New PSERS bosses are selling properties and still checking miscalculations from the last regime

New bosses and trustees at the $70 billion Pennsylvania Public School Employees’ Retirement System are still dealing with legacies of the previous administration, whose top officers stepped down in late 2021 as the agency coped with investigations of an exaggerated profit report and Harrisburg land sales.

The U.S. Attorney’s Office in Philadelphia told the agency last year that it wasn’t filing charges after a 17-month probe. But now PSERS is seeking more information from the firm that conducted an internal investigation, as it reviews potential gaps between its public findings and more recent testimony in a court case focused on pinning blame for the bad numbers.

» READ MORE: From 2022: Justice Department investigation of PSERS ‘has closed’ with no charges. SEC probe goes on.

Separately, the Securities and Exchange Commission, which subpoenaed PSERS records in an investigation of Wall Street investors’ and consultants’ relationships with public pension funds, has asked how much the agency spent on lawyers, advisers, and staff time to deal with the probes. Those costs, including more than $6 million state records show the agency has paid to law and consulting firms, have continued to rise as the agency is still paying lawyers to deal with fallout.

Meanwhile, PSERS is trying to sell a $1.4 billion portfolio of real estate that former managers purchased directly for the pension plan, instead of relying on its usual mix of Wall Street real estate investment managers.

Over its history, the agency has oscillated between buying real estate directly or instead leaving those decisions to Wall Street specialists, which is the direction it has adopted since the departure of former executive director Glen Grell and his top investment officials last year.

At their regular meeting Friday, trustees agreed to approve the sale of property held by Commonwealth Holdings Inc., one of several holding companies set up to help PSERS manage directly-owned properties.

PSERS had no comment on that sale or other pending or recent sales of properties held directly by PSERS, said Evelyn Williams, a spokesperson for the agency.

Agency records show that holding company owns one large property, the Atlanta Airport Marriott, a 630-room hotel that PSERS acquired in 1987 and has tried several times before to sell. The hotel had an estimated value of $82 million, down from $89 million in 2019, according to internal PSERS reports.

According to Florida public records and published real estate industry accounts, four apartment complexes PSERS owned — one each in Parkland and Orlando and two in Miramar, Fla., each of which were included in the agency’s $1.4 billion “directly owned” real estate portfolio as of last June 30 — have been sold over the last four months, for a total of at least $363 million.

PSERS officials, who have not publicly disclosed the sales, would not say how much of the proceeds would go to the agency or how it might be reinvested.

PSERS is also seeking to market the Galleria, a mall and surrounding property in St. Petersburg, Fla., that it estimated was worth over $300 million in a 2020 report, but less today, and a smaller commercial property at the Rivercenter in San Antonio, Texas.

And it is seeking to sell properties in Harrisburg covering three blocks east of its headquarters, whose acquisition, mostly without appraisals, became a subject of the U.S. Attorney’s and SEC’s probes.

In 2017-19, PSERS staff persuaded trustees to approve $13.5 million to buy and level the former state and Patriot-News printing plants and surrounding properties in hopes of redeveloping the land at a profit, and possibly moving staff from its longtime headquarters on Fifth Street to part of the site.

Those properties remain vacant. PSERS hired appraisers last year as it began preparations to sell the ground, and currently estimates the value of the properties at a combined $1.3 million, according to people familiar with the agency’s properties. PSERS also owns farms in several states and a network of trailer parks across the South and Midwest.

PSERS is also coping with the past as it prepares its triennial review of past investment profits to determine whether school staffers should pay more, less, or about the same, toward their pensions, as mandated by the state “risk-sharing” law.

Teachers will pay more than $1 billion into the plan this year, while state government and school districts contribute around $5 billion. A third source of funds — investment income — is larger than these employer and employee contributions combined in some years, but negative in others.

In 2020, the last time PSERS ran the numbers, it got into trouble. At first, it reported it had made just enough to avoid charging teachers more than the typical 7.5% of their paychecks. But in early 2021, it announced the true returns were slightly lower — just low enough to force all school staff hired since 2011 to pay an extra 0.5%, or sometimes more.

As federal law enforcement investigated, PSERS hired the law firm Womble, Bond & Dickinson to conduct its own review of the error.

After Womble issued a report that did not accuse PSERS staff of wrongdoing, and the feds backed off, PSERS sued one of its consultants, Aon Investments USA, which it blamed for the error. Aon was also among the PSERS consultants sued by a Delaware County teacher, Kevin Steinke, who accused them of ripping off the plan. Aon in court papers denies “that its performance calculations were in any way improper” or cost teachers money.

Testimony in the Steinke case has differed from the accounts collected by Womble, according to sources inside and outside PSERS — suggesting there is still more to learn from the 2020 miscalculation that sparked the costly, disruptive investigations. PSERS wants Womble to help explain any gaps between information it collected and statements made in the Aon litigation.

As a result, a PSERS auditors told trustees March 22 that they were not ready to present their plan for reviewing how the agency calculates returns for the risk-sharing report.

The overall risk-sharing calculation “remains on schedule” for later this year, said PSERS spokesperson Williams. She said the agency won’t discuss the Steinke testimony, some of which is sealed from the public record.

Also at Friday’s meeting, PSERS chairman Chris Santa Maria announced that Joseph Torsella had resigned from the board, which he joined in 2017 as state treasurer and was later Gov. Tom Wolf’s representative. Santa Maria credited Torsella with pushing the board to “greater transparency,” and limiting the practice of letting contractors front staff travel expenses.

Torsella’s departure leaves Gov. Josh Shapiro to pick a replacement. Shapiro has said he favors dumping the kind of high-fee private investments PSERS has come to rely on and investing more in low-cost index funds, such as those sold by Malvern-based Vanguard Group, just as Montgomery County’s pension plan did when Shapiro was head of its commissioners in the early 2010s.

The amount spent on legal and consulting fees has been updated in this version of the article, from around $4.5 million as of March, 2022, in the original post, to more than $6 million through March, 2023.