And how’s that going guys??
Public-sector unions, left unchecked, cloud our financial future
East Valley Tribune – June 20, 2015
- An unsustainable pension and benefits system is cracking.
- Today government unions, with their enhanced bargaining power, have aggressively leveraged superior compensation along with lavish health and pension benefits onto the traditional advantages of government employment.
- Public-sector unions get to participate in the selection of the bosses with whom they negotiate. Which they do, heavily. Government unions have become a go-to funder of the Democratic Party. Labor “negotiations” commonly have the same interests on both sides of the table.
- While private sector unions have steadily declined since the ’50s to less than 7 percent participation, public-sector unions have flourished. Compensation for government employees grew 21 percent since 2000, according to the Bureau of Economic Analysis, only 9 percent in the private economy.
- Skyrocketing costs of salaries, pensions and health care are making basic services like public safety and education unaffordable for many local governments. Several cities and states are facing bankruptcy, owing $2.5 trillion (not a typo) to their own pension systems alone. An unsustainable system is cracking.
Even Americans traditionally sympathetic with labor unions are beginning to realize that, left unchecked, public-sector unions are clouding our financial future.
Unlike private sector unions, government unions don’t have to deal with the hazard of pushing their employers too far. Government is not profit-oriented and has theoretically limitless ability to tax.
Even better, public-sector unions get to participate in the selection of the bosses with whom they negotiate. Which they do, heavily. Government unions have become a go-to funder of the Democratic Party. Labor “negotiations” commonly have the same interests on both sides of the table.
As a consequence, while private sector unions have steadily declined since the ’50s to less than 7 percent participation, public-sector unions have flourished. Compensation for government employees grew 21 percent since 2000, according to the Bureau of Economic Analysis, only 9 percent in the private economy.
Government employment traditionally was compensated somewhat less for similar jobs, but this was offset by less demanding employment, good benefits and ironclad job security. Today government unions, with their enhanced bargaining power, have aggressively leveraged superior compensation along with lavish health and pension benefits onto the traditional advantages of government employment. Workers, especially the educated, are beginning to prefer government work rather than the private sector, which creates the wealth and drives the economy.
But there’s a more immediate problem. Skyrocketing costs of salaries, pensions and health care are making basic services like public safety and education unaffordable for many local governments. Several cities and states are facing bankruptcy, owing $2.5 trillion (not a typo) to their own pension systems alone. An unsustainable system is cracking.
Illinois, the state in deepest trouble, should serve as a warning for other governments on the same course. For example, 5,000 education retirees pulldown over $100,000 per year in benefits. Half of government employees retire before age 60.
Illinois pension funding rose 12 percent last year alone. Yet these contribution levels don’t begin to keep up with the actual cost of the programs, which are far more generous than those available to most taxpayers. Illinois is $110 billion behind on pension funding and that number inexorably grows.
Unfortunately, Illinois has used up most of its options. Taxes are already so high that raising them further has only hastened the exodus of businesses from the state. Borrowing likewise isn’t a practical option for a state already deeply in debt, with a credit rating near junk-bond status.
Worse, just this month, the Illinois Supreme Court overturned a much-needed pension reform on the basis that benefits are constitutionally protected. The court even threw out provisions that affected only newly entering workers! Under the court’s dictates, Illinois is faced with cutting $6 billion from other stressed services to maintain pensions.
States like Illinois would obviously like a federal bailout but that’s another wretched idea. The line would be long of states who would rather get (another) handout from Washington rather than go through the pain of real reform at home.
One hopeful sign is the several states are now shining light on what have always been secret negotiations between union and government officials. Pennsylvania recently joined a list of 12 states that provide some transparency like open meeting laws and public access to agreements before they are finalized.
“It’s simply anti-labor, anti-worker legislation” a labor leader in Pennsylvania charged. It sounds like secrecy must really be important to those negotiations, right? It’s outrageous that taxpayers should have to beg for information when their money is being spent on a powerful interest group.
In Arizona, if we’re not as bad off as Illinois, we’re headed that direction. As recently as 2002, state retirement plans ran a surplus. No longer. By 2011, pension plans were $13 billion underfunded. Today the public safety retirement system is just 49 percent funded.
Yet even Arizona’s fiscally conservative government has not moved on such important reforms like weaning state workers off of defined benefit plans. Arizona actually has a law requiring secrecy in contract negotiations.
We would be wise to learn from states like Illinois. Why keep doing the same thing when the eventual consequences are bound to be dreadful?
Arizona Supreme Court picks five judges to hear pension case
- The Arizona Supreme Court has drafted five subordinate justices to decide how much long-serving judges should pay for their state pension benefits.
- A 2011 pension-reform law increased the amount judges must contribute to their retirement, raising it in steps from 7 percent of their salary to 13 percent.
- Arizona Court of Appeals Judges Philip Hall and Jon W. Thompson filed suit to roll back the increase, arguing that their pension contributions were locked in by contract at a lower rate. They sued on behalf of themselves and others who were on the bench before July 20, 2011, when the pension-reform law went into effect
- The case is expected to be heard by the end of the year, according to an attorney for the Elected Officials’ Retirement Plan.
The Arizona Supreme Court has drafted five subordinate justices to decide how much long-serving judges should pay for their state pension benefits.
The state’s high court last week appointed the five judges in an apparent bid to avert conflicts of interest, since the outcome of the case would affect the justices.
The five judges who will hear the nearly 4-year-old civil case are newer to their positions and are not a part of the old judicial retirement system. They therefore are not affected by the outcome of the lawsuit. In it, several judges challenged a hike in the cost of their retirement benefits by the Elected Officials’ Retirement Plan.
Though the Supreme Court sought to avert any appearance of a conflict, the new arrangement might still raise eyebrows because two of the replacement judges are colleagues of a key plaintiff in the case.
The Supreme Court did not give a reason for recusing itself, but the high court’s five justices would financially benefit if the suit prevails.
A 2011 pension-reform law increased the amount judges must contribute to their retirement, raising it in steps from 7 percent of their salary to 13 percent. The law was designed to save taxpayer money and shore up the financially ailing Elected Officials’ Retirement Plan and other state retirement systems.
Arizona Court of Appeals Judges Philip Hall and Jon W. Thompson filed suit to roll back the increase, arguing that their pension contributions were locked in by contract at a lower rate. They sued on behalf of themselves and others who were on the bench before July 20, 2011, when the pension-reform law went into effect. Hall has since retired.
The suit also seeks to restore pension cost-of-living increases after retirement.
Hall and Thompson won their case in Maricopa County Superior Court, claiming the law was an unconstitutional infringement on a judge’s state-mandated salary and contract. Because the plaintiffs were members of the appellate bench, the case bypassed the Court of Appeals and went to the state’s high court on appeal.
Should they prevail, they could have their contribution rates for pensions restored to 7 percent of their salary. That would eventually require government employers to put more taxpayer funds into the retirement system, according to the Elected Officials’ Retirement Plan’s most recent annual report.
By comparison, members of the more financially stable Arizona State Retirement System pay 11.47 of their pay for pension benefits.
If the judges win, the decision likely would also benefit police officers, firefighters and correctional officers. All of those groups have retirement plans through the Public Safety Personnel Retirement System, which acts as the umbrella organization for the Elected Officials’ Retirement Plan and pension programs for first responders and prison guards.
When a separate legal challenge restored cost-of-living increases for retired judges, those benefits also were restored for retired first responders and correctional officers. That cost the system a one-time hit of at least $233 million.
A spokesman for the Elected Officials’ Retirement Plan said Monday that the pension plan did not have an estimate of the cost should the judges prevail in the current case.
Judges ordered to hear the pension case are Randall Howe and Kent Cattani of the Court of Appeals, Michael Butler of Pima County, Karl Eppich of Pinal County and Patricia Trebesch of Yavapai County. All of these judges were seated after the law went into place, and therefore would not be affected because they are part of a different Elected Officials’ Retirement Plan retirement group.
Howe and Cattani are Appeals Court colleagues of Thompson, one of the lead plaintiffs in the case.
Supreme Court Chief Justice Scott Bales was unavailable to discuss the case.
Heather Murphy, a Supreme Court spokeswoman, said while Howe and Cattani serve on the same court as one of the plaintiffs, the system has a “rule of necessity” that says “someone has to have this case.”
Jon Riches, an attorney with the Goldwater Institute, said it may appear that a conflict of interest remains, but there is not much that can be done. The Goldwater Institute has previously sued over public-pension abuses in Phoenix.
“It’s a tough deal. There is no other entity that can make these rulings,” Riches said.
The case is expected to be heard by the end of the year, according to an attorney for the Elected Officials’ Retirement Plan.
On this very day, one year ago…
The #$%! Up In The Desert was made public.
– Pensioners First
Dust-up in the desert
Arizona public safety fund is still grappling with a controversy over some real estate investments
BY RANDY DIAMOND | JUNE 23, 2014
Staff and board members of the underfunded $7.9 billion Arizona Public Safety Personnel Retirement System, Phoenix, continue to deal with fallout from questions about real estate valuations and legal matters involving former staff members who questioned those valuations.
Three portfolio managers, as well as the pension fund’s chief investment counsel, resigned between June and October 2013 over valuation of some of the properties in portfolios managed by Desert Troon Cos., Scottsdale, Ariz.
The FBI has interviewed at least two of the former portfolio managers, asking whether senior management had inflated the value of real estate managed in a joint venture between the pension fund and Desert Troon.
Mark Selfridge, a former portfolio manager, said in an interview with Pensions & Investments that FBI agents questioned him about the valuation issues. Anton Orlich, another former portfolio manager, testified in a deposition taken by the pension fund that he, too, was questioned by the FBI.
James Hacking, the pension fund’s administrator, said in a letter to P&I that the valuations used by PSPRS senior management — Chief Investment Officer Ryan Parham, Deputy CIO Marty Anderson and Mr. Hacking — for the Desert Troon portfolios “were reasonable” and “most accurately reflected” the underlying value of the real estate properties.
One month after this article was published, Administrator James Hacking was fired for lying to the Governor about suspended bonuses and hidden pay raises that were a direct result of these employee resignations.
– Pensioners First
A federal grand jury has subpoenaed PSPRS for documents in connection with the FBI investigation.
The pension fund is suing Mr. Orlich, alleging he improperly took fund documents with him when he resigned. Mr. Orlich insists he had permission to take the documents. In addition, Desert Troon filed suit against the four people who resigned from PSPRS, alleging they made false statements to the media, including P&I, defaming the firm and senior officials at the pension fund.
One thing is certain: PSPRS won’t be entering into any other relationships structured like the joint venture with Desert Troon. Pension trustees voted earlier this year to prohibit PSPRS from investing in any new “joint venture real estate investments.”
Despite repeated written requests and phone calls, Desert Troon CEO Daniel Smith did not comment for this article.
PSPRS and Desert Troon formed at least two real estate ventures that remain active today, part of a real estate investment program that Mr. Hacking said in an April 22 letter ”reflected PSPRS’ commitment to investment in the Arizona community.”
The first is DTR1 LLC, which Mr. Hacking said was formed in the mid-1990s. This is the joint venture that Messrs. Selfridge and Orlich said the FBI asked them about.
PSPRS owns between 85% and 100% of each property in the DTR1 portfolio; Desert Troon owns the remainder and manages all of it. The joint venture also contains what Mr. Hacking called “the majority of the … assets” that another real estate money manager, The Pivotal Group, had managed for the pension fund; Pivotal was terminated in 2009.
The second company, DTR1C LLC, was formed in 2009 as a wholly owned subsidiary of PSPRS, the assets of which are managed by Desert Troon. It was formed to assemble, reposition and sell distressed properties; the pension fund is the sole investor. The portfolio includes properties that had been managed by Apex Capital Management which, like Pivotal, had been hurtby the collapse of the real estate market and had poor performance.
The pension fund terminated Apex in 2011 and transferred about $30 million in properties managed by Apex to DTR1C in early 2012. The properties in DTR1C are 100% owned by the pension fund. DTR1C also contains some properties in which Desert Troon gave up its minority interest after the pension fund paid down debt on them, minutes from PSPRS board meetings show.
The assets managed by Desert Troon in both portfolios represented 55.08% of PSPRS’ overall real estate portfolio at the end of fiscal 2008. That dropped to 36.6% at the end of last year.
Overall, PSPRS has made capital commitments and/or investments of more than $550 million with Desert Troon during the 18-year relationship.
Desert Troon manages almost 4.7% of the pension fund’s total assets, according to PSPRS’ June 30, 2013, financial statement.
A report from Bank of New York Mellon (BK) Corp. (BK), the pension fund’s custodian, showed PSPRS’ investments with Desert Troon returned an annualized -6% net of fees on a time-weighted basis for the five-year period ended June 30, 2013. The NCREIF Property index returned an annualized 2.79% for the same period.
Mr. Hacking confirmed the pension fund uses the NCREIF index as a benchmark. But he said for accounting reasons, comparing the returns of DTR1 and DTR1C to that index “will result in material distortions and inaccuracies. Simply put, it is not an ‘apples-to-apples’ comparison.”
• -16.4% One-year performance
• -3.1% Three-year performance
• -4.7% Five –year performance
There appears to be an over-weighting of the real estate portfolio in Desert Troon while the portfolio itself has been consistently underperforming over the past five years. Regardless, it does appear that the relationship will need to change so that PSPRS can diversify its real estate portfolio and not have its returns so closely tied to a single company.
– http://www.PSPRS.info (PSPRS Pension Watch blog)
The value of the two portfolios Desert Troon managed led to a dispute in 2013 over whether Messrs. Parham and Hacking had used the appropriate appraisal methods during the previous four years.
The three former PSPRS portfolio managers — Messrs. Selfridge, Orlich and Paul Corens — and former Chief Investment Counsel Andrew Carriker cited the valuation dispute as a reason for their resignations.
Mr. Hacking acknowledged to P&I that the four men had disputed the valuation and “resigned, ostensibly over this issue.”
The controversy came to light last year after Messrs. Orlich and Carriker began questioning how PSPRS was valuing the Desert Troon portfolios.
The roots of the valuation dispute go back to 2009. That’s when the pension fund began using a market value for all appraisals. The purpose was to provide “meaningful insight into the value of (the pension fund’s) investments” and “specific asset values” in the preparation of PSPRS’ financial statements, Mr. Hacking said in a letter to P&I. (Until then, a cost basis — what it cost to acquire a property — was used.)
But in 2010, Messrs. Hacking and Parham discarded the market-value-based appraisal process. They agreed to Desert Troon’s request that the pension fund use an investment-value-based approach.
The Governmental Accounting Standards Board requires public pension funds’ real estate holdings to be appraised at market value, using factors such as comparable sales or an income approach using discounted cash flow analysis, said William Holder, a former GASB board member and dean of the Leventhal School of Accounting at the University of Southern California, Los Angeles. He is not involved in the PSPRS matter.
For the fiscal year ended June 30, 2012, Desert Troon valued the real estate it managed for the Arizona pension fund using investment value, “to reflect what it fully expected those assets would sell for in the future as the real estate markets revive, especially here in Arizona,” Mr. Hacking said in a July 2013 letter to Arizona Auditor General Debra K. Davenport, requesting that her office evaluate Desert Troon’s valuation methods.
He said Desert Troon used the income approach to analyze future cash flows from the properties, the same method used by independent appraiser Ernst & Young LLC.
But they used different discount rates.
While the auditor general said Desert Troon used a 5% discount rate for lifestyle and retail properties, which were the bulk of the portfolios, discount rates of 7.75% to 20.5% were used for commercial properties.
Ernst & Young, however, appraised every property using discount rates of 7.75% to 20.5%.
The auditor general said the 5% discount rate Desert Troon used for lifestyle and retail properties “may not be consistent with accounting standards.” But the auditor general also said the discount rates used for the commercial properties were ones “market participants would use,” and were appropriate.
As a result, Desert Troon’s appraisals for the year ended June 30, 2012, totaled $303.5 million; Ernst & Young’s appraisals totaled $213.6 million.
Desert Troon’s valuation was used in the pension fund’s financial statements for the year ended June 30, 2012, which led to a dispute the following year among PSPRS investment staff as to what discount rate to use. That disagreement ultimately led to the resignation of the three portfolio managers and the chief counsel.
Mr. Holder said the 5% discount rate was too low to reflect the market value of real estate, as required by the GASB. He said investors in real estate generally use at least 12% to 15% to reflect the speculative nature of real estate investments. He said 5% would be closer to a risk-free rate.
For the fiscal year ended June 30, 2013, Ernst & Young’s valuation was about $82 million less than the approximately $344 million Desert Troon had reported.
Mr. Hacking told P&I that using a market-based valuation would have understated the value of the Desert Troon portfolio by as much as $151 million combined in the two fiscal years ended June 30, 2013.
Valuation issues also surfaced in earlier years. In 2007, the joint venture with Desert Troon purchased Superstition Gateway, a shopping complex in Mesa, Ariz., and tracts of vacant land in other parts of metropolitan Phoenix.
In 2010, the pension fund hired CBRE Group Inc. to appraise the shopping center and land, using PSPRS’ new market-value appraisal policy, Christa Severns, the pension fund’s former external spokeswoman, has said.
Based on the appraisal by CBRE, the pension fund’s entire equity investment of $64.4 million in Superstition Gateway would have to be written down, according to a June 18, 2010, e-mail to Mr. Corens from Desert Troon CFO Daniel Hammons,who questioned the appraisals.
“These values seem criminal,” Mr. Hammons wrote.
That e-mail also said that based on the CBRE appraisal, the pension fund’s entire $31.7 million investment in Terra Verde, a partially completed office park in Scottsdale, would be wiped out.
In an e-mail to P&I, Ms. Severns said pension fund and Desert Troon executives were concerned that the market-based appraisals might have “produced ‘fire sale’ values that would have wiped out the (pension) system’s and DTC’s equity interests in some of those properties.”
“The resulting values could have arguably violated the loan covenants and potentially caused lenders to issue technical loan defaults or at the very least demand principal reductions,” she wrote.
Ms. Severns said after seeing market-based appraisals that showed a severe decline in property values, Desert Troon executives requested the pension fund use the investment-value approach for its joint-venture portfolio.
She said PSPRS’ CIO Mr. Parham then arranged a meeting in the summer of 2010 between Desert Troon and CBRE group officials and both agreed an investment-based methodology should be used to value the properties. And it was.
Mr. Hacking said in his July 2013 letter to the state auditor general that Desert Troon officials had argued in 2010 that it would be unreasonable to report then-current market values for the joint venture, DTR1, since those properties were not going to be sold immediately and could be sold at substantially higher prices in the future.
The properties were ultimately reappraised higher, using investment value, as requested by Desert Troon. The properties — including Superstition Gateway and Terra Verde — were written down by approximately $50 million in 2011.
A 2010 appraisal that valued the properties at about $100 million less using market value was never used. Indeed, for the five fiscal years between July 1, 2009, and June 30, 2013, PSPRS used investment value in appraisals.
In a formal report to the pension fund’s board, Mr. Carriker, the chief investment counsel, contested those valuations. But the board adopted a report signed by Mr. Hacking and PSPRS’ outside fiduciary counsel Marc Lieberman that said the use of investment value calculations was proper.
Last November, the auditor general responded to Mr. Hacking’s July 2013 letter regarding the asset valuation methods, saying the pension fund must adhere to GASB rules of using fair, or market, value.
However, in another section of its report, the auditor general said for the properties in the joint venture, investment value can be used. It said PSPRS, as an investor in the entity that owns the real estate, doesn’t value its investments based on the appraisals but rather on values provided by Desert Troon under the joint venture’s operating agreement.
Because of that scenario, the auditor general quotes generally accepted accounting principles as allowing Desert Troon to estimate the value of PSPRS’ ownership interest. The pension fund used that number.
Mr. Holder, the USC dean, disagreed that PSPRS could report investment value for the Desert Troon joint venture portfolio. He said regardless of whether joint venture real estate assets can be sold at the time they are appraised, the GASB requires public pension funds to list real estate at fair, or market, value.
PSPRS mainly made direct real estate investments with several firms between 1990 and 2008 as the pension fund expanded its investments in Arizona strip shopping centers, office buildings, residential development and vacant land.
Most of the direct real estate investments were in the Phoenix area.
Concentrating investment in one area can be risky because a pension plan could expose itself to the vagaries of that market, said Robert Heinkel, a professor at the Sauder School of Business at the University of British Columbia, Vancouver, and co-author of the book, “The Role of Real Estate in a Pension Portfolio.”
While Mr. Heinkel isn’t familiar with the Arizona pension fund, he commented: “It’s real obvious that you want to diversify not just in real estate investments, but any investments. It’s dangerous not to do so.”
When Mr. Parham became CIO on May 27, 2009, the Arizona and Southwest real estate markets had collapsed, which meant such investments the pension plan made had already soured. Pension officials began publicly acknowledging problems in the real estate portfolio that year, board and investment committee meeting minutes show.
Problems with some properties emerged when the pension fund was called on to help Desert Troon repay debt from property investments for both portfolios.
Minutes of a January 2010 PSPRS investment committee meeting show Desert Troon was facing demands from bank lenders requiring immediate repayment of debt on properties, first in the joint venture (DTR1) and later in both portfolios.
When asked how much pension fund money was used to pay down debt on properties managed by Desert Troon, Mr. Hacking said in an e-mail: “We cannot say without research … but we have confirmed that since 2009, (PSPRS) has contributed $93 million to DTR1 and $76 million to DTR1C.“
In some cases, PSPRS was forced to repay the debt because it had guaranteed it would make payments if the joint venture — DTR1 — could not.
The pension fund’s pledge enabled the PSPRS Desert Troon joint venture to get a lower interest rate on loans, according to minutes from a PSPRS board meeting on Nov. 30, 2011.
“The decision to enter into recourse (debt) was made when debt was cheap for joint ventures and the market was doing well, in order to save money,” Don Stracke, a consultant from the pension fund’s general consultant NEPC LLC, was quoted in the minutes as saying. “The situation that has occurred was not foreseen and today we would never agree to recourse debt.”
Mr. Hacking said in a posting on the fund’s website in August 2013 that Desert Troon had done an excellent job managing depressed real estate assets back to health. He cited more than $37 million in real estate sales at that time, two to three times their value in December 2007, he said. He didn’t say how many properties were sold.
Mr. Hacking has said the pension fund intends to sell the properties managed by Desert Troon when the market recovers. For now, most of the properties in the two Desert Troon-managed portfolios remain unsold.
Desert Troon earns fees from PSPRS as its real estate manager, operating partner, developer and property manager as well as when properties are sold. The pension fund paid Desert Troon $12 million in fees in 2012, according to a report compiled by ORG Portfolio Management, the pension fund’s real estate investment consultant. The report concluded the fees were appropriate.
The valuation dispute is just one issue raised by the former employees. They also questioned the lack of quarterly reporting by Desert Troon about investment performance of the portfolios the company manages for the pension fund.
As the Arizona fund’s allocations to Desert Troon increased, PSPRS’ oversight of the manager did not keep up with Desert Troon’s expanding role, said Mr. Corens, who was real estate manager from 2006 to 2010.
Messrs. Corens and Selfridge said in separate interviews that Desert Troon failed to provide quarterly financial reports, which real estate investment consultants say are an industry standard.
The two former PSPRS employees said that while Desert Troon did provide annual performance reporting, that reporting generally was limited to only aggregate data on the overall Desert Troon portfolio. That, they said, made it difficult for the PSPRS staff to determine what pieces of the portfolio were performing well and which were underperforming.
Mr. Hacking in his e-mailed answers to questions, said Desert Troon “has always complied, and continues to comply, with all of its financial reporting obligations under the DTR1 Operating Agreement and the DTR1C Management Agreement.”
This article originally appeared in the June 23, 2014 print issue as, “Dust-up in the desert”.
The Public Pension Funding Trap
To make up for shortfalls in contributions, plans take extraordinary risks to earn higher returns
Andrew G. Biggs – May 31, 2015
State and local government pensions were national news during the recession, as unfunded liabilities rose into the trillions of dollars and overheated commentators predicted that rising pension costs could push governments into bankruptcy. Today attention has faded and the public-pension industry claims that plans are back on track. Don’t be too sure.
Governments are still failing to make their full contributions; as recently as this week New Jersey’s chief budget analyst deemed it not “fiscally or physically possible” for the state to make its nearly $3 billion full pension contribution this year. Public pensions are taking greater investment risk with the money they do receive. If those investments fail to pan out, the budget picture for many governments will once again be grim.
In truth, only 41% of state and local plans received their full contribution last year, according to plan data, down from 65% in 2008. New York state plans to defer $1 billion in pension contributions over the next five years. Pennsylvania’s school-employees retirement plan last year received less than half its full contribution.
Even the “full” pension contribution isn’t all it is cracked up to be. Compared with American corporate pension plans or public pensions in other countries, U.S. public pensions calculate their contributions assuming a higher rate of return on their investments, and they take longer to pay off their unfunded liabilities. If U.S. public plans operated under the same accounting rules as corporate pensions, annual contributions would roughly double. In other words, public pensions are failing to meet what is already a very low bar.
To make up for shortfalls, U.S. public plans are taking extraordinary investment risks to earn higher returns. Three Japanese public-employee plans, for example, recently shifted to what news reports termed an “equity-heavy” portfolio holding 50% stocks and 50% bonds. In the U.S., the average public plan devotes 72% of investments to stocks or other risky assets and only one plan out of 98 tracked by the Public Fund Survey held less than half its assets in risky investments.
Kansas has recently gone further, by borrowing $1 billion from the public, which it will invest in hopes of generating a 7.75% annual return. Kansas’ hoped-for return is the norm—the average U.S. public pension also assumes an annual investment return of about 7.75% and bases its contributions on those projected returns.
But are these returns realistic? In October 2014, the Pension Consulting Alliance compiled investment-return projections from eight investment consultants and five asset managers. For a portfolio of 70% stocks, 30% bonds, the survey’s median projected return over the next 10 years was 5.9%. No adviser projected a return exceeding 6.5%.
Many of the investment advisers surveyed are employed by public plans for their advice, but the plans don’t want to listen. If these advisers turn out to be correct, funding costs could rise by 40% above the current levels that most governments already cannot pay.
U.S. state and local governments are required to contribute half as much to their pensions as are private employers, and six-in-10 public plans fail to receive even that low required contribution. If public pensions are indeed back on track, that track may simply be leading the country to more trouble down the road.
Arizona cities, towns face public safety pension crisis
Cottonwood’s balance sheet shows $9 million debt
Jon Hutchinson Staff Reporter
COTTONWOOD — Cities and towns all over Arizona are shuddering at the thought of paying down the unfunded liabilities of the Public Service Personnel Retirement system.
Cottonwood, for one, has a $9 million debt that has come to roost.
The state pension system for police officers and firefighters has less than half of the money it needs to fund current and future retirement payments, an amount equal to $7.78 billion.
Cities and towns around the state face extra-large pension bills from the Arizona Public Safety Personnel Retirement System because of a state Supreme Court decision that shot down a law that cut costs for the system. The highest court ruled unconstitutional Permanent Benefit Increase (PBI) changes made by Senate Bill 1609 in 2011.
That was the Fields Case, explained Rudy Rodriguez, Cottonwood’s Administrative Services General Manager. Now, Rodriguez would like to divert funds from every budget source possible to help plug Cottonwood’s debt sooner than later to avoid accumulated interest.
The average lifetime annual pension for a public-safety retiree is $53,236, nearly three times what an average retiree receives in the more financially-stable Arizona State Retirement System for teachers and government workers, according to an Arizona Republic finding.
Rodriguez says the unfunded amount for the Cottonwood Fire Department amounts to nearly $1.5 million, but the unfunded liability for the Cottonwood Police Department is $7.59 million. The unfunded amounts could be paid off over 22 years in exchange for a 7.85-percent interest rate, pushing Cottonwood’s $9 million debt to $21 million.
The City of Prescott, by comparison, is one of the Arizona cities considering raising taxes to pay down its debt.
Arizona is not the only state facing a pension crisis. Time Magazine has called it a “Pension Time Bomb in America.”
Illinois is facing bankruptcy. One columnist says California is facing Death by Pension, in a periodical called PensionTsunami.
91 Arizona cities publicly expressed that they want the Arizona Public Safety Personnel Retirement System’s seven member Board of Trustees replaced due to lack of expertise and lack of fiduciary action. In sum, they are political hacks willing to do anything to save their own skin.
- League of Arizona Cities and Towns call for the closure of the public safety pension
- The league also wants to replace the seven-member Public Safety Personnel Retirement System board
- League’s plan would only influence employees hired after July 1, 2016.
- The Legislature would have to make any changes to PSPRS.
The League of Arizona Cities and Towns is calling for major changes to the financially troubled retirement system for first responders because its members have been hard hit by rising public-safety pension costs.
The 91-member league wants a new statewide retirement system for employees hired after July 1, 2016. It wouldn’t change the pension plan for current members and retirees.
The league also wants to replace the seven-member Public Safety Personnel Retirement System board, which has only three private-sector members, with an independent body of “qualified experts with fiduciary responsibility.“
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money for another person.
PENSIONERS FIRST LINK: The Public Safety Pension Board Should Be Fired
The Arizona PSPRS Board of Trustees
-Brian Tobin, Chairman
-Greg Ferguson, Vice Chairman
-Randie A. Stein
-Richard J Petrenka
-Jeff Allen McHenry
-William C Davis
The league’s plan has been in the works since June 2014. It was presented Wednesday before the PSPRS board, with one member expressing skepticism. The board took no formal action.
The proposal comes amid another reform effort pushed by the Professional Firefighters of Arizona and a work group at the Capitol.
Most of those involved have publicly acknowledged the current system is financially broken and needs an overhaul as cities and towns have been forced to cut services and put a freeze on hiring police and firefighters because of increased public-safety pension costs. Teachers and other public employees are part of the Arizona State Retirement System and not covered by this proposal.
Costs have increased because of generous benefits for retirees, years of poor investment returns and an Arizona Supreme Court decision that rolled back cost-saving reforms.
The Legislature would need to make any significant changes to the public safety pension system.
The league’s plan would:
•Create a different pension system for new employees hired after July 1, 2016.
•Have employers and employees pay the same amount of money or contribution rate into the trust. Currently, employers pay four to eight times the contribution rate of employees.
•Pool assets and liabilities to spread the risks among all government bodies.
•Have a pension board of trustees who are independent, qualified experts. The current board has four public employees with three — a firefighter, police officer and county supervisor — who benefit from the system.
“We have to change the system, and the way it’s designed,” said Scott McCarty, Queen Creek’s finance director and league pension-task-force chairman.
McCarty said the league wants to make changes for future employees to avoid court challenges. Arizona courts and those across the country have struck down numerous pension-reform laws that have reduced benefits for retirees or changed the system for current employees.
Greg Ferguson, PSPRS Vice Chairman and a Yuma County supervisor, told McCarty that the league’s pooled-asset plan amounted to a cost shift for some governments that would have to pay more to offset the burden of other communities that have high contribution rates. Ferguson also said the current system would suffer even more if new members were not allowed to join.
This is exactly why the current Board of Trustees needs to go!
– Pensioners First
McCarty, later in an interview, complained that it was unfair to ask new employees to continue to prop up an ailing system, calling it a “death spiral.”
Sen. Debbie Lesko, R-Peoria, has been running a pension-reform work session at the Capitol since February. Lesko, in a phone interview, said she hoped to have a plan in place for the 2016 Legislature to consider in January.
Lesko said the league is a major player in discussions because its members employ thousands of police officers and firefighters and are major financial contributors to PSPRS.
Lesko said the league’s plan and the firefighters’ proposal, which would change the funding mechanism for pension increases, have good points and that she’s not ruling anything out.
“We are close to a breaking point and everyone realizes we need to do something,” Lesko said. “I’m excited we have all been in the same room talking about this. We may get something done.”
Brian Tobin, PSPRS chairman and a Phoenix deputy fire chief, said he’s attended Lesko’s meetings, and he believes they have been productive.
“It’s a healthy, collaborative effort to determine a reasonable solution to pension reform,” Tobin said.
The Arizona Republic in 2010 published a weeklong series detailing the burdens that state governments faced because of generous pension benefits and rising costs.
The Legislature responded in 2011 by passing cost-saving reforms, but the state Supreme Court in 2014 restored cost-of-living raises to PSPRS retirees, costing the system hundreds of millions of dollars.
Since 2011, the health of the PSPRS has deteriorated, and the funded ratio — the percentage of pension-fund liabilities that could be paid with current assets — has dropped from nearly 62 percent to about 50 percent.
As funded ratios drop, more money is needed from taxpayers to shore up the nearly $8.3 billion trust.
I’ll gladly pay you Tuesday for a hamburger today!
- Phoenix leaders say its budget is balanced but city has delayed paying pension costs to avoid deficit
- City Manager Zuercher recommended phasing in higher pension cost for police and fire over three years
- Budget includes money for hiring more police and increasing officer training
- The city’s payments to the system are increasing by $40 million
Phoenix leaders voted 6-3 Tuesday to approve a final budget for the next fiscal year, but City Council members were sharply divided over whether the city truly balanced its books.
On paper, the spending plan backed by Mayor Greg Stanton and the council’s liberal and more centrist members is balanced. The city projects collecting enough revenue to cover its expenses without raising taxes or making any cuts to public programs in the next year.
While supporters of the budget have praised Phoenix’s return to black ink, their message clashed with critics who said that the city only avoided making cuts because it irresponsibly delayed paying its full retirement costs.
The city delayed paying money it owes to the state pension system for police officers and firefighters. Because of an Arizona Supreme Court decision that struck down part of a state law meant to reduce pension costs, the city’s payments to the system are increasing by $40 million.
PREVIOUSLY: Phoenix budget sidesteps soaring pension costs
However, City Manager Ed Zuercher recommended that the city phase in those high payments over three years — a move that increases its long-term pension costs by about $69 million over 22 years.
Council members ultimately approved Zuercher’s $1.16 billion general-fund budget for the 2015-16 fiscal year; Phoenix operates on a July 1-June 30 fiscal calendar. The general fund pays for everyday expenses, such as police, fire and parks.
Stanton and council members who supported the budget have said it makes sense to defer paying some pension costs because absorbing the full amount today could require drastic cuts to popular city services. The city would face a roughly $30 million deficit if it paid its full pension tab to the state next year, officials said.
“We’re here to provide those services,” Councilwoman Thelda Williams, a moderate Republican, told The Arizona Republic after she voted for the budget. “In the meantime, the economy could turn around, circumstances could change and next year, we might not even have a problem.”
The council’s more fiscally conservative members, Councilmen Bill Gates, Sal DiCiccio and Jim Waring, voted against the budget. DiCiccio and Waring said the city should address its fiscal problems head on and not create higher costs for taxpayers in the long run.
“The budget just literally puts the city of Phoenix further in debt,” DiCiccio said. “It’s like using a credit card to pay off your mortgage. You’re using debt to pay off debt.”
Even without an unexpected jump in pension costs, the city originally projected a deficit next year, and funding cuts at the state level added to the problem.
Phoenix ended up in the black because it has created a new water-bill tax for residents, cut employee compensation, eliminated 162 vacant city jobs and delayed replacing some old city vehicles and equipment.
Still, city leaders increased spending in a few areas, including $2.2 million that will pay overtime and other costs for 40 hours of additional training for all city police officers.
The city will also accelerate the hiring of police in the next year, bringing on 110 new officers. Zuercher projects that’s enough to offset personnel the department will lose through attrition. A hiring freeze shrunk the force by nearly 600 officers in recent years.
Phoenix can hire more officers now because its special public-safety funds, which are supported by a voter-approved tax, are rebounding after running sizable deficits during the recession. Those funds are separate from the city’s general fund.
Although the city has avoided a deficit next year, it’s far from resolving its long-term red ink. Phoenix faces the prospect of deficits for several years, starting with an estimated $31 million to $58 million deficit in fiscal 2016-17.
Zuercher has said the city will spend the next year finding new ways to save money and resolve a potential deficit.
So far, the city plans to increase how often it makes pension payments to the state, which could save about $20 million over 22 years because the money would be invested for longer and potentially provide larger investment returns, city officials said.
Phoenix firefighters to get $2.5 million in back pay
The Republic – May 13, 2015
- Nearly 200 firefighters will get $2.5 million in back pay
- The city put some firefighters at incorrect salary levels during recession-era budget cuts
- Payouts range from $249 to more than $19,400
- The United Phoenix Firefighters Local 493 union began an investigation
Nearly 200 Phoenix firefighters will get $2.5 million in back wages to correct a payroll error that resulted in underpayment for as many as four years.
The Phoenix City Council voted unanimously Wednesday to spend the money, allowing the city to close the book on missteps that started in July 2010 during recession-era budget cuts. Human Resources Department employees had failed to adjust some employees’ salaries to match changes in the fire union’s contract, according to a city memo.
City leaders have widely panned the mistake, saying it should have been caught and corrected years earlier. One longtime councilwoman said she has never seen a personnel mix-up of this magnitude at City Hall.
Phoenix recently signed settlement agreements with the firefighters who were underpaid, allowing the city to avoid potentially costly litigation. Affected employees have received lump-sum checks, ranging from $249 to more than $19,400.
Fire union President Steve Beuerlein said while some of his members were frustrated by the delay and discussed filing lawsuits, the union convinced them to work with the city so the dispute could be resolved more quickly and without additional costs.
“It’s been over a year and a half that we’ve been working on this and we’re definitely relieved that it’s behind us,” he said. “That’s an understatement. They’ve assured us that they’ve taken the steps and they’re prepared to make sure it doesn’t happen again.”
The problem went unnoticed until two firefighters compared their paychecks in mid-2013, Beuerlein said. They noticed that one of the men was paid more even though they had been hired around the same time.
After that, leaders of the United Phoenix Firefighters Local 493 began an investigation. City officials initially told them there wasn’t a problem, but both sides soon realized widespread payroll errors had occurred, human-resource records show.
The firefighters filed a labor grievance last summer after the issue went unresolved for nearly a year. Beuerlein has said the firefighters could have sued for up to triple damages.
City officials said the mix-up happened when the city reduced the number of pay grades and changed the amount of time between raises for firefighters who were early in their careers. Because the changes weren’t implemented correctly, some employees were placed at a wrong salary level.
WHAT PHOENIX FIREFIGHTERS MAKE IN BASE SALARY
Like many government agencies or companies with unions, Phoenix has a “step-pay” system that allows nearly every employee to get a set raise every year. The salary ladder includes up to 10 steps, and employees generally start receiving a “longevity” bonus instead of a raise once they’ve reached the top step for their position.
Phoenix employees who are hired at the same time for the same position often earn the same salary for the bulk of their careers because of this pay system.
Councilman Jim Waring, who had been undecided on whether he would support the settlement, ultimately voted in favor. He said city officials haven’t given a clear enough explanation of how the problem occurred, but he doesn’t want to punish firefighters for a mistake that wasn’t theirs.
“We owe them the money, so that’s kind of a no-brainer,” Waring said. “It’s frustrating. No doubt about it.”
Acting Human Resources Director Cindy Bezaury, who came to Phoenix in late 2013, has said the error happened when the city was “trying to survive an economic disaster” and making all of its employee unions take cuts. The department has a new executive leadership team due largely to retirements.
“I can understand why it was missed at that particular point,” she said in March. “A great deal of change was taking place. They were trying to track and monitor that.”
Despite the scope of the settlement, it won’t have an impact on Phoenix’s budget because it’s being paid out of the city’s risk-management fund, a pool of money used to protect the city from lawsuits and claims, Bezaury said.
The $2.5 million expense is in addition to about $58,000 in settlements the city paid out in late 2014 and early 2015, making the firefighters whole since the start of the fiscal year on July 1. Phoenix put all of the firefighters on the correct pay steps last fall.
Bezaury said fixing the problem took so long because of the complicated payroll math that needed to be done for each employee. The city had to account for each employee’s overtime pay, pension payments and other factors.
Former state official fired by Brewer seeks $1.5 million
Craig Harris and Yvonne Wingett Sanchez, The Republic | azcentral.com
- Ex-Department of Administration director seeks nearly $1.5 million for wrongful termination.
- Brian McNeil’s claim alleges former Gov. Jan Brewer’s administration engaged in unethical behavior.
- Former Gov. Jan Brewer declined to respond to the allegations.
Brian McNeil, former director of the Arizona Department of Administration, is seeking nearly $1.5 million from the state in a wrongful-termination claim that alleges former Gov. Jan Brewer’s administration engaged in unethical conduct.
Among the allegations in the 94-page claim — a precursor to a lawsuit — is that high-ranking officials within Brewer’s administration engaged in a “legislative ploy” to overturn a $3 billion mental-health contract.
The claim also accuses Brewer of quietly giving staff raises that were outside state policy, despite publicly cracking down on large raises given to certain employees of the Arizona Public Safety Personnel Retirement System pension.
The claim further contends Brewer staffers deliberately dragged their feet on the release of public records to the media, as opposed to an attempt “to be in compliance with the letter and spirit of Arizona law.”
Brewer, who left office in January, declined to comment on McNeil’s claims.
McNeil, whom Brewer fired in late October, also says in his claim that he was terminated without explanation and was denied the opportunity to respond to “unfounded” allegations of racist behavior and sexual misconduct toward a female employee.
Shortly after Brewer fired McNeil, her spokesman, Andrew Wilder, released a U.S. Equal Employment Opportunity Commission complaint by that employee that alleged McNeil had discriminated against her.
McNeil’s claim contends the state’s decision to “disclose the unsubstantiated and false allegations” to the media was motivated to discredit him because he had fought the Brewer administration over the misuse of public funds and government waste.
McNeil declined comment when reached by phone Friday.
The claim asserts McNeil, who also served in the military, had his reputation damaged by the firing, tarnishing a long and distinguished career in state government.
The claim seeks $1.46 million, including $500,000 for damage to reputation and $250,000 for emotional distress.
In addition to seeking monetary damages, the claim provides a rare public peek into the inner workings of the Governor’s Office and allegations of bare-knuckle politics in which Brewer rewarded friends while overlooking public policy or state law.
One of the biggest controversies centered on a $3 billion state mental-health contract awarded to Mercy Maricopa rather than former provider Magellan Health Services.
The claim contends that Brewer had been upset that Mercy Maricopa had won the bid. In March 2014, according to the claim, a lobbyist told McNeil that Brewer’s chief of staff, Scott Smith, authorized a legislative ploy to get the contract overturned and awarded to Magellan Health Services.
In late March 2014, Magellan made a last-minute attempt to have the Legislature derail the contract, but it didn’t work.
The claim also alleges Joe Sciarrotta Jr., Brewer’s legal counsel toward the end of her tenure, tried to influence the decision-making process in favor of a Magellan contract. Brewer at the end of her term appointed Sciarrotta as a judge to Maricopa County Superior Court. Sciarrotta could not be reached for comment.
The claim also contends that Brewer engaged in a “bait and switch” in regard to her personnel-reform initiatives, which imposed strict procedures to follow in granting raises for state employees.
In summer 2014, McNeil ordered a rollback of inappropriate raises that had been given to some staff members at the Public Safety Personnel Retirement System without ADOA approval. The raises were first uncovered by The Arizona Republic, forcing the retirement of PSPRS Administrator Jim Hacking.
McNeil claims he discovered through his office’s investigation of PSPRS that other state agencies, including the Governor’s Office, also had given out improper raises without ADOA approval. His claim says Kathy Peckardt, Brewer’s deputy chief of staff and a key player in advancing the governor’s personnel-reform agenda, pushed him to “suppress” those records.
Contacted by The Republic, Peckardt declined to answer questions except to say, “I can’t comment on pending litigation.” Brewer elevated Peckardt to head of ADOA after she fired McNeil. Peckardt retired at the end of March.
The claim describes “significant friction” between McNeil and the Governor’s Office over her state parks director’s nepotism. The Republic reported at the time that then-Parks Director Bryan Martyn had hired his three sons and increased the pay for their positions.
McNeil’s claim says Brewer had no intention of disciplining Martyn over the matter, but she eventually gave him a three-week suspension after McNeil expressed outrage and pushed for harsh discipline. Newly elected Gov. Doug Ducey did not retain Martyn as parks director.
Kraig Marton, McNeil’s attorney, wrote in response to questions from The Republic that McNeil had “an extremely limited relation” with Brewer during his tenure as ADOA director. Marton wrote that McNeil’s relationship with Smith “started off positively, but in time their relationship became strained.”
Asked why McNeil did not speak publicly before he was terminated about the improper behavior he now alleges, Marton wrote, “It is true that things happened that troubled Mr. McNeil while he was in state government, but he did not react or act at the time because he hoped they would get better. Also, on a number of occasions, bad results were avoided based on the hard work and diligence of McNeil and some other state employees. McNeil’s intention in discussing the matters now is to share some perspective on the additional impact on him resulting from the poor behavior and practices of the governor’s most senior staffers.”
Legal bills go unabated at public-safety pension fund
The Public Safety Personnel Retirement System’s spending on outside legal counsel continued largely unabated in February, bringing its total to $1.1 million for the fiscal year.
Records given to the pension system’s trustees Wednesday show that outside legal bills for February totaled $128,181, and the trust has overspent its fiscal year budget for outside legal counsel by at least $817,885.
Overall system spending was 8.7 percent over budget as of March 20.
The retirement system for police, firefighters, correctional officers and elected officials spends much more on outside counsel than the larger Arizona State Retirement System, which serves teachers and state employees and historically has produced better investment returns than the PSPRS.
The public-safety pension system can offset the overspending by dipping into its $8.1 billion trust fund or by passing the cost on to its members: state and local governments and public employees.
Valley cities, for example,are experiencing a $28.6 million jump in their police and fire pension bills for the next fiscal year, primarily due to an Arizona Supreme Court decision and poor to modest investment returns at the PSPRS.
Some trustees on the seven-member board have publicly expressed concern about the legal expenses. But the trust’s Operations, Governance Policy and Audit Committee on Wednesday morning approved payment of the latest billings.
Trustee Greg Ferguson, a Yuma County supervisor, said he remains concerned about the legal bill. However, he added budget forecasting is difficult because the trust cannot always predict when it may need additional outside legal advice on investment opportunities.
“That is something we don’t have control over,” Ferguson said.
Interim PSPRS Administrator Jared Smout said outside costs for lawsuits and administration have gone down, and “that is what you need to focus on.”
Christian Palmer, a spokesman for the public-safety pension, said outside counsel legal bills for administrative, litigation and investment issues have fallen since July, the start of the fiscal year, and as compared with February 2014.
However, public-safety pension records show February’s outside legal expenses of $128,181 exceeded the monthly tabs in four of the previous five months.
The steepest legal expense continues to be for investment advice. Though the PSPRS has its own in-house investment attorney, who was hired in August at a $215,000 annual salary, Palmer said the investment-related legal workload this fiscal year exceeded the capability of a single attorney.
The public-safety pension also has a state lawyer assigned to it from the Arizona Attorney General’s Office.
The Arizona State Retirement System, whose $34.9 billion trust is more than four times larger than the PSPRS’, does not have an in-house investment lawyer and spends less on private attorneys, ASRS records show. That system on average has spent slightly more than half of what the PSPRS has spent on outside legal counsel so far this fiscal year.
Investment returns at the ASRS typically outperform those at the PSPRS. Last fiscal year, the ASRS posted an 18.6 percent return on investments; the PSPRS had a 13.28 percent rate of return.
Ferguson said the ASRS has a lower legal bill for investments because a larger percentage of its funds are in the stock market, which does not require as much outside counsel. The PSPRS investment portfolio is more diversified to hedge against economic downturns in the stock market, he said.
The largest recipient of PSPRS payments for outside counsel continues to be Kutak Rock, a firm that through February of this fiscal year had been paid $865,058, records show. Kutak Rock’s legal bills dwarf by a 3-to-1 ratio the combined outside legal bills of 10 other firms used by the PSPRS.
Hefty PSPRS legal tab
Legal bills for outside counsel have reached $1.1 million at the Public Safety Personnel Retirement System this fiscal year.
A monthly breakdown: