With a $40 million limit, Pa.’s biggest pension fund is lawyering up to confront FBI probe

As the staff of Pennsylvania’s largest pension fund cope with an FBI investigation, the employees have one thing to comfort them — generous fund-paid coverage if they need a lawyer.

Officials of the $64 billion PSERS plan have confirmed that eight staffers have hired lawyers since the investigation began under a policy that will pay up to $40 million in total legal bills in any one year for agency staff caught up in one investigation.

The PSERS bylaws say the fund will keep paying employees’ defense lawyers right up to the outcome of any trial, provided they agree to pay back the money if convicted. In contrast, the Pennsylvania legislature cuts off payments to lawmakers and aides once anyone is charged with a crime.

For state employees, the Wolf administration decides the cutoff point on a case-by-case basis. It also caps payments at $250,000 for a state worker.

Critics says the pension plan’s policy is excessive.

“The PSERS board is diverting millions in retirement funds, set aside and intended to pay retirement benefits, to their preferred lawyers to represent them in what may be adversarial to the intended PSERS beneficiaries,” said Arthur Steinberg, president of AFT Pennsylvania, the union for teachers in Philadelphia, Pittsburgh, and some suburban schools.

“This is a classic case of protection for me — the board — but not for thee — the educators who pay into and benefit from the pension.”

Craig Holman, a government-ethics expert with Public Citizen, a watchdog group, said government workers need legal protection, but PSERS’ policy lacked “oversight procedures to ensure that the public legal funds are not used to protect negligent or criminal actions by an official.”

PSERS spokesperson Evelyn Williams would not identify the eight staffers or the law firms they hired. Nor was information immediately available on the law firms’ fees. The hirings come on top of the plan’s authorization of more than $1 million in “emergency” spending in recent weeks to hire three law firms to represent the agency itself, as well as a new investment consultant, all to cope with the federal investigation.

PSERS, the Pennsylvania School Employees’ Retirement System, is one of the nation’s biggest pension plans. It sends checks to 265,000 former teachers and other retired staff from public schools.

In the current fiscal year, taxpayers are to provide about $5 billion to the fund, working teachers and other public school employees an additional $1.1 billion, and $3.7 billion more was to be raised via investments. Nonetheless, the plan has a $40 billion hole in what it needs to pay future retirees.

The giant shortfall reflects decisions by Harrisburg politicians to greatly sweeten taxpayer-paid retirement benefits, including their own, without enacting ways to pay for them. However, detractors also criticize the plan’s lagging investment returns, the accuracy of its financial statements, and the luxury business travel by its investment staff.

As The Inquirer has previously reported, federal prosecutors and the FBI are using a grand jury and subpoenas to investigate the plan’s $3 million in land purchases near Harrisburg, as well as the board’s adoption last year of a figure that falsely exaggerated its investment profits. The board later abandoned that number in favor of a lesser one, forcing newer school employees to pay more for their retirement.

The agency has more than 340 employees, about 50 of whom are highly paid members of the investment unit, whose roles in the purchase of properties and financial decisions appear to be at the center of both areas of inquiry.

That unit is headed by James H. Grossman Jr. who is paid $485,421 yearly, the most in state government and more than double the governor’s pay. Grossman’s two deputies are each paid $399,611. One deputy, Thomas Bauer, was among at least three senior PSERS employees subpoenaed in March as part of the probe, The Inquirer and Spotlight PA have reported.

No one, including those served with subpoenas, has been accused of wrongdoing in the probe. In investigations, authorities often subpoena or interview someone not as a suspect but as a “fact witness” to explain how things work or simply as a custodian of documents.

To help it cope with the federal probe and to conduct its own internal inquiry, the fund by mid-April had brought in the three law firms — Morgan Lewis, a Philadelphia firm; Womble Bond Dickinson, based in the United States and the United Kingdom; and Pillsbury, a Washington firm.

Womble is to be paid up to $367,500, its contract says. Contracts for Morgan Lewis and Pillsbury have yet to be made public, though they were hired more than seven weeks ago. Documents do show that the lead attorney from Morgan Lewis charged the fund $1,250 an hour for initial work.

PSERS has its own in-house legal staff, including a chief counsel and her team. Moreover, even before the FBI probe, its policies called for it to pay two outside firms to serve as “standing counsel,” available to represent staff as needed. The agency was not immediately able to identify those firms.

Until the federal probe, the fund had been planning to spend far less on outside legal help. It budgeted just $227,000 for this in the current fiscal year.

As with its policy on defense lawyers, PSERS enjoys an unusual independence within state government. In part, that reflects its unique board — seven members elected by teachers, other school workers, school boards, or pensioners; five elected officials, including two legislators from each party; and three appointed by the governor.

Until 2017, PSERS’ top lawyers were appointed by the governor’s general counsel, and its attorneys responded to the governor. This was supposed to ensure the pension system acted for the good of the whole state, not just to serve its board or management.

But that year, as part of a reform law, the PSERS board was newly authorized to hire its own legal team. The board later that year gave its senior executives the power to hire outside lawyers as needed, without advance permission.

Government provides lawyers for many groups, ranging from people under arrest who are too poor to hire an attorney to elected politicians or taxpayer-paid workers facing administrative, civil or criminal investigations or charges.

For example, in Dauphin County, where PSERS is located, the county will pay no more than $7,500 in total to a private defense lawyer in a murder case for an indigent client facing the death penalty. The amount paid is only slightly higher in Philadelphia.

In Harrisburg, Gov. Wolf’s policy for the 80,000-person state workforce relies on a 1986 directive that says the administration will decide case-by-case whether to cover legal fees. The administration also says it will approve legal fees and they must be “reasonable.” Payments per employee are capped at $250,000, although it can go higher with special permission.

As for PSERS’ sister agency, SERS, the smaller pension plan for state workers, it covers defense fees, with a cap of $25 million “per claim or series of related claims.”

In recent years, taxpayers have paid heavily to cover the defense bills of elected politicians and aides swept up in Harrisburg corruption probes.

The state paid $14 million to defense lawyers in the so-called Computergate and Bonusgate investigations that led to the conviction of two dozen legislators and aides from both parties. Taxpayers paid $1.4 million in legal fees to challenge federal prosecutors pursuing then-State Sen. Vincent J. Fumo, a once-powerful Philadelphia Democrat convicted of corruption in 2009.

Under a 1996 state law, government officials were to be required to pay back any money spent defending, but, as The Inquirer has reported, the law has been largely ignored.