Study concludes Arizona's public-safety pension fund among worst-performing in nation: Craig Har
Arizona's pension system for public safety officers, politicians and correctional guards is among the worst-performing public retirement plans in the U.S. because of sub-par investment returns and high investment-management costs, a national report on state retirement systems says.
The Pew Charitable Trusts, a Philadelphia-based non-profit that has extensively researched public pensions, concluded the Arizona Public Safety Personnel Retirement System was the third-worst performing government trust fund as measured over a 10-year period that ended in 2015.
Pew, which recently released its findings, also found PSPRS paid the highest percentage of its investments in fees for outside investment management among the 73 largest public retirement systems in the country.
Christian Palmer, a PSPRS spokesman, said the trust fund changed its investment strategy in 2007-08 to be less dependent on stocks and to be more diversified, which included alternative assets. He added that PSPRS may be more transparent than other retirement systems in disclosing fees, and it pays more in fees because it is more expensive to manage alternative assets such as real estate and commodities.
"This isn't magic or a testament to how great anyone is," Palmer said. "This is because PSPRS has the highest share of alternative investments. ... Our costs may look high compared to other systems that may not make the same efforts to report all fees and investment expenses."
In 2016, the most recent year for which information was available and a year after Pew's findings, PSPRS spent nearly $129 million on investment management fees, while earning less than 1 percent return — or $49 million — on its investments.
“This isn't magic or a testament to how great anyone is. This is because PSPRS has the highest share of alternative investments.” ... Christian Palmer, PSPRS spokesman
Below-average investment returns, combined with high fees and generous payouts to retirees, have placed PSPRS in financial peril.
The nearly $9 billion trust has only about half the money it needs to pay all current and future pension obligations to its members. The financial problems have been shifted to local governments, like Phoenix, which have been required by law to make higher payments to the financially troubled retirement system on behalf of employees. Some communities have been hit with such steep increases in pension obligations that they have been unable to hire additional police officers or firefighters.
Only the retirement systems of Indiana and South Carolina fared worse than PSPRS on investment performance during the 10-year review period, according to Pew.
Pew also found that pension funds that had historically poor returns invested heavily in private equity, hedge funds, real estate and commodities, all of which typically carry higher fees than fixed-income investments or stocks.
PSPRS, however, posted an 11.3 percent return on its private equity investments last year.
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Pew also found that PSPRS paid fees of 2 percent to outside firms to manage its investments, while most state retirement funds paid less than one-half of 1 percent on management fees. The Arizona State Retirement System, for example, paid about four-tenths of 1 percent on investment management fees.
While that might not appear significant, every small increase in management costs on multibillion-dollar pension trusts can result in millions of dollars in fees and less money to pay retirees.
Real estate loses $110M in value
While Pew's findings focused on a period that ended in 2015, last year was worse for PSPRS.
The pension fund posted a net return of less than 1 percent on its investments. That was far below the assumed earnings rate of 7.5 percent.
"We know that our portfolio isn't going to get the highest returns possible because it isn't built to beat the high score," Palmer said. "It is built to not lose money during the cold years, like last year, and to earn considerable returns during hot years."
According to its most recent annual report, PSPRS paid $128.8 million in outside management fees.
Palmer declined to disclose which company received the highest management fee or its performance for the trust. He said such a question "ignores a fundamental of alternative investments," and he referred The Arizona Republic to an online tutorial on investing.
One of the biggest drags on PSPRS was its real-estate portfolio, which has cumulatively lost $110 million in value.
The most significant loss came from a real-estate partnership with Scottsdale-based Desert Troon, whose properties since they were purchased have lost $160 million in value for PSPRS.
Despite the losses in the value of its real-estate holdings, the trust posted a 1 percent gain on properties it sold last year.
PSPRS paid $27.7 million in fees to outside groups to manage its real-estate portfolio. Palmer was unable to provide a breakdown of how much went to Desert Troon.
Other Ariz. pension system earns high marks
The Pew Report found the Arizona State Retirement System, a $36.2 billion retirement plan for teachers and local and state employees, was ranked among the top third when it came to performance on investment returns.
Last year, ASRS also posted a return on investments of less than a 1 percent — about the same as PSPRS.
ASRS is healthier than PSPRS, however.
The larger pension system has about 78 percent of the money needed to cover all of its pension obligations, and government employers pay far less for pension benefits for employees in ASRS than for those in PSPRS.
The report found ASRS had some of the lowest external management fees on investments.
"Investment fees are an important consideration for the ASRS in the overall process of selecting outside managers and choosing investment options. Our investment management staff is certainly diligent about negotiating fee structures that are most beneficial to the ASRS," said David Cannella, ASRS spokesman.