Pennsylvania’s underperforming pension funds need new investment approach, state warns

Pennsylvania needs a new investment office with better strategies to replace the underperforming offices that manage state and public school pension plans, a commission tasked with recommending changes to the retirement systems with a combined deficit of $75 billion told lawmakers Thursday.

A single office would help the State (SERS) and Public School (PSERS) Employees' Retirement Systems cut investment costs, boost pension profits, and reduce pension expenses that currently eat up more than 10 percent of the state budget, according to a new report from the commission.

The bipartisan, five-man Pennsylvania Public Pension Management and Asset Investment Review Commission, headed by State Rep. Mike Tobash, (R., Schuylkill Haven) also urged the state (aided by local school districts) to continue paying more than 30 cents into the pensions, for every dollar paid in wages, as the state’s “employer contribution” to help erase past deficits. Tobash said that’s 10 times what private business typically spends on retirements.

Under Govs. Tom Ridge and Ed Rendell, the state had cut its pension funding even as legislators, teachers, state troopers, and other public workers retired in larger numbers, with bigger pensions, and lived longer than projected — saddling future taxpayers with growing costs.

The commission also urged legislators to force SERS to follow PSERS in starting to publicly disclose how many billions of dollars have been collected by hedge fund managers and other private contractors who manage the state’s pension assets.

The state should make both funds do a better job managing risk and adopting “stress tests,” so they can avoid the massive losses SERS suffered in the 2008 market collapse because the funds were weighed down with hedge funds and other private investments, instead of hedging against stock and bond losses as their well-paid private managers had promised

PSERS risk has "nearly doubled" in recent years, with nearly half its invested or committed assets now tucked away in "illiquid" private assets and unavailable for sale in an emergency; the school pensions are now a "greater cause for concern" than SERS, according to the report.

The commission urged SERS and PSERS to dump any remaining "actively-managed" stock or bond funds they own, in favor of indexed funds.

The report also said SERS and PSERS investments have long performed poorly compared to dozens of other, similarly-sized pension plans, and blamed the shortfall in part on over-investment in expensive, underperforming private investments.

SERS and PSERS ranked 49th and 50th, out of 52 state funds measured by the commission, for their investment returns over the past 10 years. They also trailed most state funds over the past one-year, three-year, and five-year periods.

Gov. Tom Wolf and State Treasurer Joe Torsella, the commission’s vice chairman, made claims for billions of dollars in potential savings through what Wolf called lower fees “to Wall Street,” which they said would follow adoption of these reforms. Cost saving is the commission’s stated goal.

But the report stopped short of recommending that the state sell its private-equity, venture-capital, private real estate, hedge fund, commodities, junk bond, and other “alternative” investment portfolios, as Torsella and Wolf have sometimes recommended during their election campaigns.

Tobash pointed out that any savings would not result in new money available to the state’s annual budget. Instead, effective reform will help keep the long-term pension deficits from growing larger, stabilizing state and school districts' annual payments after a decade of rapid increases.

In a brief interview after the report was released, SERS executive director Terry Sanchez said her system has been asking its hundreds of hired private money management firms for permission to tell Pennsylvanians how much of the profits private contractors make on state investments is kept by those managers as part of their compensation.

But Sanchez couldn’t say whether SERS will begin disclosing that information in state budget hearings later this winter, or in its annual report next year, or anytime in particular. There is no timetable, she said.

Tobash joined vice chair Torsella and fellow Democrat Wolf, along with other commission members and state officials, to unveil the recommendations.

The pension review commission was set up by the General Assembly when it passed curbs on guaranteed pensions for future state hires and began steering them toward 401(k)-style pension plans, whose values rise and fall with those of the investment markets, leaving taxpayers off the hook for part of the shortfall when pensioners' investments lose value. These revised pensions take effect for new state hires starting in January.