Frank Ryan is a CPA, a retired Marine Reserve colonel, and Iraq War veteran who got himself elected to the state House in Harrisburg two terms ago, promising to watchdog the people’s money. That includes our biggest pile of capital, the $60 billion school pension fund (PSERS).
“I specialize in keeping companies out of bankruptcy,” says Ryan (R., Lebanon). “It’s what I do for a living." He was a rescue CFO at troubled firms and, once, for a bank.
At the rate Pennsylvania is funding and spending its government -- $36 billion this year, or $2,800 worth of medical and school aid, social work and law enforcement, for each resident -- plus as-yet unfunded future commitments, Ryan expects the state will spend its way to insolvency, forcing radical cuts or giant tax hikes, unless it restructures its finances over the next few years. (Pennsylvania’s credit ratings are among the worst of U.S. states, but Wall Street isn’t predicting default.)
“I have apprehensions about how Pennsylvania is funded, across the board,” Ryan says. So he has become a lead sponsor of several reform bills that could change the way PSERS is run.
The PSERS staff, headed by former State Rep.-turned-executive director Glen Grell and chief investment officer Jim Grossman, has new reasons to care what Ryan thinks: His fellow Republicans who control the state legislature last year put Ryan on the PSERS board, which last month named him vice chairman.
The PSERS staff has a long record of favoring private investments -- hedge and buyout funds, shopping malls and farms, oil and commodities ventures, junk debt -- some of them lucrative, some costly. The staff has persuaded most of the board, led until last month by retired Poconos math teacher Melva Vogler, to buy more of those private investments, instead of doubling down on S&P 500 index funds, for example.
Count Ryan with the insurgents: “I’m in lockstep with the [Democratic] treasurer,” Joe Torsella, “and the banking commissioner,” who until last week was Robin Wiessmann, a Gov. Tom Wolf appointee. Torsella, joined by Wiessmann when she voted, led the scant opposition to buying all those private investments, which Torsella doubts are worth their fees.
Weissmann is now the ex-bank commissioner and will presumably be replaced on the PSERS board by her successor, Richard Vague, the credit card innovator-turned-Philadelphia investor and donor -- another independent thinker who is an experienced operator of public and private companies. Even as a bloc, Torsella, Ryan, and Vague would be outvoted on the 15-member board. Just not as fast.
What PSERS earns from its vast holdings is not nearly enough to pay all the pensions. PSERS is one of the largest, steadiest-growing expenses in the Pennsylvania state and local school district budgets, consuming $5 billion in public “employer contributions” this year, up from $0 in the early 2000s. The state’s burden will grow $119 million this year, according to Wolf’s new budget, more than any state expense except health care.
Blame former Gov. Tom Ridge, who back in 2001 boosted pensions and cut funding, under the theory that dot.com stocks would save us all. And former Gov. Ed Rendell, who signed laws delaying pension funding.
Gov. Tom Corbett trimmed pension eligibility, and Wolf trimmed pension guarantees. These moves have slowed the growth of PSERS’ deficit and should in time reduce it.
PSERS wants to speed that up. The system says its investments routinely beat its benchmarks. But a pension review commission chaired by State Rep. Mike Tobash (R., Schuylkill), assisted by Torsella, posted a fat 2018 report ranking PSERS near the bottom of state pension systems, and recommending reforms, such as combining operations and buying plain-vanilla investments, to cut costs and boost returns. PSERS’ Grossman, Wolf, and legislative leaders pledged support.
Ryan points out that PSERS assets dropped by more than $20 billion amid the investment-market meltdown of 2009-10, and nearly half as much in 2001-2, part of which was lost forever, as pensioners had to be paid and assets liquidated cheap, before markets recovered.
“That’s one of the reasons the [annual state contribution] is as high as it is,” Ryan says. “I’m trying to get people to recognize we can’t just get money from taxpayers, lose it, and then get it from taxpayers again."
PSERS’s Esack noted the system was more heavily invested in stocks in those down years.
Ryan wants to cut the system’s long-term annual return target, now 7.25%, to a more conservative 6%. The price of this realism: It would make the PSERS deficit projection look worse, and force bigger taxpayer contributions.
Ryan, Tobash, and dozens of their Republican allies have sponsored a string of pension reform bills up for hearings this year. Some highlights:
House Bill 1960: Sets up a single Commonwealth Pension Investment Office, replacing the separate offices that now run money for PSERS and the State Employees’ Retirement System, with a board of finance professionals, professors, and CPAs.
Unlike SERS and PSERS members, who get free meals, hotels, and trips but no state cash, investment board members would be paid. Public meetings will be televised. A Contribution Fund will collect state and school district funding, making it harder to skirt payments in times of fiscal pressure
The state’s Independent Fiscal Office, using data that PSERS contractors provided, estimated that setting up a new agency could cost more, not less.. But Rep. Tobash says a single office would be more efficient. SERS and PSERS sometimes pay the same money managers different rates, and “SERS buys Microsoft on Monday while PSERS is buying it on Thursday,” boosting broker paydays at public expense.
Bill 1962 requires an annual Stress Test to show what happens if the markets fall 10% or 20% a year. PSERS already does stress tests. Tobash says that’s not good enough: “We need a stress test that can be delivered clear and simple for the General Assembly.”
Bill 1964 originally mandated quarterly reports of all payments and returns -- included “carried interest” or profits kept by private equity and real estate managers, which are currently secret. The bill was amended and softened last fall by Ryan’s fellow PSERS board member, State Rep. Matthew D. Bradford (D., Montgomery).
Bill 1995. Ryan’s pet project, the Keystone Solvency Operating Study Commission, will review state and agency income and spending, including pensions, and recommend steps to avoid long-term state insolvency. It would use planning benchmarks embedded in the federal PROMESA Puerto Rico financial reform act.
Bill 1996. This would require five-year control audits of the pension funds, plus separate executive, independent audit, and risk committees. "This represents a change in the culture of the pension problems. I think that’s prudent,' Tobash said.