The PSPRS website has recently linked to this March 7, 2014 opinion piece in the Arizona Capitol Times, Retirement system steadily climbing back to financial health, by PSPRS Board of Trustees Chairman Brian Tobin. The bulk of the piece is a response to what some people believe are questionable practices in how PSPRS’ values its real estate holdings. I have previously written about this valuation issue (see: Notes on a (PSPRS) scandal) and view it as a distraction from more serious issues affecting PSPRS.
Mr. Tobin’s piece does include this quote by the late, great Senator Daniel Patrick Moynihan, “You’re entitled to your own opinions, but you are not entitled to your own facts,” which I would like to juxtapose with this paragraph by Mr. Tobin:
Of course, facts that fail to square with the opinion that PSPRS is in a shambles often get conveniently buried these days. Did you know the fund’s $6 billion in investments earned a 14 percent return last year? Probably not. Have you heard that when ranked against our 58 peer public funds, the total performance of PSPRS over the past three fiscal years ranks in the top 10 percent nationwide? Doubtful.
This is where I find a problem with Mr. Tobin’s piece. He states that PSPRS’ investments “earned a 14 percent return last year.” The problem with this statement is that it does not specify to what year he is referring. PSPRS earned a return of 11.48%, gross of fees, in fiscal year 2013, which ended June 30, 2013. This is the rate of return that truly matters since it is used to determine the PSPRS’ funded ratio, the annual required contributions (ARC) from employers, and any amounts that will go to the fund that pays COLA’s to retirees. I think he must be referring to the 2013 calendar year. Board of Trustees’ meeting materials show that PSPRS earned 13.26%, gross of fees, for the 2013 calendar year. This is closer to his 14% figure but still three-quarters of a percent lower.
Whether PSPRS earned 13.26% or 14% in the 2013 calendar year is irrelevant since, as mentioned earlier, the only rate that matters is the one at the end of the fiscal year, not the calendar year. PRPRS’ rate of return fluctuates from month to month, and a casual reader might assume that PSPRS is producing better returns than it actually is. Gross of fees, PSPRS’ earned 10.98% 11.48% during the last fiscal year; this is a fine return that bested the 7.85% expected rate of return (ERR) by 3.13% 3.63%, but it is also 3% 2.5% less than the 14% referred to by Mr. Tobin. As seen in the last post, PSPRS has a fiscal year to date return as of 2/28/2014 of 9.11%. This is great, but a down month or two or three could easily push PSPRS’ rate of return below the ERR by the end of the fiscal year. This would mean a lower funded ratio and higher ARC’s for employers in coming years. Will anyone care what PSPRS’ rate of return for the 2013 calendar year was on June 30, 2014 if PSPRS ends the fiscal year with a rate of return less than 7.85%? Probably not.
Mr. Tobin also writes, “Have you heard that when ranked against our 58 peer public funds, the total performance of PSPRS over the past three fiscal years ranks in the top 10 percent nationwide?” I think it is necessary to parse this statement. Here the term “fiscal year” is specifically used, so looking back to the end of the last fiscal year on 6/30/2013, PSPRS had a three-year rate annualized rate of return of 9.38%, gross of fees, but as of the last calendar year end of 12/31/2013, PSPRS had a three-year annualized rate of return of 7.74%, gross of fees. (Remember that these numbers are both “gross of fees,” meaning that they do not include fees paid to outside investment firms. From what I can see, returns that are “net of fees” are about 0.50% lower. Returns net of fees are the true returns, but PSPRS does not always include them in its reports. I am using rates that are gross of fees for purposes of consistency.) 9.38% is a good rate of return since it is more than PSPRS’ ERR of 7.85%. However, 7.74% is not good as it is below the ERR. Once again, we see a big difference when we compare fiscal and calendar year returns. Yet in one short paragraph, both are strategically utilized in an attempt to highlight how well PSPRS’ investments are doing. A consistent use of terminology would give a more mixed picture of PSPRS’ investment returns.
Furthermore, Mr. Tobin boasts about PSPRS’ standing compared to 58 peer public funds. What was the range of returns between the top peer public fund and number 58. What was the average return? What was the median return? Without context, saying PSPRS is in the top 10% is meaningless. A fund can lose money and still be in the top 10% or exceed its ERR and still be in the bottom 10%. It all depends on your data. Regardless, will anyone care where PSPRS ranks among its peers if it can not achieve its ERR on a consistent basis? Doubtful.
If Mr. Tobin truly believes that no one is entitled to their own facts, he might want to be more cautious in his own use of statistics. While all his numbers are factual, their selective use produce an inaccurate picture. I think that PSPRS is in a stronger financial position now thanks to Mr. Tobin, the other Trustees, Administrator James Hacking, and the rest of the PSPRS staff. How the investigations shake out is anyone’s guess, but why in the world would Mr. Tobin send out information like this to the public and PSPRS members when the organization he represents is already trying to prove that it can be trusted to fairly value its investments?