PSPRS: All Lawyered Up Spending Other People’s Money

http://www.azcentral.com/story/news/politics/investigations/2015/02/24/outside-legal-tab-puts-pension-system-million-budget/23921855/

Outside legal tab puts pension system $1 million over budget

Craig Harris, The Republic | azcentral.com February 24, 2015

Story Highlights

  • Outside legal bills are expected to push PSPRS $1 million over budget.
  • The legal tab is rising despite warnings from the Attorney General’s Office to cut outside costs.
  • The PSPRS board is expected to address the budget problem at a meeting Wednesday, February 25, 2015

The state Public Safety Personnel Retirement System is projected to exceed its budget by at least $1 million because of unexpected expenses for outside legal advice.

Trustees for the pension system for police officers, firefighters, elected officials and correctional officers are expected to address the issue at a Wednesday board meeting.

The news comes at a difficult time for the pension system. The fund’s deteriorating financial condition during the recession was accompanied by staff turmoil and a turnover last year in top leadership.

The system responded to financial challenges by raising pension-fund contributions from Arizona public-safety workers and their government employers. Many employers have been forced to consider service cuts because of the rising cost.

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Meanwhile, the fund was told last fall to reduce its legal tab after its large outside legal fees caught the attention of the Arizona Attorney General’s Office.

However, spending on outside counsel has continued under acting Administrator Jared Smout, and the trust is projected to be at least $1 million over budget with four months left in the fiscal year.

Smout took over temporarily last July when his successor was forced to retire. Smout is a finalist for the top job. He did not respond to a request for comment on the budget issue.

The $8.1 billion pension system pays its administrative costs from investment earnings and payments from public employers and employees who are retirement-system members. It does not rely directly on general-fund dollars for its operation.

The trust runs on an $11.2 million annual budget that pays for personnel, operating expenses and outside consultants such as private attorneys. Legal bills are paid from various accounts.

The $1 million in excess legal fees means the trust is projected to exceed its budget by nearly 10 percent.

Christian Palmer, a fund spokesman, said most of the additional legal expenses stem from hiring outside attorneys who specialize in investment advice. Records show 70 percent of the additional legal costs arose from investment issues, while 30 percent involved administrative issues.

“It’s a good problem to have. We had older investments that came to realization,” Palmer said. “As older investments have realized a return, we had to find new investments. You have to bring in a due-diligence process.”

The budget imbalance could be addressed by taking money from contributions paid by employees and employers, or by transferring money directly from the trust fund.

The Arizona Republic last week filed a public-records request seeking the hourly rates for the outside counselors and firms that were paid. Palmer said the trust likely would not be able to provide that information until Wednesday’s board meeting.

While the trust has relied heavily on outside counsel, it also has a full-time, in-house investment attorney paid $215,000 annually, and it also is represented by the state Attorney General’s Office.

A legislative budget hawk questioned the agency’s continued reliance on outside counsel.

“That is interesting,” said state Sen. John Kavanagh, R-Fountain Hills. “It certainly raises a yellow flag, but it’s hard to say if it’s an abuse.”

Kavanagh, who has unsuccessfully proposed changes to the trust’s governance in the past, said he would like to examine the legal bills to see what kind of work is being done.

The Attorney General’s Office in October told the fund to limit its reliance on Kutak Rock, a law firm that was paid $1.76 million last fiscal year. The Attorney General’s Office told the trust at the time to rely more on state attorneys.

Records prepared for Wednesday’s board meeting show Kutak Rock has continued to provide legal advice, but the records lack a precise breakdown of what the firm and others have been paid.

Marc Lieberman, a Kutak Rock attorney representing the trust, said his firm’s work for the retirement system has dramatically decreased since the Attorney General’s Office last fall instructed the trust to decrease its use of outside counsel.

Lieberman said he believes the trust uses at least 13 outside law firms, including nine that specialize in investments.

The trust is run by a volunteer seven-member board appointed by the governor. Former Gov. Jan Brewer appointed the current members. A spokesman for Gov. Doug Ducey, who is proposing an austere state budget because of lower revenues, said Ducey did not have enough information to comment.

Major contributors to the trust on behalf of their employees include Arizona’s departments of corrections and public safety.

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