Michael Townsend, administrator of the system who was hired in 2019, said in an interview he was a certified public accountant who had spent 25 years in Arizona city and county government prior to taking the job at PSPRS. His interest in pension funds had developed during his time as a member of the board of trustees (including a stint as chairman) at the $48 billion Arizona State Retirement System, Phoenix.
Also, since 2007, he had served as deputy county manager of Coconino County where he oversaw initiatives to increase that county’s public safety pension funds’ funding ratio to more than 70% from as low as 25%.
In coming to PSPRS, Mr. Townsend said, “I really thought I could make a difference with my understanding of government work and my understanding of pensions and how to explain it to people.”
It was a tall order. The system’s previous administrator, Jared Smout, was terminated by the board of trustees by unanimous vote in June 2019 for “inappropriate behavior and workplace harassment,” and his predecessor, James Hacking, was terminated in July 2014 for initiating salary hikes for some investment staff without proper approval.
The good news was that Arizona had enacted legislation in 2016 to address the funding crisis, which included creating a new tier of defined benefit plan participants beginning July 1, 2017, and also created a new defined contribution plan that newly hired employees had the option of selecting instead of the DB plan. While the legislation helped matters, there was still far more to do, Mr. Townsend said.
“It was actually worse than I thought,” Mr. Townsend said. “I think I was there about three months and the CFO at the time decided to resign … we (now) had one CPA on staff at the pension system, and I was it.”
The beginning of the rebuilding of the system was hiring Foster & Foster as its new actuarial consultant replacing Gabriel, Roeder, Smith & Co.; and CliftonLarsonAllen LLP as the new auditor replacing Heinfeld Meech & Co. Mr. Townsend said one of the most important moves was hiring Clark Partridge, retired Arizona state comptroller, for the new position of senior executive consultant.
“I wanted someone who understood accounting and actuarial valuations who could work with individual employers,” Mr. Townsend said. Mr. Partridge also had the benefit of having relationships with all the state agencies.
With a mandate to improve the funding of the system, Messrs. Townsend and Partridge began to reach out to the hundreds of pension funds in the state to talk about not only the necessity of making additional contributions, but also building relationships with the employers to re-establish trust in the entire system.
“Really, pensions are hard to understand anyway,” Mr. Townsend said. “Then, given the history of PSPRS, there was no trust. No one knew what was going on.”
At the beginning of 2020, Mr. Townsend and his staff were ready to roll out presentations, and then the COVID-19 pandemic hit. And while “it’s hard to find a silver lining for the pandemic,” Mr. Townsend said the necessary Zoom meetings allowed Mr. Partridge and him to meet with more employers than otherwise, particularly in rural areas.
The key to understanding the importance of improving the funding, he said, was not only giving the employers and their boards of trustees an understanding of the issues at hand, but also giving them access to financial advisers to assist them in their efforts, along with the tools to educate their taxpayers to get behind initiatives that might be necessary to increase funding.
This could include issuing debt that would have to be approved by any given municipality’s voters, and that meant convincing them that with interest rates at a historic low, the timing was perfect to issue debt.
“Our investment chair, he makes reference a lot to that once-in-
a-generation event,” Mr. Townsend said. “There’s nobody on our board who even remembers rates being that low in their lifetime.” Mr. Townsend did note that debt issuance was not the only method that municipalities used to increase contributions. Sometimes it was simply a matter of increasing contributions through existing cash reserves.