In his 30 years of public service in places ranging from Philadelphia City Hall to the United Nations, Joe Torsella says he thought he had seen every kind of government dysfunction.
Then he went to Harrisburg to become state treasurer.
After four tumultuous years in office, Torsella looks back with a mixture of pride and exasperation. As treasurer, he took on the state’s mammoth, multibillion-dollar pension funds and tried to shake them down to their roots.
He made lots of headway — pushing to make secret money manager fees public, exposing poor performance, blocking political insiders from lobbying for contracts — but also lots of enemies. And after all his troubles, voters dumped him in November.
Now, Torsella says his clash with the pensions systems was a rough schooling in “how incredibly hard it is to change the ecosystem around certain parts of government, especially those that involve Wall Street.” The funds are the prize, he says, in a “corrupt system” that too often helps financiers and hedge funds, not the retirees, or taxpayers.
Torsella, 57, a Democrat, won election in 2016. A graduate of the University of Pennsylvania and a Rhodes scholar, he had worked as a policy aide to Philadelphia Mayor Ed Rendell, as the first head of the National Constitution Center in Philadelphia, and as a U.S. diplomat to the United Nations.
He took on an office abused by past treasurers. During his years in office, two predecessors were sentenced in corruption cases.
As treasurer, Torsella automatically got a board seat on Pennsylvania’s two massive pension plans, the $60 billion PSERS for public school employees and the $30 billion SERS for state workers. (The letters stand for the Public School Employees’ Retirement System and the State Employees’ Retirement System.)
Everything about them is supersized. Together, they serve more than 700,000 retired and working Pennsylvanians. Taxpayers pay $7 billion into the funds annually, up from near zero in the early 2000s, and five times what employees contribute. Despite that, the plans are hugely underfunded — collectively short $65 billion.
Their health is heavily dependent on their investments. Once on board, Torsella asked to see investment contracts and fee deals with outside money managers — and was told they were not public. It was as if they were somehow more confidential than a town paving contract or a sanitation worker’s salary.
He found out that these financial managers were actually collecting much more than the systems had disclosed. He learned that the funds’ staff traveled the globe to keep track of investments, with their airfare and hotels booked by the money managers — and very little of that was public, too.
In sum, Torsella said, he found that the pension plans, especially the teachers’ fund, treated Wall Street as a close partner rather than as a hired servant and were enmeshed in “a culture that was staff-driven, where robust dissent was sometimes frowned on.”
With Torsella as a goad, with initial support from Democratic Gov. Tom Wolf and steady backing from some Republicans, much has changed.
The pension funds both are finally revealing to the public how much the investment houses and hedge funds have been paid. They are doing so after years of protesting that the figures were private, irrelevant, hard to calculate — and secret in other states, too.
PSERS, the larger system, reported paying private managers more than $5 billion in direct fees and expenses since 1980. It pays fees that analysts at Pew Charitable Trusts say are far more generous than most public funds.
But there was more — a lot more: Under pressure from Torsella and his allies, the larger fund in 2018 acknowledged that over the years it had let managers keep an additional $5 billion in previously unreported performance fees, sometimes called “carried interest.”
In 2019, in the most recent figures, the fund paid the private firms $293 million in management fees and expenses — plus an additional $448 million in those performance fees.
The agency also just made public its first manager-by-manager fee breakdown, money paid to some of the biggest and most powerful firms on Wall Street. The other fund for state employees, too, finally disclosed similar information, though heavily redacted.
The payments from both funds since 2005 include more than $300 million to Blackstone, headed by billionaire Abington native Stephen Schwarzman. More than $200 million went to LLR, the Philadelphia investment firm of Ira Lubert, a former board chair of Pennsylvania State University.
In December, PSERS announced its new 2021 investment strategy. It will boost stocks to 27% of its holdings, up from 19% before Torsella arrived, pumping less money into the private firms owned by high-fee Wall Street money managers. This, too, was a move Torsella and his allies had urged. To be sure, the boost was mostly in foreign stocks, not the cheaper-to-buy and more closely regulated American shares.
It also unveiled a new travel policy. In another first, the fund agreed to detail hundreds of work-related trips made by investment professionals, trips from Sydney to Paris, Beverly Hills to Miami. In 2019 alone, the first report showed, money managers booked airfare and hotels costing $417,000 for 38 PSERS officials.
And board meetings at both funds are now streamed online.
An iconic chairman
Torsella came to Harrisburg skeptical of high-flying investment pros. At the Constitution Center, his board chairman was John S. Bogle, the iconic founder of Vanguard Group, the Chester County investment giant. Bogle, who died in 2019, created popular low-fee funds based on stock indexes such as the S&P 500, which over time outperformed higher-priced funds run by celebrity stock pickers.
Torsella absorbed a lesson: Even the brightest and luckiest investment wizards can’t beat the market. So why pay their high fees? The smarter play, Bogle taught, was to buy a broad range of investments at the lowest cost.
Torsella’s view put him in conflict with the staff at the pension funds, especially the one for public school workers. Themselves highly paid — James Grossman, the PSERS investment chief, earns $485,000 a year, the most in state government — they were believers in hiring highly paid private money managers. They said indexing has its place, but maintained that private investment houses boosted returns in the long run.
As a battering ram for change, Torsella turned to a time-tested weapon, the blue-ribbon commission. Torsella got his chance when Wolf put him on a new state pension review panel and told him to do something about their runaway costs.
Torsella recruited a review team led by Ashby Monk, an investments professor from Stanford University. The team had help from scholars such as Ludovic Phalippou, who runs the economics department at Oxford University, Torsella’s old Rhodes turf.
Other allies joined in from across party lines. Key were two Republican states representatives, Mike Tobash, a fiscal conservative from the Pottsville area, and Iraqi war vet Frank Ryan, a legislator from outside Harrisburg and a fervent Donald Trump booster. Tobash chaired the commission. Torsella was vice chair. Ryan later joined Torsella on the 15-member school fund board.
“I have worked around the world, from Ulan Bator, to Juneau, to Stockholm,” Monk said in a recent interview. “The project there [in Pennsylvania] felt like the most politicized, lacking in trust, I ever experienced.”
The investment staff grilled him on his politics. They questioned whether Monk’s Stanford background meant he really wanted to privatize pensions, a view promulgated at Stanford’s conservative Hoover Institute. Monk explained that he directed a different center there.
Phalippou also found the funds hostile. In a separate interview, he said their staffs bridled when questioned, especially about the deals to invest billions in “private equity” businesses that aren’t listed on the stock market.
“I am perceived as an enemy,” Phalippou said. “They treat me as if they are Democrats and I am Fox News: ‘Don’t give him information — he will make us look bad.’”
“They did not want to talk to me,” he added. “They did not want to give data. They did not want to collaborate with the treasurer or the legislature.”
At times, the tension spilled into public. At a legislative hearing, Glen Grell, chief executive for the teachers’ fund, questioned the credentials of the commission. “We were a little surprised” they hadn’t managed more money themselves, he said.
Grell testified that one panel recommendation — that a board of paid experts oversee investment for both funds ― was “one of the worst ideas I’ve heard of in Harrisburg in about 25 years.”
Grossman agreed with a legislator who dismissed Torsella’s consultants as mere “educators.”
Rep. Ryan put it this way: He now doubts Torsella would be welcome at the teachers’ fund offices in Harrisburg.
“He pulled a Band-Aid off a wound, ” Ryan said. “The person who does it is not always appreciated. As it says in the Bible, ‘A prophet is not welcome in his own town.’”
In a statement for this article, the PSERS administration called Torsella a force for reform and openness. That said, the fund also called Torsella “intractable” at times and said he seemed to mistrust the agency’s information.
When the experts hired by Torsella and the other commissioners got to the bottom line of investment profits, they were disturbed. As Monk put it, performance “wasn’t as good as I thought it would be.”
It was actually among the worst in the nation, according to the 2018 commission report.
Fund defenders said the rankings were unfair. In PSERS’s case, spokesperson Steve Esack said recently that it had bet heavily on stocks in the 2000s to counteract state underfunding. When the national economy tanked late in the decade, it reversed course, selling stocks.
In short, the teachers’ fund had too much stock when stocks were going down, but not enough when the market was rising. It lost both ways — and shouldn’t be blamed for the resulting poor performance, the agency said. “It is easy in hindsight to judge,” Esack said.
More recent data from Boston College’s pension center show the Pennsylvania funds have failed to post better results than other large state pension funds, despite spending more on private money managers. PSERS has an especially unusual profile: It had far less invested in publicly traded stocks and more tied up for years in hedge funds and private firms, but results remained mediocre. The comparative data were through 2019.
What troubled Torsella was the coziness — how the funds’ leaders, after years of betting on high-priced private investments, taking their trips, hanging out with millionaire managers, had come to identify with their Wall Street contractors and their costly visions.
He said the funds had foolishly bought into the idea that paying outsider advisers generously would guarantee good returns. “It is largely snake oil, peddled by Wall Street, that you can buy your way out of investment difficulties,” Torsella said.
Phalippou, the Oxford don, had similar concerns. He said the staff, after so many years of pouring money into private, untraded firms, had fallen under the spell of the outside investment managers.
“They want to believe their story,” he said. “It’s like, ‘Those guys are very rich. They tell me they are doing cool stuff. Everyone says they are doing cool stuff. It must be cool.’”
An election upset
Up for reelection last November, Torsella seemed a sure thing.
After all, his campaign outspent his opponent $1.8 million to $217,000. But he lost, although by less than 1% of the nearly seven million votes. The surprised winner, Stacy Garrity, said she had accepted the GOP treasurer’s nomination only after failing to obtain backing for a seat in Congress.
She benefited from a strong Republican showing statewide anyway. Garrity has said she supports pension plan reforms.
As he reviews his tenure, Torsella points to other, far less contentious, initiatives. Notable was the new Keystone Scholars program in which the state seeds a $100 college nest egg for each of the 14,000 babies born yearly in Pennsylvania.
”But the big battle,” he said, “was over how that $80 billion in state pension funds will be managed.”
Though some fund officials and Wall Street executives may have been happy to see him defeated, Torsella said he had no regrets.
“My job as treasurer wasn’t to make people comfortable,” Torsella said. “There needs to be a vigorous culture where questioning is seen as a sign of strength and not a sign of weakness.”