This article has been updated to make clear that, during a December 2020 board vote to certify investment returns, chief financial officer Brian Carl told chief executive officer Glen Grell that a different accounting method produced a lower figure for returns, but said that this number did “not add value” and was not based on the most up-to-date financial information.

The former top executive of Pennsylvania’s largest pension fund was told by his chief financial officer that a different accounting method produced a lower figure for profits, but that the figure did “not add value” because it did not take into account the most up-to-date financial information, a new investigation found.

After receiving that message, then-executive director Glen Grell instructed his staff not to provide the lower figure to the board, although members had asked about it. “Leave it alone,” Grell wrote in an email less than 30 minutes before the board voted in December 2020.

The board then certified the higher figure for its investment performance -- only to retract the number later after learning it was corrupted by bad data. The reversal led to an increase in pension payments for teachers and triggered an ongoing investigation by the FBI, federal prosecutors, and financial regulators.

Grell’s legal team said he did nothing wrong and made the right decision because the lower figure was not the “consensus” view and was based on an “illegitimate and inappropriate methodology.”

» READ MORE: Read the full report

The board of PSERS, the $73 billion Public School Employment Retirement System, made public the long-awaited report by Womble Bond Dickinson lawyers about 12:01 a.m. Tuesday. Its weary members did so after the panel met in secret for 15 hours Monday to review the 37-page report and its accompanying 95 pages of rebuttal statements and significant documents.

The report was circumspect in its language. It repeatedly gave the benefit of the doubt to top fund executives. It said it found nothing sinister, for instance, in their use of the term “backdated returns” to describe how the fund had adopted upwardly revised figures for profits that avoided a pension payment increase for younger teachers and other school staff.

Womble found no evidence of crime on anyone’s part and blamed the botched investment figure on “a series of unfortunate oversights and a lack of transparency from a key consultant.”

Consultant faulted

The outside company singled out for criticism was Chicago-based Aon Consulting. In two letters to PSERS last year included in the report, Aon admitted that its staff had given PSERS incorrect numbers for its profits. The firm apologized and blamed its mistakes on input glitches by an unidentified firm analyst. Aon refused to cooperate fully with the Womble probe, the report said, providing written answers to “limited” questions, but refusing to give an interview. The firm said Tuesday that it would have no comment.

In a separate statement packaged with the report, Grell’s lawyers blamed the adoption of the bad number “solely” on Aon — and they noted that Grell had called without success for the PSERS board to fire Aon as soon as it revealed the mistakes. PSERS pays Aon about $750,000 a year to work with its staff on investments and other financial matters. In briefing the board, Womble’s legal team pointed out that, unlike federal prosecutors, it lacked subpoena power and could not require people to cooperate.

Financed by taxpayers, working teachers and other staff, and its investment profits, PSERS is among the 25 largest pension funds in the United States. It sends out $6 billion in pension checks yearly to 250,000 retired former school workers.

The plan has been under investigation for months by federal prosecutors, the FBI, and the U.S Securities and Exchange Commission. The result of those probes — it’s unknown when they will wrap up — will likely be another watershed event for the beleaguered fund and its board.

The federal investigations, civil and criminal, are known to be focused on the adoption of the mistaken profit figure. The PSERS board in early 2021 admitted that the figure it adopted the previous December was wrong and it certified a new, lower number, one that led to an increase in pension payments for many school staff.

The U.S. authorities have also been probing the plan’s expenditure of about more than $10 million to buy 10 industrial properties near its Harrisburg headquarters as well as suggestions that PSERS staff might have accepted gifts from outside investment firms.

Womble’s team — led by North Carolina-based lawyer Claire Rauscher, a former defense lawyer — had been paid $484,000 so far to conduct a parallel investigation into all three issues.

Tuesday’s Womble report did not address the SEC’s gifts and travel probe; the firm apparently is still looking into that.

It found little problematic about the real estate purchases.

In a curious move, the report was silent about what had been to date the most controversial aspect of those purchases. As The Inquirer and Spotlight PA reported a year ago, financial documents drafted as part of the sales said that PSERS staffers would also be paid by the firm hired to manage the properties — a clear conflict of interest, if true.

PSERS responded at the time that the forms were poorly written and inaccurate and would be amended. The Womble report makes no mention of the documents.

The federal probes represented another headache for a volunteer, 15-member PSERs board wracked by dissension for much of last year. In particular, a growing number of board members questioned the leadership of Grell and of investment chief James H. Grossman Jr., long the highest-paid person in state government, making $485,000 a year.

The schism climaxed in November when both Grell and Grossman suddenly announced their retirement. PSERS praised their tenures and gave no explanation for their decision to leave.

At the end of Monday’s marathon session, the board met briefly in public, in a meeting that was streamed online. A succession of board members congratulated each other on how they had handled the matter before voting unanimously to release the report immediately.

“This is the kind of transparency that will give the public confidence in our actions,” said board member Stacy Garrity, the state treasurer and a critic of the agency.

Another board member, State Sen. Katie Muth (D., Montgomery) said Tuesday, “A ton of money was spent on a whitewashing report that didn’t even cover all the things the press covered.”

Muth added: “I’m sick that bus drivers and school support staff and teachers and all school employees have to fight for good pay and benefits and get an average of $26K in a pension yet there’s no problem with spending $13.5 million on crap — [Harrisburg] real estate, millions in legal fees for lawyers that the system shouldn’t need if nothing bad happened, and hundreds of millions in Wall Street fees.”

Not a minor math mistake

The board’s official endorsement of a figure for investment profits was no mere accounting mishap. Under a state reform law known as a “risk-share” measure, working teachers and taxpayers pay more or less into the fund depending on whether profits hit a specified target. The key figure to be derived was the fund ‘s average investment profit over the previous nine years.

Anxiety flooded the agency in late 2020 as the date for the state-mandated computation closed in. Staffers were acutely aware that lagging returns would mean that the fund might fall below the target, triggering an increase in payroll deductions from teachers.

In about June 2020, the report reveals, PSERS staff even asked another outside adviser vendor, Buck Consulting, precisely what profit figure it needed to reach to avoid triggering that jump in payroll deductions.

Characteristically, the report views this benignly.

“We found nothing to suggest that this request was made with an intent to ‘game’ the system; rather it was requested to permit an early understanding of the process and potential outcome,” Womble wrote.

In the summer of 2020, board member Joseph Torsella, a leading critic of PSERS management who was then state treasurer, wrote to Grell to say that the fund appeared to be straying from its ordinary accounting methods and reaching back to increase profit figures in earlier years — retroactively boosting the figure significantly, for example, for 2015.

Grell replied, “The adjustments are not errors in reporting.”

As the Womble review notes, however, “We now understand this is incorrect — unknown to staff at that time, there were errors in Aon’s reporting.”

In the fall of 2020, the fund, worried about the coming calculation, hired a familiar consulting firm, ACA, to check Aon’s work.

As it happens, the Womble report said, Grossman selected ACA at the suggestion of — Aon.

“Based on our review of the materials available and our interview of ACA, we found nothing to suggest any impropriety with this referral,” the report said.

Internal PSERS records trace the error to “data corruption” in just one month — April 2015 — over the near-decade-long period reviewed for the calculation. ACA, hired to check the numbers, has said it sampled only 40 of the 108 months in the review period and did not check April 2015.

Womble said neither Grell nor investment czar Grossman had focused on the performance surge in April 2015. “Grell acknowledged that he could not recall if he ever had a direct exchange with anyone” over the change, the report said.

The report also noted that ACA was never told what the investment “target” figure was. However, according to material obtained separately by The Inquirer and Spotlight PA, PSERS did notify Aon about its concern over hitting the number — something that went unmentioned by Womble.

The climax

The entire issue came to a head on Dec. 3, 2020, when board members gathered to adopt a figure for profits. Based on interviews, documents and audio and video of the meeting, the Womble lawyers were able to provide almost a minute-by-minute narrative of that crucial meeting.

That morning, the report said, Grell, Grossman and the fund’s chief financial officer, Brian S. Carl, exchanged emails noting that under one form of accounting, the fund would fall just short of the target while under another it would just exceed it. The higher figure was before the board for a vote.

The one that produced the lower figure was based on a more traditional accounting method. The other approach relied more on updated figures for earlier years.

The three executives exchanged the emails after a board member — the report does not say which one — first raised the issue and asked for a calculation based on the more conservative method.

However, the board was never given both numbers, the report said, only the higher one.

In an email, Carl cited the more conservative estimate and asked Grell whether management should consider “holding off” disclosing the lower figure to the board “until we can discuss it further.” He explained to Grell that in his “professional opinion” the lower figure did “not add value,” but noted that “it was requested.”

If the board approved the higher figure, Grell replied to Carl, “leave it alone.” In an interview with Womble, Grossman said that Grell indicated to him that he was not to share it with the board unless someone asked again.

The investigative report found that Carl, Grossman, and Aon all agreed at the time that the higher number reflected the correct calculation.

Eighteen minutes later, the board approved the higher figure with nobody voting “no.” Torsella and two other skeptical board members abstained.

According to the Womble probe, PSERS investment experts began to detect flaws in the figure the very next day. By early March, Aon had written the fund to say it had made serious mistakes.

In April the PSERS board voted again, adopting a new, lower figure for investment returns, one under the target. This forced PSERS to raise pension contributions from 100,000 school staff, after all.