Under the glare of a pair of federal investigations, the state’s biggest pension fund has shaken up its leadership.
Last week, months of controversy reached a climax of sorts when the PSERS fund suddenly announced that its veteran chief executive and top investment czar were both retiring.
The fund’s board is now looking for replacements for chief executive Glen Grell, a former state GOP lawmaker, and investment chief James H. Grossman Jr., the highest-paid official in state government.
The $73 billion pension plan sent them on their way with news releases extolling their work. The releases made no mention of the ongoing probes or a key botched calculation that set the stage for their exits.
Why are PSERS’ two top executives leaving?
Their negotiated departures come as the pension fund for retired public school teachers and other former school staff has been under investigation for eight months. Federal prosecutors from Philadelphia, FBI agents, and investigators from the U.S. Securities and Exchange Commission are looking into the agency.
Subpoenas arrived in March only days after the fund’s 15-member volunteer board admitted making a costly mistake when it endorsed an inflated figure for its return on investments.
Authorities are examining that mistake and, in a seemingly unrelated matter, also digging into the fund’s purchase of old industrial buildings and parking lots near its Harrisburg offices, the prosecutors’ subpoenas said. The SEC, in a more recent subpoena, asked the fund whether staff had accepted gifts from vendors.
The probes have been a massive migraine for a board that has also been badly split between supporters and critics of the investment strategies of Grell and Grossman.
Grell, 64, a former state legislator who is paid $227,000 yearly, had headed the fund since 2015. Grossman, 54, took over as investment chief two years before that. He is paid $485,000 yearly, a figure reflective of his high-finance role.
The two men will have retired by May. By staying into next year, Grossman will complete 25 years with the agency, qualifying him for state medical benefits for life. His annual pension on reaching the retirement age of 60 would be about $170,000, less if he started taking it earlier.
Back up a bit — what is PSERS?
PSERS is an acronym for the state’s Public School Employees’ Retirement System. It is among the largest 25 pension funds in the nation, ranked by assets.
The plan oversees the pension system for nearly 250,000 retired teachers and other local school workers, and a similar number of working educators who pay into it.
It has been underfunded since then-Gov. Tom Ridge, backed by leaders of both parties, dismissed warnings from a few legislators and boosted benefits for public employees, including their own, without putting aside money to pay for them. This has created a deficit of over $40 billion, despite growing public subsidies.
The plan sends out $6 billion yearly in pension checks to retirees. It is mainly funded by its investment returns, but taxpayers put about $5 billion into it this year — $3 billion from state funds, $2 billion from local school districts — and working educators an additional $1.1 billion.
PSERS is often confused with a smaller sister fund with a similar name, SERS — the $35 billion State Employment Retirement System for 133,000 retired state government workers. SERS has posted similarly lackluster returns, has a large deficit, and has been the recipient of ever-increasing taxpayer help.
How generous are PSERS pensions?
Among retirees, nearly half collect about $45,000 yearly after working 30 years or more, boosted by a pension formula that for many years was among the nation’s most generous for teachers. Teachers hired before 2011 will continue to retire on the old terms for decades to come. And unlike teachers elsewhere, PSERS members also pay into and qualify for Social Security payments.
PSERS pensions aren’t at any risk. Courts have ruled they are guaranteed by the state constitution, like other state contracts. It’s taxpayers who pay most of the extra costs when the plan’s investments fail to profit as projected.
Still, longtime retirees grouse that they haven’t been granted a cost-of-living increase since 2004
Moreover, politicians, particularly fiscal conservatives from both parties, have had their knives out for PSERS for years, especially for new hires. They have raised their retirement ages, cut their benefits, and steered them toward 401(k)-style plans.
OK — why did those executives leave now?
Neither the feds nor PSERS has said a word about the probe for months. Still, it seems likely that the leadership change was driven by the fact that an outside law firm has essentially concluded its own probe of the pension fund — and had let the board know its findings were damaging.
The firm, Womble Bond Dickinson, was hired to conduct a parallel investigation to that of the federal authorities. Thus, it has been looking into the botched calculation on returns, the Harrisburg real estate buys, and the matter of any gifts. Gov. Tom Wolf has called on the PSERS board to make the report’s conclusions public, but so far the agency has not announced plans to release it.
What was that big PSERS math error?
In December 2020, the board officially found that PSERS yearly investment returns had averaged 6.38% in recent years.
That was not a very exciting number — but it was just above the threshold needed to avoid an increase in pension payments from 100,000 school employees. That threshold, set by investment experts, was 6.36%.
In 2010, the state had adopted a so-called risk-sharing mandate establishing such thresholds and requiring school staff to pay more, as taxpayers do, when PSERS investments underperform.
Then in March of this year, the PSERS board admitted it was mistaken and said returns had only gone up 6.34%.
How did the mistake happen?
PSERS won’t say. It has rejected requests from The Inquirer under the state Right-to-Know law for copies of its correspondence with consultants about the error. The Inquirer is appealing.
One of those consulting firms seemed to take the blame for it in one internal document obtained by The Inquirer and Spotlight PA, citing “clerical mistakes at a data-entry level.”
That said, the bad number was adopted after dissident board members, notably then-State Treasurer Joseph Torsella, raised concerns that chief executive Grell was using unaudited figures to come up with investment returns. This was a break from past procedures, the critics said.
When Torsella and others raised questions about the figure at the December 2020 meeting, their warnings were brushed aside.
“We did our due diligence,” Grossman said at the time. “We covered it. I’m not worried about it.”
Along with triggering the investigations, the board’s adoption of a new figure, under the risk-sharing law, means that it also had to hike payments into the pension plan by teachers and other staff hired since 2011. That’s about 40% of the 250,000 public school employees. (Teachers with more seniority were exempted from the pension-payment increases).
Most saw their levy jump from 7.5% to 8%. Typically that meant a teacher would have to pay about $300 more into the pension system every year.
Newer teachers, those hired after 2019, have to pay $450 more.
And consider this: While retirees are paying about $27 million more a year, taxpayers statewide are on the hook for a $200 million bump in their subsidy share.
What’s up with that Harrisburg real estate?
Since 2017, the fund has authorized spending about $13.5 million to buy about 10 properties near its headquarters in the capital. The real estate — including the former state and Patriot-News printing plants, which PSERS demolished — has sat dormant since, despite PSERS’ early promise to redevelop the blocks.
Earlier this year, the fund admitted that it had listed Grossman and other members of his investment team on the payroll of the firm managing the Harrisburg real estate. The plan said that was another error and the forms would be amended.
How about the SEC’s questions about staff pocketing gifts?
Under state and PSERS policies, the fund’s employees are forbidden from taking gifts.
No one has leveled a specific allegation of such an illegal exchange. That said, some agency critics say that senior employees have grown too cozy with the outside money managers who do business with the plan.
As The Inquirer has reported, the system spent more than $1.5 million over three years on staff travel before COVID-19 kept everyone home. Most of the money went to cover about 500 trips by about 40 staffers in the investment office, a unit with some of the most highly paid employees on the state payroll. PSERS was supposed to reimburse the firms.
Most of the trips were booked by the outside money managers — and some choices were extravagant. In a not-atypical example, one taxpayer-paid investment manager flew to London in 2019. His fare was $15,627.
The plan has said the trips were entirely legal. However, the board in July took steps to rein in travel spending.
What’s ahead for the fund?
Short-term, the fund’s board must decide how much to reveal from the critical consultant’s reports. The FBI and SEC investigations should come to a head soon also.
Amid the turmoil of recent months, lawmakers in Harrisburg have been working on measures to overhaul the fund.
Their proposals would strip away some of PSERS’ secrecy and disclose more about the fees going to the fund’s well-paid outside money managers. One measure would empower the auditor general to conduct fraud audits while another would give additional financial education to board members.
One of the more radical proposals would combine the investment arm of PSERS with that of SERS, the smaller sister plan.
In recent years, the fund’s detractors have faulted it for lagging behind other funds in its investment performance, especially given the plan’s underfunded condition. The fund rebounded last fiscal year along with the world economy, posting a record return of 25%, a massive jump from the previous year’s nearly flat return of 1.1%.
Still, the plan’s profit rate trailed many other state funds, including the Pennsylvania and New Jersey state pension plans, and was well beneath the S&P 500 stock index’s climb of 38%
Critics such as Torsella have zeroed in on Grossman’s investment strategy, saying it was marred by an overreliance on high-fee, illiquid, and opaque investments often available only via private deals. Even before the retirement announcements, the board had overruled Grossman’s team at least twice, rejecting private alternative investments as board members voiced support for Vanguard-style “passive” index funds.
With Grossman and Grell on the way out, and new leaders arriving, it seems more likely that the move away from the old investment approach will continue.