What a Marine turned CPA learned as a watchdog of Pennsylvania’s and PSERS’s billions

Francis X. Ryan, Marine officer turned CPA, headed to Harrisburg in 2016 as a freshman Republican state representative for Lebanon County. He pored over financial reports and then warned that the state was going broke and offered to fix it.

In 2020, he joined the Pennsylvania Public School Employees’ Retirement System (PSERS) board and began voting against proposed investments with big Wall Street firms — just in time for an embarrassingly exaggerated profit report, an ensuing federal investigation (since ended without charges), and the departures of four top-ranking officers.

Ryan, 71, didn’t run for reelection to his legislative seat this year, and he recently stepped down from PSERS. He agreed to talk about his experience in government over eggs at Exton’s all-night Bistro 24. The interview has been edited for length and clarity.

The state has been here since 1682 spending the people’s money. It’s government, and I didn’t expect the controls over spending by state agencies to be at the standards of the business community, even after all those years. Still, I was stunned how [government has] failed to develop even basic controls.

The pension plans are an example of this. Your story about the $1.7 billion [PSERS] spent in a year on money managers was another reminder. We are only starting to report what we get for that money, in terms of returns.

Controls should mean you have transparency, including over the fees. If you can’t measure it, you can’t be held accountable for it.

We had a bill that would mandate better controls. It has not passed. We started implementing provisions of that bill at PSERS anyway. It should make it easier to measure if, for the fees you are paying, you get the returns you expect.

A bigger issue is that valuations of all those alternative investments we own are suspect. [Former state Treasurer] Joe Torsella, [Banking and Securities] Secretary Richard Vague, and [current Treasurer] Stacy Garrity and I have spoken about our concerns about this.

I am working with professor Tim Nash at Northwood University in Michigan to test my hypothesis that funds use economic downturns as a means of cleaning up their balance sheets in a bad year [and moving losses off the books], as corporations tried to do with “restructuring” back in the 1970s. The accounting profession finally got up the courage to maintain that those “restructuring” costs are actually operational costs [and should be reported as losses]. We need to see if that’s happening with private equity, too.

The next economic downturn will take a state like Illinois and drive them into bankruptcy. [Pennsylvania is] not that far behind Illinois, if you look at the imbalance between long-term obligations like the pension funds and revenues.

I did books for a lot of manufacturers. Pennsylvania was a great manufacturing state until we chased a lot of the factories away.

When I worked at Lukens in Coatesville in the 1970s, the family owners were still very involved. [Charles L.] Skip Huston wanted to build a new plant north of the city, on a 1,500-acre greenfield site. Thousands of people, the future of the city, depended on this application. But the Department of Environmental Protection would not expedite the proposal. While they were waiting, they lost the opportunity. The company was sold. The old plant has by now gone through a series of owners based far away. Many of their other plants have closed.

I’m a school-choice person, and the teachers’ unions don’t like that at all. But they were respectful of the fact we had differences of opinion.

I think the world of Chris Santa Maria [Lower Merion social studies teacher and PSERS board chairman]. He’s an honorable person. He’s a devout Catholic. But I didn’t know how it was going to work out when he asked me to be vice chair of the board and chair the audit committee.

When a leader has an adversarial relationship with the audit committee, you can end up with what happened at Disney recently, when the financial officer got rid of the CEO.

But Chris told me he thought he understood: “You just want to see what’s going on.” I said, “Right, financial issues shouldn’t be political. As long as we communicate freely.” And Stacy Garrity [the Republican state treasurer and a critic of some PSERS policies] was a tremendous vice chair.

[Democratic Gov. Tom Wolf’s appointees] Joe Torsella and Richard Vague and, before him, Robin Wiessmann and I became very close friends. Democrats and Republicans. At my first meeting, Robin told everyone, “You need to listen to what Frank Ryan is telling you about financial controls.” And I have to give Joe Torsella a lot of accolades for raising issues.

And Chris would always be listening. I’ve watched him in very difficult situations. He’s the calmest person in the room.

Pulling together all the information that the investigators required, that fell on our audit committee. For 18 months, it was many hours a day and every day of the week.

I have tremendous respect for them. [Former PSERS chief investment officer] Jim Grossman is a really smart guy. We had differences of opinion. We would argue on a fairly regular basis. We were looking at a new asset allocation model.

But once the investigation started, we couldn’t talk to them. I need to be impartial in an investigation.

You see the pressure. You are running a $74 billion pension fund, concerned about where the economy was going, keeping your eye on that ball. All the other stuff, while critically important, becomes tangential if we lose $15 billion [as happened in the 2008-2009 market collapse]. Another hit like that would be catastrophic. It would be unrecoverable. The stress came from not knowing where things were headed.

In the beginning, I was voting for none of them. Then they started bringing in different deals. By the end, I was approving 70%. You will also see that with Garrity and Vague.

Having an informed dissent prevents groupthink. Unanimous votes concern me; informed gadflies are useful. You have to have people who are willing to challenge the status quo.

I had another bill to tighten state financial controls. State Sen. Pat Browne (R., Lehigh), who was also on the PSERS board, looked at me and said, “You do realize when you talk about efficiency, you are going to run an uphill battle with everyone who benefits from state spending. You are talking about logical decisions that will meet with political resistance. You are about to learn the difference between politics and business.”

I said, “We can reduce spending and still improve services.” He laughed and said, “Go public with that. See what happens.” They were all lined up, the unions and the business groups. That bill never made it out of committee.