FBI probes big pension fund’s $13.5 million in Harrisburg projects

The FBI is investigating the purchase of millions of dollars in real estate in Harrisburg by Pennsylvania’s largest pension fund, The Inquirer has learned.

People familiar with the newly disclosed probe say federal authorities are digging into the PSERS fund’s authorization of $13.5 million in spending in recent years to purchase and demolish buildings near its headquarters in the state capital.

While remaining silent about the focus of the investigation, the pension plan itself disclosed earlier this month that federal authorities, using a grand jury, have subpoenaed records from its management. The retirement system has hired two outside law firms over the probe.

Retirement system officials declined to respond to questions for this article. “No comment at this time as an investigation is underway,” spokesperson Evelyn Williams wrote, without elaboration.

PSERS — the Pennsylvania School Employees’ Retirement System — is a $64 billion plan that oversees benefits for 500,000 working and retired school employees. Even as news broke of the federal probe, it has been facing a separate controversy over the board’s admission that it erred by adopting an inflated official figure for investment performance.

It’s unclear whether the federal prosecutors and FBI agents with the U.S. Attorney’s Office in Philadelphia are also looking at that issue.

» READ MORE: Bad math: PSERS was warned but inflated investment returns anyway

In recent years, the giant fund has been criticized for its lagging returns, especially given the plan’s underfunded condition going back 20 years. In its last fiscal year, the plan had an investment rate of return of only 1.1%, compared with 5.4% for the S&P 500.

The fund is increasingly being forced to rely on larger handouts from taxpayers and school employees to pay pensions.

The fund invests most of its billions into stocks, bonds, and so-called alternative investment, such as firms not traded on the stock market.

But it also put about 10% of its money into real estate. Among other such buys, it has purchased fruit and nut farms in Western and Southern states, a hotel in Atlanta, and an ailing mall in Florida.

Closer to home, PSERS in late 2017 launched the effort to buy buildings and land around its multistory offices on Fifth Street, near Market Street, a few blocks from the Capitol buildings.

In all, the board has approved spending the $13.5 million, doing so in five votes since 2017. So far, about $3 million has been spent directly on purchases, according to PSERS and Dauphin County deed records. Additional money has gone for other expenses, including demolition.

The venture has been wrapped in secrecy. At one point, for example, the board authorized spending $5 million without disclosing precisely how the money would be used. That information was kept from the public, shared only with the board in a confidential memo from executive director Glen Grell. The fund has also made purchases through two front companies.

Nor has the pension fund ever made clear its overall plan for the properties.

» READ MORE: PSERS and its troubles: A guide to the woes facing Pa.’s biggest pension plan

State Sen. Katie Muth (D., Chester), a new PSERS board member, said the fund’s executives left far too much vague.

“We need honest, thorough and timely answers from leadership at PSERS about exactly where our money is going and why,” she said. “Sadly, that’s not the case at the moment.”

In what is known, records show that in a first purchase in late 2017, the plan spent $1.6 million to buy the former newsroom and printing plant of the Patriot-News newspaper and seven other properties. That was a big markup from the last sale price for those properties only six months before: $644,000.

Anticipating criticism, the pension fund put out a statement at the time justifying the buy.

The previous $644,000 purchase price, the fund said, “bears no direct relationship to the true value of the property. The $1.6 million purchase price paid by PSERS represents the fair value of the eight-parcel property.”

PSERS bought the properties from an affiliate of Alden Global Capital, a national company that specializes in buying troubled newspapers.

In the statement, Grell said PSERS was pleased to help redevelop the area. While saying the agency had no definitive plans for the site, he said the property had “strong investment potential” and could be a “catalyst” for other businesses to open up there.

About a year later, the fund demolished the building on the site. The ground has sat vacant since.

In late 2018, PSERS made its next buy — spending $450,000 for three parking lots on 10th Street, at Market. The seller, Robert Clay, made no profit, selling them for what he paid a decade earlier.

In 2019, the fund bought another Market Street property, for $200,000 from the Pennsylvania Housing Finance Agency, which had obtained it three years before for $1,408 in a sheriff’s sale.

Last year, records show, a newly formed entity bought two more lots in the area for $785,000. The buying entity had the same post office box and address as PSERS’s holding company for the other buys.

The seller, Clay, said the buyer was a front organization for PSERS. He said the fund approached him and wanted to keep using the lots for parking. The fund confirmed the purchase Saturday.

Clay had bought the two properties in 2013 for $500,000 and sold them for $785,000.

Later last year, the fund picked up its most recent acquisition: a former state printing shop at 908 Market. A state agency deeded it over for $1. The pension system said it would tear it down to consolidate it with the old Patriot-News lot.

In investing in the area, the pension plan has put money into a region that Harrisburg planners say could be revitalized from an industrial space to one of condos, shops, and offices.

In 2018, state officials floated the idea of a $90 million project that would include renovation of the Amtrak and bus station there and work to limit flooding of a creek that runs through the site. Harrisburg also rezoned the area in an attempt to lure in development.

David Black, head of the Capital Region Economic Development Corp., noted how the area was a walk from state and legislative offices.

“It’s got incredible potential,” Black said. “The seeds are there.”

Black and Bradley Jones, chief executive of Harristown Enterprises Inc., which developed the successful Strawberry Square center in Harrisburg, both said they were unaware of what PSERS was planning.

That said, they agreed the area was ripe for change.

“We believe that is a very developmental and attractive site to grow the downtown,” Jones said. “The possibilities are very wide and opportunistic.”