PSERS investigation into FBI finally prompts Pennsylvania lawmakers to act
With the state’s largest pension plan facing an FBI probe, poor investment results, and a coup attempt by dissenting administrators, Pennsylvania lawmakers are finally showing they are serious about the matter of the pension reform.
After many false starts, several bills have been introduced to the state legislature this year to reform the agency.
“I feel very good about four or five new laws coming into effect this year,” predicted State Representative Frank Ryan (R., Lebanon), a CPA who took over as a vice last year. -President of the PSERS and head of its audit committee.
What is different? “It happened because of what’s going on now,” Ryan said, referring to the agency’s myriad of challenges.
The bills under consideration would increase transparency and disclose more fees to the fund’s well-paid external fund managers. One measure would empower the Auditor General to conduct fraud audits while another would educate pension trustees.
The most radical bill would combine the investment side of the PSERS with that of its government employee counterpart known as SERS. Ryan acknowledges that the bill will be the most difficult to move forward, but says he has the support of Republican leaders, who control both the State House and Senate, to put these measures in place.
He cited support from Speaker of the House Bryan Cutler (R., Lancaster), Majority Leader Kerry Benninghoff (R., Center) and Chairman of the State Government Committee, Seth Grove (R. , York).
Ryan also credited State Senator Pat Browne (R., Lehigh), another PSERS administrator who has supported the agency’s current managers, as “my mentor” in figuring out how to allay the concerns of lawmakers and move forward. bills.
Mike Straub, spokesperson for House of Commons Speaker Cutler, did not discuss the merits of the individual proposals but said that “as more and more of these disclosures are released” the House leaders see it is time to move beyond the “discussion cycle” and update pension governance laws.
In March, The Inquirer reported that the US attorney in Philadelphia and the FBI were investigating PSERS land purchases in Harrisburg and the agency’s report of exaggerated profits. This investigation is continuing and the pension plan has hired lawyers to defend the agency and advise senior staff.
Later that month, Ryan’s audit committee hired another law firm to conduct its own investigation into the agency’s actions, which is still ongoing.
The PSERS Board of Directors has already made some changes. He recently agreed to change his travel policies and no longer allow staff to stay in fancy hotels where Wall Street financiers hold meetings, regardless of the cost. The changes came after an Inquirer article detailed an expensive travel model, ranging from $ 1,178 for an overnight person in New York City to $ 15,627 for a round-trip London.
In June, Ryan joined other PSERS critics in rejecting staff recommendations and voting against $ 1 billion in hedge funds and private real estate investments. Critics say these high-cost investments are the main cause of the agency’s poor investment performance.
Ryan, however, didn’t go as far as the other PSERS administrators. He declined to back the six other directors who in June demanded the sacking of executive director Glen Grell and chief investment officer James H. Grossman Jr.
In July, 100,000 young school workers began paying more out of their wages to fund pensions, as required by state law. This change came after a corrected report found the return on investment to be below the PSERS target for 2011 to 2020.
The PSERS has been abused in recent years without too much legislative hindsight. In late 2018, a state commission released a scathing 420-page report on the high costs and low benefits of Pennsylvania’s public pension plans, including the PSERS, officially the public school employee retirement system.
Lawmakers passed a few relatively minor measures last fall – legislation mandating “stress tests” to warn when investments plummet (plans said they already did); and another facilitating the comparison of SERS and PSERS results.
It is questionable whether the current effort will have much effect. The current proposals do not appear to target the agency’s private investment, which critics say is the main cause of its poor performance.
Here are the additional laws Ryan says executives have agreed to support when the legislature returns later this summer:
Transparency: State Representative Brett Miller (R., Lancaster) and his co-sponsors resurrected what is now House Bill 1671. This would force plans to make video recordings of their public meetings available for seven years, post easy-to-compare returns for private as well as publicly traded investments, and details five types of fees paid to fund managers, who raise hundreds of millions of SERS and up to $ 1 billion in PSERS each year . They will also have to disclose trips paid for by investment managers. The plans have already agreed to some of these steps.
The bill includes significant loopholes for “sensitive” investments and other concessions to Wall Street’s demands for secrecy. And he does not renew a call to make all investment contracts public.
Still, Ryan says the compromise bill scores a “95” on a 0-100 transparency scale.
National standards: Ryan’s House Bill 1698 imposes the ethical and disclosure standards of the Global Investment Performance Standards (GIPS) on staff and trustees of state pension plans. These standards, developed by the Chartered Financial Analysts Institute which certifies investment analysts, are designed to ensure that users fully disclose their actual returns and expenses.
Most of the major equity and bond managers, such as BlackRock, Fidelity Institutional and Wellington Management, say they approve GIPS. But many private real estate and hedge fund managers don’t. These include the Apollo, Blackstone, Bridgewater, Carlyle, KKR, and LLR funds, which have each invested billions for Pennsylvania pensions.
Only one other state – Ohio – has similar rules, and Pennsylvania should learn from Ohio’s experience that higher standards may not be enough to improve performance if the state continues to hire employees. external investment managers who also do not meet these standards, warned a public pension consultant. Chris Tobe.
“Hardly any manager of ‘alternative investments’ complies with the GIPS, and dozens of equity and hedge funds that manage the Ohio teachers’ plan money themselves refuse to comply with the GIPS. GIPS, ”Tobe wrote. “They use what I call the ‘Bernie Madoff policy’: if you ask too many questions, you are not allowed to have ‘hot’ investments.
Fraud audits: Ryan’s House Bill 117 gives the state’s elected auditor general the power to conduct fraud or investigative audits of the PSERS, SERS and other state agencies – at the request of the agency, governor or officers of either party’s appropriations in the State House and Senate. Ryan says this year’s state budget includes $ 1.5 million to train new hires to do these audits.
‘Necklaces’: HB 1578, by State Representative Dawn Keefer (R., York), removes old limits on how much taxpayers must pay to PSERS and SERS if the value of their investments suddenly collapses.
Two other proposals are still underway: A draft law on training of trustees would require pension administrators and certain other state-appointed investment supervisors to undergo vocational training courses.
And Ryan says there is no timeline yet for the most controversial change in 100-year pension history – the merging of the investment branches of SERS and PSERS into one office, under a board of paid financial professionals. This would be a stark contrast to the current mix of political administrators and interest groups, who are unpaid.
PSERS staff in particular have resisted a merger, suggesting that a new investment agency could increase costs rather than reduce them.
But a well-designed expert office, according to Ryan and other advocates, would isolate policy decisions from interest groups and expensive investment modes.
Are agency bosses ready for change?
Top SERS positions are open: Chief Investment Officer Seth A. Kelly resigned last month after less than a year on the job, for a position in his native Missouri. Executive director Merrill Sanchez had planned to retire on July 1, but has agreed to stay on as a keeper for now.
Their PSERS counterparts, CIO Grossman and Executive Director Grell, survived that June call after they were fired by six directors. They seem determined to stay at work, while investigations progress.