A fight at the heart of PSERS: Who is in charge at the big pension fund? The board or its executives?

Glen Grell had been the executive director of Pennsylvania’s biggest pension fund for two years in 2017 when he drove by the shuttered newspaper plant near his Harrisburg headquarters and noticed the “for sale” sign. Within a few months, the PSERS plan bought the place for $1.6 million.

A much-awaited investigative report into the PSERS fund ticked off a series of issues with that purchase and others as the fund spent $10 million on a handful of nearby industrial buildings and parking lots.

The report found that PSERS committed the money to buy the printing plant a day before the board voted to approve the purchase. And that the fund bought that building and others without appraisals.

Five years out, the agency — the Public School Employees’ Retirement System — has little to show for its money but vacant lots. Various development plans have fizzled. And an FBI subpoena obtained by The Inquirer and Spotlight PA has pressed PSERS for more details about the real estate buys.

Critics of PSERS, on and off its board, say the recent $484,000 report by the Womble Bond Dickinson law firm reveals an agency where the executives too often seemed to give short shrift to the board, circumventing normal checks and balances. The critics fault the managers for taking actions without board approval and not providing some information.

PSERS leaders dispute the criticisms, saying they worked hard to give board members the best data available.

The report made public Feb. 1 echoes complaints previously raised by dissidents on the board. Last year, six of the panel’s 15 members complained in a public letter that the agency’s executives were “divorced” from the board. The letter cited years of “repeated governance failures,” such as last-minute dumping of information on the board.

An outside consultant, in a $400,000 report late last year, urged the board to exert more authority. The PSERS board spent too much time dithering over minutiae and too little on such big issues as charting an overall strategy for investing, the Funston consulting firm said. It also warned about the “potential for management capture/control,” the firm’s phrase for a danger that executives take over decisions that should be made by the board.

State Sen. Katie Muth (D., Montgomery County), the board’s most outspoken critic of the fund’s leadership, said the Womble report confirmed her dissatisfaction with PSERS’ management. “They don’t feel they have to answer to the board,” she said. In June, Muth took the unusual step of suing the pension fund, saying it had denied her key documents.

Charles Elson, an adviser to corporations who founded a center for corporate governance at the University of Delaware, said the Womble report portrayed “a problematic relationship” between executives and the board. And one example was why the fund had bought the local properties in the first place.

“What is PSERS doing in the real estate business?” he said. “That’s not their expertise. They weren’t created to invest in real estate. They are completely out of their comfort zone.”

Elson also faulted the leaders’ decision not to share the results of an alternate method of calculating investment returns when board members asked about it.

“Every director has the right to receive all relevant answers they request. Period,” Elson said.

Executives did not share all their information when the board of the $73 billion PSERS plan held a crucial vote in late 2020 certifying a figure for investment profits. The executives say they did so because the figure in question was flawed and didn’t take into account the most up-to-date data, the Womble report said.

The board went ahead and approved a figure that was endorsed by management but was later revealed to be incorrect. The board’s consultant, AON, took responsibility for that error. PSERS eventually had to rescind the number, adopting a lower figure for profits, forcing the state to hike pension payments for 100,000 working teachers and other school workers.

The botched calculation triggered ongoing investigations by federal prosecutors, the FBI, and the U.S. Securities and Exchange Commission. No one been charged in the probes and there have been no findings of civil or criminal wrongdoing by PSERS executives.

Chief executive Grell, 65, and chief investment officer James H. Grossman Jr., 54 -- once the state’s highest-paid employee, making $485,000 yearly -- announced their retirements in November. Chief financial officer Brian Carl, 56, remains at the agency.

The three men all rejected the critical findings in the Womble report. In a response included with the report, Grell’s lawyers said the real estate buys were conducted properly and met a need for more PSERS parking and office space.

» READ MORE: The full Womble report is here.

There was no legal requirement for appraisals, they noted. And all buys were carefully studied through a robust process that included PSERS investment officers, lawyers, and an outside real estate firm. Of the purchase before a board vote, they said Grell had spoken with the board chair and knew board approval would be forthcoming. And the lawyers said the properties “remain valuable assets,” their redevelopment stalled by the COVID-19 pandemic.

As for not passing on the requested information, the executives said the data given to the board were the most accurate at the time and reflected the consensus view of PSERS executives and its consultants.

The executives said the blame for the adoption of the mistaken calculation lay not with them but entirely with Chicago-based Aon, a financial consulting firm paid almost $700,000 yearly by PSERS. They stressed they had no idea of any problems with it until Aon’s admission to PSERS after the meeting that Aon’s staff had made data input errors.

Grell’s lawyers noted that in June 2020, Grell told Carl in an email regarding the calculation: “I want to play it straight and let the chips fall. I know you do too.”

In a letter to The Inquirer, Marc S. Raspanti, a lawyer for Grell, said that Grell and his staff had “worked diligently to keep the board informed.” His performance reviews gave him “high marks” and emphasized his “positive working relationship with the board.”

And if any board members felt differently, Raspanti said, it might be because some skipped meetings, sending aides instead.

Until a dissident bloc grew on the PSERS board over the last year, the biggest advocate of change was Democratic politician Joe Torsella, who first served on the 15-member volunteer panel ex officio after his election as state treasurer.

His criticism did not endear him to management.

The day before the key board vote in late 2020 on the figure for investment returns, Grell cited Torsella in an instant message exchange obtained by The Inquirer under the state’s right-to-know law.

The messages reveal that Grell gave an early heads-up to the leader of the state’s main teachers’ union, the Pennsylvania State Education Association, or PSEA, that the fund’s profits would be sufficient to spare teachers a pension contribution increase.

This good news turned out later to be wrong.

The five PSEA members on the board have generally been faithful allies of the fund’s executives.

In the exchange with the PSEA leader on Dec. 2, 2020, Grell made a small joke at Torsella’s expense. He noted that Torsella would be leaving the board as he had been defeated for another term as state treasurer in the general election.

Or as Grell put it, “AND it’s somebody’s final Board Meeting!!”

Grell’s lawyer, Raspanti, said: “No disrespect of any kind was intended, or did happen, by Mr. Grell, of Treasurer Torsella.”

Torsella, whom Gov. Tom Wolf reappointed to the board last year, declined comment.

It was Torsella who pushed for more data about the calculation at the Dec. 3, 2020, board meeting in Harrisburg.

At the session, Torsella asked if a different accounting method would produce a lower profit figure. Later in the meeting, a similar question was asked by aide Alan Flannigan, stand-in for the state’s banking secretary, Richard Vague.

Torsella and Flannigan were asking about the figures as computed for the fund’s Comprehensive Annual Financial Report, or CAFR. The plan’s management, meanwhile, had presented the board a different set of numbers prepared by Aon, the big consulting firm that tracks PSERS’ finances. These figures had more up-to-date information about returns on investments, managers maintained.

In response to the questions, Carl said that he hadn’t checked the math but that the two accounting methods would probably not differ significantly.

According to Grell and other leaders, Torsella said “yep, yep” when asked if they had answered his questions.

Unbeknown to Torsella, his questions prompted an exchange of emails between fund executives and outside consultants.

The managers quickly determined that, yes, the CAFR-based count would produce a different figure –- in fact, a number low enough to trigger pension-plan contribution hikes. Under state law, current teachers have to pay more into the system if returns fall short of a certain hurdle or target.

In passing along the lower CAFR figure, Carl emailed Grell to say that his “professional opinion” was that this method of computing returns did “not add value.”

Carl and Grossman, consultants Aon as well as ACA, another consulting firm brought in to check Aon’s work, all agreed at the time that the higher number reflected the correct calculation, according to the Womble inquiry.

What they didn’t realize at the time was that the number was corrupted by an input error. The following February, Aon admitted making this mistake.

In the email during the Dec. 3 meeting, Carl suggested to Grell they could “hold off” disclosing the lower figure to the board “until we discuss it further.”

Grell’s emailed reply: If the board approved the higher figure, “leave it alone.”

Grossman said that Grell told him during a break in the meeting that Grossman was not to share the CAFR number with the board “unless someone asked again,” the Womble report found.

The report also quoted Grell saying he did not share the number because doing so “would have put the board in the position of selecting one methodology and meeting the hurdle or selecting another and missing the hurdle.”

At the meeting, Grell cautioned the board against delaying a vote, saying, “What we presented to the board was the most accurate and double-checked, triple-checked number.” He told Womble that, among other reasons, the Wolf administration needed a board decision quickly. He noted that most of the board agreed that they needed to proceed.

Womble, however, stated, “We have been unable to locate any definitive requirement that would have prevented a delay.”

There was no delay. The panel approved the figure that management had endorsed.

Torsella, Flannigan, and State Rep Frank Ryan (R., Lebanon) abstained.

Had the board been given the lower CAFR figure, one board member said recently, that likely would have persuaded the board to delay a vote and revisit the matter.

Within three months, Aon alerted the pension fund that the adopted higher investment performance number was wrong. With the data corrected, PSERS ended up agreeing to a result identical to the CAFR figure.

Nearly a year later, the Womble law firm has completed most of its work, but the federal investigation remains open.