As feds subpoena information, big Pa. pension fund admits it’s under investigation

Federal authorities have subpoenaed records from executives of Pennsylvania’s mammoth $62 billion teachers’ pension fund, the state treasurer has said, as she and the retirement plan confirmed for the first time that the fund is under investigation.

“The PSERS situation is extremely troubling,” Stacy Garrity, told a legislative hearing Tuesday afternoon, referring to the pension plan of which she is a trustee. “Board members have been made aware that federal subpoenas have been served on several members of PSERS management.”

After the latest of a string of secret meetings, the board later Tuesday approved and made public a terse resolution to hire another law firm “to provide guidance to the board in matters related to a federal investigation and any collateral issues.”

That was the third time in recent days that PSERS has hired an outside law firm to deal with potential scandal.

Garrity provided few details to the State Senate panel. Ever since The Inquirer on March 26 quoted sources as saying that the FBI was looking into the fund, she, PSERS board members, and its management have declined to say what agents are investigating or to specify which actions might be the subject of federal scrutiny.

PSERS — the Public School Employees’ Retirement System — has not announced actions against any staff members in connection with the federal probe, nor in relation to a separate, internal investigation of false investment returns endorsed by the board. That false report was used to determine state, school and staff payments into the pension system.

The agency has not hired lawyers for any individual staffers, spokeswoman Evelyn Williams said Tuesday.

Garrity and other PSERS trustees voted unanimously Tuesday night to hire the New York law firm Pillsbury Winthrop Shaw Pittman LLP to deal with the federal investigation. The board voted shortly before 10 p.m., after a meeting that lasted more than five hours and was closed to the public.

“Well-done,” banking secretary Richard Vague told fellow board members as the meeting ended.

The pension fund has said it is probing its own staff after finding that an investment report, approved by a majority of the board in December, was in error, in a way that was likely to have cost taxpayers extra and saved school workers from a hike in their pension contributions.

Last month, the fund’s audit committee hired the Anglo American law firm Womble Bond Dickinson to investigate why it approved a number that overstated the performance of the fund.

It also brought on the Philadelphia-based law firm Morgan Lewis to review whether to change the balance between taxpayer and teacher payments into the plan. In a clue to the nature of the error with the estimate, it also said Morgan Lewis would examine whether the plan had lost a degree of federal tax exemption related to its investments.

Asked about the cost of the three law firms, Williams said contracts for the services were still being negotiated, though the work had already begun.

PSERS budgeted $227,000 for legal services and fees in each of the last two years, but has called for a more than 50% increase to $352,000 in its annual budget request this year. PSERS did not immediately say why it expected last winter that it would need more money for lawyers. That was before the investment performance error or the federal investigation were disclosed.

The board hired the firms after admitting that it made a mistake that exaggerated the pension’s fund investment performance. The numbers are critical because they determine how much teachers and other school employees contribute to the pension fund. Fixing an overstated number might trigger greater payments from employees.

The target for those years was an average yearly return of 6.36%. In December, the board endorsed a report from the plan’s experts that the fund had actually grown by 6.38% — just enough to spare teachers an increase in their pension contributions.

The error had been incorporated into a report approved by a majority of PSERS board members in December after executive director Glen Grell, investment chief James Grossman, and chief financial officer Brian Carl told board members it was accurate. Even with their assurances, three board members who raised questions about it declined to approve the report.

Like other special board meetings over the last three weeks, including one on Friday night, Tuesday’s meeting was held mostly in secret, following a series of closed special board and audit committee meetings in March.

The board and its audit committee, which is overseeing the false-reporting investigation, have held a total of seven “special” such meetings to discuss investigations since early March. Both board and audit committee plan to meet again Friday evening.

Such secrecy is legally permitted when the board talks to lawyers about current or likely litigation, Grell told the board at Friday’s session.

Among those attending the private sessions Friday and Monday with trustees were PSERS staff lawyers and Charlotte, N.C.-based Claire J. Rauscher, a partner at Womble Bond Dickinson.

Rauscher typically works as a defense lawyer who “protects her client from the long reach of the government, both state and federal,” according to her law firm’s profile.

She specializes in conducting internal investigations for corporate clients, and resolving them “without publicity or reputational damage,” the bio added.