PSERS’s pension reversal has former allies questioning its strategy

On Monday, when the state’s largest pension fund voted to charge school employees more for their retirement, the fund was compelled to do so because it had missed its 10-year investment goal by the narrowest of margins: two 100ths of a point.

Had the fund invested more in stocks as it used to, it would have made up its shortfall and prevented the extra charges, records show. Instead, the $64 billion fund invested in high-cost private equity and alternative investments that drove down PSERS’s performance numbers, triggering a need to require more contributions from recently hired school employees.

The fund’s flip flop — PSERS said it made its target in December, then retracted the claim in March — has left feelings of bitterness among school employees, state officials and others. The reversal is fostering a sense that teachers and school employees need to be more proactive in how PSERS is run.

“This was a long time coming,” said former state Rep. Mike Tobash (R., Berks), who chaired a 2018 state commission that criticized high costs and poor investment returns at PSERS, the Pennsylvania School Employees’ Retirement System.

“The culture built into [PSERS] was so disappointing,” Tobash said. “They were the party of ‘leave us alone and go away,’” and union leaders voted relentlessly to continue its expensive investment program, opposing a small dissident faction on the PSERS board.

“‘Obstructionist’ is not too strong a word,” Tobash concluded. “We were trying to fix a system that would benefit their members. Now [the union] is doing duck-and-cover.”

Union leaders dispute that. They too are “angry and disappointed” at how PSERS handled the increase, Pennsylvania State Education Association president Rich Askey wrote in a letter to members on Tuesday.

Askey noted how PSERS has confirmed an FBI investigation, first reported by The Inquirer. He cited other Inquirer reports detailing PSERS land purchases in Harrisburg and the millions that the fund has spent on travel for employees to visit investors, and gave a warning: “If the probe discovers information that indicates changes to PSERS’s operations are necessary, we will certainly support those reforms.”

Other observers say the path forward is fairly straightforward. “A diversified group of mostly equities in two Fidelity mutual funds has been averaging just around 12% per year,” said Paul Hale, a retired Doylestown resident and one of many readers who have written to The Inquirer in recent weeks asking how PSERS expected to beat the market with its expensive alternatives.

“Passive investing really does work,” Hale added. “How is it that PSERS can only generate less than 7% per year? Why do they feel the need to invest in esoteric opportunities?”

Before the financial crisis of 2008, PSERS invested mostly in U.S. stocks. But unnerved by the meltdown, the giant fund sold stocks and shifted to private equity, hedge funds and other “alternative” investments that had outperformed stocks in some years.

That multi-billion-dollar bet has gone badly: U.S. stocks came roaring back, while private equity and hedge funds have lost their edge.

PSERS’s stock returns averaged 8.9% a year from mid-2011 to mid-2020, the test period under state law. PSERS’s private-equity returns averaged just 7.2% for the same period, while hedge funds were worse, at an average 4.4%. Combined, PSERS now has more than 30% of its assets in those two classes, though it has lately been trimming the total.

“A lot of funds are now indexed to publicly traded equities, such as TIAA-CREF, the college retirement fund,” noted Charles Elson, corporate governance professor at the University of Delaware. “Anyone who put most of their retirement money into the S&P 500 has done very nicely over the last 10 years. A question to ask these other funds: Are they going into widely held investments, or pet projects?”

On Tuesday the fund hired an outside manager to oversee its complex and low-performing investments while chief investment officer James Grossman deals with various probes.

PSERS is run by a 15-member board. Even when some trustees began voting against the staff’s costly proposals, they could usually count on the loyal support of PSERS’s board — especially the largest bloc, five members of the powerful PSEA, the politically influential school employees’ union.

In December, all five union members and retirees on the PSERS board, led by board chairman Chris Santa Maria, a social studies teacher at Lower Merion’s Harriton High School, joined the majority to approve a report certifying that PSERS had returned an average 6.38% a year over the last nine years.

That was just above the 6.36% threshold that would have forced an increase in worker payments to PSERS under the state’s “shared-risk” law.

But five weeks ago, the fund admitted making “errors” in its first number and hired outside law firms to discover what went wrong. Then, on Monday, PSERS admitted that the real figure was 6.34% — two 100ths of a point too low — forcing an increase in school workers’ share.

The shift will cost school workers more than $75 million over the next three years, according to The Inquirer’s estimate. PSERS refused to comment on that or how higher teacher contributions could affect the $5 billion-plus that taxpayers pay PSERS each year.

A 10-year veteran teacher earning $70,000 would pay an extra $350 a year, the president noted. Only those hired since 2011, when the shared-risk law was passed, will pay more.

Amid the fallout, the ranks of the dissidents have been growing.

Board members who have lately voted against the staff’s alternative-investment proposals include state treasurer Stacy Garrity, State Rep. Frank Ryan (R., Lebanon), state bank commissioner Richard Vague, newly appointed state Sen. Katie Muth (D., Montgomery), and sometimes school boards rep Nathan Mains and education secretary Noe Ortega.

Former treasurer Joe Torsella, a pioneer reformer and Tobash’s vice chairman on the reform commission, was unanimously voted back onto the board as Gov. Tom Wolf’s representative by the state Senate on Tuesday.