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Pa.’s largest pension fund faces twin probes over financial results and land buys

The probe by federal prosecutors and the FBI is exploring how top executives of PSERS responded when word spread internally that its financial performance was inflated.

Pictured is the red PSERS office building in Harrisburg.
Pictured is the red PSERS office building in Harrisburg.Read moreKalim A. Bhatti

The federal investigation of Pennsylvania’s $64 billion pension fund for teachers has come into sharper focus with reports that officials are examining both the plan’s inflated estimates of its returns and its spending spree on Harrisburg real estate.

The probe by federal prosecutors and the FBI is exploring how top executives of the fund, known as PSERS, responded when word spread internally that its financial performance might fall short of its official goal, The Inquirer has learned.

And PSERS itself, in an official document, has newly disclosed that it hired a law firm specifically to investigate the “purchase and valuation” of buildings and parking lots it bought in Harrisburg. This is the first time that the fund has acknowledged possible problems with those deals.

The retirement plan stopped short of acknowledging the ongoing federal probe in the document covering its new contract with an outside law firm. But the contract did itemize the real estate transactions in question.

In a previous article, The Inquirer reported that people familiar with the matter said that the FBI was looking into those land purchases.

PSERS — the Pennsylvania Public School Employees’ Retirement System — has declared publicly that it is under federal investigation, but has declined to say over what.

» READ MORE: School teachers now face a hike in pension costs but state workers dodged one. Here’s why.

The employment contract, posted recently on a state website, details concerns over the Harrisburg purchases in asking the law firm of Womble Bond Dickinson to conduct an investigation.

And the clear direction that Womble examine the “valuation” of the properties suggests that the various lines of inquiry may share common ground: the accuracy of the fund’s finances.

PSERS did not respond directly when asked Thursday whether any questions had been raised about how the Harrisburg real estate had been valued as part of the fund’s recent appraisal of its financial performance.

“The PSERS board is in the process of conducting an independent internal investigation. Moreover, PSERS is in the process of responding to and cooperating with a federal investigation,” the fund said in a statement released late Thursday. To protect its members’ interests, “PSERS is unable to comment on or respond to any questions relating to these investigations.”

Ever since an embarrassed board admitted last month that it had adopted a mistaken number for investment returns, the fund has been busy trying to set matters right.

On April 19, it adopted a new, and lower, figure for its financial performance. The reversal meant the fund fell short of a goal set by state law and triggered an increase in pension paycheck deductions soon for 100,000 working teachers and other school employees.

» READ MORE: How a Steelers owner wrote big campaign checks days after $100 million investment from Pa.’s largest pension fund

PSERS has also hired the Womble law firm and two others as it struggles to cope with the federal probe involving a grand jury. One lawyer hired for the work from Morgan Lewis, a Philadelphia firm, is paid $1,210 an hour, contracts disclose.

While PSERS invests most of its billions in stocks, bonds, or private businesses, a small portion of its portfolio consists of direct buys of real estate across the nation.

Locally, the fund set aside $13.5 million since 2017 to buy and clear properties in the somewhat isolated area around its multistory office around Market Street in Harrisburg, not far from the Capitol grounds.

So far, about $3 million has been spent directly on purchases, according to Dauphin County deeds. Additional money has gone to demolish buildings and for other costs. Total spending is not known.

In the contract with the Womble firm, pension officials instructed the lawyers to look into four buys. They were:

  1. The 2017 purchase for $1.6 million of the old newsroom and printing plant for the Patriot-News. The retirement system spent nearly $1 million more than the site had sold for six months earlier. However, in a statement with the buy, PSERS said the earlier price low-balled its true value.

  2. The 2018 purchase for $450,000 of three parking lots on 10th Street, near Market Street, close to the fund’s headquarters. Real estate records say the seller sold the parcels for what he paid a decade earlier.

  3. The 2019 purchase for $200,000 of another Market Street property. The seller was the Pennsylvania Housing Finance Agency, which had obtained it three years before for less than $1,500 in a sheriff’s sale.

  4. The 2020 purchase for $785,000 of two more parking lots on Market. The seller, the same man who sold the 10th Street lots, bought them seven years earlier for $500,000, records show.

The money to buy these last two lots came from a $5 million appropriation approved by the board on Oct. 11, 2019. The matter was handled with unusual secrecy.

The two addresses were kept from the public. Information about the proposed buys was disclosed only to the board, in a confidential memo from PSERS executive director Glen Grell. The purchases were later made with front companies. The contract with Womble cites the $5 million appropriation in 2019.

Since then, PSERS has demolished structures on its real estate, but otherwise, the land lies open. Top development officials in Harrisburg say no one from the pension fund has contacted them about its plan for the properties.

» READ MORE: FBI probes Pa. school pensions amid furor over false investment report, sources say

Mounting legal bills

In hiring this string of law firms, PSERS appears likely to bust its budget this year for legal services. The spending plan put aside $227,000 for legal services in 2021 — dramatically under what it now says it might pay Womble alone.

In the contract with Womble, the fund agreed to pay its lawyers up to $650 an hour, up to a maximum firm payout of $367,500.

Womble partner Claire Rauscher, a North Carolina-based lawyer who was once a public defender in Philadelphia, signed the contract. Rauscher, who has expertise in defense work in white-collar crime cases, has been attending closed PSERS board meetings of late.

Womble is a transatlantic operation, the result of a merger in 2017 between a London-based firm and one with roots in North Carolina.

Along with Womble, the fund board has hired two other outside firms: Morgan Lewis and the Pillsbury firm, of New York City.

» READ MORE: PSERS and its troubles: A guide to the woes facing Pa.’s biggest pension plan

In hiring Morgan Lewis, the board said publicly that the firm would advise the board about its own employees in connection with a federal investigation.

Morgan Lewis also was tasked more narrowly with looking into the board’s now-retracted investment statement, especially any tax implications of the board’s mistake. While the full details of Morgan Lewis’ fees have yet to be made public, initial documents said that partner Timothy Levin, the top person, would be paid $1,210 an hour.

Pillsbury was added “to represent and provide guidance to the board in matters relating to a federal investigation,” the fund has said.

Most recently, the fund also decided it needed new investment advice. It brought on Verus Investments, of Seattle, to help while the plan’s investment staff deals with the investigations.

Full contracts for Morgan Lewis, Pillsbury, and Verus are not yet public. PSERS has not responded to questions about how it will pay for the new hires.

Angela Couloumbis of Spotlight PA contributed to this article.