Performance audit, Public Safety Personnel Retirement System, Elected Officials' Retirement Plan

              PERFORMANCE AUDIT
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
ELECTED OFFICIALS' RETIREMENT PLAN
Report to the Arizona Legislature
By the Auditor General
September 1994
Report 94- 6
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
DEPUTY l U O l T D l GENERAL
September 26, 1994
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. Jack M. Cross, Administrator
Public Safety Personnel Retirement System
Elected Officials' Retirement Plan
Transmitted herewith is a report of the Auditor General, A Performance Audit
of the Public Safety Personnel Retirement System and Elected Officials'
Retirement Plan. This report is in response to a May 5, 1993, resolution of the
Joint Legislative Audit Committee. This performance audit was conducted as
part of the Sunset review set forth in A. R. S. 9541- 2951 through 41- 2957.
We found that the Public Safety Personnel Retirement System and the Elected
Officials' Retirement Plan ( administered by the same Fund Manager) are
generally well managed. Both systems provide good benefits at reasonable
costs, and have good investment performance. However, we believe brokerage
commissions can be reduced by 25 percent and that the governing board
should develop general policies to govern the hiring of brokers.
My staff and I will be pleased to discuss or clarlfy items in the report.
The report will be released to the public on September 27, 1994.
Sincerely,
Auditor General
2910 NORTH 44TH STREET. SUITE 410 I PHOENIX, ARIZONA 85018 ( 602) 553- 0333 - FAX ( 602) 553- 0051
SUMMARY
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Public Safety Personnel Retirement System and the Elected Officials' Retirement
Plan, pursuant to a May 5, 1993, resolution of the Joint Legislative Audit Committee.
This performance audit was conducted as part of the Sunset review set forth in Arizona
Revised Statutes ( A. R. S.) 9541- 2951 through 41- 2957.
The Public Safety Personnel Retirement System ( PSPRS) is an agent multiple- employer
retirement plan and the Elected Officials' Retirement Plan ( EORP) is a cost- sharing,
multiple- employer retirement plan. The PSPRS administers retirement benefits to various
local, municipal, and state public safety personnel including police and firefighters; state
and county investigators; and county sheriffs and deputies; while the EORP covers state
and county elected officials, judges, and some city elected officials. As of June 30, 1993,
145 government employer groups involving 14,506 members participated in the PSPRS;
30 govenunent employer groups and 1,173 members participated in the EORP. The PSPRS
and the EORP are governed by the same five- member oversight Board.(')
Our review of the two systems revealed that both systems appear to provide good benefits
at reasonable costs, and investment performance has been excellent overall.
We did find, however, that PSPRS and EORP can reduce expenditures by lowering
commissions paid for investment- related brokerage services. Currently, the systems will
pay a broker five, six, or seven cents per share to execute stock trades with no apparent
justification for the different fee levels. Lowering commission rates to no more than 5
cents per share would create an annual savings of more than $ 150,000. In addition, to
ensure that potential cost savings are adequately pursued, the retirement systems' Fund
Manager needs to play a more active role in overseeing brokers.
A third system, the Correctional Office Retirement Plan ( CORP), is also administered by this Board,
but has never been placed under the provisions of the Sunset law.
Table of Contents
Introduction and Background . . . . . . . . . . . . . . . . . . . .
Finding: The Retirement Systems'
Governing Board Needs To Exercise
Greater Control Over
Fees Paid To Brokers . . . . . . . . . . . . . . . . . . . . . . .
Commissions Paid To Brokers
Can Be Reduced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
More Systematic Oversl'ght By The
Retirement Systems' Governing Board
IsNeeded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Public Safety Personnel Retirement System and Elected Officials' Retirement Plan,
pursuant to a May 5,1993, resolution of the Joint Legislative Audit Committee. The audit
was conducted as part of the Sunset review set forth in A. R. S. 5541- 2951 through 41- 2957.
The Public Safety Personnel Retirement System ( PSPRS) is an agent multiple- employer
retirement plan and the Elected Officials' Retirement Plan ( EORP) is a cost- sharing,
multiple- employer retirement plan. Both were established to administer retirement benefits
to eligible members. The PSPRS was created in 1968 to provide a uniform, consistent,
and equitable statewide retirement program for various local, municipal, and state public
safety personnel ( including police and firefighters, state and county investigators, and
county sheriffs and deputies). The EORP, created in 1970, provides retirement benefits
to state and county eleited officials, judges, and some city elected officials. In addition
+=' --- to retirement benefits, the PSPRS and the EORP o f f e r ~ l , O , n c & ~ ~ a s a n d
health insurance benefits. As of June 30,1993,145 government employer groups involving
14,506 members participated in the PSPRS, while 30 government employer groups and
1,173 members participated in the EORP.
A five- member governing board called the Fund Manager, administers the PSPSR, the
EORP and a thrd plan, the Correctional Office Retirement Plan.(') The Governor appoints
three board members and the Legislature appoints two board members. The Fund Manager
invests the systems' assets, sets employer contribution rates, determines eligibility for
EORP members( 2) a, nd pays benefits. To fulfill these responsibilities, the Fund Manager
retains a staff comprised of 12 full- time and two part- time positions, including a fund
investment administrator, and utilizes the services of outside professional advisors,
including investment counsel and consulting actuaries. Administrative and investment
expenses for both the PSPRS and the EORP totaled $ 813,832 in fiscal year 1993.( 3)
' The CORP has never been placed under the provisions of the State's Sunset law and was not reviewed
as a part of this audit.
( 2) Each employer of the PSPRS is represented by a five- member Local Board that determines eligibility
for membershp, service credits, and benefit eligibility.
( 3) Does not include $ 623,052 in commissions paid to investment brokers.
The Public Safety Personnel
Retirement System And The
Elected Officials Retirement
Plan Offer Competitive Benefits
At Reasonable Cost
/ psy
P
Benefits provided by Arizona's PSPRS are competitive with those offered by similar
systems in other states. A June 1991 survey c ducted by the National Conference of
State Legislatures reveals that the benefits pr vided to Arizona's PSPRS members are
in line with those offered by other states' 4safe ty retirement plans. For exa--- p le,
the survey found that, like Arizona, most tates use a salary multiplier of 2.5 percent
to determine a member's annual benefit amount.( l) Benefit factors ranged from a low
of 1.5 percent in Tennessee to a high of 3 percent in Louisiana, Nebraska, and New
Mexico. In addition, the years of service required for Arizona PSPRS members to receive
full retirement benefits are low in comparison to similar systems in other states. Of the
30 states that allow for retirement based solely on years of service, Arizona is one of
only 11 states that allows for retirement with full benefits after 20 years of credited service.
Nineteen states require at least 25 or more years of service to retire with full benefits.
Furthermore, Arizona's PSPRS offers these comparable benefits at relatively low
contribution rates. Contributions from both employers and employees are used to help
accumulate the monies needed to fund the PSPRS pension obligations. Arizona's combined
contribution rate for employers and employees totaled 16.38 percent for fiscal year 1993.
At our request, an actuarial firm provided information on other public safety retirement
system contribution rates. Their analysis of 11 systems found that the average contribution
rate for employers and employees in these systems was 26.68 percent, considerably higher
/ than Arizona's rate.
I
Arizona's Elected Officials' Retirement Plan also appears to offer competitive benefits
at a reasonable cost We found benefits provided by h o n a ' s Elected 0ff; cials Retirement
Plan are generous in comparison to those offered by the Arizona State Retirement System
and the Public Safety Personnel Retirement System. For example, EORP's 4 percent benefit
factor is double ASRS' benefit factor and also higher than PSPRS's benefit factor. While
limited to receiving 80 percent of their final annual salary, EORP members can acheve
this benefit level in a much shorter time than either ASRS members or PSPRS members.
Consequently, an EORP member could receive double the retirement income of an ASRS
w--
- mem- ven- identical sa. l- a- r- v" - l, u- s tories and years-- --* s erv= rrfiscal year 19- 6 contribution rate for EOemTplo yers averaged 16.55 percent, with the member's rate
statutorily set at 7 percent.
(') Arizona's benefit factor is actually 2.5 percent for the first 20 years of service, plus 2 percent for
years 21 through 24, and 2.5 percent for years 25 and over.
Prudent Funding Mechanisms And
Solid Investment Performance Have
Enabled The Systems To Meet
Their Pension Obligations
The Public Safety Personnel Retirement System and the Elected Officials' Retirement Plan
are financially strong. As of June 30, 1993, the PSPRS assets exceeded liabilities by
approximately $ 93 million, while the EORP assets exceeded liabihties by almost $ 8 million.
As a result, both systems have adequate resources to meet their current pension
obligations.
Prudent funding policies have been established to ensure that sufficient assets are
accumulated to pay benefits when due. Both the PSPRS and the EORP use accepted
actuarial methods to determine required employer contribution rates, to describe the
plan's current financial position, and to analyze changes in the plan's condition. A recent
review by an independent actuarial firm under contract with both the PSPRS and the
EORP found that benefit obligations are being funded as incurred.
Solid investment performance has also contributed to the financial strength of both funds.
Prudent investment transactions guided by specified investment parameters, coupled
with employer and member contributions, have allowed assets to increase substantially
over the past ten years. As of June 30,1993, the PSPRS assets totaled almost $ 1.8 billion,
while the EORP assets totaled approximately $ 129 million. Both systems have also
experienced excellent rates of return on investments. Over the past five years, the PSPRS
annualized rate of return on domestic equity investments was 14.6 percent, vs. 14.2 percent
for the Standard and Poor's 500 stock index. The PSPRS fixed- income investments also
outperformed the Lehman Aggregate Index for the same cumulative five- year period.
The EORP has also outperformed the S & P 500 and Lehrnan index in four of the past
five years.
Audit Scope
Our review of the Public Safety Personnel Retirement System and the Elected Officials'
Retirement Plan revealed few problems. As described above, both systems appear to
provide good benefits at reasonable costs, and investment performance has been excellent
overall. We did find, however, that commission rates paid to investment brokers could
be reduced and the broker selection process could be improved ( see Finding, page 5).
The audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Fund Manager, fund
administrator, and staff of the Public Safety Personnel Retirement System and the Elected
Officials' Retirement Plan for their cooperation and assistance throughout the audit.
FINDING
THE RETIREMENT SYSTEMS'
GOVERNING BOARD NEEDS TO EXERCISE
GREATER CONTROL OVER FEES
PAID TO BROKERS
More stringent management of brokers used by the Public Safety Personnel Retirement
System ( PSPRS) and the Elected Officials' Retirement Plan ( EORP) to execute investment
transactions could: 1) reduce agency expenditures by more than $ 150,000 annually, and
2) ensure greater protection against potential abuse.
A retirement system's investment performance is a key measure in evaluating the
effectiveness of its money management. In that regard, the PSPRS and the EORP have
done well. As noted on page 3, investment earnings for the two systems compare
favorably to the standard market indexes and the investment earnings of other pension
funds.
Our review, therefore, focused on another aspect of the systems' money management
function: whether the cost of managing investment transactions has been adequately
controlled. We concentrated our efforts on fees paid to brokers who invest the PSPRS'
and the EORP's assets since this represents a major cost component of this function.
Commissions Paid To
Brokers Can Be Reduced
The PSPRS and the EORP can reduce annual expenditures by lowering commissions
paid for brokerage services. Brokers employed by the two systems are private
intermediaries whose chief function is to execute stock or bond trades. Our audit found
that commissions paid for stock trades vary, and, overall, are unnecessarily lugh. Based
on the current volume of trades executed by the two systems, we believe that brokerage
expenses can be reduced $ 150,000 or more annually.
Brokerage services - The PSPRS and the EORP currently utilize the services of 11 private
brokerage firms. The primary service provided by these brokers is to execute transactions
at or below a price set by the systems' fund administrator. On occasion, these brokers
may also counsel the administrator on the timing of a particular transaction. Likewise,
these firms periodically provide market research to assist the administrator in identifying
investment opportunities.
Commission costs - Commissions paid to brokers who trade stock on behalf of the
PSPRS and the EORP vary. Depending on the broker selected to execute a transaction,
the systems will pay a broker either five, six, or seven cents per share to execute stock
trades.(') Charges for investment counseling and market analysis noted above are built
into these cost figures. Whle these commissions at first may not appear significant,
brokerage fees paid by the systems and financed by both member and employer
contributions are in fact quite substantial. For example, in fiscal year 1993 alone, brokers
earned commissions of nearly $ 650,000 by trading almost 10 million shares of stock on
behalf of the two systems.
Commissions can be mduced - Our review showed that commission costs can be reduced
by almost 25 percent with no impact on service being provided. As noted above, some
brokers earn higher commissions than others. However, we found no apparent justification
for the different fee levels. For example, all 11 brokers used by the two systems provide
essentially the same service. Moreover, a survey of those brokers earning six and seven
cents per share revealed that most would be willing to reduce their commissions to five
cents a share without any reduction in service.
M y then are some brokers paid more than others? According to the fund administrat - r,
commissions are based solely on the length of time a broker has conducted business
for the two systems, with those brokers who have served the systems longer receiving
a higher rate. The administrator agreed that this practice should be discontinued, and
that commissions should be set at no more than five cents per share of stock traded.
Based on fiscal year 1993 trade levels, such a reduction would result in an annual savings
of over $ 150,000.
Our review suggests that even greater reductions may be possible. As noted previously,
brokers factor supplemental services, such as investment counseling and market analysis,
into the commission rates they assess. However, the administrator has said that these
services are not essential in all cases. For example, he cited four brokers, accounting for
approximately 40 percent of the systems transactions and charging up to 7 cents per
share, whose counseling and market analysis are expendable. Ths being the case, we
believe the systems are in a position to seek out more modestly priced brokers. For
example, without the extra charges associated with investment counseling and market
analysis, our analysis showed that the systems can procure the services of brokers for
approximately three cents per share. If the two systems were able to conduct 40 percent
of their transactions at three cents a share, with the remaining shares traded at five cents,
they would lower their brokerage expenses ( based on fiscal year 1993 trade levels) by
36 percent, for annual savings of about $ 232,000 a year. While the fund administrator
believes that conducting a portion of the PSPRS and the EORP's transactions at three
cents per share is viable, he did express concern regarding whether brokers earning this
amount would work as vigorously to obtain the best trading price. Reduced performance
Brokers do not earn commissions for executing bond transactions. Rather, they earn money by keeping
the difference between the buy- or- sell price accepted by the fund administrator, and the price the
broker is able to negotiate in the marketplace.
in this area could offset the cost savings resulting from lower commissions. We agree
that only brokers who can obtain competitive trading prices should be retained by PSPRS
and EORP.
There may be other opportunities to reduce brokerage expenses as well. The fund
administrator, for example, has stated he may not need 11 brokers to effectively execute
trades, and that reducing the number of brokers could be used as an incentive for brokers
to lower their commission rates in exchange for executing a higher volume of transactions.
More Systematic Oversight By The
Retirement Systems' Governing
Board Is Needed
The PSPRS and the EORP's governing board, referred to as the Fund Manager, needs
to become more involved in overseeing brokers. The PSPRS and the EORP's governing
board should increase its oversight role by developing written policies and procedures
whch:
Require the administrator to seek out, use, and evaluate brokers in a manner that
includes cost as an important criterion; and
Exert greater control over the systems' use of brokers. Our review found that the
current arrangement between the fund administrator and the systems' brokers,
in which the administrator may freely select and retain brokers, determine
commission amounts, and apportion business, leaves the systems vulnerable to
improper acts. Written procedures could help protect the PSPRS and the EORP
against potential abuse by establishing guidelines that compel the administrator
to justie his use of brokers, including the manner in whch business is apportioned.
RECOMMENDATION
The Public Safety Personnel Retirement System and the Elected Officials' Retirement Plan
Fund Manager should develop written procedures in order to ensure that costs for
brokerage services are minimized, and to protect the systems against illicit activity.
These procedures should include:
Criterion for selecting, using, and retaining brokers that includes cost;
Provisions for ensuring that any discrepancies in pricing are adequately justified;
and
Guidelines for apportioning business among brokers.
SUNSET FACTORS
In accordance with A. R. S. 941- 2954, the Legislature should consider the following 12
factors in determining whether the Public Safety Personnel Retirement System and the
Elected Officials' Retirement Plan should be continued or terminated.
1. Objective and purpose in establishing the agency.
The Public Safety Personnel Retirement System ( PSPRS) and the Elected Officials'
Retirement Plan ( EORP) were established to administer retirement benefits to elipble
members. The Public Safety Personnel Retirement System was created in 1968 to
provide a d o r m , consistent, and equitable statewide retirement program for various
local, municipal, and state public safety personnel. The Elected Officials' Retirement
Plan, created in 1970, has evolved to cover state and county elected officials, judges,
and some city elected officials. In addition to pension benefits, disability and health
benefits are also provided.
The Fund Manager, consisting of five appointed members, is responsible for the
administration and investment activities of both the PSPRS and the EORP. The Fund
Manager develops investment guidelines, investment policies, and funding objectives
with the assistance of independent investment counsel. A fund administrator,
employed by the Fund Manager, is responsible for collecting and refunding
contributions from members and employers, disbursing benefits to qualified members
in a timely manner, and investing monies in a safe and prudent manner to meet
investment objectives.
2. The effectiveness with which the agency has met its objectives and purpose
and the efficiency with which the agency has operated.
In general, the Fund Manager appears to be effective in providing retirement income
and other benefits to eligible members at a reasonable cost. According to agency
personnel, as of March 1994,4,203 members are receiving monthly retirement benefits
from either the PSPRS or the EORP. The cost of providing these benefits has been
kept low due to the solid investment performance of both funds. For example, annual
reports for both the PSPRS and the EORP indicate the funds have continued to
outperform the market indexes on a long- term basis. In addition, investment
performance has consistently exceeded the actuarial yield prescribed by the Fund
Manager. Furthermore, both the PSPRS and the EORP are over 100 percent funded.
As a result, PSPRS employer contributions have decreased more than 10 percent
over the past 20 years, from a high of 22.13 percent in fiscal year 1973 to 8.73 percent
in fiscal year 1993. However, while the Fund Manager is operating quite efficiently,
we found the fund could save over $ 150,000 annually by exercising greater control
over fees paid to outside brokers who conduct investment transactions on behalf
of the two systems ( see Finding, pages 5 through 8).
3. The extent to which the PSPRS and the EORP have operated within the
public interest.
The agency has operated withn the public interest by providing a commendable
retirement program at a reasonable cost. Members, employers, and taxpayers all
benefit from the agency's operation. Members benefit from the prudent operation
of a retirement system which has and hopefully will continue to accumulate sufficient
assets to ensure payment of retirement benefits to all eligible members. Employers
benefit by being able to offer potential and existing employees a retirement program
at a reasonable cost In addition, the fund's solid investment performance has resulted
in lower contribution requirements, which benefit employers, employees, and
taxpayers alike.
4. The extent to which rules adopted by the agency are consistent with the
legislative mandate.
Neither the PSPRS or the EORP have specific statutory authority to promulgate
rules and regulations. The Fund Manager does have the authority to develop, and
has issued, investment guidelines, statements of investment policy, and fund
objectives.
5. The extent to which the agency has encouraged input from the public before
adopting its rules and the extent to which it has informed the public as to
its actions and their expected impact on the public.
Although the Fund Manager has not promulgated rules and regulations, it does
regularly hold meetings to discuss investments, investment strategies, administrative
matters, and other issues. Our review found these meetings are appropriately posted
in compliance with the open meeting law.
6. The extent to which the agency has been able to investigate and resolve
complaints that are within its jurisdiction.
The Fund Manager does not have specific statutory authority to investigate and
resolve complaints.
7. The extent to which the Attorney General or any other applicable agency
of state government has the authority to prosecute actions under enabling
legislation.
A. R. S. 538- 848( M) authorizes the Attorney General or an attorney approved by
the Attorney General to represent the Fund Manager in any legal proceeding. At
present, a private law firm is representing the Fund Manager in several cases that
are in litigation.
8. The extent to which the agency has addressed deficiencies in its enabling
statutes which prevent it from fulfilling its statutory mandate.
Numerous technical and administrative changes have been made to statutes
pertaining to both the PSPRS and the EORP over the years. However, these changes
were made to either clarify statutory language or bring state statutes in compliance
with federal law. According to agency personnel, there are no deficiencies in their
enabling statutes which prevent them from fulfilling their statutory mandate.
9. The extent to which changes are necessary in the laws of the agency to
adequately comply with the factors listed in the sunset laws.
The Fund Manager is considering requesting changes to broaden its investment
authority. For example, the Fund Manager would like to have specific statutory
authority to invest in a wider array of stocks. Currently it is unclear whether the
Fund Manager has authority to trade over the counter stocks other than bank or
insurance stocks. In addition, the Fund Manager would like specific statutory
authority to invest in real estate, limited partnerships, and limited liability corpora-tions.
-. - ". .
10. The extent to which the termination of the agency would significantly harm
the public health, safety or welfare.
The Legislature could terminate the agency, however, a member's retirement or
disability benefit may not be changed since members of the ASRS have a
constitutionally protected property interest in the funds. Even if the agency was
terminated, the state would still need an administrative mechanism to distribute
benefits.
11. The extent to which the level of regulation exercised by the agency is
appropriate and whether less or more stringent levels of regulation would
be appropriate.
Since the agency is not regulatory, this factor does not apply.
12. The extent to which the agency has used private contractors in the
performance of its duties and how effective use of private contractors could
be accomplished.
The Fund Manager contracts out several types of services, some of whch are
statutorily required. For example, an independent investment firm advises the Fund
Manager on investments. The Fund Manager also contracts with an actuary to
provide actuarial valuations of the fund. In addition, contracted services are used
to meet the Fund Manager's legal, banking, and auditing needs. Furthermore, the
Fund Manager uses independent brokers to execute stock and bond transactions.
PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM
CORRECTIONS OFFICER RETIREMENT PLAN
ELECTED OFFICIALS' RETIREMENT PLAN
1020 East Missouri
Phoenix, Arizona 85014- 2613
JackM. Cross, C. P. A., C. F. A.
Administrator
TELEPHONE: ( 602) 255- 5575
FAX: ( 602) 255- 5572
Michael H. Ong, J. D.
Assistant Administrator
September 19, 1994
Mr. Douglas R. Norton
Auditor General
State of Arizona
2910 North 44th Street
Suite 410
Phoenix, Arizona 85018
Dear Mr. Norton:
This letter is in response to your report on the Public Safety Personnel Retirement System and the
Elected Officials' Retirement Plan.
We would first like to note the professional and thorough staff that was assigned to our review. They
cut quickly to the important issues and kept their time demands on me and my staff at a minimum.
Also, we would like to thank you for your positive comments about our management of the Plans--
specifically our cost- conscious management and our excellent investment performance. Having been
an auditor, I know that the auditor's job is generally to look for what is wrong, rather than what is
right.
In general, we agree with your finding and have begun to implement it. In fact, commissions for
brokerage services were one of the first areas researched when I first took over as Administrator in
1986. At that time, the Plans were paying an average of about 14- cents per share, with the price
varying based on the price of the stock. After my research, the Plans cut the brokerage rate from the
variable average of 14- cents to a flat 7- cents per share. Since then, if one of my brokers changed
firms or a new broker was added, that broker was required to beat the 7- cent price the Plans were
already receiving. This was done to test for any change in service level and to see how low the
brokers would go. We had been contemplating a reduction of fees to 5- cents a share for some time.
Your research supported our idea that we could probably lower all of our brokers to the Scents per
share level. I sent out a letter dated August 16, 1994, resetting commissions to the 5- cents per share
level for all brokers used by the Plan with the new rates effective retroactively to July 1, 1994. We
will continue to study possible further savings as suggested in the narrative portion of your report.
Mr. Douglas R. Norton
September 19, 1994
Page - 2-
You have also suggested a need for the Fund Manager to have more direct oversight over brokerage
services. I want to point out that the Fund Manager has always received detailed information on
commissions paid on a regular basis. The board receives a copy of the stocks bought and stocks sold
reports which contain the commission rate ( Scents, 6- cents or 7- cents) and the broker name for each
transaction. The Fund Manager also receives and approves a copy of the Annual Report which
contains a copy of the Schedule of Commissions Paid to Brokers by broker for that fiscal year.
The broker's personal investment knowledge, the firm's investment research, and company's ability to
complete transactions can have a great affect on investment performance. This is why, in nearly all
cases, the portfolio manager is granted the authority to select brokers. For example, one- half of a
one percent change in investment returns for the PSPRS would result in a $ 10 million change in
investment returns. This is about 70 times the savings projected in your report.
In order to improve the Fund Manager's oversight, staff has drafted a provision that was added to
the Statement of Investment Policy. This provision requires that any future changes in brokers or
brokerage rates be approved by the Fund Manager.
Sincerely,
kl- 44. L
' 1 Jack M. Cross
Administrator