arizona pension system gave out bonuses? What it needs is Pine Sol and pink slips</a>," and "<a href="https://www.azcentral.com/story/opinion/op-ed/laurieroberts/2019/05/13/psprs-public-safety-pension-staff-gets-bonuses-while-arizona-cities-go-broke/1194924001/">Jackpot! Pension staff bonuses approved while Arizona cities go broke</a>."<br />
<br />
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:<br />
<blockquote class="tr_bq">
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.</blockquote>
However, in the May 9th article it says:<br />
<blockquote class="tr_bq">
In summer 2015, then-Administrator Jim Hacking was forced out after <i>The Republic </i>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. </blockquote>
<blockquote class="tr_bq">
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.</blockquote>
<blockquote class="tr_bq">
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. </blockquote>
<blockquote class="tr_bq">
"We are not law enforcement," she said. </blockquote>
<blockquote class="tr_bq">
She
added that PSPRS does not currently need ADOA's approval from raises
because it's not an agency that reports to the governor. </blockquote>
<blockquote class="tr_bq">
<div class="p-text">
PSPRS is overseen by a volunteer board, whose members are appointed by Gov. Doug Ducey, the House speaker and Senate president.</div>
</blockquote>
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.<br />
<br />
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 <a href="https://www.azcentral.com/story/news/local/arizona-investigations/2017/04/14/arizona-public-safety-pension-fund-among-worst-performing-in-nation/100466318/">one of the worst-performing public pensions</a> in the country. I guess that type of stellar performance doesn't come cheap.<br />
<br />
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:<br />
<br />
<blockquote class="tr_bq">
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 <i>The Republic</i>. <i>The Republic</i> 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.</blockquote>
<blockquote class="tr_bq">
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."</blockquote>
<blockquote class="tr_bq">
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.</blockquote>
<blockquote class="tr_bq">
4. The three employees were each given $1,000 to sign the settlements.</blockquote>
<blockquote class="tr_bq">
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.</blockquote>
So what does this look like? Do we believe PSPRS' petulant communications director Christian Palmer when he says:<br />
<blockquote class="tr_bq">
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."</blockquote>
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.<br />
<br />
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 <i>Arizona Capitol Times</i>, 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.<br />
<br />
Columnist Laurie Roberts, in her <a href="https://www.azcentral.com/story/opinion/op-ed/laurieroberts/2019/04/24/arizona-pension-psprs-jared-smout-raise-pay-back/3568394002/">April 25, 2019 editorial</a>, 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:<br />
<blockquote class="tr_bq">
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.</blockquote>
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)?<br />
<br />
As for the other settlement/bonuses, Mr. Palmer whines:<br />
<blockquote class="tr_bq">
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.</blockquote>
Really? They haven't grown anything; they have horribly underperformed. As Ms. Roberts writes in her <a href="https://www.azcentral.com/story/opinion/op-ed/laurieroberts/2019/05/09/arizona-pension-board-psprs-needs-pink-slips-not-bonuses/1155051001/">May 9, 2019 editorial</a>, ". . . 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."<br />
<br />
Finally, Ms. Roberts' <a href="https://www.azcentral.com/story/opinion/op-ed/laurieroberts/2019/05/13/psprs-public-safety-pension-staff-gets-bonuses-while-arizona-cities-go-broke/1194924001/">May 14, 2019 editorial</a> 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:<br />
<blockquote class="tr_bq">
<b>Why not disband this irresponsible agency?</b> </blockquote>
<blockquote class="tr_bq">
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? </blockquote>
<blockquote class="tr_bq">
<div class="p-text">
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.</div>
</blockquote>
Of course, I would add a sixth question: Why has Jared Smout not been fired yet?<br />
<br />
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 <a href="https://www.linkedin.com/in/jaredsmout">LinkedIn profile</a>
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.<br />
<br />
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.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com0tag:blogger.com,1999:blog-7609353726565000072.post-23452578352294033512019-04-24T14:23:00.000-07:002019-04-24T14:23:49.960-07:00Above the law and beyond the pale: Another mess brought to us by Jared Smout and the PSPRS Board of TrusteesI 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 <i>Arizona Republic</i> deserve some discussion.<br />
<br />
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.<br />
<br />
Mr. Harris' first article in the April 16, 2019 <i>Republic</i>, "<a href="https://www.azcentral.com/story/news/local/arizona-investigations/2019/04/16/psprs-pension-fund-places-administrator-jared-smout-paid-leave/3490650002/">Public-safety pension system places administrator on paid leave amid workplace allegations</a>," 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.<br />
<br />
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. <br />
<br />
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 <a href="https://www.azcentral.com/story/news/local/arizona-investigations/2017/08/09/public-safety-personnel-retirement-system-legal-bills-desert-troon-civil-lawsuit/549727001/">here</a> 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.<br />
<br />
Mr. Harris's second article in the April 23, 2019 <i>Republic</i>, "<a href="https://www.azcentral.com/story/news/local/arizona-investigations/2019/04/23/public-safety-pension-gave-top-boss-43-k-raise-while-paid-leave-officials-warn-may-have-been-illegal/3555291002/">Public safety pension gave top boss $43K raise. Officials warn it may have been illegal</a>," 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.<br />
<br />
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 <a href="https://www.azcentral.com/story/news/arizona/2015/08/27/arizona-public-safety-pension-system-new-leader/71276038/">Mr. Smout, as Deputy Administrator, signed off on the illegal raises that cost Mr. Hacking his job</a>. 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.<br />
<br />
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:<br />
<blockquote class="tr_bq">
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. </blockquote>
<blockquote class="tr_bq">
<div class="p-text">
"This is something we will have to work with them on," Rose said.</div>
</blockquote>
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.<br />
<br />
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.<br />
<br />
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?<br />
<br />
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.<br />
<br />
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.<br />
<br />
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?<br />
<br />
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.<br />
<br />
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.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com5tag:blogger.com,1999:blog-7609353726565000072.post-50756536933579608812019-02-18T16:52:00.000-07:002019-02-28T18:22:57.632-07:00Will to power: New year, new chairman, and a PSPRS update for February 2019<u>Inflation and COLA's</u><br />
<br />
Let's start with the topic that will interest retirees the most. The <a href="https://www.bls.gov/regions/west/data/consumerpriceindex_phoenix_table.pdf">Phoenix-Mesa CPI-U</a> 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%.<br />
<br />
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: <a href="https://www.bls.gov/regions/west/data/consumerpriceindex_sandiego_table.pdf">San Diego - 3.4%</a>, <a href="https://www.bls.gov/regions/west/data/consumerpriceindex_sanfrancisco_table.pdf">San Francisco - 3.9%</a>, <a href="https://www.bls.gov/regions/west/data/consumerpriceindex_losangeles_table.pdf">Los Angeles - 3.8%</a>, <a href="https://www.bls.gov/regions/west/data/consumerpriceindex_honolulu_table.pdf">Honolulu - 1.9%</a>, <a href="https://www.bls.gov/regions/west/data/consumerpriceindex_seattle_table.pdf">Seattle - 3.2%</a>, as well as the entire <a href="https://www.bls.gov/regions/west/data/consumerpriceindex_west_table.pdf">West Region - 3.3%</a>. I found it remarkable that the inflation in the Phoenix-Mesa is higher than traditionally expensive cities like San Francisco and Honolulu.<br />
<br />
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. <br />
<br />
<u>Board of Trustees departures</u><br />
<br />
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 <a href="https://www.phoenix.gov/fire/about-us/executive-staff/assistant-chief-brian-tobin">long and accomplished career</a> there. He has been on the Board since 2009 and been Chairman since 2010. His current term was scheduled to end in January 2019.<br />
<br />
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 <u><b>INVESTMENT</b></u> Officer, <a href="https://azcapitoltimes.com/news/2014/12/18/the-truth-about-psprs-investment-performance/">publicly confessed in 2014 to low-balling PSPRS' returns to prevent paying permanent benefit increases (PBI's) to retirees</a>, Mr. Tobin did nothing and even called Mr. Parham "<a href="http://www.psprs.com/article/psprs-investment-chief-ryan-parham-retires-after-14-years">. . . one of the best in the business for more than a decade,</a>" after he retired last year.<br />
<br />
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, "<a href="https://awealthofcommonsense.com/2019/02/how-to-wreck-a-pension-plan-in-3-easy-steps/">How to Wreck a Pension Plan in 3 Easy Steps</a>." at his website <a href="https://awealthofcommonsense.com/"><i>A Wealth of Common Sense</i></a>, which says to "invest heavily in things you don't understand." <a href="https://www.bestlawyers.com/Content/Downloads/Articles/5184_1.pdf">Modern Pension Diversification</a> 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 <a href="https://www.ibtimes.com/fake-research-papers-how-did-more-120-gibberish-computer-generated-studies-get-published-1558725">here</a> and <a href="https://www.sciencealert.com/cultural-studies-sokal-squared-hoax-20-fake-papers">here</a>.)<br />
<br />
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 <a href="https://www.azasrs.gov/content/board-trustee-bios">Board of Trustees</a>, and even more important, this pool includes individuals with extensive professional and academic backgrounds in finance and management.<br />
<br />
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, <a href="https://www.azcentral.com/story/news/local/arizona-investigations/2017/04/14/arizona-public-safety-pension-fund-among-worst-performing-in-nation/100466318/">say like Arizona shopping malls and housing developments</a>, 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.<br />
<br />
<u>Investment Returns through November 2018</u><br />
<br />
The following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through November 2018, the fourth month of fiscal year (FY) 2019, with
the past five FY end returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl66" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl66" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl68" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl68" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl66"><u>Month End</u></td>
<td class="xl66"><u>Fiscal YTD</u></td>
<td class="xl66"><u>Month End</u></td>
<td class="xl66"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl66">0.78%</td>
<td class="xl66">13.82%</td>
<td class="xl66">2.51%</td>
<td class="xl66">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl66">-0.73%</td>
<td class="xl66">4.21%</td>
<td class="xl66">-1.67%</td>
<td class="xl66">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl66">-0.32%</td>
<td class="xl66">1.06%</td>
<td class="xl66">0.21%</td>
<td class="xl66">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">6/30/2017</td>
<td class="xl66">0.22%</td>
<td class="xl66">12.48%</td>
<td class="xl66">0.90%</td>
<td class="xl66">18.51%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">6/30/2018</td>
<td class="xl66">-0.66%</td>
<td class="xl66">7.76%</td>
<td class="xl66">0.66%</td>
<td class="xl66">14.78%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl66"><br /></td>
<td class="xl66"><br /></td>
<td class="xl66"><br /></td>
<td class="xl66"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">7/31/2018</td>
<td class="xl66">1.03%</td>
<td class="xl66">1.03%</td>
<td class="xl66">3.32%</td>
<td class="xl66">3.32%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">8/31/2018</td>
<td class="xl66">0.94%</td>
<td class="xl66">1.98%</td>
<td class="xl66">3.51%</td>
<td class="xl66">6.95%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">9+10/2018</td>
<td class="xl66">-2.57%</td>
<td class="xl66">-0.59%</td>
<td class="xl66">-7.63%</td>
<td class="xl66">-0.68%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl67" height="20" style="height: 15.0pt;">11/30/2018</td>
<td class="xl66">0.95%</td>
<td class="xl66">0.36%</td>
<td class="xl66">2.00%</td>
<td class="xl66">1.32% </td>
</tr>
</tbody></table>
<br />
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.<br />
<br />
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.<br />
<br />
<u>Individual Employer Actuarials</u><br />
<br />
PSPRS has individual employer actuarials available <a href="https://members2.psprs.com/Estimators/actuarials.aspx">here</a>. 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.<br />
<br />
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.<br />
<br />
<u>PSPRS Newsletter and CAFR</u><br />
<br />
If you have not seen it yet, the <a href="http://www.psprs.com/uploads/publisher/10/PSPRS%20FY2019%20Third%20Quarter%20Newsletter.pdf">PSPRS third quarter newsletter</a> is available. The <a href="http://www.psprs.com/uploads/sites/1/2018_CAFR_FINAL.pdf">FY 2018 Consolidated Annual Financial Report</a> is also available. While the entire CAFR is 156 pages long, readers may find PDF pages 10-14 and 70-71 of interest.<br />
<br />
<u>Tier 1b DROP and Service Purchases</u><br />
<br />
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. <a href="http://www.psprs.com/employers--local-boards/tier-1b-drop-rollbacks">PSPRS is supposed to be calculating these payments and asks anyone affected to be patient</a>, but there is no timeline for payments or updating eligible members.<br />
<br />
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.<br />
<br />
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.<br />
<br />
* 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<br />
<br />Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com3tag:blogger.com,1999:blog-7609353726565000072.post-85798224045144088982018-12-01T14:22:00.001-07:002018-12-01T19:07:12.626-07:00Just in time for Christmas, here's something for everyone: the DROP, service purchases, COLA's, and investment returns through August 2018 (CORRECTED)PSPRS had its November 2018 Board of Trustees meeting this week, and there are several things in the <a href="http://www.psprs.com/about/board-of-trustees">meeting materials </a>that might interest PSPRS members:<br />
<br />
<b><u>Rollbacks of changes to the Deferred Retirement Option Program (DROP) and service buybacks</u></b><br />
<br />
1. The changes to the DROP program affects both the interest paid on DROP contributions and member contributions to the DROP.<br />
<br />
<u>The change in member contributions to the DROP</u> This affects what used to be called Tier 1b members, members who were PSPRS members before January 1, 2012 but did not have 20 years in the system. Tier 1a members were those with 20 years in the system before January 1, 2012. Tier 2 and Tier 3 members are not eligible for the DROP. Currently, if you are a Tier 1b member and are or will be in the DROP, you must continue to pay the 7.65% member contribution to PSPRS. These accumulated contributions are repaid to you when you permanently leave employment, along with 2% interest. This program, the Contributory DROP, will end in January 2019.<br />
<br />
This means that if you are currently in the DROP you will be entitled to a refund of your accumulated contributions plus interest, minus taxes, as these contributions were pre-tax and did not have income tax withheld when they were first taken. It appears that the interest rate will be PSPRS' assumed rate of return (ARR) at the time the contributions were taken. This rate has gradually decreased since fiscal year (FY) 2012 from 8% down to the current ARR of 7.3% for FY 2019. It also appears that the refunded contributions and interest will be handled like the refunded contributions from the<i> Hall/Parker</i> decisions with taxes taken out them at 22-25%. Interest payments would not have taxes withheld and would be reported on a 1099 at the end of the tax year. If this interest payment was paid as post-<i>Hall/Parker</i>, it would come in the form of a check or direct deposit from your employer.<br />
<br />
If you were in the Contributory DROP and have retired, you should have received your accumulated contributions and 2% interest, but you will still be due some type of interest payment with the same aforementioned tax situation. If you have yet to DROP, you will simply see an increase in your weekly pay as you will no longer pay the 7.65% member contribution once you enter the DROP.<br />
<br />
<u>Change in DROP interest rates</u> Currently, the DROP pays or would pay a Tier 1B member an interest rate on the accrued monthly retirement benefits in his DROP account that is equal to PSPRS' 7-year average return or the ARR, <u>whichever is lower</u>. This 7-year average return is currently 6.60%, but since FY 2012 it has been as low as 3.10%. Prior to the implementation of SB 1609, the interest paid on a member's DROP contributions was the ARR, which has ranged between 7.3% and 8.0% since FY 2011.<br />
<br />
This means that anyone who is currently in or has participated in the Contributory DROP will get some increase in their final DROP payment as the ARR has always been higher than the 7-year average return. Those who DROP in the future will see their DROP contributions grow at whatever the ARR is at that time.<br />
<br />
<strike>With this change in the DROP interest rate increasing his final DROP payment, PSPRS Board of Trustees Chairman Brian Tobin may literally be a <a href="https://www.azcentral.com/story/news/local/arizona-investigations/2017/08/10/public-safety-pension-boss-defends-drop-program-payments/549897001/">Million Dollar Man</a> during his first year of retirement. It seems like a conflict of interest that he did not recuse himself from the final vote on a proposal that would give him such an immediate personal financial benefit, but it appears that his vote was necessary to pass the proposal as they barely had a quorum at the previous Board of Trustees meeting.</strike> <b>I have been informed that Mr. Tobin is in the non-contributory DROP, which means that Mr. Tobin's vote had no effect on his personal DROP benefit. I apologize to Mr. Tobin and readers for this error.</b><br />
<strike></strike><br />
<br />
2. Change in discount rate for service purchases<br />
<br />
The DROP was always a late-career money grab for senior PSPRS members, so these changes will unfortunately just add to the unfunded cost of this benefit for Tier 1 members. However, the change to service purchases will, at least partially, reverse an unfair change to PSPRS. For more detail, about the original change, you can read about it in<a href="http://www.psprs.info/2016/07/theyll-fail-but-youll-pay-financial.html"> this post from July 2016</a>, but the gist is that PSPRS will once again use PSPRS' ARR as the discount rate to calculate service purchases.<br />
<br />
This had changed to a rate based on the 10-year US Treasury (T-bill) bill rate plus 2% or the ARR, <u>whichever is lower</u>. As we know, interest rates had been low for a quite a while, and accordingly, so has the 10-year T-bill rate, making it the lower of the two discount rate. This method has benefited PSPRS since it forces members to value their time at a lower rate than PSPRS expects to earn on its own investments, forcing members to pay more upfront to buy their service time. This turns members into another profit center for PSPRS. So members were either being forced to donate money to PSPRS in order to purchase their service time or forgo the purchase completely, as this change made service purchases much more expensive and out of reach for many members.<br />
<br />
Reverting to the use of the ARR will mean members' upfront payments will be expected to earn the same rate as the rest of PSPRS investments, making the upfront payment lower and more manageable. Members will no longer be treated as a revenue source by PSPRS. Those who purchased service at the lower rate can expect to get refunds when service purchases are recalculated at the higher ARR (7.3% or 7.4%, depending on when the time was purchased). Tier 1 and Tier 2 members who have yet to purchase service time will have the cost calculated using the ARR in effect at the time of purchase.<br />
<br />
As for Tier 3 members, the lower of the 10-year Treasury bill rate plus 2% or the ARR is still in effect. As we can see, this policy is an injustice, not for merely constitutional reasons, but because it is out-and-out theft from PSPRS members. Tier 3 members, many of whom I speculate will want to buy time from their military service in Iraq and Afghanistan, deserve to be treated the same as Tier 1 and Tier 2 members and not be ripped off by PSPRS. Tier 3 members were sold out by the Professional Fire Fighters of Arizona (PFFA), PFFA president Bryan Jeffries, and the other state law enforcement unions and their personnel when the third tier was created to protect the disproportionately generous benefits of Tier 1 members. Tier 3 members should judge these state public safety unions and their senior leadership by how hard they work to correct this injustice.<br />
<br />
The relevant portion of the meeting materials can be found on PDF page 261-265.<br />
<br />
<b>PSPRS tries to explain why it pays so much in investment fees</b><br />
<br />
PSPRS' management and Board of Trustees got their feelings hurt by the Pew Center for the States (Pew), which reported that <a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/09/state-public-pension-funds--investment-practices-and--performance-2016-data-update">PSPRS paid, far and away, the highest external management fees of the 44 funds that report returns, net of fees, for FY 2016</a>, and they make an attempt to explain why they received this dubious honor. Readers can see PSPRS' explanation on PDF pages 189-191.<br />
<br />
In the end, PSPRS' explanation is meaningless without any context from the other 43 funds Pew included in its study. Did all the other 43 funds profiled under-report to Pew the fees they paid? Did Pew over-report PSPRS' fees while accurately reporting every other fund's? Is PSPRS saying the researchers at Pew, who do these types of analyses all the time, don't understand the fee structure, or are they just biased against PSPRS?<br />
<br />
I checked back at Pew's website, and I saw no corrections or clarifications to the report. What still appears is that PSPRS paid the highest external management fees, which were more than double the next highest fund, and they had the third worst returns.<br />
<br />
<b>PSPRS FY 2018 Actuarial Report</b><br />
<br />
The PSPRS FY 2018 Actuarial Report was not included in the meeting materials, just a set of PowerPoint slides. The important information is that PSPRS' aggregate funded ratio improved slightly from 45.3% at the close of FY 2017 to 45.8% at the close of FY 2018. The aggregate employer contribution rate increased slightly from 51.93% to 52.31% from FY 2017 to FY 2018. Tier 3 members are accounted for separately from Tier 1 and Tier 2 members, and all Tier 3 employers, are funded between 75% and 125%. More importantly for Tier 3 members, who must split contributions 50/50 with employers, the range of employee contribution rates is 9.50% to 10.88%, depending on the employer. It is about an even split between rates going up and rates going down. These Tier 3 contribution rates can be found on PDF page 311. The new rates will go into effect in FY 2020 starting July 1, 2019. Tier 1 and Tier 2 members' contribution rates are fixed at 7.65% and 11.65%, respectively.<br />
<br />
PSPRS expects to have its final consolidated annual report and actuarial reports complete by the end of the year. Members can find out the status of their own employers' funded ratios and contribution rates when those reports drop sometime this month.<br />
<br />
<b>PSPRS investment returns through August 2018</b><br />
<br />
The following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through August 2018, the second month of fiscal year (FY) 2019, with
the past five FY end returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt; width: 67pt;" width="89"><u>Report</u></td>
<td class="xl64" style="width: 71pt;" width="94"><u>PSPRS</u></td>
<td class="xl64" style="width: 75pt;" width="100"><u>PSPRS</u></td>
<td class="xl66" style="width: 75pt;" width="100"><u>Russell 3000</u></td>
<td class="xl66" style="width: 79pt;" width="105"><u>Russell 3000</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl64">0.78%</td>
<td class="xl64">13.82%</td>
<td class="xl64">2.51%</td>
<td class="xl64">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl64">-0.73%</td>
<td class="xl64">4.21%</td>
<td class="xl64">-1.67%</td>
<td class="xl64">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl64">-0.32%</td>
<td class="xl64">1.06%</td>
<td class="xl64">0.21%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2017</td>
<td class="xl64">0.22%</td>
<td class="xl64">12.48%</td>
<td class="xl64">0.90%</td>
<td class="xl64">18.51%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2018</td>
<td class="xl64">-0.66%</td>
<td class="xl64">7.76%</td>
<td class="xl64">0.66%</td>
<td class="xl64">14.78%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">7/31/2018</td>
<td class="xl64">1.03%</td>
<td class="xl64">1.03%</td>
<td class="xl64">3.32%</td>
<td class="xl64">3.32%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><b>8/31/2018</b></td>
<td class="xl64"><b>0.94%</b></td>
<td class="xl64"><b>1.98%</b></td>
<td class="xl64"><b>3.51%</b></td>
<td class="xl64"><b>6.95%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns.<br />
<br />
Once again, there is not much to comment on so early in the
fiscal year, especially with the volatile months of October and November still to be reported. It will be interesting to see how PSPRS did those two months. The Russell 3000 had a large loss in October 2018 but managed to earn 2.0% in November 2018. PSPRS did not report results for September 2018 in these materials, even though they would normally be reported in the November meeting materials. PSPRS did not have a Board of Trustees meeting in October 2018.<br />
<br />
<b>Inflation and COLA's</b><br />
<br />
2018 has not come to a close, but it seems likely that inflation in the Phoenix-Mesa area will be over 2% for the calendar year. The 2018 first half inflation was 3.9%, meaning inflation in the second half of 2018 would have to be zero or negative for it to be be below 2%. This means retirees should expect a 2% COLA in their benefits starting July 1, 2019.<br />
<br />
Thank you for reading. I hope everyone has a safe and happy holiday season.<br />
<br />
* 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 2018.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com5tag:blogger.com,1999:blog-7609353726565000072.post-50643281353365087172018-10-03T12:02:00.001-07:002018-10-03T12:02:31.479-07:00PSPRS is number one! (in investment management fees, of course) plus investment returns through July 2018Some of you may have received a recent email from PSPRS with <a href="http://www.psprs.com/article/psprs-generates-660-million-in-returns-for-fy18">this bit of information</a>:<br />
<blockquote class="tr_bq">
<h2 style="text-align: center;">
PSPRS generates $660 million in returns for FY18<span style="font-weight: normal;"> </span></h2>
</blockquote>
<blockquote class="tr_bq">
<h2 style="text-align: center;">
<i><span style="font-size: 22px;">7.8 percent gross return rate helps trust tops $10 billion in assets</span></i> </h2>
</blockquote>
<blockquote class="tr_bq">
ARIZONA – Arizona’s Public Safety Personnel Retirement System netted
investment returns of nearly $660 million over the last fiscal year,
with the help of strong performance by the trust’s public and private
equity assets. </blockquote>
<blockquote class="tr_bq">
The fund’s investments generated a gross return rate of 7.8 percent
for the year, helping the system, which serves more than 55,000 members,
top the $10 billion mark in assets under management for the first time
in its 50-year history. Net of fees, the overall returns stood at 7.1
percent for FY2018. </blockquote>
<blockquote class="tr_bq">
“Our investment team has made enormous strides in building a
portfolio capable of producing solid returns while we take less risk
than the vast majority of our peer funds,” said PSPRS Board Chairman
Brian Tobin. “It can be hard to show the value of a low-risk approach
in a bull market but we have to keep perspective if we want to avoid the
same mistakes that led to significant losses in the past. This strategy
protects our members, Arizona employers and millions of taxpayers while
the system continues to recover.” </blockquote>
<blockquote class="tr_bq">
Investments in private equity made possible by 2008 changes to state
law have performed admirably by exceeding benchmarks based on the
Russell 3000 index, which has grown steadily during the nation’s
historic bull market featuring positive returns for most of the last
decade. </blockquote>
<blockquote class="tr_bq">
PSPRS investment returns in asset classes including private equity,
fixed income, private credit, global trading strategies, real assets and
risk parity continue to meet or outperform long-term benchmarks, while
overall returns were hampered by pre-recession joint venture real estate
investments. </blockquote>
<blockquote class="tr_bq">
“Our portfolio is built around the fact that we need to invest
responsibly because losses over the course of even a single year could
prove disastrous for some employers and potentially harm our ability to
meet our obligations to retirees,” said PSPRS Chief Investment Officer
Mark Steed. “This requires a balanced strategy across multiple asset
classes and far less reliance on the stocks and bonds that make up the
typical investment portfolio.” </blockquote>
<blockquote class="tr_bq">
The 2018 fiscal year returns are below the 9 percent threshold
required under state law to trigger pension increases for retirees of
the Corrections Officer Retirement Plan and the Elected Officials
Retirement Plan. </blockquote>
<blockquote class="tr_bq">
PSPRS investments generated just under $3 billion of investment
returns over the past five years. Retirement plans managed by PSPRS
typically distribute about $1 billion of retiree, survivor and
disability benefits each year.</blockquote>
While we should not be surprised considering this comes from PSPRS' management, this press release is deceptive from nearly the beginning. The sub-headline trumpets a "7.8% gross return rate," (actual was 7.76%) and you need to look into the second paragraph to see that PSPRS paid 0.7% in investment management fees and only earned 7.1% (actual was 7.07%) for fiscal year (FY) 2018. This is 0.3% below PSPRS' assumed rate of return (ARR) for FY 2018, and 0.64% below its own benchmark of 7.74%. If PSPRS included this information, the "7.8%" and "$660 million" figures do not look quite so good. Even worse, PSPRS is paying more in investment fees than it has in past years, 0.69% in FY 2018 versus 0.63% in FY 2017.<br />
<br />
The FY 2017 annual report states that PSPRS' assets were $9.3 billion as of June 30,2017. For comparison <a href="https://www.azasrs.gov/blog/financial-status-asrs">the Arizona State Retirement System (ASRS) earned 9.5% in FY 2018</a>. If PSPRS had earned that additional 2.4%, it would have increased PSPRS' assets by $223 million. In FY 2018, PSPRS paid $65 million in investment fees to earn $223 less than if ASRS had been managing PSPRS' assets. Over the past ten years, ASRS' annualized returns were 1.9% per year higher than PSPRS' (7.4% versus 5.5%). That additional 1.9% per year on $9.3 billion in assets would be worth nearly $2 billion in ten years, yet we keep hearing the same tired explanations from the likes of Board of Trustees Chairman Brian Tobin and new Chief Investment Officer (CIO) Mark Steed that PSPRS is well prepared for the next market crash.<br />
<br />
PSPRS has already missed the last ten years of the current bull market during which the Russell 3000's annualized return was 10.24%. I am not saying that PSPRS should simply invest all its money in the Russell 3000, but based on ASRS' results, it is obvious that there is a better strategy out there already being executed (within just a few miles of PSPRS' offices, I might add). Look at <a href="https://www.azasrs.gov/content/rates-return">ASRS' annual returns over the past 36 years</a>. Even after the rough patches in FY's 2000 and 2001 and FY's 2008 and 2009, ASRS more than earned back all it lost and more during each of the two fiscal years following 2000-01 and 2008-09. Market downturns are unavoidable, but as ASRS shows, they are manageable. On the other hand, like generals preparing for the last war, PSPRS' management is preparing for the last market crash.<br />
<br />
PSPRS' own analysis shows that while they are only suffering 31% of market downside, they are only getting 44% in market upside. If we look again at ASRS' returns over the last 36 years, there were 31 years of positive returns, with 20 of those years producing double digit returns, versus only five years of negative returns with only one year of double digit losses. Capturing only 44% of those 31 years of positive returns to limit PSPRS to only 31% of the losses in the five down years is not a good tradeoff. Ben Carlson of <a href="https://awealthofcommonsense.com/2018/09/what-if-stocks-dont-crash/"><i>A Wealth of Common Sense</i></a> has a longer historical perspective on markets and the unpredictability of market crashes and bull markets. Whenever Mr. Tobin and Mr. Steed, PSPRS Adminstrator Jared Smout and recently retired CIO Ryan Parham speak about PSPRS' current investment strategy, it always sounds like they are longing for another market crash that will validate the strategy, but I think the verdict is already in. PSPRS' current investment strategy is a failure.<br />
<br />
However, PSPRS does have one dubious achievement it can claim. On September 26, 2018, the Pew Center for the States reported in its <a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/09/state-public-pension-funds--investment-practices-and--performance-2016-data-update">State Public Pension Funds' Investment Practices and Performance: 2016 Data Update</a> that <b>PSPRS paid the highest external management fees of the 44 funds that report returns, net of fees, for FY 2016</b>. As a percent of assets, PSPRS paid 2.23% in external management fees. Not only did PSPRS top the list in external management fees paid, it ran away with the title, more than doubling second place South Carolina Retirement Systems, which paid 1.00% of assets in external management fees. ASRS paid 0.49% of assets in external management fees in FY 2016. Of the 44 pension funds listed, PSPRS was 42nd in 10-year annualized returns. ASRS was 9th. PSPRS also had the highest investment expenses at 1.76% of assests; ASRS was at 0.59% of assets. These achievements all occurred in a fiscal year in which PSPRS earned a whopping 1.06%.<br />
<br />
When I read that Mr. Parham was retiring as PSPRS CIO, I was hoping that he had been finally been forced out due to his consistent record of poor results and that more significant changes were in the offing . However, that does not appear likely. <a href="http://www.psprs.com/article/mark-steed-named-psprs-chief-investment-officer">PSPRS' Board of Trustees has promoted his Deputy CIO Mark Steed to replace him</a>, so we can expect PSPRS to continue with its failed investment strategy.<br />
<br />
Finally, the following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through July 2018, the first month of fiscal year (FY) 2019, with
the past five FY end returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl64" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl65" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl65" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl67" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl67" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl64" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl65"><u>Month End</u></td>
<td class="xl65"><u>Fiscal YTD</u></td>
<td class="xl65"><u>Month End</u></td>
<td class="xl65"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl66" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl65">0.78%</td>
<td class="xl65">13.82%</td>
<td class="xl65">2.51%</td>
<td class="xl65">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl66" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl65">-0.73%</td>
<td class="xl65">4.21%</td>
<td class="xl65">-1.67%</td>
<td class="xl65">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl66" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl65">-0.32%</td>
<td class="xl65">1.06%</td>
<td class="xl65">0.21%</td>
<td class="xl65">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl66" height="20" style="height: 15.0pt;">6/30/2017</td>
<td class="xl65">0.22%</td>
<td class="xl65">12.48%</td>
<td class="xl65">0.90%</td>
<td class="xl65">18.51%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl66" height="20" style="height: 15.0pt;">6/30/2018</td>
<td class="xl65">-0.66%</td>
<td class="xl65">7.76%</td>
<td class="xl65">0.66%</td>
<td class="xl65">14.78%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl64" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl65"><br /></td>
<td class="xl65"><br /></td>
<td class="xl65"><br /></td>
<td class="xl65"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl66" height="20" style="height: 15.0pt;"><b>7/31/2018</b></td>
<td class="xl65"><b>1.03%</b></td>
<td class="xl65"><b>1.03%</b></td>
<td class="xl65"><b>3.32%</b></td>
<td class="xl65"><b>3.32%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns.<br />
<br />
There is not much to comment so early in the fiscal year, but we once again see PSPRS lagging the Russell 3000. For the 2018 calendar year, the Russell 3000 has returned 6.64%, double the 3.30% return of PSPRS over the same seven months. <br />
<br />
* 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 2018.<br />
<br />Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com7tag:blogger.com,1999:blog-7609353726565000072.post-81715898980160141742018-09-02T21:40:00.003-07:002018-09-02T21:40:59.325-07:00PSPRS investment returns through June 2018 with a few other matters covered as wellThe following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through June 2018, the last month of fiscal year (FY) 2018, with
the past four FY end returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl64" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl64" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl66" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl66" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl64">0.78%</td>
<td class="xl64">13.82%</td>
<td class="xl64">2.51%</td>
<td class="xl64">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl64">-0.73%</td>
<td class="xl64">4.21%</td>
<td class="xl64">-1.67%</td>
<td class="xl64">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl64">-0.32%</td>
<td class="xl64">1.06%</td>
<td class="xl64">0.21%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2017</td>
<td class="xl64">0.22%</td>
<td class="xl64">12.48%</td>
<td class="xl64">0.90%</td>
<td class="xl64">18.51%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">7/31/2017</td>
<td class="xl64">0.83%</td>
<td class="xl64">0.83%</td>
<td class="xl64">1.89%</td>
<td class="xl64">1.89%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">8/31/2017</td>
<td class="xl64">1.06%</td>
<td class="xl64">1.91%</td>
<td class="xl64">0.19%</td>
<td class="xl64">2.08%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">9/30/2017</td>
<td class="xl64">0.80%</td>
<td class="xl64">2.72%</td>
<td class="xl64">2.44%</td>
<td class="xl64">4.57%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">10/31/2017</td>
<td class="xl64">0.64%</td>
<td class="xl64">3.38%</td>
<td class="xl64">2.18%</td>
<td class="xl64">6.85%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">11/30/2017</td>
<td class="xl64">1.28%</td>
<td class="xl64">4.70%</td>
<td class="xl64">3.04%</td>
<td class="xl64">10.10%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">12/31/2017</td>
<td class="xl64">0.66%</td>
<td class="xl64">5.39%</td>
<td class="xl64">1.00%</td>
<td class="xl64">11.20%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">1/31/2018</td>
<td class="xl64">2.35%</td>
<td class="xl64">7.86%</td>
<td class="xl64">5.27%</td>
<td class="xl64">17.06%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">2/28/2018</td>
<td class="xl64">-1.37%</td>
<td class="xl64">6.38%</td>
<td class="xl64">-3.69%</td>
<td class="xl64">12.74%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">3/31/2018</td>
<td class="xl64">0.65%</td>
<td class="xl64">7.07%</td>
<td class="xl64">-2.01%</td>
<td class="xl64">10.48%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">4/30/2018</td>
<td class="xl64">0.49%</td>
<td class="xl64">7.59%</td>
<td class="xl64">0.38%</td>
<td class="xl64">10.90%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">5/31/2018</td>
<td class="xl64">0.82%</td>
<td class="xl64">8.47%</td>
<td class="xl64">2.82%</td>
<td class="xl64">14.03%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><b>6/30/2018</b></td>
<td class="xl64"><b>-0.66%</b></td>
<td class="xl64"><b>7.76%</b></td>
<td class="xl64"><b>0.66%</b></td>
<td class="xl64"><b>14.78%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns.<br />
<br />
<u>FY 2018 Earnings</u><br />
<br />
So after a bit of a hiatus here, we can once again discuss PSPRS' investment returns and a few other matters. PSPRS once again significantly lagged the Russell 3000. For FY 2018 PSPRS earned only 52.50% of the Russell 3000. PSPRS has been amazingly consistent in this regard. During the past five fiscal years, PSPRS has earned 54.80%, 57.75%, 49.53%, 67.42, and 52.50% of the Russell 3000. With the exception of FY 2017, the other four years all fell within about a pretty close eight percentage point range. If we can expect PSPRS to capture only 50-60% of the Russell 3000 each year, the Russell 3000 will have to range between 12.17% and 14.60% in order for PSPRS to just earn its recently reduced expected rate of return (ERR) of 7.30%. The following table shows even more of the consistent 50-60% capture rate:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 219px;"><colgroup><col style="mso-width-alt: 5193; mso-width-source: userset; width: 107pt;" width="142"></col>
<col style="mso-width-alt: 2816; mso-width-source: userset; width: 58pt;" width="77"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt; width: 107pt;" width="142"><u>Time Period</u></td>
<td class="xl65" style="width: 58pt;" width="77"><u>Captured</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2014</td>
<td align="right" class="xl65">54.80%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2015</td>
<td align="right" class="xl65">57.75%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2016</td>
<td align="right" class="xl65">49.53%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2017</td>
<td align="right" class="xl65">67.42%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2018</td>
<td align="right" class="xl65">52.50%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">3-Year Annualized</td>
<td align="right" class="xl65">60.45%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">5-Year Annualized</td>
<td align="right" class="xl65">58.39%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">10-Year Annualized</td>
<td align="right" class="xl65">58.46%</td>
</tr>
</tbody></table>
<br />
The 7.76% FY 2018 is<i> gross of fees</i>. Net of fees, PSPRS likely earned only about 7.25%, in FY 2018, as PSPRS earnings are reduced about a half-percent after investment fees are subtracted. This return falls short of PSPRS' FY 2018 ERR of 7.40%. The final FY earnings rate, net of fees, is reported in September.<br />
<br />
So how did PSPRS do versus the Arizona State Retirement System (ASRS) and PSPRS' own Cancer Insurance Plan (CIP) in FY 2018? ASRS earned 9.50% and the CIP earned 6.72% in FY 2018. ASRS earned 2.25% more on its assets than PSPRS. The CIP, a simple fund consisting of 50% equity, 45% bonds, and 5% gold, made about a half-percent less than PSPRS. PSPRS' assets at the end of FY 2017 were $9.3 billion. An additional 2.25% on $9.3 billion would have earned PSPRS an additional $209 million in FY 2018.<br />
<br />
<u>Chief Investment Officer (CIO) Ryan Parham retires</u><br />
<br />
The lackluster investment numbers for FY 2018 are a fitting coda to Mr. Parham's unimpressive career at PSPRS. According to <a href="https://www.abc15.com/news/data/arizona-salaries-see-which-state-employees-are-making-the-most-money">this database</a> published by ABC 15 in November 2017, Mr. Parham was the second-highest, non-university system employee in the state of Arizona. Among non-university system employees, his $268,000 annual salary is exceeded only by that of ASRS Director Paul Matson, who earned $285,000. What is even more bizarre is that Mr. Parham earned over $66,000 a year more than ASRS' CIO Karl Polen, despite ASRS much better earnings history.<br />
<br />
PSPRS Board of Trustees Chairman Brian Tobin had this to say about Mr. Parham:<br />
<blockquote class="tr_bq">
Ryan Parham’s accolades and results in a fiercely difficult marketplace
tell a clear story: He has been one of the best in the business for more
than a decade,” said Tobin. “Even with Ryan gone, the new path he’s
helped set and the changes in law that needed to occur have the system
well-positioned moving forward. PSPRS has positive momentum. And we’ve
never been more committed to serving our members and our fellow
taxpayers. Ryan and his team worked exceedingly hard for years to help
make that the truth.</blockquote>
Heckuva job, Hammy! I suppose for <a href="https://www.azcentral.com/story/news/local/arizona-investigations/2017/08/10/public-safety-pension-boss-defends-drop-program-payments/549897001/">Mr. Tobin, who will soon receive an $817,000 Deferred Retirement Option Plan (DROP) and a $134,000 annual retirement benefit</a>, life looks great, and maybe that is why he would consider Mr. Parham "one of the best in the business." Personally, Mr. Tobin is going to make out extremely well. However, if he looked at the investment performance of PSPRS over the past 14 years, especially in comparison to ASRS, and how it has affected the financial security of thousands of PSPRS members, he might call Mr. Parham's career at PSPRS a bit of a disappointment.<br />
<br />
As for his commitment to serving PSPRS members, let's go back to Mr. Parham's own words about investment returns in a <a href="https://azcapitoltimes.com/news/2014/12/18/the-truth-about-psprs-investment-performance/">2014 editorial in the Arizona Capitol Times</a>:<br />
<blockquote class="tr_bq">
PSPRS wants its retirees to enjoy increases, but we are incentivized to
seek lower returns in the range of 9 percent to maximize earnings that
can be applied to cover – and hopefully reduce – unfunded liabilities.</blockquote>
I guess I don't have the enlightened understanding and appreciation that Mr. Tobin has for all of Mr. Parham's hard work, commitment, and dedication to underperformance. I just thought PSPRS' Chief Investment Officer best served PSPRS members by maximizing investment returns. <br />
<br />
<u>Inflation and COLA's</u><br />
<br />
Retirees should be getting their first cost of living allowance (COLA) under the new system implemented with the passage of Proposition 124 in May 2016. The COLA is based on the Phoenix-Mesa regional consumer price index for all urban consumers (CPI-U) at the end of 2017. The COLA is limited to the lower of the actual Phoenix-Mesa CPI-U or 2%. The actual CPI-U at the end of 2017 was 2.5% so retirees are getting a 2% COLA based on their individual monthly benefit. The Phoenix-Mesa CPI-U for the last half of 2017 was 2.2% but was 3.9% for the first half of 2018. This means the inflation rate for FY 2018 was about 3.0%. 1-2% a year may not seem like a lot but over 20-25 years it will mean a significant loss in purchasing power, and of course, any inflation higher than that would do even more damage to a retiree's income.<br />
<br />
<u>Ballot measure affecting retirees in the EORP and CORP</u><br />
<br />
This ballot measure would change the permanent benefit increase (PBI) system in the Elected Officals' Retirement Plan (EORP) and the Corrections Officers' Retirement Plan (CORP) to the COLA system currently in place at PSPRS. The measure does not have proposition number yet but more information can be found at <a href="https://ballotpedia.org/Arizona_Adjustments_to_Elected_Officials%E2%80%99_Retirement_Plan_and_Corrections_Officer_Retirement_Plan_Amendment_(2018)">Ballotpedia</a>. This measure is likely to pass, which is when it should become interesting. I suspect a CORP or EORP retiree (especially one in particular) will file a lawsuit claiming that this measure is unconstitutional under the Contract Clauses of the Arizona and US Constitution. If you are curious about those constitutional issues, they are discussed <a href="http://www.psprs.info/2017/07/was-it-constitutional-for-proposition.html">here</a> and <a href="http://www.psprs.info/2018/04/lets-get-ready-to-rumble-will-we-see.html">here</a>. If someone can successfully convince the courts that this measure is unconstitutional, it would mean that Proposition 124 was also unconstitutional. If they were to lose the case, especially at the US Supreme Court, it could empower legislatures and/or special interest groups throughout the country to unilaterally alter pension benefits that have been consider inviolable. This will be fascinating to watch play out.<br />
<br />
That is a short recap of some of the recent news about PSPRS. Have and safe and happy Labor Day.<br />
<br />
* 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.
The
past four years fees have reduced the final annual reported return by
about a half percent. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, and 11.85% in FY 2017.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com2tag:blogger.com,1999:blog-7609353726565000072.post-45283700459792837212018-04-26T16:54:00.000-07:002018-04-26T16:54:03.606-07:00PSPRS investment returns through February 2018 with a recommendation to the Arizona Legislature on how to better oversee PSPRSThe following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through February 2018, the eighth month of the current fiscal year (FY), with
the past four FY end returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl64" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl64" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl66" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl66" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl64">0.78%</td>
<td class="xl64">13.82%</td>
<td class="xl64">2.51%</td>
<td class="xl64">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl64">-0.73%</td>
<td class="xl64">4.21%</td>
<td class="xl64">-1.67%</td>
<td class="xl64">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl64">-0.32%</td>
<td class="xl64">1.06%</td>
<td class="xl64">0.21%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2017</td>
<td class="xl64">0.22%</td>
<td class="xl64">12.48%</td>
<td class="xl64">0.90%</td>
<td class="xl64">18.51%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">7/31/2017</td>
<td class="xl64">0.83%</td>
<td class="xl64">0.83%</td>
<td class="xl64">1.89%</td>
<td class="xl64">1.89%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">8/31/2017</td>
<td class="xl64">1.06%</td>
<td class="xl64">1.91%</td>
<td class="xl64">0.19%</td>
<td class="xl64">2.08%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">9/30/2017</td>
<td class="xl64">0.80%</td>
<td class="xl64">2.72%</td>
<td class="xl64">2.44%</td>
<td class="xl64">4.57%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">10/31/2017</td>
<td class="xl64">0.64%</td>
<td class="xl64">3.38%</td>
<td class="xl64">2.18%</td>
<td class="xl64">6.85%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">11/30/2017</td>
<td class="xl64">1.28%</td>
<td class="xl64">4.70%</td>
<td class="xl64">3.04%</td>
<td class="xl64">10.10%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">12/31/2017</td>
<td class="xl64">0.66%</td>
<td class="xl64">5.39%</td>
<td class="xl64">1.00%</td>
<td class="xl64">11.20%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">1/31/2018</td>
<td class="xl64">2.35%</td>
<td class="xl64">7.86%</td>
<td class="xl64">5.27%</td>
<td class="xl64">17.06%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><b>2/28/2018</b></td>
<td class="xl64"><b>-1.37%</b></td>
<td class="xl64"><b>6.38%</b></td>
<td class="xl64"><b>-3.69%</b></td>
<td class="xl64"><b>12.74%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns.<br />
<br />
We finally have data from February 2018, which was an extremely volatile month for the markets with the Russell 3000 losing 3.69%, versus a loss of 1.37% for PSPRS. This means PSPRS suffered only 37.13% of the monthly loss of the Russell 3000. On the other hand, PSPRS only captured 44.60% of the gain in January 2018. In <a href="https://www.azasrs.gov/sites/default/files/pdf/04%2027%2018%20Board%20Public%20Version%20.pdf">the latest information provided by the Arizona State Retirement System (ASRS)</a>, ASRS' fiscal YTD return through April 17, 2018 is about 9.0%. PSPRS' Cancer Insurance Plan (CIP) has earned 6.42%, <i>net of fees</i>, fiscal YTD. The Russell 3000 had another loss of about 2.5% for the month of March
2018, and as of April 25, 2018, the Russell 3000 is up about 1% for the month of April with two trading days left. It will be a close call whether PSPRS achieves its assumed rate of return (ARR) of 7.4% by the end of June.<br />
<br />
For the fiscal YTD, PSPRS has captured almost exactly 50% of the gains of the Russell 3000. This once again fits PSPRS' pattern of returning 50-60% of the Russell 3000. At this capture rate, the Russell 3000 must earn between 12.33% and 14.80% in order for PSPRS to earn 7.4%. PSPRS' actuaries are recommending that PSPRS lower this rate to 7.3% based on an experience study from last year. Tier 3 members have an ARR of 7.0%. Any decrease in the ARR will increase current liabilities as investment earnings going forward will be lower, which means contribution rates for Tier 1 and Tier 2 members will have to increase. This will cause an increase in employer contributions as Tier 1 and Tier 2 members' contribution rates are fixed at 7.65% and 11.65%, respectively.<br />
<br />
There was a bill that was attempting to tie PSPRS' ARR to the 3-year rolling average of the 20-year treasury constant maturity rate. The bill would have forced PSPRS to adopt an ARR that was not more than 2% higher than this rate. PSPRS would have been forced to drop the ARR 0.25% every year until that target was reached. Fortunately, this bill was amended, and the language was changed to limit PSPRS from raising its ARR unless PSPRS was at least 80% funded. This original bill was foolish, as it would have forced PSPRS to drop its ARR down to somewhere around 5%, which would have devastated every employer in the state and hit Tier 3 employees in the defined benefit pension especially hard. These Tier 3 employees are required to split normal costs and unfunded liabilities 50/50 with employers, and once the ARR dropped below 7%, they would see increases in their pension contributions. There is no way that this could have worked.<br />
<br />
If the Arizona Legislature wants to impose more control over PSPRS, it should start by giving another state agency, such as the Office of the State Treasurer or the Auditor General, the authority to select PSPRS' actuaries, pension consultants, and accountants. We know that PSPRS' Board of Trustees and senior management cannot be trusted. See this passage from <a href="http://www.azleague.org/DocumentCenter/View/6050">The League of Arizona Cities and Towns PSPRS Task Force Report</a> from August 2015:<br />
<blockquote class="tr_bq">
<blockquote class="tr_bq">
<div style="left: 603.534px; top: 812.825px; transform: scaleX(1.0263);">
<span style="font-size: small;"><span style="font-family: inherit;">It is also important to point that prior to FY 2015-16, the cost of the PBI (permanent benefit increase) was not included in the employer contribution rate. Excluding the PBI from the calculation effectively underestimated the normal cost of the pension plan, causing it to manifest itself in the unfunded liability. <b>This issue was identified by PSPRS actuaries several years ago, but the PSPRS Board did not take action to address it</b>. (boldface mine)</span></span></div>
</blockquote>
</blockquote>
Despite this, the PSPRS Board of Trustees is still allowed to contract for these services. It would be far better if the actuaries, consultants, and accountants were reliant on another state agency to award these contracts. Their work would be more independent and not influenced by concerns over continued business with PSPRS, if they shined a negative light on the Board or senior management. Their reports and recommendations would also circulate outside of PSPRS for review and analysis. The PSPRS Board and senior management would then be under pressure to adopt the recommendations of these independent companies or justify to the Arizona Legislature why they cannot. If PSPRS repeatedly ignored the recommendations without justification, the Legislature or Governor could make personnel changes at PSPRS or pass legislation to force good policies. This would be a good first step in holding PSPRS accountable.<br />
<br />
* 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.
The
past two years fees have reduced the final annual reported return by
about a half percent. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, and 11.85% in FY 2017.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com0tag:blogger.com,1999:blog-7609353726565000072.post-53936803418723195262018-04-11T13:41:00.001-07:002018-04-11T13:57:05.806-07:00Let's get ready to rumble! Will we see Round 3 of Fields v. EORP, and how would it affect PSPRS members?As some of you may have noticed, posts are getting less frequent here. There simply isn't as much going on now that the <i>Fields</i> and <i>Hall</i> cases have been settled, or at least, as it relates to issues that concern most PSPRS members. Understandably, most PSPRS members want information about things that will affect their own finances, particularly anything that might change current wages or monthly retirement checks. So just as I was starting to consider closing up shop, PSPRS sent this out:<br />
<blockquote class="tr_bq">
<div align="center" style="text-align: center;">
<span style="color: #083871; font-family: "georgia" , , "times" , serif , serif , "emojifont";">Referendum headed to ballot </span></div>
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<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">Arizona
voters will be asked to reform the permanent benefit increase formula
for retired members of the Elected Officials Retirement Plan and the
Corrections Officers Retirement Plan. This question will be wrapped into
one referendum appearing on the November 2018 ballot.</span></div>
<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;"></span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">The reforms to pension increases for CORP and EORP largely mirror those included in </span><a href="http://r20.rs6.net/tn.jsp?f=001LK8sft2fiYr_0HuEopAx1Yh-F-Obnph1Cg9hcnvotvJcolhHqhd-5HA2t3Vq3vjnqeQ9jzBQWBuSyrTLtElFdAZRHKInOq5gR6TjpUyJbpSLCvGK2K-80H1oMWjhC8y3QHODmw8WQcaFCdiW-1jCqjPmlD9Nen3DawqIISNEauM6KJmQt2rJ8xL7XeCNbugCRl2QhuB_y8kVm3XpCF0US9TGx24a-KgKjUR6D9MbV7o=&c=vtOOWpy30jMoEgUbpUwzxfrvewMBmYl1CkgDquFgMHnVg_7hJQuxsw==&ch=jBTl59Cnfcbv3O_Da8y9wh-B0Ken0KvB3LIoQ1QnrnlxkyWGlj3swQ==" rel="noopener noreferrer" style="color: black; font-family: Georgia ,Times New Roman ,Times ,serif; font-size: 14.0px; font-style: normal; font-weight: normal; text-decoration: underline;" target="_blank">Prop 124</a><span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">,
which voters passed in May 2016 to replace the permanent benefit
increase (PBI) for public safety retirees with a
cost-of-living-adjustment model.</span></div>
<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;"></span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">The PBI reform to CORP was included in Senate Bill 1442, which was signed into law last year and created </span><a href="http://r20.rs6.net/tn.jsp?f=001LK8sft2fiYr_0HuEopAx1Yh-F-Obnph1Cg9hcnvotvJcolhHqhd-5H3LglftHtn1WjRoHsiF3JqKoJsIm6iy6bVfPXWcqEmPHPbrM0Jbj2L92QURXmil94dsvaeULzKTKtytHQalVCXvgzVaCAXL-C5ODMvOyCCCjgDo-dqO4TW_qR0H00QXr3C2CiUw4TlObRoJ8NeY74E1FK5DecSFAesm7xjlw5jZosFOE_wuSdc=&c=vtOOWpy30jMoEgUbpUwzxfrvewMBmYl1CkgDquFgMHnVg_7hJQuxsw==&ch=jBTl59Cnfcbv3O_Da8y9wh-B0Ken0KvB3LIoQ1QnrnlxkyWGlj3swQ==" rel="noopener noreferrer" style="color: black; font-family: Georgia ,Times New Roman ,Times ,serif; font-size: 14.0px; font-style: normal; font-weight: normal; text-decoration: underline;" target="_blank">additional benefit reforms.</a> <span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">The legislation impacting EORP, </span><a href="http://r20.rs6.net/tn.jsp?f=001LK8sft2fiYr_0HuEopAx1Yh-F-Obnph1Cg9hcnvotvJcolhHqhd-5HA2t3Vq3vjnysQjUdhDHqwtgWKxH-At8qOMEWL8S76sSFjJUK6BHzIcNYFFRivh_6DAd6WYxkpv4hjvDlToavrkD1A6wry1A3sCxy9fUFTtdvBwKYbWi8vi_VddYBl7fQ==&c=vtOOWpy30jMoEgUbpUwzxfrvewMBmYl1CkgDquFgMHnVg_7hJQuxsw==&ch=jBTl59Cnfcbv3O_Da8y9wh-B0Ken0KvB3LIoQ1QnrnlxkyWGlj3swQ==" rel="noopener noreferrer" style="color: black; font-family: Georgia ,Times New Roman ,Times ,serif; font-size: 14.0px; font-style: normal; font-weight: normal; text-decoration: underline;" target="_blank">House Bill 2545</a><span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">, was signed into law this week by Governor Doug Ducey. </span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">As
was the case with Prop 124, the changes to CORP and EORP require
subsequent voter approval to amend the state constitution to adjust the
retiree benefit structure. </span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">The replacement of the permanent benefit increase (PBI) for CORP and EORP retirees is </span><a href="http://r20.rs6.net/tn.jsp?f=001LK8sft2fiYr_0HuEopAx1Yh-F-Obnph1Cg9hcnvotvJcolhHqhd-5ABNhLROSon2hwmf-Fbwf9Ac17yvQRmbZmNNiK0qb_xX2vgXMIYoiMcIhCd3fNKihSgIb2gT6B80LdJfL5hbmu2Wla3UW--w5ZObvAWVMJVNEy4gWVpRxo2_iTyLSr_6viAzXqanRLZVkjKFsqJKUOgXdcvmau_fs-gNlQb87rlcbaBP4RxOpgg1_G8UDxDZb30XtIwFjYd76azHzhXq33ONIC1yua3mLjJE6qy-8Lca-456H2RhRST-BTNkPkGpDg==&c=vtOOWpy30jMoEgUbpUwzxfrvewMBmYl1CkgDquFgMHnVg_7hJQuxsw==&ch=jBTl59Cnfcbv3O_Da8y9wh-B0Ken0KvB3LIoQ1QnrnlxkyWGlj3swQ==" rel="noopener noreferrer" style="color: black; font-family: Georgia ,Times New Roman ,Times ,serif; font-size: 14.0px; font-style: normal; font-weight: normal; text-decoration: underline;" target="_blank">supported by the PSPRS Board of Trustees</a><span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">
due to the urgency to bring stability and sustainability to
PSPRS-managed retirement plans. Reform related legislation passed
through the state Legislature with unanimous votes or overwhelmingly
majorities.</span></div>
<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;"></span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: "georgia" , , "times" , serif , serif , "emojifont"; font-size: 14px;">Employers
and those interested are strongly encouraged to read all reform
legislation related to PSPRS-managed retirement plans. This email is not
intended to provide details on all pending or proposed reforms. </span></div>
</div>
</div>
</blockquote>
The Arizona Legislature is going to try and change how the Elected Officials' Retirement Plan (EORP) and Corrections Officers Retirement Plans (CORP) pay post-retirement benefit increases via a voter referendum in the 2018 general election. EORP and CORP still use a permanent benefit increase (PBI) system similar to what PSPRS had for Tier 1 members prior to the passage of Proposition 124 in May 2016, which replaced PSPRS' old PBI formula with a capped 2% cost of living allowance (COLA) that is based on the inflation rate in the Phoenix-Mesa area. PSPRS' COLA applies to ALL PSPRS members, regardless of tier, though Tier 3 members have additional restricions on the payment of their COLA's.<br />
<br />
For Tier 1 CORP members (retired before July 1, 2011), half of any annual investment earnings over 9% go into a reserve fund that is used exclusively to pay PBI's of up to 4% of the average normal benefit. For Tier 2 CORP members (retired July 1, 2011 or later, a sliding scale is used to pay the PBI. The scale is based on the funded ratio of CORP. Tier 2 members can get a PBI from 2-4% based on the funded ratio between 60-80%. You can read more about the PBI's in the <a href="http://www.psprs.com/uploads/sites/1/CORP_Member_Handbook_Rev_3-2017.pdf">CORP Member Handbook</a>. For EORP members, the PBI rules are the virtually the same. EORP members are not designated by tiers (tiers are for the little people, apparently) but are broken into in two groups with the same cutoff date as CORP members. The only major difference I see in the <a href="http://www.psprs.com/uploads/forms/EORP%20Member%20Handbook%207-2016_4.pdf">EORP Member Handbook</a> is that the EORP PBI's are based on a member's individual benefit, not the average normal benefit. which makes sense since there is wide range in salaries among EORP members.<br />
<br />
On March 23, 2018 the <i>Arizona Republic</i> published this <a href="https://www.azcentral.com/story/opinion/op-ed/2018/03/23/arizona-pension-fund-elected-officials-retirement-plan-broke/451017002/">editorial </a>by PSPRS Board of Trustees Chairman Brian Tobin about the dire state of EORP. While I do not want to get into what Mr. Tobin had to say in his editorial, we should note the complete cluelessness and utter lack of credibility of <a href="https://www.azcentral.com/story/news/local/arizona-investigations/2017/08/10/public-safety-pension-boss-defends-drop-program-payments/549897001/">a public servant who will walk away with nearly $1 million in his first year of retirement</a> telling taxpayers that they need to pony up more money to pay for a broken pension system. <br />
<br />
It might be tempting for PSPRS members to say what is good for the goose is good for the gander, especially when it involves the benefits of "elected officials." However, the <a href="http://www.psprs.com/uploads/sites/1/2017_CAFR_FINAL.pdf">2017 consolidated annual financial report (CAFR)</a> shows the average annual PSPRS service pension is higher than the average annual EORP service pension ($56,232 vs $54,860), while CORP's average annual service pension is only $28,977. So even if you have no sympathy for retired politicians and judges, many of whom had other sources of income during their working lives and shorter careers in public service, we should not forget that CORP members will be especially hard hit by a change in their PBI's. No CORP member is getting rich off PBI's, and in fact, the average active CORP member's <u>salary</u> is lower than the average benefit of PSPRS and EORP retirees. This might be something PSPRS members should keep in mind when it comes to fill out our ballots in November. The PSPRS press release states that both CORP and EORP will be covered under a single referendum, rather than separately, cynically assuming that voters will want to punish "elected officials" more than they want to help retired corrections officers.<br />
<br />
If I had to predict, the referendum changing EORP and CORP's post-retirement increases from a PBI to a COLA will pass. I cannot see any organized opposition from EORP members (There are just not enough of them.), and I have never seen CORP members (Are they even unionized?) flexing any financial or political muscle in Arizona. I do not expect much to happen between now and November 6, 2018, but if the referendum passes, that's when I suspect things will really start to heat up because standing on the sidelines is EORP's arch-nemesis, retired Maricopa County Superior Court Judge Kenneth Fields. His <a href="http://pensionlitigation.org/wp-content/uploads/2014/05/ARIZONA-Fields-v.-Elected-Official-Retirement-Plan-of-State-of-Arizona-Superior-Court-Decision-May-2012.pdf">successful challenge to SB 1609 in 2011</a> was over the very issue of alteration of the PBI formula. He also <a href="http://pensionlitigation.org/wp-content/uploads/2017/07/AZ-Fields-v.-EORP-Memorandum-Decision-July-24-2017.pdf">won another case against EORP in 2017</a> over how much employers were required to pay in contributions. EORP currently has a fixed employer contribution rate that is grossly inadequate to fund the pension.<br />
<br />
The curious thing about this is that EORP <u>must</u> be funded. It makes no sense for Legislature could not set a fixed employer contribution rate and deliberately starve it of funding. The obligation to retirees would not disappear because the state refused to make employers pay the necessary contributions. EORP's defined benefit pension will have to be funded until the last member or survivor dies, and for some perspective, see <a href="https://www.usnews.com/news/articles/2016-08-08/civil-war-vets-pension-still-remains-on-governments-payroll-151-years-after-last-shot-fired">this story</a>. So what was the purpose of setting a fixed employer contribution rate that is only half or one-fourth of what is needed? I do not like conspiracy theories, but what else could it be but to force EORP into such a financial crisis that a radical change would be required. For instance, maybe something like changing EORP's PBI to a capped COLA like PSPRS? The Legislature tried to change the PBI's less radically in 2011, and Judge Fields beat them in court. He beat them again last year. If we can all see how this was set up, an experienced attorney and retired judge surely can, and I am sure that Judge Fields knew all along what the Legislature was trying to do.<br />
<br />
Will we see round three in Kenneth Fields v. EORP? I suspect so. This is a man who has won a case against Maricopa County over retaliation by former Sheriff Joe Arpaio and the former County Attorney. He also attempted to force former PSPRS Administrator James Hacking to attend remedial classes in the role of a public fiduciary. We have previously discussed the constitutionality of changing PSPRS' PBI formula, and if you are not familiar with the issues, you can see this post, "<a href="http://www.psprs.info/2017/07/was-it-constitutional-for-proposition.html">Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?</a>" Long story short is that changing the PBI unilaterally, even if by voter referendum, appears to violate the contract clauses of both the Arizona and US Constitution, assuming the contract clauses trump <a href="https://www.azleg.gov/const/29/1.htm">Article 29 of the Arizona Constitution</a>.<br />
<br />
I would suspect that this is the legal argument Judge Fields would take to overturn any changes to EORP's PBI made via referendum. He will have a tougher audience this time around, since Governor Doug Ducey has appointed three new justices to the Arizona Supreme Court since his first lawsuit agains SB 1609, though I do not know how may would recuse themselves from the case due to a personal stake in the outcome. However, this is a case that seems tailor-made for the US Supreme Court since it would affect every public pension system in the country. I suspect that no matter who wins, the loser would appeal to the highest court in the land.<br />
<br />
While I believe that the PBI is horrible financial policy and should be eliminated, based on my layman's understanding of contracts, the electorate simply cannot vote to unilaterally alter a contract except in very extraordinary circumstances, like bankruptcy or fraud, and you certainly cannot initiate a Sopranos-like bust out of a pension in order to create extraordinary circumstances. Suppose we have another financial crisis, not even one as bad as in 2008-09, could the legislature or special interest group place a measure on the ballot that implemented across the board cuts to existing pensions or raise contribution rates 5% or 10%? How would those be different than Proposition 124? It appears that the Arizona Legislature has gotten a taste for legislating via referendum.<br />
<br />
So possibly standing in the way of all this is one man. Judge Fields seems to be a disappearing breed, a man willing to fight on principle. Does anyone really believe that he cares about the financial losses he might suffer over changes to the PBI? You have to already be a successful attorney to get a judgeship in the first place, and it appears he is still <a href="http://www.nadn.org/kenneth-fields">quite active in the legal field</a>. So his lawsuits have been fought strictly to hold the government accountable. Most of us expect promises to be kept, especially financial ones to those who are no longer working, but there are not that many that are willing to fight so hard to make sure they are. So CORP members can take a little heart, they could have a white knight coming to their rescue, but they will have to wait until after the election to see.<br />
<br />
What does this mean for PSPRS members? If the EORP referendum passes and Judge Fields or some other EORP member (EORP has a lot of lawyers among its membership) sues to overturn it, I have not doubt that a CORP member will also file his or her own lawsuit the same way PSPRS members piggy-backed onto the EORP lawsuits by Judge Fields and Judge Hall. However, PSPRS member unions started all this referendum nonsense in the first place, and it will be two and a half years since Proposition 124 was passed with no challenge made to it constitutionality. Is there a timely filing requirement or other legality that would prohibit a PSPRS member from again piggy-backing onto an EORP lawsuit? I guess like CORP members we will have to wait and see. If this does happen, we will have a very interesting few years ahead of us.<br />
<br />
We cannot end without remarking on the contrast between Judge Kenneth Fields and our "leaders" in Arizona. We had the flaccid negotiating of the Professional Fire Fighters of Arizona (PFFA) and law enforcement unions against the Arizona Legislature and Reason Foundation. These crack artists of the deal were willing to give away everyone else's benefits as long as they kept their deferred retirement option plan (DROP). (Who cares about retirees keeping up with inflation or protecting Tier 3 members' paychecks from contribution increases?! We are going to fight to the end to make sure Brian Tobin gets that $817,398 payment when he retires!) Speaking of Mr. Tobin, this is someone who will not even stand up to PSPRS' management, the very group that he and the other trustees are supposed to oversee. How can we expect him to call out the Arizona Legislature for manufacturing a crisis in order to bring about a "constitutional" change to diminish and impair retirees' benefits. Can't Mr. Tobin at least stand up for CORP members now that a manufactured crisis for EORP is engulfing them, the lowest paid retirees of all? He and the other Trustees represent CORP members as well. How is that EORP members have one man fighting so effectively for them, while PSPRS members are stuck with such a group of spineless, selfish, and shortsighted leaders? Too foolish to know that they were opening a Pandora's Box of pension chaos when they supported Proposition 124, they now want to open the lid again and see what other havoc they can let loose.<br />
<br />
There is more to talk here on pension chaos and havoc, but that will have to wait for another post.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com4tag:blogger.com,1999:blog-7609353726565000072.post-3634543281605391942018-03-01T19:38:00.003-07:002018-03-01T19:38:49.193-07:00Inflation, COLA's, the future of PSPRS, and investment returns through December 2017The following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through December 2017, which is the midpoint of the current fiscal year (FY), with
the FY end 2014, 2015, 2016, and 2017 returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl64" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl64" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl66" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl66" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl64">0.78%</td>
<td class="xl64">13.82%</td>
<td class="xl64">2.51%</td>
<td class="xl64">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl64">-0.73%</td>
<td class="xl64">4.21%</td>
<td class="xl64">-1.67%</td>
<td class="xl64">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl64">-0.32%</td>
<td class="xl64">1.06%</td>
<td class="xl64">0.21%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2017</td>
<td class="xl64">0.22%</td>
<td class="xl64">12.48%</td>
<td class="xl64">0.90%</td>
<td class="xl64">18.51%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">7/31/2017</td>
<td class="xl64">0.83%</td>
<td class="xl64">0.83%</td>
<td class="xl64">1.89%</td>
<td class="xl64">1.89%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">8/31/2017</td>
<td class="xl64">1.06%</td>
<td class="xl64">1.91%</td>
<td class="xl64">0.19%</td>
<td class="xl64">2.08%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">9/30/2017</td>
<td class="xl64">0.80%</td>
<td class="xl64">2.72%</td>
<td class="xl64">2.44%</td>
<td class="xl64">4.57%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">10/31/2017</td>
<td class="xl64">0.64%</td>
<td class="xl64">3.38%</td>
<td class="xl64">2.18%</td>
<td class="xl64">6.85%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">11/30/2017</td>
<td class="xl64">1.28%</td>
<td class="xl64">4.70%</td>
<td class="xl64">3.04%</td>
<td class="xl64">10.10%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><b>12/31/2017</b></td>
<td class="xl64"><b>0.66%</b></td>
<td class="xl64"><b>5.39%</b></td>
<td class="xl64"><b>1.00%</b></td>
<td class="xl64"><b>11.20%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns.<br />
<br />
Through the first half of the current fiscal year (FY), PSPRS is returning about 48% of the Russell 3000. PSPRS has pretty consistently been capturing 50-60% of the Russell 3000 as this table shows:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 219px;"><colgroup><col style="mso-width-alt: 5193; mso-width-source: userset; width: 107pt;" width="142"></col>
<col style="mso-width-alt: 2816; mso-width-source: userset; width: 58pt;" width="77"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15pt; text-align: center; width: 107pt;" width="142"><u>Time Period</u></td>
<td class="xl63" style="text-align: center; width: 58pt;" width="77"><u>Captured</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2014</td>
<td align="right" class="xl63">54.80%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2015</td>
<td align="right" class="xl63">57.75%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2016</td>
<td align="right" class="xl63">49.53%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">FY 2017</td>
<td align="right" class="xl63">67.42%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">Calendar Year 2017</td>
<td align="right" class="xl63">53.90%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">3-year Annualized</td>
<td align="right" class="xl63">67.00%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">5-year Annualized</td>
<td align="right" class="xl63">53.72%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td height="20" style="height: 15.0pt;">10-year Annualized</td>
<td align="right" class="xl63">55.23%</td>
</tr>
</tbody></table>
<br />
The exceptions are FY 2017 and the 3-year annualized returns, but the 50-60% range seems to hold for long and short periods and for periods of high and low returns. The only data missing is a year of longer period(s) of negative return(s). It will be interesting to see what the month of February 2018 does to these numbers as the Russell 3000 lost 3.69%. This loss is lower than mid-February when the Russell 3000 was down as much as 8%, but we will see what PSPRS' alternative investments do to counteract the losses in equities. Unfortunately we will not get to see these numbers until April. The Arizona State Retirement System (ASRS) had a <a href="https://www.azasrs.gov/sites/default/files/pdf/Board%20Agenda%20-%20Packet%20%202%2023%2018.pdf">Board of Trustees meeting on February 23, 2018</a>, and its meeting packet included returns up through February 12, 2018. I do not know why PSPRS cannot provide more up-to-date numbers in its meeting packets. Between January 29, 2018 and February 12, 2018, ASRS' FY 2018 return dropped approximately 3% from about 11% to about 8%. These ASRS numbers come from a graph on PDF page 29 of the meeting packet.<br />
<br />
Through the end of December 2017, ASRS looks to have had a FY return of approximately 8.50%, over 3% more than PSPRS through the same time period. PSPRS' Cancer Insurance Plan (CIP) has returned 6.82%, <b>net of fees</b>, through December 2017, also beating PSPRS by about 2%, when we subtract a half percent in fees from PSPRS' returns. If this 50-60% capture range remains consistent, the Russell 3000 would need annualized returns of 12.33% to 14.80% in order for PSPRS to achieve its assumed rate of return of 7.40%.<br />
<br />
The meeting minutes from January 2018 show that the Board of Trustees unanimously approved the use of the calendar year Phoenix-Mesa CPI-U to determine the cost of living allowance (COLA) for retirees. The first of the new COLA's will be paid in FY 2019. More detail about this is in <a href="http://www.psprs.info/2018/02/psprs-investment-earnings-through.html">this post from earlier this month</a>. The relevant statutory language about COLA's is:<br />
<blockquote>
<blockquote class="tr_bq">
A retired member or a survivor of a retired member shall receive annually a cost-of-living adjustment in the base benefit based on the average annual percentage change in the metropolitan Phoenix-Mesa consumer price index published by the United States department of labor, bureau of labor statistics, with the immediately preceding year as the base year for making the determination ....</blockquote>
</blockquote>
The gist of this is that retirees will be getting a 2.0% COLA starting <b>July 2018</b>. The average inflation rate in the 2017 calendar year was 2.5%, 2.2% in the first half of 2017 and 2.7% in the second half. Starting this year, inflation numbers will be provided every two months, instead of just twice a year, which means average inflation calculation will be based on six rates, not just two. The first of these two-month rates will come out in about two weeks. The meeting materials from January 2018 showed the average inflation rates for Phoenix-Mesa from 2004 to 2017. For a PSPRS member who retired in 2003 with a $3,000 monthly benefit, this is the difference between actual average inflation and the new COLA benefit:<br />
<br />
<div class="MsoNoSpacing">
<span style="mso-tab-count: 1;"> </span>Average<span style="mso-tab-count: 1;"> </span>Actual<span style="mso-tab-count: 2;"> </span>New</div>
<div class="MsoNoSpacing">
Year<span style="mso-tab-count: 1;"> </span>Inflation<span style="mso-tab-count: 1;"> </span>Cost <span style="mso-tab-count: 1;"> </span>COLA<span style="mso-tab-count: 1;"> </span>Benefit</div>
<div class="MsoNoSpacing">
2004<span style="mso-tab-count: 1;"> </span>1.8%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,054
<span style="mso-tab-count: 1;"> </span>1.8%<span style="mso-tab-count: 1;"> </span>
$3,054 </div>
<div class="MsoNoSpacing">
2005<span style="mso-tab-count: 1;"> </span>2.9%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,143
<span style="mso-tab-count: 1;"> </span>2.0%<span style="mso-tab-count: 1;"> </span>
$3,115 </div>
<div class="MsoNoSpacing">
2006<span style="mso-tab-count: 1;"> </span>3.0%<span style="mso-tab-count: 1;"> </span><span style="mso-tab-count: 1;"> </span>$3,237
<span style="mso-tab-count: 1;"> </span>2.0%<span style="mso-tab-count: 1;"> </span>
$3,177 </div>
<div class="MsoNoSpacing">
2007<span style="mso-tab-count: 1;"> </span>3.4%<span style="mso-tab-count: 1;"> </span><span style="mso-tab-count: 1;"> </span>$3,347
<span style="mso-tab-count: 1;"> </span>2.0%<span style="mso-tab-count: 1;"> </span>
$3,241 </div>
<div class="MsoNoSpacing">
2008<span style="mso-tab-count: 1;"> </span>3.5%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,464
<span style="mso-tab-count: 1;"> </span>2.0%<span style="mso-tab-count: 1;"> </span>
$3,306 </div>
<div class="MsoNoSpacing">
2009<span style="mso-tab-count: 1;"> </span>-1.4%<span style="mso-tab-count: 1;"> </span><span style="mso-tab-count: 1;"> </span>$3,416
<span style="mso-tab-count: 1;"> </span>0.0%<span style="mso-tab-count: 1;"> </span>
$3,306 </div>
<div class="MsoNoSpacing">
2010<span style="mso-tab-count: 1;"> </span>0.6%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,436
<span style="mso-tab-count: 1;"> </span>0.6%<span style="mso-tab-count: 1;"> </span>
$3,326 </div>
<div class="MsoNoSpacing">
2011<span style="mso-tab-count: 1;"> </span>2.8%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,532
<span style="mso-tab-count: 1;"> </span>2.0%<span style="mso-tab-count: 1;"> </span>
$3,392 </div>
<div class="MsoNoSpacing">
2012<span style="mso-tab-count: 1;"> </span>2.2%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,610
<span style="mso-tab-count: 1;"> </span>2.0%<span style="mso-tab-count: 1;"> </span>
$3,460 </div>
<div class="MsoNoSpacing">
2013<span style="mso-tab-count: 1;"> </span>1.3%<span style="mso-tab-count: 1;"> </span><span style="mso-tab-count: 1;"> </span>$3,657
<span style="mso-tab-count: 1;"> </span>1.3%<span style="mso-tab-count: 1;"> </span>
$3,505 </div>
<div class="MsoNoSpacing">
2014<span style="mso-tab-count: 1;"> </span>1.6%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,715
<span style="mso-tab-count: 1;"> </span>1.6%<span style="mso-tab-count: 1;"> </span>
$3,561 </div>
<div class="MsoNoSpacing">
2015<span style="mso-tab-count: 1;"> </span>0.2%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,723
<span style="mso-tab-count: 1;"> </span>0.2%<span style="mso-tab-count: 1;"> </span>
$3,568 </div>
<div class="MsoNoSpacing">
2016<span style="mso-tab-count: 1;"> </span>1.6%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,782
<span style="mso-tab-count: 1;"> </span>1.6%<span style="mso-tab-count: 1;"> </span>
$3,625 </div>
<div class="MsoNoSpacing">
2017<span style="mso-tab-count: 1;"> </span>2.5%<span style="mso-tab-count: 1;"> </span> <span style="mso-tab-count: 1;"> </span>$3,877
<span style="mso-tab-count: 1;"> </span>2.0%<span style="mso-tab-count: 1;"> </span>
$3,698</div>
<br />
Over the 14 years since the member's retirement, the monthly loss of purchasing power would have been $179 or $2,148 annually. This retiree would only be able to purchase about 96% of what he could in 2003. This is not insignificant, especially if one is living on a fixed income. If we eliminate the one year of deflation in 2009 and replace it with 0% inflation, the monthly loss goes up $55 to $234 and the annual total to $2,811, leaving the retiree only able to buy 94.5% of what he could in 2003. In the 14 years, we have seven years with inflation under 2%, including one year of deflation, and seven years of inflation over 2%. Outside of deflation or perpetual 2% inflation, retirees will always end up losing purchasing power over time.<br />
<br />
If we project out another six years for this hypothetical PSPRS retiree using the current 2.5% annual inflation for 2018 through 2023, after 20 years in retirement the retiree will have lost about 7.5% of the value of his retirement. If inflation is 3% over that same six-year period, the loss will be 10%. Your guess is as good as mine as to what extent the recent market volatility has been driven by fears of higher inflation, but the prospect of higher inflation is certainly concerning if you are already retired.<br />
<br />
This is again a reminder to those still working to fund another source of retirement income and not rely solely on your PSPRS pension. If inflation does take off, it only benefits debtors like PSPRS, which can pay retirees benefits that will decrease in value over time, while it takes advantage of the rising rates of less risky investments like US Treasury and high-grade corporate bonds. <a href="https://www.bankrate.com/banking/cds/historical-cd-interest-rates-1984-2016/">As recently as 2000, anyone could invest in a six-month certificate of deposit (CD) earning 5% a year</a> at a time when the US inflation rate was 3.4%. With inflation at this level, a PSPRS benefit would lose value every year, and it is critical to have some other retirement savings that can benefit from risk-free instruments like CD's to maintain a lifestyle.<br />
<br />
As for current retirees, what options do they have? Unlike the <a href="https://www.azasrs.gov/content/board-trustee-bios">ASRS Board of Trustees</a>, where one of the seven seats is held by a retiree representative, they have no representation on the PSPRS Board of Trustees, where four of the nine seats are filled by active PSPRS members. The cost of the new COLA system is also included in the annual contribution rate that is split 50/50 between employers and Tier 3 employees (those hired in FY 2018 or later). These Tier 3 employees <a href="https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/38/00856-06.htm">(whose COLA will be determined on a sliding scale, based on PSPRS' funded level)</a> are already getting a less generous, more restrictive COLA than Tier 1 and 2 members. Why would they push for higher COLA's for current retirees when this will eat into their wages, especially after the previous generation shafted them? They are more likely to push for more non-PSPRS retirement enhancements like matching contributions to their deferred contribution accounts. Tier 3 members will likely become the majority of active members within 10-12 years.<br />
<br />
This situation was brought to us by the blue falcons in the leadership of the Professional Fire Fighters of Arizona (PFFA) and, to a lesser extent, the state law enforcement unions, who played Sancho Panza to the PFFA in this matter. Not content with just selling out existing retirees and future public safety workers, they set the precedent of altering contractually-bound pension benefits via referendum through their support of <a href="https://ballotpedia.org/Arizona_Public_Retirement_Benefits_Amendment,_Proposition_124_(May_2016)">Proposition 124</a>. This will come back to haunt all PSPRS members if there is another pension crisis in Arizona, especially when we have been "led" by people like <a href="https://www.nytimes.com/2014/08/12/us/chief-of-arizona-firefighters-group-pushes-for-cut-in-pensions.html">PFFA President Bryan Jeffries who told the <i>New York Times,</i> public safety members "should volunteer to cut their own pension benefits" </a>during a financial crisis. However, the final deal he and others brokered with the Arizona Legislature did clarify that he didn't mean<i> his generation of public safety members</i> should sacrifice any benefits, just those that came before and after him.<br />
<br />
* 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.
The
past two years fees have reduced the final annual reported return by
about a half percent. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, and 11.85% in FY 2017.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com2tag:blogger.com,1999:blog-7609353726565000072.post-26149835819517172892018-02-08T20:51:00.001-07:002018-02-09T09:22:59.347-07:00PSPRS to members: Keep calm and don't think about annualized returnsAs we discussed in the last post, we will not know for about another
two months if PSPRS' investment strategy will show the success of its more
conservative approach. (The <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> dropped about 3.65% today and is down 8.33% for the month of February 2018.) However,
PSPRS will not wait that long to see evidence. They came out with a <a href="http://www.psprs.com/article/psprs-built-to-protect-your-retirement-through-stock-shocks">press release</a> on February 6, 2018 which boasts that "the
current PSPRS portfolio is 72 percent less volatile than the Standard
& Poor (S & P) 500 Index." This kind of public relations is
what you buy with t<a href="https://www.azcentral.com/story/news/local/arizona-investigations/2017/11/13/arizona-pension-system-police-firefighters-hires-contractor-media-outreach/860198001/">he $95,000 a year taxpayers shell out to PSPRS spokesman Christian Palmer and the $72,000 paid to an outside consultant.</a><br />
<br />
As
PSPRS is wont to do, they only present half the picture. While
controlling volatility is part of the picture, PSPRS still has to
balance this with maximizing returns. The time frame PSPRS used to
graph its volatility ran from May 2008 to November 2017. This period
starts with the market crash in 2008 and runs to the latest investment
returns PSPRS reported. I wanted to compare PSPRS' returns with those
of the PSPRS Cancer Insurance Plan (CIP), <a href="https://www.azasrs.gov/content/rates-return">Arizona State Retirement System (ASRS)</a>, the <a href="https://dqydj.com/sp-500-return-calculator/">Standard & Poor (S&P) 500 Index,</a> and a Vanguard 3
Fund Portfolio that Ben Carlson uses to measure endowment performance at
his blog, <a href="http://awealthofcommonsense.com/2018/02/the-vanguard-endowment-model/"><i>A Wealth of Common Sense</i></a>.
This Vanguard 3 Fund Portfolio is a mix of 53% US stocks, 27%
foreign stocks, and 20% bonds. The time period for the following table
is for the period ending June 30, 2017, which is necessary for
consistency purposes. Here are the annualized rates of return for the
various portfolios over one, three, five, and 10 years:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 329px;"><colgroup><col style="mso-width-alt: 2669; mso-width-source: userset; width: 55pt;" width="73"></col>
<col span="4" style="width: 48pt;" width="64"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt; width: 55pt;" width="73"><br /></td>
<td class="xl65" style="width: 48pt;" width="64">1-year</td>
<td class="xl65" style="width: 48pt;" width="64">3-year</td>
<td class="xl65" style="width: 48pt;" width="64">5-year</td>
<td class="xl65" style="width: 48pt;" width="64">10-year</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">PSPRS</td>
<td class="xl66">11.85%</td>
<td class="xl66">5.27%</td>
<td class="xl66">7.95%</td>
<td class="xl66">3.98%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">CIP</td>
<td class="xl66">10.12%</td>
<td class="xl66">4.34%</td>
<td class="xl66">7.64%</td>
<td class="xl66">5.36%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">ASRS</td>
<td class="xl66">13.90%</td>
<td class="xl66">5.70%</td>
<td class="xl66">9.60%</td>
<td class="xl66">5.60%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">S&P 500</td>
<td class="xl66">16.80%</td>
<td class="xl66">7.72%</td>
<td class="xl66">12.96%</td>
<td class="xl66">4.86%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">Vanguard</td>
<td class="xl66">14.90%</td>
<td class="xl66">7.00%</td>
<td class="xl66">8.30%</td>
<td class="xl66">6.50%</td>
</tr>
</tbody></table>
<br />
PSPRS' annualized returns over the 10-year period is lower than all the other funds. It might be fairer to look at the 5-year returns since PSPRS had not fully implemented its strategy ten years ago. During the 5-year period, PSPRS still lags all but its own CIP, a fund that consists of 50% US and foreign stocks, 45% bonds, and 5% commodities. ASRS bested PSPRS by 1.65% over the five year period, and the S&P 500 bested PSPRS by 5%. A 5% annual return on a $9 billion portfolio would earn nearly $2.5 billion over five years, so while the S&P 500 was more volatile, it also earned a significantly higher return for that added risk.<br />
<br />
If we include reinvested dividends in the 5-year period that ended June 30, 2017, the S&P 500 earned 15.28%. This extra annualized return of 7.33% would have earned PSPRS an additional $3.82 billion. We all know that there is a correlation between risk and reward, but it is deceptive of PSPRS to point only to the volatility of the S&P 500 without acknowledging that the S&P 500 had nearly double the return of PSPRS' portfolio. Even the less impressive additional 0.88% annualized return over ten years would have earned PSPRS an additional $824 million. With reinvested dividends, the S&P 500 had an annualized 10-year rate of 7.10%. This additional 3.12% per year would have earned PSPRS an additional $3.24 billion over ten years. Unfortunately, there are no volatility numbers for the other portfolio. Regardless, it is clear that the volatility/return tradeoff has been favorable for the S&P 500, but PSPRS does not want members to see this full, honest picture<br />
<br />
While PSPRS likes to make absurdist claims on incomplete and cherry-picked information, we should not do that as well. It is not realistic to solely compare PSPRS against the S&P 500, as no pension or endowment would ever be 100% invested in a single market index, or even the Vanguard 3 fund portfolio. A fairer comparison would be against another pension fund like ASRS that deals with the same risk/reward conundrum. Over the five and ten year periods, ASRS has bested PSPRS by 1.65% and 1.62%, respectively. The extra 1.65% would have earned PSPRS an additional $767 million over five years; the extra 1.62% would have earned an additional $1.57 billion over ten years.<br />
<br />
Despite the whining and excuses of PSPRS <a href="http://www.psprs.com/article/a-statement-from-the-chairman-of-the-psprs-board-of-trustees">Board of Trustees Chairman Brian Tobin</a> and PSPRS <a href="https://azcapitoltimes.com/news/2014/12/18/the-truth-about-psprs-investment-performance/">Chief Investment Officer (CIO) Ryan Parham</a>, ASRS has consistently outperformed PSPRS while operating in the same market conditions. Yet Mr. Parham, <a href="https://www.bizjournals.com/phoenix/news/2017/11/01/here-are-the-highest-paid-state-of-arizona.html">who was paid $268,000 in 2016</a>, is the second highest paid in employee in the Arizona state government (Note: this does not include Arizona university system employees). Who was the highest paid Arizona state government employee? Why it was Paul Matson, the Director of ASRS, who made $285,230 in 2016. For some perspective, <a href="https://www.abc15.com/news/data/arizona-salaries-see-which-state-employees-are-making-the-most-money">Karl Polen, the CIO of ASRS, made $201,420 in 2016, while Jared Smout, PSPRS Administrator, made $210,000 in 2016</a>.<br />
<br />
So Mr. Matson, who has successfully run ASRS for 15 years, makes only $17,230 more than Mr. Parham. Even more perplexing is how Mr. Parham is paid $57,000 more per year than ASRS' CIO. The combined salary of Mr. Matson and Mr. Polen is $486,650. The combined salary of Mr. Smout and Mr. Parham is $478,000. Looking at the millions and billions in higher ASRS earnings, I think that the $8,650 more paid to Mr. Matson and Mr. Polen is the bargain of the century.<br />
<br />
The difference in performance and management between ASRS and PSPRS is stark, and while ASRS continues along its steady path of stronger earnings, PSPRS has to blow smoke. Until PSPRS has some evidence to show us that their strategy is working, they might do something useful for members, like getting their software working properly so members can get retirement estimates. I think seven months is enough time for members to wait for this to be fixed.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com3tag:blogger.com,1999:blog-7609353726565000072.post-22836733214505359802018-02-06T17:32:00.004-07:002018-02-14T07:14:27.259-07:00PSPRS investment earnings through November 2017 (with some discussion about COLA's)The following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through November 2017, which is the fifth month of the current fiscal year (FY), with
the FY end 2014, 2015, 2016, and 2017 returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl64" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl64" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl66" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl66" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl64">0.78%</td>
<td class="xl64">13.82%</td>
<td class="xl64">2.51%</td>
<td class="xl64">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl64">-0.73%</td>
<td class="xl64">4.21%</td>
<td class="xl64">-1.67%</td>
<td class="xl64">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl64">-0.32%</td>
<td class="xl64">1.06%</td>
<td class="xl64">0.21%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2017</td>
<td class="xl64">0.22%</td>
<td class="xl64">12.48%</td>
<td class="xl64">0.90%</td>
<td class="xl64">18.51%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">7/31/2017</td>
<td class="xl64">0.83%</td>
<td class="xl64">0.83%</td>
<td class="xl64">1.89%</td>
<td class="xl64">1.89%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">8/31/2017</td>
<td class="xl64">1.06%</td>
<td class="xl64">1.91%</td>
<td class="xl64">0.19%</td>
<td class="xl64">2.08%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">9/30/2017</td>
<td class="xl64">0.80%</td>
<td class="xl64">2.72%</td>
<td class="xl64">2.44%</td>
<td class="xl64">4.57%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">10/31/2017</td>
<td class="xl64">0.64%</td>
<td class="xl64">3.38%</td>
<td class="xl64">2.18%</td>
<td class="xl64">6.85%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><b>11/30/2017</b></td>
<td class="xl64"><b>1.28%</b></td>
<td class="xl64"><b>4.70%</b></td>
<td class="xl64"><b>3.04%</b></td>
<td class="xl64"><b>10.10%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns.<br />
<br />
PSPRS' Board of Trustees published its <a href="http://www.psprs.com/uploads/board-of-trustees/Public%20Meeting%20Materials%20PDF_3.pdf">January 2018 meeting materials</a> last week, but in light of the market conditions over the past several days, it is nice to discuss them now, rather than earlier. The Russell 3000 is down 6.00% for the month of February 2018 as of February 5, 2018, so this will possibly be the first real test of PSPRS' investment strategy. I say "possibly" because we are only five days into February with quite a bit of time for the market to recoup its loss or even end with a gain. Regardless, we will have to wait two months to find out the end-of-month (EOM) results for February 2018.<br />
<br />
In the meantime, the November 2017 EOM results provide us with a picture of the market since the election. For the current FY, PSPRS has earned 46.50% of the Russell 3000 (4.70% vs. 10.10%, respectively). From December 1, 2016 through November 30, 2017, PSPRS' did a little better, earning 53.40% of the Russell 3000 (10.66% vs. 19.93%, respectively). This tracks with what has been PSPRS' usual pattern, earning 50-60% of the Russell 3000, with last fiscal year being an exception. <br />
<br />
For some perspective, PSPRS' Cancer Insurance Plan (CIP) has earned 5.85% FY-to-date and 15.03% over the preceding 12 months. These earnings were <u>net of fees</u> as opposed to PSPRS', which are gross of fees, making the CIP's earnings even more impressive compared to PSPRS'. The Arizona State Retirement System (ASRS) has earned 3.5%, <u>net of fees</u>, through September 30, 2017, which is the latest number available on ASRS' website. This handily beats PSPRS' return, gross of fees, through the same period. Whether PSPRS' conservative strategy pays off remains to be seen, but through November 2017, PSPRS has lagged both the CIP and ASRS.<br />
<br />
There was one other interesting bit of information in the meeting materials which will be especially pertinent to retirees. This is what it says about calculating the new cost of living allowance (COLA), which will be paid for the first time next fiscal year:<br />
<blockquote class="tr_bq">
<b>QUESTION: WHICH YEAR SHOULD WE USE AS THE BASE YEAR?</b> </blockquote>
<blockquote class="tr_bq">
Since 2001, the Phoenix-Mesa CPI has been updated by the Bureau of Labor Statistics every 6 months. Beginning later this year, the Phoenix-Mesa CPI will be updated every 2 months after each even month (February, April, June, etc.). The results are typically available about two weeks after the end of the month. For instance, the June, 2018 results will be available July 12, 2018. There are advantages and disadvantages of using the fiscal year vs. the calendar year as the basis for determining the COLA that<br />
will be granted to benefit recipients each July 1st. </blockquote>
<blockquote class="tr_bq">
The biggest advantage of using the fiscal year as the base year (in other words, measure CPI from June 30 to June 30) is that the COLA is granted closer to the period of time the price of goods is being measured. For instance, if the price of oil increases during the January to June timeframe, the COLA granted on July 1st will better reflect that increase. </blockquote>
<blockquote class="tr_bq">
The biggest advantage of using the calendar year is that staff would have enough time to calculate, communicate and process COLAs by July 1, as is required by statute. Any delays in the Department of Labor calculating and publishing the CPI would not have an effect on getting the COLAs processed timely. While we can’t comment on the intent of the legislature, it is important to note that typically when the statute refers to a fiscal year, it specifically states “fiscal year.” In the two sections of statute that refer to how the new COLA is calculated (§38-856.05 and §38-856.06), the statute does not specify “fiscal year” but rather states “year.” That may be an indication that the legislature intended us to measure the CPI on a calendar year basis. </blockquote>
<blockquote class="tr_bq">
<b>Recommendation: Staff recommends that we use the calendar year that precedes July 1 as the base year when calculating the amount of the COLA.</b> </blockquote>
<blockquote class="tr_bq">
<b>QUESTION: WHICH CPI SHOULD WE USE?</b> </blockquote>
<blockquote class="tr_bq">
The Bureau of Labor Statistics publishes two measures of the Consumer Price Index—the CPI-U and the CPI-W. The CPI-U is the Consumer Price Index for all urban consumers. Approximately 89% of the population in the Phoenix metro area is included in this measurement. The CPI-W is the Consumer Price Index for a subset of the CPI-U population. It includes wage earners and clerical workers only, and represents approximately 29% of the population. Retirees who are not earning a “wage” are included in the CPI-U, but not in the CPI-W. Likewise, unemployed people are included in the CPI-U, but not in the CPI-W. In general, the CPI-W is more volatile because it uses a smaller sample population. According to the Bureau of Labor Statistics, in most cases across the country the CPI-W increases more than the CPI-U. In looking at the increases over the past 14 years in Phoenix, however, the CPI-U has outpaced the<br />
CPI-W in 9 of those years. Because the CPI-U population coverage is more comprehensive, it is typically the measurement used in most escalation agreements. </blockquote>
<blockquote class="tr_bq">
<b>Recommendation: Staff recommends that we use the CPI-U as the measurement when calculating COLAs since retirees are included in that population and it is less volatile over time.</b></blockquote>
Remember that the new COLA will be the <u>lower</u> of either the Phoenix-Mesa CPI or 2%. The staff recommendations would have to be approved by the Board of Trustees, and they will almost certainly go along with their own staff's recommendations. For retirees, the main issue is the rate of inflation. The Phoenix-Mesa CPI-U annual average rate for the 2017 calendar year was 2.5%; for the FY that ended June 30, 2017, it was 2.25%. Under either base year rate, retirees would be limited to the 2.0% COLA. Historical rates for the Phoenix-Mesa CPI-U can be found on PDF page 212 of the meeting materials. <br />
<br />
If the Board of Trustees accept the staff recommendation on the base year, retirees will lag inflation by 0.5% in fiscal year 2019. This may not seem like a lot, and for a retiree on a $50,000/year retirement, it would only amount to a "loss" of $250. The "loss" is the amount of goods and services the retiree will no longer be able to afford in the second year. However, the compounding effect over ten years of a 0.5% difference between the COLA and actual inflation will leave the retiree with only 95.7% of the purchasing power he had in the first year and a "loss" of $2,689. A 1.0% difference will leave the retiree with only 91.6% of purchasing power and a "loss" of $5,485 in the tenth year. If one has another source of retirement income, such as a 457, Social Security, or an IRA, there will be some cushion against inflation. This makes it all the more urgent that current workers utilize any and all retirement savings vehicles available to them. I have bookmarked the <a href="https://www.bls.gov/regions/west/news-release/consumerpriceindex_phoenix.htm#table1">Phoenix-Mesa CPI-U</a> page at the US Bureau of Labor Statistics (BLS) for future reference. <br />
<br />
* 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.
The
past two years fees have reduced the final annual reported return by
about a half percent. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, and 11.85% in FY 2017.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com0tag:blogger.com,1999:blog-7609353726565000072.post-51978654561139026692017-12-01T12:37:00.001-07:002017-12-01T12:37:58.547-07:00PSPRS investment returns through September 2017 (with some information from PSPRS' FY 2017 actuarial report)The following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through September 2017, which ends the first quarter of the current fiscal year (FY), with
the FY end 2014, 2015, 2016, and 2017 returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl64" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl64" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl66" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl66" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl64">0.78%</td>
<td class="xl64">13.82%</td>
<td class="xl64">2.51%</td>
<td class="xl64">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl64">-0.73%</td>
<td class="xl64">4.21%</td>
<td class="xl64">-1.67%</td>
<td class="xl64">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl64">-0.32%</td>
<td class="xl64">1.06%</td>
<td class="xl64">0.21%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2017</td>
<td class="xl64">0.22%</td>
<td class="xl64">12.48%</td>
<td class="xl64">0.90%</td>
<td class="xl64">18.51%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">7/31/2017</td>
<td class="xl64">0.83%</td>
<td class="xl64">0.83%</td>
<td class="xl64">1.89%</td>
<td class="xl64">1.89%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">8/31/2017</td>
<td class="xl64">1.06%</td>
<td class="xl64">1.91%</td>
<td class="xl64">0.19%</td>
<td class="xl64">2.08%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><b>9/30/2017</b></td>
<td class="xl64"><b>0.80%</b></td>
<td class="xl64"><b>2.72%</b></td>
<td class="xl64"><b>2.44%</b></td>
<td class="xl64"><b>4.57%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns.<br />
<br />
Through the first quarter of FY 2018, PSPRS has reverted back to returning 50-60% of the Russell 3000, achieving 59.5%, gross of fees, of the return of the Russell 3000. For FY 2017 PSPRS returned, net of fees, 64% of the Russell 3000, which was an improvement over the previous three fiscal years. It will take several more fiscal years to see if FY 2017 was the start of a trend or just a blip, but 60% still seems to be the high end of the range for PSPRS in comparison to the Russell 3000.<br />
<br />
<a href="http://www.psprs.com/uploads/board-of-trustees/Public%20Meeting%20Materials%20for%20Posting%20(11-29-2017)%20revised.pdf">PSPRS' November 2017 meeting materials</a> also contained the draft of PSPRS' FY 2017 Actuarial Report. Anyone interested can find that draft report starting on PDF page 298 in the meeting materials. The aggregate employer contribution rate for Tiers 1 and 2 increased slightly to 51.93% from 51.84%, meaning that all the state's employers combined will contribute $51.93 for every $100 in pensionable wages for all the state's active Tier 1 and Tier 2 members. Individual employer contribution rates for Tier 1 and Tier 2 employees vary widely and can be found on PDF pages 369-374. If anyone wants to see if an employer's rate has increased or decreased from the previous FY, FY 2016' individual actuarial reports can be found<a href="https://members2.psprs.com/Estimators/actuarials.aspx"> here</a>. The employer contribution rate for my employer increased by almost 9%, creating more budget problems for my employer as several million more will have to be paid to PSPRS starting in July 1, 2018.<br />
<br />
PSPRS' aggregate funded ratio decreased to 45.30% from 46.00%. Individual employer's funded ratios can be found on PDF pages 363-368. These ratios run from a couple in the single digits to a few that are over 200% funded. Once again, you can compare FY 2017 to FY 2016 by checking your individual employer report. My employer's funded ratio dropped 0.10% but still remains under one-third funded. Most of the major public safety employers, like DPS and those in the Phoenix Valley, appear to be 30-50% funded.<br />
<br />
One last interesting tidbit in the meeting materials was the current breakdown of Tier 3 members who chose the defined benefit (DB) versus the defined contribution (DC) plan. Out of 187 Tier 3 members, only twelve chose the DC plan, 6.4%. As more Tier 3 members join the ranks and the DC plan becomes better established, it will be interesting to see if this percentage grows over time.<br />
<br />
* 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.
The
past two years fees have reduced the final annual reported return by
about a half percent. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, and 11.85% in FY 2017.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com0tag:blogger.com,1999:blog-7609353726565000072.post-46142796538432102982017-11-21T18:16:00.001-07:002017-11-21T18:16:58.287-07:00Parker v. PSPRS interest rate set at 5.25%: no timeline on payments to membersHere is PSPRS' <a href="http://www.psprs.com/article/parker-lawsuit-interest-rate-settled-by-court">press release on the settlement of <i>Parker v. PSPRS</i></a>: <br />
<blockquote class="tr_bq">
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<a href="http://r20.rs6.net/tn.jsp?f=001IvOVHPhc9JXZX4ncvYgWT-MJMQNoN198oHP0PyEfU6HnmnE0dYhoAIDwHU2fSJYgudWKhnqcPulchGyQ6OWQQFhpbIPNFXUPhfLh3tTcmuKX3LDsPNiewfqGAf6pgAkRoMG3GAatEFRlzrbZqM2oWbu7gM2bhvv3zi06OV3FBrp_aQ8fUCCruYJDEOsRlgmgNhXMK7JnJ5dj7bWG-2Svkg==&c=zoYcg6vho65QSjdfOjAVw_TPeoKgZqr0nhxsPUi6yNJsX_LI1PgTVg==&ch=L8IHIDQDa5tXqxseSOj-rikqc7GGhKug3LIOthmA6HODZ0sCRpbGyA==" style="color: maroon; font-family: Georgia , Times New Roman , Times , serif; font-size: 22.0px; font-style: normal; font-weight: bold; text-decoration: underline;" target="_blank">Parker lawsuit interest rate settled by court</a></div>
<div align="center" style="text-align: center;">
<span style="color: #083871; font-family: Georgia , Times New Roman , Times , serif; font-size: 14.0px; font-style: italic;">PSPRS Chairman: 2011 changes cost system more than $220 million </span></div>
</div>
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<div class="text-container galileo-ap-content-editor">
<div>
<div>
<span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">ARIZONA – Members of PSPRS impacted by the </span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif; font-style: italic;">Parker</span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">
lawsuit are entitled to collect 5.25 percent interest on excess
contribution refunds, according to a Maricopa County Superior Court
ruling entered today. </span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">The
decision applies the same rate to pre-judgment and post-judgment
interest on contribution refund amounts, as well as any permanent
benefit increase (PBI) amounts withheld due to 2011 pension reforms
deemed unconstitutional.</span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">“The </span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif; font-style: italic;">Hall </span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">and</span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif; font-style: italic;"> Parker</span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">
litigation serves as a good example of what can happen when pension
reforms are not properly vetted,” said PSPRS Board of Trustees Chairman
Brian Tobin. “This cost our system more than $220 million while
Proposition 124, which was crafted and supported by all stakeholders, is
expected to provide about a half a billion dollars in savings.”</span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">The
interest period for excess contribution refunds started July 1, 2011,
for all PSPRS members and employers. Ending periods will vary according
to when each employer refunded excess contributions to impacted members.
</span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">Employers must notify PSPRS of the final processing date of contribution refunds related to the </span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif; font-style: italic;">Parker</span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">
lawsuit if they have not done so already. PSPRS needs this information
in order to accurately calculate interest owed to members affected by
the litigation. Employers can provide this information by emailing </span><a href="mailto:activemembers@psprs.com" style="color: maroon; font-family: Georgia , Times New Roman , Times , serif; font-style: normal; font-weight: normal; text-decoration: underline;" target="_blank">activemembers@psprs.com</a><span style="color: black; font-family: Georgia , Times New Roman , Times , serif;"> or by calling 602-255-5575. Members should then be notified by their employer of their individual amount.</span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">These
dates are also necessary for employers who wish to claim PSPRS
contribution credits for pre-judgment interest totals awarded in light
of the </span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif; font-style: italic;">Hall </span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">and</span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif; font-style: italic;"> Parker </span><span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">lawsuits. </span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">Post-judgment
interest must be separately applied by the employer to any contribution
refund amounts not returned by November 21, 2017, which is the date of
the official entry of Judge Rosa Mroz’s order that establishes the
interest and concludes the lawsuit. As a reminder, employers are not
allowed to take credits against post-judgment interest.</span></div>
<div>
<br /></div>
<div>
<span style="color: black; font-family: Georgia , Times New Roman , Times , serif;">“This
ends a difficult chapter in PSPRS history,” said PSPRS Administrator
Jared Smout. “And it gives the fund the opportunity to build on the
positive trajectory of the last fiscal year, when the fund gained more
than $1 billion in value.”</span></div>
</div>
</div>
</blockquote>
<span style="font-family: inherit;">You can read the <a href="http://www.psprs.com/uploads/sites/1/Parker_Lawsuit_Interest_Decision.pdf">actual judgment here</a>. One interesting thing here is the final pre- and post-judgment interest rate of 5.25%, which is one percent higher than the pre-judgment rate in <i>Hall</i>. The post-judgment rate is the same in both <i>Hall</i> and <i>Parker</i>. The decision states:</span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;"></span>The Existing Active Plan Members shall be paid prejudgment interest and postjudgment interest pursuant to A.R.S. § 44 -1201(B) and (F) at the rate of 5.25%. Pursuant to paragraph 2 of this Judgment, the interest shall run on the amount of any Existing Active Plan Member’s employee contribution in excess of 7.65 percent,<b> from the date each such amount was withheld from such member ’s paycheck until payment of the amount</b>, whether before or after entry of this Judgment. Pursuant to paragraph 3 of this Judgment, the same interest shall also run on the amount of any permanent benefit increase not paid to an Existing Active Plan Member, from the date on which the permanent benefit increase should have been paid until payment of the amount, whether before or after entry of this Judgment.</blockquote>
<span style="font-family: inherit;">This portion I placed in boldface is key since it makes clear that interest runs from the time the excess contributions were taken. This means that every excess payment a member paid has been earning 5.25% from the time each one was deducted all the way up to the day the aggregate excess was refunded. If you are interested in a discussion of interest payments, please check <a href="http://www.psprs.info/2017/06/psprs-members-preliminary-estimate-on.html">this post</a>. Based on a refund of around $12,000, I calculated an interest payment for myself of about $1,200. This one percent difference increases that interest payment by about $300.</span><br />
<br />
<span style="font-family: inherit;">Unfortunately, there is no deadline for payment. The court has mandated that "</span>the Plan shall undertake further efforts, in good faith and within a reasonable time, to achieve the Plan’s or the employers’ completion of such remedial actions." PSPRS has shown time and time again that their definition of "good faith" and "reasonable time" are not based on any consideration of its membership. It would not surprise me if PSPRS dragged its feet again as it can continue to make more by holding onto the interest payments than by paying them out as quickly as possible. (The interest is simple, not compounded, so once a member has been paid, no more interest accrues.) As usual, don't expect any help from Board of Trustees Chairman Brian Tobin, whose only statement in the press release is about rehashing a political argument, one, by the way, that could have easily gone the other way if a single judge had voted differently, and nothing about what the Board and PSPRS plan to do for members. Something like "we'll being working to get members their payments ASAP" or "we expect all payments to be paid by such-and-such date" would have been nice to hear. He is a members' representative, after all, but he went native along time ago and has been worthless as a member representative and as a board trustee. Since we can't count on Million Dollar Man Brian Tobin to do anything for members, it will have to fall on one or more of the other three member representatives to actually work for the benefit of members and not PSPRS' administration this time around.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com7tag:blogger.com,1999:blog-7609353726565000072.post-44788459644421116312017-11-09T19:30:00.001-07:002017-11-09T19:30:12.746-07:00Injunction, injunction, what's your function: Some speculation as to why there is not a final judgment in Parker v. PSPRS<div data-contents="true">
<div class="" data-block="true" data-editor="cf4kj" data-offset-key="18ls5-0-0">
<div class="_1mf _1mj" data-offset-key="18ls5-0-0">
<span data-offset-key="18ls5-0-0"><span data-text="true">PSPRS had its <a href="http://www.psprs.com/employers--local-boards/education-training">annual information seminar on November 7, 2017</a>. The only update given on the <i>Parker</i> case were these bullet points on a Powerpoint slide:</span></span></div>
</div>
<ul>
<li><span data-offset-key="64a0b-0-0"><span data-text="true">Two of the three parties have informally agreed as to the form of judgment, the ball is in the third party’s court.</span></span></li>
<li><span data-offset-key="7ro7u-0-0"><span data-text="true">Formal agreement is done through legal documents and court filings, which have not happened yet. </span></span></li>
</ul>
<span data-offset-key="bjbhh-0-0"><span data-text="true">PSPRS does not say which party has not agreed to the form of judgment. The <a href="http://www.courtminutes.maricopa.gov/docs/Civil/092017/m8007298.pdf">minute entry of the last status conference on September 22, 2017</a> said this:</span></span></div>
<blockquote class="tr_bq">
<div data-contents="true">
The plaintiffs in the <i>Hall</i> case have decided not to appeal the trial court’s ruling regarding prejudgment interest. Phoenix Law Enforcement Association (PLEA) has also decided to abide by the same prejudgment interest rate. PSPRS has already paid members for the permanent benefit increases (PBI), except to the few members ho are deceased. PSPRS is also working with each employer to return the excess contributions to their employees. There are many employers, each with its own issues. The parties will be discussing whether the issuance of a declaratory judgment will be sufficient to resolve the case.</div>
</blockquote>
So it certainly appeared at that time that a final judgment was imminent, as neither the plaintiffs nor PLEA were going to challenge the interest rates already set in the <i>Hall </i>case. The only other outstanding issue would be attorneys' fees, and that issue would have no bearing on a final judgment on interest rates. However, not being an attorney, I did not note the significance of the term "declaratory judgment."<br />
<br />
I am speculating here, but it appears that one party does not agree with the final decision being in the form of a <a href="https://en.wikipedia.org/wiki/Declaratory_judgment">declaratory judgment </a>alone, and not including an <a href="https://en.wikipedia.org/wiki/Injunction">injunction</a>. You can follow the links if you are interested in reading more about those legal terms, but an injunction (i.e. injunctive relief) legally requires some type of action pertaining to the resolution delivered by the declaratory judgment. You can get a little insight into this issue from this <a href="http://www.courtminutes.maricopa.gov/docs/Civil/012015/m6672767.pdf">minute entry from <i>Hall</i></a>. So in this case, the declaratory judgment would legally settle the interest rate question, as no parties object to the 4.25% pre-judgment/5.25% post-judgment interest rates set in <i>Hall</i>, but an injunction would be a further legal mandate on PSPRS to achieve final resolution.<br />
<br />
Based on our experience of PSPRS' deliberate slow walking of the excess contribution refunds, my guess is that the third party (most likely PLEA) wants a definite deadline this time around when it comes to the payment of interest, which would include a penalty if PSPRS does not meet that deadline. PSPRS spent months continuing to withdraw excess contributions after it was already declared unconstitutional by the Arizona Supreme Court, then they dragged out the process of paying refunds. All the while PSPRS was earning interest well in excess of the 4.25% pre-judgment interest rate assigned in <i>Hall</i>. It has been exactly a full year since the <i>Hall</i> case was decided on November 10, 2017 and the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> has returned 21.80% in that time. Even <a href="http://www.psprs.com/investments--financials/fund-performance">PSPRS' own annualized rate</a> over the five years ending June 30, 2017 was 7.95%.<br />
<br />
I suppose someone might ask why continue to litigate when the litigation itself is acting to prolong the delay in paying interest, but the response to that is why would there be any objection to setting an exact date on when the interest will be paid. PSPRS has known that these payments were required for a year now, and it seems unlikely that there are anymore outstanding excess contribution refunds to be made. This means interest is ready to be paid today, but of course, why should PSPRS be in a hurry to pay members if PSPRS benefits financially from dragging its feet? Only a strict deadline with a penalty for non-compliance will force PSPRS to act ethically and for the benefit of its members.<br />
<br />
The next status conference in <i>Parker v. PSPRS</i> is January 22, 2018.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com10tag:blogger.com,1999:blog-7609353726565000072.post-26483109600026971122017-09-24T16:19:00.003-07:002017-11-09T19:36:55.909-07:00The continuing tragedy of PSPRS' investment returnsThe following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through June 2017, the final month of the current fiscal year (FY), with
the FY end 2014, 2015, and 2016 returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl64" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl64" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl66" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl66" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl64">0.78%</td>
<td class="xl64">13.82%</td>
<td class="xl64">2.51%</td>
<td class="xl64">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl64">-0.73%</td>
<td class="xl64">4.21%</td>
<td class="xl64">-1.67%</td>
<td class="xl64">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl64">-0.32%</td>
<td class="xl64">1.06%</td>
<td class="xl64">0.21%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">7/31/2016</td>
<td class="xl64">1.62%</td>
<td class="xl64">1.62%</td>
<td class="xl64">3.97%</td>
<td class="xl64">3.97%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">8/30/2016</td>
<td class="xl64">1.76%</td>
<td class="xl64">3.40%</td>
<td class="xl64">0.26%</td>
<td class="xl64">4.23%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">9/30/2016</td>
<td class="xl64">0.71%</td>
<td class="xl64">4.14%</td>
<td class="xl64">0.16%</td>
<td class="xl64">4.40%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">10/31/2016</td>
<td class="xl64">-0.27%</td>
<td class="xl64">3.86%</td>
<td class="xl64">-2.16%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">11/30/2016</td>
<td class="xl64">1.17%</td>
<td class="xl64">5.07%</td>
<td class="xl64">4.48%</td>
<td class="xl64">6.71%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">12/31/2016</td>
<td class="xl64">1.30%</td>
<td class="xl64">6.43%</td>
<td class="xl64">1.95%</td>
<td class="xl64">8.79%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">1/31/2017</td>
<td class="xl64">1.03%</td>
<td class="xl64">7.52%</td>
<td class="xl64">1.88%</td>
<td class="xl64">10.84%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">2/28/2017</td>
<td class="xl64">1.17%</td>
<td class="xl64">8.78%</td>
<td class="xl64">3.72%</td>
<td class="xl64">14.96%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">3/31/2017</td>
<td class="xl64">1.06%</td>
<td class="xl64">9.93%</td>
<td class="xl64">0.07%</td>
<td class="xl64">15.04%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">4/30/2017</td>
<td class="xl64">0.75%</td>
<td class="xl64">10.76%</td>
<td class="xl64">1.06%</td>
<td class="xl64">16.26%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">5/31/2017</td>
<td class="xl64">1.33%</td>
<td class="xl64">12.24%</td>
<td class="xl64">1.02%</td>
<td class="xl64">17.45%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><b>6/30/2017</b></td>
<td class="xl64"><b>0.22%</b></td>
<td class="xl64"><b>12.48%</b></td>
<td class="xl64"><b>0.90%</b></td>
<td class="xl64"><b>18.51%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns. PSPRS' August 2017 Board of Trustees meeting included returns from both May and June 2017 because PSPRS did not have a meeting in July 2017.<br />
<br />
PSPRS' FY 2017 return, net of fees, was <a href="http://www.psprs.com/investments--financials/fund-performance">11.85%</a>. For comparison, PSPRS' own Cancer Insurance Plan (CIP) earned 10.12%, net of fees. The CIP is a simple mix of approximately 25% US equity, 25% non-US equity, 30% fixed income, 10% inflation-linked bonds, 5% commodities, and 5% short-term investments. The Arizona State Retirement System (ASRS) has not given its FY 2017 returns yet, but an <a href="http://www.azcentral.com/story/news/local/arizona-investigations/2017/07/19/arizona-mayors-lawmakers-want-fixes-fragile-police-fire-pensions/486170001/">Arizona Republic article from July 19, 2017</a> stated that it will be around 13.6%, net of fees. We should keep in mind, though, that this same article also said that PSPRS' FY 2017 returns, net of fees, were going to be 12.5%, so the ASRS estimate might be inaccurate as well.<br />
<br />
PSPRS is already <a href="http://www.psprs.com/uploads/publisher/10/PSPRS%20FY2017%20Fourth%20Quarter%20Newsletter_4.pdf">crowing about the FY 2017 return</a> and are again using their own particular data set to make their returns look like something special. However, if we go here to ASRS' page on its <a href="https://www.azasrs.gov/content/rates-return">rates of return</a>, we can see PSPRS' true mediocrity in comparison to ASRS. The numbers presented by ASRS do not even do ASRS justice as they do not include the most recent FY return of 13.6%, and yet ASRS still beats PSPRS by 2% (6% to 4%) in the 10-year annualized rate. On a $9 billion fund, the additional 2% annualized returns over 10 years would generate nearly $2 billion in additional earnings. PSPRS also lags the CIP by 1.40% in the 10-year annualized rate.<br />
<br />
Even more telling is ASRS' historic rates of return, which go back over 35 years. This is data, by the way, that PSPRS conspicuously does not provide on their webpage. I suspect that this is because similar PSPRS data would make past PSPRS Administrator Jim Cross look too good in comparison to the succession of mediocrities that have run PSPRS since his departure. Mr. Cross is the favorite scapegoat of PSPRS' current administration and Board of Trustees, as well as state union leaders, because of some bad investment choices he made during the dot.com bust, but these same people conveniently fail to mention the years of stellar returns he produced prior to those last couple of years of his career as PSPRS Administrator. I believe that his good years were just in line with the overall markets at the time and not the sign of any particular investing acumen, but it is unfair to look at only his last couple of bad years and not give him credit for his many prosperous years.<br />
<br />
ASRS' historic rates of return show that in 37 years, dating back to FY 1981, ASRS had only five years of negative returns. One negative year was way back in FY 1984 (-5.2%). The other four were in FY 2001 (-6.7%), FY 2002 (-8.2%), FY 2008 (-7.6%), and FY 2009 (-18.1%), and we all know what happened during those years. During that same period, PSPRS had negative returns in eight years in FY's 1984 (-2.45%), 1988 (-1.10%), 1994 (-0.71%), 2001 (-16.86%), 2002 (-15.07%), 2008 (-7.27%), 2009 (-17.72%), and 2012 (-0.79%). This PSPRS data had to be gleaned from annual reports and is not openly available like it is on ASRS' webpage.<br />
<br />
We can see that PSPRS had losses that were nearly double what ASRS had during the dot.com bust. This makes sense because of the individual stock investment strategy that was being followed at that time by Mr. Cross. An index-based approach would not have produced such large losses, though some type of market crash was unavoidable when the internet bubble finally popped. During the Great Recession ASRS' and PSPRS' losses are not much different with ASRS' losses only about 33 basis points greater than PSPRS' losses. This is because that crisis was systemic and took down everything. It would not have mattered where one was invested, except strictly in cash or in Big Short-type bets on the housing crash. You were going to suffer some type of loss. There was virtually no way to avoid that. <br />
<br />
The point here is that we now have the brain trust at PSPRS trying to develop a strategy for two recent past events that were either caused and/or exacerbated by bad policy (i.e. stock picking during a bubble) or major market downturns (i.e. an investment bubble popping and/or a global liquidity crisis). This is why they continually highlight data about how the current portfolio would have done in the past during specific crises, but, of course, anyone could retroactively design a better strategy when they know what the markets actually did. Bad investment policies are easy to deal with by simply getting rid of them, but what about market crashes?<br />
<br />
PSPRS is selling the idea that they have found a strategy for mitigating market crashes with its <a href="https://www.bestlawyers.com/Content/Downloads/Articles/5184_1.pdf">Modern Pension Diversification</a>, but the strategy has yet to be put to the test in an actual market downturn. Even if we buy into PSPRS' theory, there is the other side of the coin: how much would PSPRS have foregone in higher returns during the past had it utilized this investment strategy? PSPRS, of course, do not provide this information, and we are left with an incomplete picture, as if PSPRS' only goal was to mitigate the effects of market downturns.<br />
<br />
The goal for PSPRS should be to produce steady gains over the long term. ASRS has done this over the past 37 years, absorbing losses during the inevitable market downturns but more than making the losses during the subsequent bull markets. This has been a success for ASRS, and if PSPRS wants to implement an effective investment strategy all they need to do is study and mimic what ASRS has done. Or better yet, place PSPRS' investment portfolio in the hands of ASRS.<br />
<br />
What is even more unsettling is that PSPRS does not see the policy pitfalls in its own strategy. By my count, PSPRS has 74 private equity investments, 53 real asset investments, and 39 real estate investments listed its 2016 Consolidated Annual Financial Report (CAFR). This compares to only a total of 22 US and non-US equity investments listed. At what point does their strategy become just another form of individual asset picking, especially with private equity (PE), which makes up about 14% of PSPRS' total portfolio? While I do not know exactly how PSPRS may be invested with each PE firm, we can see that the PE firms themselves have a multitude of investments. Just looking at the first three PE firms listed in the CAFR, <a href="http://abry.com/investments/">Abry Partners</a>, <a href="https://www.avalon-ventures.com/our-investments">Avalon Ventures</a>, <a href="http://www.bpeasia.com/private-equity/our-portfolio/">Baring PE Asia</a>, we can see each has numerous companies in their PE portfolios. So you have PSPRS picking dozens of PE firms which each have dozens of companies in their portfolios. What will happen to all these companies, and PSPRS's stake in them, if there is another market crash?<br />
<br />
It has never made sense for PSPRS to invest separately from ASRS, just based on economies of scale alone, and when PSPRS decided last decade to move away from one-man rule over its investment portfolio, its Board should have looked to the established, proven team that had already been successfully running ASRS to take over its investments, or at the very least, for guidance in getting PSPRS back on track. Instead of PSPRS turning things around after 15 years, we still have second-raters like <a href="http://www.psprs.info/2017/08/out-with-smout-its-time-to-get-rid-of.html">Jared Smout</a>, <a href="http://azcapitoltimes.com/news/2014/12/18/the-truth-about-psprs-investment-performance/">Ryan Parham</a>, and <a href="http://www.psprs.com/article/a-statement-from-the-chairman-of-the-psprs-board-of-trustees">Brian Tobin</a> whining and making excuses about PSPRS' failings in both its management and investment performance. What a tragedy it is that PSPRS, which is not even five miles distant from ASRS, was so incompetently led down such a different and broken financial road, a road from which there seems no exit.<br />
<br />
* 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.
The
past two years fees have reduced the final annual reported return by
about a half percent. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, and 11.85% in FY 2017.<br />
<br />Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com3tag:blogger.com,1999:blog-7609353726565000072.post-33131148317824550062017-09-22T10:46:00.000-07:002017-09-24T07:54:42.259-07:00The end is near! Final interest rates have been decided in Parker v. PSPRSThe end is nigh for <i>Parker v. PSPRS</i>. Here is the <a href="http://www.courtminutes.maricopa.gov/docs/Civil/092017/m8007298.pdf">latest minute entry</a> in the case from September 20, 2017 says:<br />
<blockquote class="tr_bq">
The plaintiffs in the <i>Hall </i>case have decided not to appeal the trial court’s ruling regarding prejudgment interest. Phoenix Law Enforcement Association (PLEA) has also decided to abide by the same prejudgment interest rate. PSPRS has already paid members for the permanent benefit increases (PBI), except to the few members who are deceased. PSPRS is also working with each employer to return the excess contributions to their employees. There are many employers, each with its own issues. The parties will be discussing whether the issuance of a declaratory judgment will be sufficient to resolve the case. </blockquote>
<blockquote class="tr_bq">
IT IS ORDERED setting a Telephonic Status Conference regarding case status on January 22, 2018 at 9:00 a.m. (time allotted: 15 minutes) in this Division . . . </blockquote>
PLEA had asked the judge in this case to consider an interest rate separate from what was awarded in <i>Hall</i>, but it appears that this was not going to happen and they have dropped this request. PLEA may have also been hoping that the plaintiffs in <i>Hall</i> were going to challenge the rate in their case and piggy-backed onto that challenge, but that did not come to pass. So it looks like litigation over SB 1609 is finally over for PSPRS members.<br />
<br />
The final interest rates set in <i>Hall</i> were 4.25% pre-judgment and 5.25% post-judgment. You can read more about in <a href="http://www.psprs.com/article/hall-lawsuit-interest-payment-info-available-for-employers-">this notice dated July 18, 2017</a> on PSPRS' website. Pre-judgment interest will come from employers, just like the excess contributions refunds did, and they will again be allowed to credit the interest payments against their current employer contributions. Post-judgment interest will have to come from employers' own funds.<br />
<br />
The final rates set in <i>Hall</i> were from a <a href="http://www.courtminutes.maricopa.gov/docs/Civil/062017/m7872828.pdf">court decision</a> dated June 8, 2017. The cutoff date that separated the pre- and post-judgment periods was June 28, 2017. It appears that there are still some legal procedures that need to be completed for a formal judgment to be lodged in <i>Parker</i>, but it appears that this should go through unchallenged. If the same timeframe is followed as it was in <i>Hall</i>, we should see a cutoff date in <i>Parker </i>of somewhere around October 10, 2017. The post-judgment period does <u>not</u> go all the way back to the Supreme Court decision. While I cannot say for certain, I would assume that all excess contribution refunds have been completed by employers, which means the only possible post-judgment interest payment that could accrue would be on any delayed pre-judgment interest payments. I do not see any reason why employers would delay these interest payments if they can just credit them against their current contributions.<br />
<br />
As we have <a href="http://www.psprs.info/2017/04/special-interest-what-would-be-fair.html">discussed in the past</a>, 4.25% is low and does not represent what PSPRS actually earned on members' money they never should have possessed in the first place. The Supreme Court decision in <i>Hall</i> came down just after the 2016 election, and we know how much the markets have gone up since then. In the end, the <a href="https://www.youtube.com/watch?v=ySxHud7abko">Duke brothers</a> carry on in spirit within the ranks of PSPRS management and Board of Trustees. If you want to see some speculation of what the interest payment might be, <a href="http://www.psprs.info/2017/06/psprs-members-preliminary-estimate-on.html">this post</a> may interest you.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com12tag:blogger.com,1999:blog-7609353726565000072.post-49171255261240687952017-08-17T12:20:00.003-07:002017-08-25T11:57:04.289-07:00How the House Ad Hoc Committee on PSPRS can begin fixing PSPRS (UPDATED)<!--[if gte mso 9]><xml>
<o:OfficeDocumentSettings>
<o:RelyOnVML/>
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</xml><![endif]--><b>***I have updated this post to correct an error about how contributions will be determined for Tier 3 members. I have used strikethroughs for incorrect parts and italicized the corrected passages. I apologize for these errors.***</b><br />
<br />
In the last post, I made the suggestion to the House Ad Hoc
Committee on PSPRS (“the Committee”) that they use their influence to press for
the removal of PSPRS Administrator Jared Smout.<span style="mso-spacerun: yes;">
</span>While this would be an overdue and important change, long-term it will
have minimal effect on PSPRS, and long-term fixes are what the Committee is
trying to find.<br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
In Craig Harris’ article, “<a href="http://www.azcentral.com/story/news/local/arizona-investigations/2017/07/19/arizona-mayors-lawmakers-want-fixes-fragile-police-fire-pensions/486170001/">Arizona mayors call on Ducey to push overhaul of financially fragile public-safety pension system</a>,” from the
July 19, 2017 <i>Arizona Republic</i>, two reform ideas mentioned by State Senator Noel
Campbell, Bisbee Mayor David Smith, and Prescott Mayor Harry Oberg were “the
abolition of the PSPRS board and management, and . . . placing the fund's operation
under the state treasurer,” and “ask voters to amend the state Constitution,
which now dictates that a pension benefit given to a public employee cannot
subsequently be taken away.”</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The first idea could be accomplished more simply by changing
the makeup of the Board of Trustees so that it was <span style="mso-tab-count: 1;"> </span>more representative of employers and taxpayers.<span style="mso-spacerun: yes;"> </span>As far as I know, the Arizona legislature can
staff the Board in any way it sees fit.<span style="mso-spacerun: yes;"> </span>It
is up to them to decide if employee representatives need to be voting members
of the Board or what value and expertise firefighters and law enforcement
officers contribute in the fields of actuarial science, finance, and
investing.<span style="mso-spacerun: yes;"> </span>PSPRS has four active
members, two fire and two law enforcement, on its nine-person Board.<span style="mso-spacerun: yes;"> </span>If this is excessive, they can change
it.<span style="mso-spacerun: yes;"> </span>There is no need to turn over the
management of PSPRS to the Treasurer, just create a Board that knows what it is
doing, and have these individuals hire a competent Administrator and other
staff.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
As to the second proposal, repealing or altering Article 29 of
the Arizona Constitution, which prohibits the diminishment or impairment of
pension benefits, would not affect the unfunded liabilities that already plague
employers.<span style="mso-spacerun: yes;"> </span>The excess contributions
portion of the <i>Hall</i> case was decided in favor of the plaintiffs on the basis of case
law (<i>Yeazell</i>) and did not rely on Article 29.<span style="mso-spacerun: yes;">
</span>The contribution rate was deemed a binding contract between employees
and employers that could not be changed unilaterally in favor of the employers.<span style="mso-spacerun: yes;"> </span>Existing pension benefits also constitute
a binding contract.<span style="mso-spacerun: yes;"> </span>[Oddly, 2016’s PSPRS
reform used Article 29 to accomplish the very thing it was meant to
prevent.<span style="mso-spacerun: yes;"> </span>Proposition 124 used a
voter-approved amendment to Article 29 of the Arizona Constitution to eliminate
the contractual<span style="mso-spacerun: yes;"> </span>and heretofore
constitutionally protected permanent benefit increase (PBI) and replace it with a capped 2% cost of living allowance (COLA).]<span style="mso-spacerun: yes;">
</span>Any change in benefits would still have to contend with case law, and
most likely, the contract clauses of the Arizona and United States
Constitutions, so repealing Article 29 is not the solution to the unfunded
liabilities that already exist.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Currently, it seems virtually impossible to decrease any
existing pension benefit, except through constitutional amendment (<a href="http://www.psprs.info/2017/07/was-it-constitutional-for-proposition.html">assuming Proposition 124 was constitutional</a>) or the bankruptcy of an employer.<span style="mso-spacerun: yes;"> </span>Any changes to PSPRS have to be prospective,
affecting only those yet to be hired, administrative, or in line with existing pension
benefits.<span style="mso-spacerun: yes;"> </span>If the House Ad Hoc Committee
on PSPRS wants to make some administrative, here are some suggestions: </div>
<blockquote class="tr_bq">
<div class="MsoNormal" style="margin-left: .25in;">
<b><u>Amend Article 29 of the Arizona
Constitution to mandate equal contributions toward <strike>normal costs</strike> "<i>the normal costs and the actuarially determined amount required to amortize the total unfunded accrued liability within the public safety pool</i>" from employers
and employees in any state pension that already has this requirement and for
all future hires.</u></b><span style="mso-spacerun: yes;"> </span>This is one of the
most important changes that state legislators could make.<span style="mso-spacerun: yes;"> </span>This would make cost sharing of <strike>normal<i> </i>costs</strike><i> all costs</i> permanent and immutable.<span style="mso-spacerun: yes;"> </span>The long game
played by the state public safety union has always been to continually push for
new or enhanced benefits like the PBI and DROP because the unions knew they
were protected from any financial consequences by a fixed employee contribution
rate.<span style="mso-spacerun: yes;"> </span>This meant that no matter how
costly the benefit became, it would never affect employees.<span style="mso-spacerun: yes;"> </span>The cost would be borne by employers and
taxpayers.<span style="mso-spacerun: yes;"> </span>Splitting <strike>normal</strike> <i>all</i> costs would force any financial costs to fall equally on employers and employees and
eliminate the perverse incentive state public safety unions have to push for
unfunded enhancements of their pension benefits.<span style="mso-spacerun: yes;">
</span>If the unions want to convince Arizona’s House and Senate to create a
new or enhanced benefit, they will have to pay their fair share for it.</div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in;">
This amendment should not be
controversial.<span style="mso-spacerun: yes;"> </span>The state public safety
unions already agreed to this condition for Tier 3 PSPRS members, and the Arizona
State Retirement System (ASRS) and Corrections Officer Retirement Plan (CORP) already
split <strike>normal</strike> <i>all</i> costs.<span style="mso-spacerun: yes;"> </span>The Elected
Officials’ Retirement (EORP) no longer has a defined benefit plan for new
members.<span style="mso-spacerun: yes;"> </span>Because of the <i style="mso-bidi-font-style: normal;">Hall</i> decision, nothing can be done about
those PSPRS, EORP, and CORP members grandfathered into their respective systems
with a fixed employee contribution rate.<span style="mso-spacerun: yes;">
</span>This amendment would be simple to write and understand, and hopefully, the state’s voters would overwhelmingly approve.</div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in;">
<b><u>Allow another state government
entity to choose PSPRS’ actuaries, accountants, and outside investment
consultants. </u><span style="mso-spacerun: yes;"> </span></b>This goes hand-in-hand
with the previous idea.<span style="mso-spacerun: yes;"> </span>A neutral,
objective party must give all stakeholders a realistic assessment of PSPRS’
financial condition.<span style="mso-spacerun: yes;"> </span>As was seen with
accounting firms and bond rating agencies, problems can arise when the
organization being scrutinized is the one paying the company scrutinizing it.<span style="mso-spacerun: yes;"> </span>I suspect it is only a matter of time before some
major actuarial firm is sued for malpractice over a public pension that fails.</div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in;">
The Treasurer or Auditor General
should set the engagement standards, choose, contract with, and pay (out of PSPRS' budget) the
actuaries, accountants, and outside investment consultants.<span style="mso-spacerun: yes;"> </span>The Treasurer or Auditor General should also
receive the actuarial reports and financial statements before PSPRS does so
that any problems identified cannot be covered up by PSPRS’ staff or Board of
Trustees. In Mr. Harris’ article, PSPRS
Board of Trustees Chairman Brian Tobin boasts, “. . . that he has supported
since 2011 legislation that would reform cost-of-living adjustments for
retirees and have employees make higher contributions for their pensions.”<span style="mso-spacerun: yes;"> </span>That’s the kind of bold, determined spirit
you get from someone who will get nearly $1 million dollars his first year of
retirement.<span style="mso-spacerun: yes;"> </span>The funny thing is that page 8 of the
<a href="http://www.azleague.org/DocumentCenter/View/6050">Arizona League of Cities and Towns’ Pension Task Force Report </a>says this: </div>
</blockquote>
<blockquote class="tr_bq">
<blockquote class="tr_bq">
<div class="MsoNormal" style="margin-left: .25in;">
. . . prior to FY 2015-16, the
cost of the PBI was not included in the employer contribution rate.<span style="mso-spacerun: yes;"> </span>Excluding the PBI from the calculation effectively
underestimated the normal cost of the pension plan, causing it to manifest itself
in the unfunded liability.<span style="mso-spacerun: yes;"> </span>This issue<span style="mso-spacerun: yes;"> </span>was<span style="mso-spacerun: yes;">
</span>identified<span style="mso-spacerun: yes;"> </span>by<span style="mso-spacerun: yes;"> </span>PSPRS<span style="mso-spacerun: yes;">
</span>actuaries several<span style="mso-spacerun: yes;"> </span>years<span style="mso-spacerun: yes;"> </span>ago,<span style="mso-spacerun: yes;">
</span>but<span style="mso-spacerun: yes;"> </span>the<span style="mso-spacerun: yes;"> </span>PSPRS<span style="mso-spacerun: yes;">
</span>Board<span style="mso-spacerun: yes;"> </span>did<span style="mso-spacerun: yes;"> </span>not<span style="mso-spacerun: yes;">
</span>take<span style="mso-spacerun: yes;"> </span>action to address it.</div>
</blockquote>
<div class="MsoNormal" style="margin-left: .25in;">
Keep in mind that Brian Tobin
became Chairman of the PSPRS Board of Trustees sometime during fiscal year
2010. He
knew the PBI was a problem, yet in his official capacity as the Chairman, he
did not require PSPRS to account for it in the normal cost, despite being informed
of this problem by PSPRS’ own actuary.<span style="mso-spacerun: yes;">
</span>This alone would argue for Mr. Tobin’s removal from the Board, and it is
further evidence of Jared Smout’s unfitness to be PSPRS’ administrator. What a
duo we have leading PSPRS.</div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in;">
If the Arizona Treasurer or
Auditor General had received a report from an actuary saying that PSPRS had, for
years, not been accounting for a major driver of PSPRS’ underfunding, I think
the problem would have been addressed much sooner and those responsible for
this “oversight” would no longer be working at PSPRS.<span style="mso-spacerun: yes;"> </span>As we see in this case, even when we have an
ethical actuary raising a red flag, we still cannot trust PSPRS
to take the proper action to address it.<span style="mso-spacerun: yes;"> </span><strike>With
normal costs now split evenly between employees and employers, there will be
even more incentive to lowball normal costs, as any normal costs not properly
accounted in the present will appear later as unfunded liabilities. Unfunded liabilities will
be the sole responsibility of employers and taxpayers.</strike><span style="mso-spacerun: yes;"> </span><i>For the sake of Tier 3 members and employers who will have to foot the bill for any of PSRPS' chicanery</i>, this is why someone other than PSPRS must choose its actuary,
accountants, and investment consultants.</div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in;">
<b><u>Subject PSPRS to a more
comprehensive analysis of its investments, fees, and how PSPRS' investment strategy
compares with those of other funds.</u></b><span style="mso-spacerun: yes;"><b> </b>
</span>This report, of course, would have to be produced by an outside entity
hired by another state agency.<span style="mso-spacerun: yes;"> </span>The
Panglossian world of the PSPRS office is one where whether PSPRS makes money, loses
money, or underperforms, it is always doing great.<span style="mso-spacerun: yes;"> </span>PSPRS is always in some top segment of some
subset of funds, but it underperforms its own Cancer Insurance Plan and
ASRS.<span style="mso-spacerun: yes;"> </span>What of all its investments in
private equity and real estate?<span style="mso-spacerun: yes;"> </span>These
are notoriously hard to value.<span style="mso-spacerun: yes;"> </span>What methodology
is used to value these?<span style="mso-spacerun: yes;"> </span>Furthermore, as
of last fiscal year, PSPRS had, by my count, 74 private equity investments, but
only 11 of these investments accounted for 83% of its gain in its private equity
portfolio.<span style="mso-spacerun: yes;"> </span>It is great that this asset
class is earning good (paper) returns, but how is this different than picking
individual stocks.<span style="mso-spacerun: yes;"> </span>When your portfolio gets
big enough, when do your picks become luck rather than any display of skill?<span style="mso-spacerun: yes;"> </span>What would PSPRS have done if it had used
other strategies, paid lower fees, or simply invested in the S&P 500 since
2000?<span style="mso-spacerun: yes;"> </span>We already know we cannot trust Mr.
Tobin or Mr. Smout to accurately account for <strike>normal</strike> <i>all</i> costs.<span style="mso-spacerun: yes;"> </span>Why would we trust them to provide accurate
investment figures or assessments?</div>
<div class="MsoNormal" style="margin-left: .25in;">
<br /></div>
<div class="MsoNormal" style="margin-left: .25in;">
<b><u>The Arizona Legislature must get
other political subdivisions involved in any penson benefit legislation they pass in
the future.</u></b><span style="mso-spacerun: yes;"><b> </b> </span>The legislature
and state public safety unions have always negotiated pension benefits over the heads of the cities, towns, counties, fire districts, and tribal
nations who have to pay for them.<span style="mso-spacerun: yes;"> </span>These groups must get a seat at
the table whenever changes in benefits are considered.<span style="mso-spacerun: yes;"> </span>Outside of the Department of Public Safety,
the state has no large employee group in PSPRS, and the state has much deeper
pockets than other political subdivisions. <span style="mso-spacerun: yes;"> </span>Unfortunately, I am not sure of a way that
this can be mandated</div>
<div class="MsoNormal" style="margin-left: .25in;">
.</div>
<div class="MsoNormal" style="margin-left: .25in;">
I personally think that the
Legislature should not determine PSPRS benefits.<span style="mso-spacerun: yes;"> </span>They farmed out negotiations for 2016’s pension
reform to Reason Foundation, a private, public policy research group, so I don’t
know why they don’t allow the Arizona League of Cities and Towns or some other
group acceptable to the political subdivisions to negotiate with the state
public safety unions. <span style="mso-spacerun: yes;"> </span>I suppose the
League could also use Reason Foundation as a consultant to help them out.<span style="mso-spacerun: yes;"> </span>The political subdivisions and the unions are
the two parties most affected by pension legislation, and they should be able
to come to some agreement about what is best for both of them.<span style="mso-spacerun: yes;"> </span>This is routine business at the local level
w here these groups negotiate over wages and benefits.<span style="mso-spacerun: yes;"> </span>The Legislature has to realize by now that
the status quo cannot continue, and political subdivisions must have some part
in determining pension benefits.<span style="mso-spacerun: yes;"> </span>This is
what Mayors Oberg and Smith should really be advocating for if they want to
stop the pension debt monster from coming back to ravage their cities in 25 or
30 years.</div>
</blockquote>
The bottom line is that too many
elements inside and outside of PSPRS have been allowed to run unchecked for too
many years.<span style="mso-spacerun: yes;"> </span>While it appears that
nothing can be done about pension benefits already promised, these are some
easy, non-litigatable steps to rein in those who cannot control their own myopia, greed,
selfishness, and stupidity.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com3tag:blogger.com,1999:blog-7609353726565000072.post-86159181881835026172017-08-12T16:05:00.003-07:002017-08-12T16:05:28.567-07:00Out with Smout: It's time to get rid of PSPRS Administrator Jared SmoutI hope most PSPRS members have read this article, "<a href="http://www.azcentral.com/story/news/local/arizona-investigations/2017/08/10/public-safety-pension-boss-defends-drop-program-payments/549897001/">Pension executive defends six-figure retirement payouts for police, firefighters</a>," by Craig Harris in the August 10, 2017 <i>Arizona Republic</i>. 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.<br />
<br />
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.<br />
<br />
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--<a href="https://en.wikipedia.org/wiki/Alan_Greenspan">Alan Greenspan</a> 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.<br />
<br />
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:<br />
<ol>
<li>For many years it paid a guaranteed interest rate of up to 9%, even when PSPRS was losing money. </li>
<li>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.</li>
<li>It slows the replacement of higher paid Tier 1 employees with Tier 3 employees.</li>
</ol>
In case Mr. Smout truly is ignorant, let's explain it to him as simply as possible: <u><b>An employee cannot be active and retired at the same time</b></u>. 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 <a href="http://www.marketwatch.com/story/dallas-police-and-fire-pension-plan-problems-caused-by-extraordinary-decisions-2016-12-14">Dallas Police and Fire Pension Plan</a>. PSPRS' own policy states that "<a href="http://www.psprs.com/uploads/sites/1/2016_PSPRS_Summary_of_Plan_Provisions_Rev_03-2017_-_FINAL.pdf">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.</a>" 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."<br />
<br />
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: <br />
<blockquote class="tr_bq">
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. </blockquote>
<blockquote class="tr_bq">
<div class="p-text">
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. </div>
</blockquote>
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:<br />
<blockquote class="tr_bq">
<div class="p-text">
. . . the Arizona State Retirement System, which is in better financial health, ended DROP because of major cost concerns.</div>
</blockquote>
<blockquote class="tr_bq">
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. </blockquote>
<blockquote class="tr_bq">
<div class="p-text">
Matson had lawmakers revoke DROP for ASRS members in 2006.</div>
</blockquote>
<blockquote class="tr_bq">
"We didn't implement it because we didn't want contribution rates to increase," Matson said. </blockquote>
<blockquote class="tr_bq">
<div class="p-text">
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. </div>
</blockquote>
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. <a href="https://www.azasrs.gov/content/paul-matson">Paul Matson</a>, 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? <br />
<br />
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 <br />
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?<br />
<br />
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<a href="http://giving illegal raises"> giving illegal raises</a> 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. <br />
<br />
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. Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com4tag:blogger.com,1999:blog-7609353726565000072.post-11564122667156521942017-07-18T18:10:00.002-07:002017-07-19T15:03:19.204-07:00Final interest rates for the Hall case: 4.25% for pre-judgment interest; 5.25% for post-judgment interestThis information about the Hall case came out this afternoon<br />
<blockquote class="tr_bq">
<div id="24a7c814-a128-6add-48f6-2d487db97a6a">
<div align="center" style="text-align: center;">
<div>
<span style="color: #f20000; font-family: "georgia" , serif; font-size: 18.0px;">IMPORTANT <span style="font-style: italic;">HALL</span> LAWSUIT NOTICE</span></div>
</div>
</div>
<table border="0" cellpadding="0" cellspacing="0" class="galileo-ap-layout-editor" style="min-width: 100.0%; width: 100%px;"><tbody>
<tr><td class="OneColumnMobile column" style="background: rgb(111,44,27);" valign="top" width="100%"><div class="gl-contains-image">
<table border="0" cellpadding="0" cellspacing="0" class="editor-image" style="min-width: 100.0%; width: 100%px;"><tbody>
<tr><td align="center" style="padding-bottom: 0.0px; padding-top: 0.0px;" valign="top"><br /></td></tr>
</tbody></table>
</div>
</td></tr>
</tbody></table>
PSPRS was informed last week that the <i>Hall</i>
lawsuit impacting Tier 1 EORP members has finally come to a conclusion.
As such, prejudgment interest was awarded at 4.25% up through June 28,
2017. Those interest amounts have been calculated and updated to the <a href="http://r20.rs6.net/tn.jsp?f=001gMTjxzQVXcQl9Uqgq7geeZXzy7Suo2Mk_gL9h8Ikxuh5Auj2Pk8N3q-IEAIQitMI8DnUdQbPyeZFg2RQc6vtngAhD7lS-8w-KeObLsVJBpS-MvwpjCRWnqEZY57GNutb9yiPESFYKEtTLzGC2HV1BHWhhravENwYY9rztYpZPxsK4JGcbifkqi2PRX1AB0Zl&c=-JkMvCqR8x_JsZ3ancjPSzvp9kQTv2J0X_gOePcnxrtOvWL3LE0dQQ==&ch=BmPPFv19EzEgVDbT3OvwxApn6IipVALaVrSm7rnlSU99kB-dIOw2OQ==" style="color: #6b1706; font-style: normal; font-weight: normal; text-decoration: underline;" target="_blank">Employer</a> and <a href="http://r20.rs6.net/tn.jsp?f=001gMTjxzQVXcQl9Uqgq7geeZXzy7Suo2Mk_gL9h8Ikxuh5Auj2Pk8N3uLQjZtnLyNTIZlE6yhEINWN0q-vKv5S8uzvyavhADtFJu7pJrJKO4JD73-qUMmTsjnQbuL_i9USDahkzeFwnpDtI9B6tztQppeuAOEVo1QT2QdOWd2lwEVk_vHEMfM3rw==&c=-JkMvCqR8x_JsZ3ancjPSzvp9kQTv2J0X_gOePcnxrtOvWL3LE0dQQ==&ch=BmPPFv19EzEgVDbT3OvwxApn6IipVALaVrSm7rnlSU99kB-dIOw2OQ==" style="color: #6b1706; font-style: normal; font-weight: normal; text-decoration: underline;" target="_blank">Local Board</a>
portals today. As a reminder, the prejudgment interest amounts will
be included in the credit amounts available for employer use. These individual amounts will be available in the Members Only portal within the coming days.</blockquote>
<blockquote class="tr_bq">
The
post-judgment interest rate has been determined to be 5.25% where each
employer will need to calculate those individual amounts. As a reminder,
the post-judgment interest amounts will not be included in the credits
available to employers. </blockquote>
<blockquote class="tr_bq">
To calculate the post-judgment interest, you may use the following formula:<br />
<div align="center" style="text-align: center;">
Post-judgment
Interest Amount = Total of Contributions and Pre-judgment Interest x
.0525 x Number of Days Between June 29 and Payout /365 </div>
</blockquote>
<blockquote class="tr_bq">
This
should be calculated on an individual basis for each of your members.
Also, this formula assumes you will pay out the contributions and the
interest on the same day. If you are planning to pay them out separately,
then apply the same formula to the separate amounts (the only difference
will be the entry for the “number of days between June 29 and payout.") </blockquote>
<blockquote class="tr_bq">
<br />
Now that the <i>Hall</i> case is officially over, the courts have begun to address the <i>Parker</i>
case for PSPRS members. While the remedies will be similar as to the
statutory reference for the amount of interest, the actual rate applied
to pre-judgment interest could be different. Therefore, we appreciate
your patience as this case is adjudicated to completion. </blockquote>
Before I comment further, I need to see an actual pre-judgment interest calculation as I do not know how they will apply this rate to the excess contributions. 4.25% seems low to me, and it appears that they used the <a href="https://www.jpmorganchase.com/corporate/About-JPMC/historical-prime-rate.htm">prime rate</a> in effect at the time SB 1609 was implemented in 2011 (3.25%) and added 1%. The current prime rate is 4.25%. I checked my own PSPRS account and found no pre-judgment interest total displayed, but PSPRS is updating its member portal and does not appear to be posting any new information there. The new member portal is supposed to go live on July 21, 2017, but it has already missed a previous deadline. While I suspect that PSPRS members are being cheated, I need to see more information first.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com25tag:blogger.com,1999:blog-7609353726565000072.post-36748736264917080572017-07-13T12:30:00.003-07:002017-07-13T15:31:09.033-07:00The lastest in Parker v. PSPRS: The prejudgment interest rate has still not been determinedHere is the latest from the <a href="http://www.courtminutes.maricopa.gov/docs/Civil/072017/m7913187.pdf">July 12, 2017 status conference in <i>Parker v. PSPRS</i></a>:<br />
<blockquote class="tr_bq">
The parties previously agreed to abide by the decisions in the <i>Hall</i> and <i>Fields</i> cases. The Court is advised that the trial court in the Hall case has ruled on what prejudgment interest rate to apply and entered a final judgment. It is unknown whether the Plaintiffs in the <i>Hall</i> case will be appealing the ruling. The Phoenix Law Enforcement Association ("PLEA") would like this Court to independently decide what prejudgment interest rate to apply. However, PLEA will discuss same with Defense counsel and determine whether it will wait to see if there is an appeal in the <i>Hall</i> case, or file its own motion.</blockquote>
<blockquote class="tr_bq">
The parties will also work together to draft a stipulated judgment for the Court’s review and approval.</blockquote>
<blockquote class="tr_bq">
IT IS ORDERED setting a further Telephonic Status Conference on September 20, 2017 at 9:00 a.m. (time allotted: 15 minutes) in this Division, before Honorable Judge Rosa Mroz . . .</blockquote>
<blockquote class="tr_bq">
If the parties reach an agreement before the Status Conference and would like to the Court to sign the stipulated judgment expeditiously, the parties are encouraged to contact this Division’s judicial assistant . . .to alert her of the filing.</blockquote>
So there is still some discussion over the final interest rate to be applied. PLEA obviously does not agree with the rate of interest applied in <i>Hall</i>, but they and PSPRS may be able to work something out before the next court date. This explains the delay in setting a rate and paying interest. As I have written before, the right and fair thing for PSPRS to do is pay members what it actually earned on the excess contributions. This rate is likely to be higher than the prime rate + 1% awarded in <a href="http://www.courtminutes.maricopa.gov/docs/Civil/062017/m7872828.pdf"><i>Hall</i></a>, but lower than the 10% the <i>Hall</i> plaintiffs wanted. PSPRS exists to serve members, not use them as a source of income Earning some profit off the spread between actual returns and the statutorily required prejudgment interest of rate is immoral. Applying PSPRS' actual rate return as the prejudgment rate seems like a good compromise to me, and it would settle this matter quickly.<br />
<br />
There is no mention of PBI's, so it does not appear that Mr. Parker and his fellow plaintiffs will be contesting the constitutionality of Proposition 124. <br />
<br />
<u>Addendum:</u><br />
<br />
A commenter asked what PSPRS' actual rate of return has been and how that translated into actual dollars. I went back to a spreadsheet I used for <a href="http://www.psprs.info/2017/06/psprs-members-preliminary-estimate-on.html">this post that estimated prejudgment interest on a $12,000 refund</a>. I changed it up by using the actual net rates of return for the following fiscal years (FY's):<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 160px;"><colgroup><col style="mso-width-alt: 3181; mso-width-source: userset; width: 65pt;" width="87"></col>
<col style="mso-width-alt: 2669; mso-width-source: userset; width: 55pt;" width="73"></col>
</colgroup><tbody>
<tr height="17" style="height: 12.75pt;">
<td class="xl67" height="17" style="height: 12.75pt; width: 65pt;" width="87"><b><br /></b></td>
<td class="xl67" style="width: 55pt;" width="73"><b><span style="mso-spacerun: yes;"> </span>Rate of</b></td>
</tr>
<tr height="17" style="height: 12.75pt;">
<td class="xl67" height="17" style="height: 12.75pt;"><b><u><span style="mso-spacerun: yes;"> </span>FY</u></b></td>
<td class="xl67"><b><u><span style="mso-spacerun: yes;"></span>Return</u></b></td>
</tr>
<tr height="17" style="height: 12.75pt;">
<td class="xl65" height="17" style="height: 12.75pt;">2012</td>
<td class="xl66">-0.79%</td>
</tr>
<tr height="17" style="height: 12.75pt;">
<td class="xl65" height="17" style="height: 12.75pt;">2013</td>
<td class="xl66">10.64%</td>
</tr>
<tr height="17" style="height: 12.75pt;">
<td class="xl65" height="17" style="height: 12.75pt;">2014</td>
<td class="xl66">13.28%</td>
</tr>
<tr height="17" style="height: 12.75pt;">
<td class="xl65" height="17" style="height: 12.75pt;">2015</td>
<td class="xl66">3.68%</td>
</tr>
<tr height="17" style="height: 12.75pt;">
<td class="xl65" height="17" style="height: 12.75pt;">2016</td>
<td class="xl66">0.63%</td>
</tr>
<tr height="17" style="height: 12.75pt;">
<td class="xl65" height="17" style="height: 12.75pt;">2017*</td>
<td class="xl66">10.26%</td>
</tr>
</tbody></table>
<br />
The rate of return for FY 2017 are only through April 2017, which is the latest PSPRS has provided, and a half-percent was subtracted from the gross return to keep it consistent with the net returns for the other FY's. As before, I divided the annual rate of return by 26 pay periods and ran a running total of the simple interest.<br />
<br />
The $12,000 in excess contributions generated $1,420 in simple interest at 5.0% and $1,489 at 5.25%, as of the end of June 2017. The prime rate at the time of the <i>Hall</i> decision was 4.0%, but it increased to 4.25% several days after the decision. I do not know which rate will be used if they use prime rate + 1%. Using PSPRS actual rates of returns generated $2,223 in prejudgment interest, a significant increase of around $735 or $800, depending on which prime rate we use.<br />
<br />
Prejudgment interest of $2,223 would produce an annualized rate of 8.1% going back the full six year period to July 2011, so we can see the incentive PSPRS has to keep the rate at the much lower prime rate + 1%. The spread was higher than I thought it would be, but this is due to the high returns in the current FY, which is when the refund amount was largest. If PSPRS maintains an annual rate of 10.26%, about $58 will be earned every pay period on the $12,000 refund amount versus only about $24 at 5.25%. Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com13tag:blogger.com,1999:blog-7609353726565000072.post-80093163402472889852017-07-07T13:43:00.003-07:002017-07-07T14:58:50.892-07:00PSPRS investment returns through April 2017The following table shows PSPRS' investment returns, <i>gross of fees*</i>, versus the <a href="http://www.ftse.com/products/indices/russell-us">Russell 3000</a> through April 2017, the eighth month of the current fiscal year (FY), with
the FY end 2014, 2015, and 2016 returns included for comparison:<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" style="width: 488px;"><colgroup><col style="mso-width-alt: 3254; mso-width-source: userset; width: 67pt;" width="89"></col>
<col style="mso-width-alt: 3437; mso-width-source: userset; width: 71pt;" width="94"></col>
<col span="2" style="mso-width-alt: 3657; mso-width-source: userset; width: 75pt;" width="100"></col>
<col style="mso-width-alt: 3840; mso-width-source: userset; width: 79pt;" width="105"></col>
</colgroup><tbody>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt; width: 67pt;" width="89">Report</td>
<td class="xl64" style="width: 71pt;" width="94">PSPRS</td>
<td class="xl64" style="width: 75pt;" width="100">PSPRS</td>
<td class="xl66" style="width: 75pt;" width="100">Russell 3000</td>
<td class="xl66" style="width: 79pt;" width="105">Russell 3000</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl63" height="20" style="height: 15.0pt;"><u>Date</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
<td class="xl64"><u>Month End</u></td>
<td class="xl64"><u>Fiscal YTD</u></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2014</td>
<td class="xl64">0.78%</td>
<td class="xl64">13.82%</td>
<td class="xl64">2.51%</td>
<td class="xl64">25.22%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2015</td>
<td class="xl64">-0.73%</td>
<td class="xl64">4.21%</td>
<td class="xl64">-1.67%</td>
<td class="xl64">7.29%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">6/30/2016</td>
<td class="xl64">-0.32%</td>
<td class="xl64">1.06%</td>
<td class="xl64">0.21%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
<td class="xl64"><br /></td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">7/31/2016</td>
<td class="xl64">1.62%</td>
<td class="xl64">1.62%</td>
<td class="xl64">3.97%</td>
<td class="xl64">3.97%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">8/30/2016</td>
<td class="xl64">1.76%</td>
<td class="xl64">3.40%</td>
<td class="xl64">0.26%</td>
<td class="xl64">4.23%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">9/30/2016</td>
<td class="xl64">0.71%</td>
<td class="xl64">4.14%</td>
<td class="xl64">0.16%</td>
<td class="xl64">4.40%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">10/31/2016</td>
<td class="xl64">-0.27%</td>
<td class="xl64">3.86%</td>
<td class="xl64">-2.16%</td>
<td class="xl64">2.14%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">11/30/2016</td>
<td class="xl64">1.17%</td>
<td class="xl64">5.07%</td>
<td class="xl64">4.48%</td>
<td class="xl64">6.71%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">12/31/2016</td>
<td class="xl64">1.30%</td>
<td class="xl64">6.43%</td>
<td class="xl64">1.95%</td>
<td class="xl64">8.79%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">1/31/2017</td>
<td class="xl64">1.03%</td>
<td class="xl64">7.52%</td>
<td class="xl64">1.88%</td>
<td class="xl64">10.84%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">2/28/2017</td>
<td class="xl64">1.17%</td>
<td class="xl64">8.78%</td>
<td class="xl64">3.72%</td>
<td class="xl64">14.96%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;">3/31/2017</td>
<td class="xl64">1.06%</td>
<td class="xl64">9.93%</td>
<td class="xl64">0.07%</td>
<td class="xl64">15.04%</td>
</tr>
<tr height="20" style="height: 15.0pt;">
<td class="xl65" height="20" style="height: 15.0pt;"><b>4/30/2017</b></td>
<td class="xl64"><b>0.75%</b></td>
<td class="xl64"><b>10.76%</b></td>
<td class="xl64"><b>1.06%</b></td>
<td class="xl64"><b>16.26%</b></td>
</tr>
</tbody></table>
<br />
There
is usually about a two-month lag in
PSPRS reporting its investment
returns.<br />
<br />
This post is more than a little late because of all the <i>Hall</i> case doings that have taken place over the last two months. Through April 2017, PSPRS is returning about 2/3 of the Russell 3000, which is very good and exceeds the 55-60% range that we have seen in the past. So kudos to PSPRS through April 2017. The Russell 3000 ended the fiscal year 2017 with an annual return at just about 18.50%, so if PSPRS gets to 2/3 of that, it would return 12.21% for the fiscal year. Even at 55-60% of the Russell 3000, it would produce an annual return in the range of 10.18% to 11.10%. All of these would well exceed the expected rate of return of 7.40%. PSPRS' Cancer Insurance Plan (CIP) has returned 8.30%, net of fees, through April 2017, so if we subtract 0.50% from PSPRS fiscal YTD returns, PSPRS is surpassing the CIP by almost 2%.<br />
<br />
PSPRS has positive returns in all its ten major asset categories and in its short-term investments. The CIP has positive returns in four of its five major categories, as well as its short-term investments. The CIP has lost about 1% on its fixed income investments for the fiscal YTD, though PSPRS has returned 4.60% on its fixed income portfolio, a 5.60% difference. The fiscal YTD returns on US and non-US equity, the only other two categories that the two funds share, showed much smaller differences, a 0.48% return in the CIP's US equity and a 0.75% higher return in the CIP's non-US equity. Fixed income makes up 26.60% of the CIP's total portfolio, while it makes up only 5.49% of PSPRS' total portfolio. I am not sure why the CIP would have a different fixed income portfolio than PSPRS, nor do I know if they have different investment managers, and not to rain on PSPRS' parade, but obviously, the CIP's fiscal year to date return would have been much closer to PSPRS' fiscal YTD return if the CIP had invested in the same fixed income portfolio as PSPRS. This shows an element of luck in choosing investments that underlies all actively managed portfolios.<br />
<br />
If PSPRS were to end the year at 12.21% returns, this would mean that under the old PBI system about 1.60% of the fiscal year's returns would be sequestered in the Fund for Future Benefit Increases to be used for PBI's. PSPRS ended FY 2016 with $8.291 billion in investments; 1.60% of that would be over $132 million available to pay PBI's. The first COLA under the new system will not be paid until next fiscal year (FY 2019). Inflation through the 12 months ending May 31, 2017 was 1.9%.<br />
<br />
* 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.
The
past two years fees have reduced the final annual reported return by
about a half percent. Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, and 0.63% in FY 2016.Drop Zonehttp://www.blogger.com/profile/07195030344305212432noreply@blogger.com0