Pa. school pension trims taxpayer cost, details $1.7 billion paid to Wall Street managers

Pennsylvania and school district taxpayers will get a welcome respite from the rising cost of pensions next year, thanks to the former bull market that generated record profits in 2021, plus a post-pandemic rebound in hiring at the state’s public schools.

Trustees for the $68 billion school pension system, known as PSERS, met in Harrisburg on Dec. 15-16 and approved the charges, while also reviewing a big jump in payments to Wall Street firms before the stock market began falling last winter.

The Public School Employees’ Retirement System will need $5.19 billion from state and school district taxpayers to help fund the pension in fiscal year 2023-24, down from $5.31 billion received in the current fiscal year, chief financial officer Brian Carl told trustees.

The employer contribution rate, a pension surcharge on every dollar paid to school staff, will drop to 34%, from 35.26% last year — the first decrease since 2008. (School staff also put about 7.5% of their pay into the plan.)

The reduction, under a complex funding formula, is due to a rise in investment values during 2021, as stocks and other investments surged, and to higher-than-expected public school hiring and pay increases last year, funded in part by federal pandemic funds, which boosted last year’s dollar contribution above expectations.

But Carl warned that the rate will likely go back up next year, given this year’s meager investment returns and other factors.

The plan faces a long-term deficit of more than $40 billion, mostly to fund future pensions for teachers who worked between 2001 and 2011, a period during which lawmakers approved higher pensions but declined to fund them. Under later revisions to the pension law, recent hires receive smaller pension guarantees and add less to the system’s long-term deficit.

The system also issued a report showing billions of dollars in payments to Wall Street money managers since the start of 2021.

The system reported $1.7 billion in fees, profit-sharing and other expenses paid to more than 50 outside money management firms, which between them invested PSERS money in more than 150 separate investment funds. The system also manages part of its assets in-house, through a staff of civil servants.

Nearly $1.4 billion of the 2021 total was in the form of “carried interest” accrued by and paid to the Wall Street managers as their cut of the profits made from PSERS investments. The managers got to keep this money for hitting targets determined by formulas that are typically excluded or redacted from publicly disclosed contracts. The system also paid $238 million in direct management fees and $95 million to cover the managers’ expenses.

Major recipients of PSERS fees during 2021 include private equity firms Apollo Global, then headed by Philadelphia 76ers co-managing partner Josh Harris, which collected $48 million from PSERS; Bridgepoint, $45 million; Cerebrus, $70 million; Clearlake Capital Partners, $97 million; and Insight Venture Partners, $74 million.

Also, $92 million to LLR, a firm started by Philadelphia investor and casino developer Ira Lubert; New Mountain Partners, $48 million; Platinum Equity Partners, $118 million; Summit Partners, $83 million; Tenaya Partners, $48 million; and real estate managers Blackstone, long headed by Abington native Stephen Schwarzman, $41 million; Cabot Industrial, also about $41 million; and Exeter Industrial, $60 million; among others.

Expenses were far higher in calendar year 2021 than in previous years, due mostly to extra-large profit sharing, as private-equity managers cashed out nonpublic companies they owned at premium prices, or boosted estimates of the value of their remaining companies in hopes of profitable sales.

In 2020, the system says, fees and related expenses totaled $695 million; in 2019, $680 million; and in 2018, $555 million.

Costs dropped in late 2021 and early 2022, as investment values began falling and fewer firms qualified for profit sharing. In a separate part of the report that covered the 12-month fiscal year ended June 30, including the first six months of 2022 plus the end of 2021, PSERS says it spent a total of $525 million on investment fees, less than one-third what it recorded for calendar year 2021.

Bridgewater Associates LP, a hedge fund manager, collected $25.3 million during the fiscal year. ECM Feeder Fund II, a Japanese fund manager, collected $44.8 million.

There were also funds that were awarded millions in profit-sharing in prior years but now owe the pension system millions due to lower valuations as investment values fell.

PSERS pays more in fees than most other state pension systems, which, in turn, pay more than private companies with retirement plans, according to industry data. PSERS returns, however, have tended to lag the market over a recent five-year period, according to a report from consultant CEM Benchmarking that was also presented to the board last week.

According to that report, PSERS returns for that period, averaging 10.6% a year, trailed a few points behind both the median for U.S. public pension loans, 11.2%, and the median for large plans such as PSERS, 10.7%.

Still, trustees and plan members could take comfort that the most expensive PSERS investments performed well, CEM staff told the trustees.

Also at their meeting, PSERS trustees agreed to offer for sale three blocks of downtown Harrisburg, east of PSERS’s own headquarters, which were acquired under the administration of former executive director Glen Grell as part of a plan to redevelop the city’s former printing district while also turning a profit for the pension fund.

Most of the properties were purchased without appraisals, and the buildings on them were demolished, but nothing has been built on the now-vacant ground. The land transactions were a subject of a federal investigation last year that ended without accusations of wrongdoing. The agency earlier this year paid for appraisals of the properties but has not disclosed their value while trying to sell them.

Trustee Melva Vogler, a former math teacher who is retiring after 28 years, will be replaced by Sue Lemmo, a retired art teacher in Curwensville, Clearfield County, who won a three-way race with almost 49% of the vote.

At Friday’s meeting, Lemmo called on legislators to act on a proposed cost-of-living raise for about 11,000 of the oldest pensioners.

While any pension increase faces an uncertain future in the legislature, trustees voted unanimously to approve a 7.8% pay increase for executive director Merrill S. Sanchez, who was hired last year from the smaller State Employees’ Retirement System at $275,000 a year.