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Billions gone from state pension funds

With markets down, cash has been going out faster than it comes in at big public investment plans

The value of PSERS, the Pennsylvania school pension fund, fell to $69.8 billion on June 30, from $74.6 billion March 31.
The value of PSERS, the Pennsylvania school pension fund, fell to $69.8 billion on June 30, from $74.6 billion March 31.Read moreCourtesy of Pa. Public School Employees' Retirement System

These are grim times for the public’s money, when big pension plans can lose billions in a few months.

When stock values crash, as they did in 2001 and 2008, a rebound can take years. Patient investors — university endowments, retirement savers with other income — can wait. But pensions have to keep paying retirees, and a long downturn makes them much more expensive for employers. And when those retirees worked for the government, taxpayers foot the bill.

The value of PSERS, the Pennsylvania school pension fund, fell to $69.8 billion on June 30, from $74.6 billion March 31. That’s a 6% drop in three months, due mostly to falling stock and bond prices, staff and advisors told trustees at their meeting Oct. 21.

But compared with other state pensions, the Public School Employees’ Retirement System has shown “very strong” returns, Claire Shaughnessy of pension consultant Aon told trustees.

The larger New Jersey state plan dropped $8.6 billion, or 9%. The Pennsylvania state workers’ plan, SERS, slipped $3.7 billion, or 10%. Philadelphia’s stock-heavy pension plan tumbled about $900 million, or 11%.

“Exceptional results, compared to our peers,” said Pennsylvania banking secretary Richard Vague at the PSERS meeting, citing the Aon data. Vague is a gubernatorial appointee on the PSERS board.

Of course, Aon is the same firm that, according to an internal investigation (known as the Womble report), presented exaggerated returns for PSERS in 2011-20, forcing a belated increase in teacher contributions to the plan, and provoked an investigation by the U.S. Attorney’s Office in Philadelphia that ended without charges. The Securities and Exchange Commission also started a probe.

Glen Grell, then the executive director of PSERS, wanted Aon fired. But it’s Grell who has since stepped down; Aon is still there. PSERS earlier this year disclosed that it’s thinking about suing Aon. Yet for now it continues to rely on Aon as a consultant.

PSERS officials acknowledged that their reported returns were boosted by the slow pace at which their many private equity and private real estate managers report their estimated worth — months later than for stocks and bonds. (The effect is more pronounced at PSERS because the system has relied more heavily on private investments.) In effect they compared spring’s stock and bond losses with last winter’s private investment valuations, before the markets’ big fall.

Advisers replaced

At the Oct. 21 investment meeting, three consultants from Hamilton Lane, the Conshohocken firm that has guided PSERS’s private investments since 2017, were lauded by trustees and staff for the firm’s guidance.

Strangely, however, no one mentioned that the PSERS board, in a special meeting Oct. 4, voted to replace Hamilton Lane, with rival Aksia. PSERS staff didn’t comment on why they didn’t renew an adviser who was praised by trustees and officers.

More questions than answers

Some of the data presented by PSERS advisers raises more questions than it answers. For example, Aon claimed that private real estate investment value rose more than 25% in the year ended June 30, while publicly traded real estate firms lost nearly 10% — even though the two different kinds of investors buy and sell similar office, warehouse, apartment and hotel buildings in the same neighborhoods.

The divergence is at least partly due to the lag in estimating returns for private investments, resulting in the apples-to-oranges (or winter-to-spring) comparisons noted above.

Missing appraisals

In other pension real estate anomalies: The Justice Department may have ended its investigation of PSERS’s purchase of three blocks in downtown Harrisburg, without criminal charges, but mystery surrounding the value of that investment has deepened.

Back in May, following findings and recommendations in its own internal investigation, PSERS hired a Philadelphia appraisal firm to value 15 properties PSERS bought from 2017 through 2019 as part of a secret plan by then-executives to redevelop the neighborhood east of its headquarters. The fund spent about $10 million buying and clearing the properties, whose value they did not have appraised. The land remains vacant.

State Rep. Frank Ryan (R., Cumberland) asked PSERS staff about the appraisals, already 45 days late, in an Oct 11 audit committee meeting, which he chaired.

“I pray to God there’s no outside interference,” Ryan told fellow trustees. “We need to get these retroactive and current appraisals as soon as possible.” He set a “non-negotiable” deadline of Oct. 15, “unless there is a clear and compelling reason.”

Banking secretary Vague backed Ryan and called the delay “very concerning.”

And yet the appraisals were not presented or even discussed in the public portions of the October meetings. PSERS spokesman Steve Esack said the agency had no comment. (Staff also wouldn’t talk about the recent sale of four Florida apartment complexes PSERS purchased from one of its advisers in 2019. At the time, staff said they planned to hold the apartments for many years to come.)

Major turnover on PSERS board

Ryan said he was in a hurry to get those appraisals partly because he’s about to leave the board, and his state House seat. Rep. Torren Ecker (R., Adams and Cumberland) will replace him at PSERS.

The unpaid PSERS board includes governor’s appointees, elected officials, working teachers, one retired teacher, and school board representatives.

In addition to Ryan’s departure, the two longest-serving board members will leave the PSERS board. Former chair Mel Vogler, a retired Poconos math teacher, is stepping down, and Sen. Patrick Browne (R., Lehigh) lost his board seat when he was defeated in his bid for reelection to the state Senate in May. His replacement has not yet been announced.

In addition, Curwensville art teacher Sue Lemmo is retiring from teaching and must step down from her seat on the board. Lemmo is another of the five Pennsylvania State Education Association union members on the board. Brian Reiser, a math teacher in Grove City, south of Erie, was the only candidate who filed to replace Lemmo so, with board approval, he will join the board for the next two years.

Lemmo hopes to replace Vogler in the lone seat reserved for retired school staff. But she faces competition: Russell J. Diesinger, a retired Reading teacher, school board member, union officer and president-elect of the Pennsylvania Association of School Retirees, also filed to represent retirees.

Diesinger has pledged to push for cost-of-living raises for those who retired more than 20 years ago and missed out on the big pension increases that Gov. Tom Ridge approved in 2001.

James P. Hoover, retired head of Pennsylvania Distance Learning Charter School, is also running for the retiree seat.

PSERS will mail retired teachers ballots on Oct. 31 for the open retiree seat, the only board position that is up for a member vote this year.

Jason Davis, the Penn-Trafford High School (Westmoreland County) economics teacher who formerly headed the investment committee, won’t have to face an election to keep his seat for three more years, because no one filed to run against him.

And the board future for Vague and two other governor’s appointees will be determined by the outcome of November’s gubernatorial race.

Editor’s note: This story includes material added post publication, including a sentence noting PSERS has relied more on private investments than others.