In a costly reversal, the state’s largest pension plan said Monday that it would require school employees to pay more to support their retirement after the fund’s executives admitted reporting inflated investment results.
The board of the Public School Employees’ Retirement System voted, 12-1, to raise the amount that school employees hired since 2011 typically pay into the fund from 7.5% to 8%. Those hired since July 2019 would see a larger jump to 8.25% of their salary. The increases will take effect in July and last for the next three years.
Early reaction was angry, amid recent reports that PSERS investments have performed poorly and that some employees have taken expensive trips.
“PSEA is disappointed,” said Chris Lilienthal, spokesman for the state’s largest teachers’ union group. The recalculation “never should have been necessary but it is necessary now to comply with the pension law and PSERS has to follow the pension law.”
The increase is “deeply disturbing,” said Jerry Jordan, president of the Philadelphia Federation of Teachers, the largest local group of PSERS members. “While the board appears to be mismanaging money, Pennsylvania’s retired educators have gone almost 30 years without a cost-of-living adjustment on their pension. ... The board’s failures should not be at the expense of our educators and taxpayers.”
”I am horrified that we have spent something like [$740 million] on consultants and we’ve still under-performed the other pensions,” said Amy Roat, an eighth-grade ESL teacher in Philadelphia who is active in the Philadelphia Federation of Teachers union. “I was horrified to find out they have been going on luxurious junkets with the money of working people.”
She said that those responsible for exaggerating PSERS performance “should be held to account for the inaccurate reports they have been giving. If they are found to have done something illegal, I think they need to get indicted. For younger members to have to pay more for someone else’s malfeasance, which is what this looks like to me, is absurd. Gov. Wolf needs to step in and do something about this.”
A spokesperson for Gov. Tom Wolf had no comment on the increase. State Treasurer Stacy Garrity, who joined the PSERS board in January and has called for reform, said she would have no immediate comment.
State Sen Pat Browne (R., Allentown) was the lone nay vote. He argued that the current law, which he helped write, did not anticipate that investment results would need to be recertified. He maintained that a new law would have to be passed.
The reversal comes four months after the $64 billion pension fund first certified its investment results and promised it would not have to raise employee contributions to the fund.
This vote marks the first time the board has applied a state law designed to ensure that teachers, not just taxpayers, pay more when PSERS investments perform poorly.
In 2010, the state adopted a so-called risk sharing mandate that requires school staff to pay more, as taxpayers do, when PSERS investments under-perform. The law mandated that the review in 2020 look at average returns over the last nine years.
In 2020 the fund’s professional staff reported that PSERS’ yearly investment returns had averaged 6.38% over the last nine years — just above the 6.36% threshold needed to avoid an increase in pension payments from 100,000 school employees hired since 2011.
But in August 2020, then-state Treasurer Joe Torsella raised doubts about the recommendation, noting that the staff had gone back almost a decade to revise — and improve — figures for past investment performance.
The plan’s executive director, Glen Grell, rejected Torsella’s concerns, saying that “the adjustments are not errors.” The Inquirer published copies of their exchange last week, obtained after invoking the state’s right-to-know law.
In December, the full board approved the revised numbers, indicating that school employees would not pay more. Torsella, who had since lost his reelection bid, and state Rep. Frank Ryan (R., Lebanon) complained about a rushed process and abstained from the vote, as did another reform-minded trustee, Richard Vague, the state banking secretary.
Board chairman Chris Santa Maria, a Lower Merion teacher, and senior pension staff insisted that the numbers were good. “We did our due diligence,” said James Grossman, the chief investment officer, at the December meeting. “We covered it. I’m not worried about it.”
Then, on March 12, the PSERS board acknowledged that it had inflated its investment performance results. The board has said little about how the mistake occurred. In late March, it said it was looking into the conduct of both its own staff and outside consultants who advise PSERS.
State and school district taxpayers are projected to pay PSERS $5 billion this year. And $1.1 billion is taken from school staff paychecks. The “employer contribution” has risen every year since the early 2000s. Investments profits averaged $3.7 billion a year over the last 10 years. Despite all that yearly income, the fund runs a deficit of more than $40 billion between its assets and future pension payouts.
After admitting the error, the board gave its audit committee, headed by Ryan, authority to investigate what happened and to hire lawyers for “a special investigation” of how PSERS staff responded to the error, and to keep it from happening again.
On March 19, the board hired the Philadelphia law firm Morgan Lewis to review “federal tax qualification issues.”
The board also hired law firm Womble Bond Dickinson to conduct a special investigation into the mistaken, nine-year investment performance.
On April 6 the PSERS board hired a third law firm, Pillsbury Winthrop Shaw Pittman LLP, to deal with the federal investigation.
And on April 8 the PSERS board acknowledged that it had been served with a grand jury subpoena for documents and is cooperating fully with the request by the U.S. Attorney’s Office in Philadelphia.
The next day, the board added a fourth law firm, Sidley Austin LLP, to “represent and advise” the board regarding its employees and PSERS generally “related to a federal investigation and collateral issues.”
But on Monday, Sidley Austin was replaced in that role by Morgan Lewis. So far, PSERS has not disclosed how much it will spend on lawyers.