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Amid PSERS troubles, Pa. lawmakers may be ready for pension reform

With pension costs at record levels and scandals in the headlines, Pennsylvania lawmakers are rushing to complete a string of long-delayed reforms. But will they make a difference?

Pennsylvania State Rep. Frank Ryan (left), a CPA and retired Marine Corps officer, has voted against a string of costly investment proposals backed by PSERS chief Investment officer James H. Grossman Jr. (right).
Pennsylvania State Rep. Frank Ryan (left), a CPA and retired Marine Corps officer, has voted against a string of costly investment proposals backed by PSERS chief Investment officer James H. Grossman Jr. (right).Read moreTYGER WILLIAMS / Staff Photographer

With the state’s largest retirement plan facing an FBI investigation, poor investment results, and an attempted coup by dissident trustees, Pennsylvania legislators are finally showing signs that they’re serious about pension reform.

After many false starts, several bills have been introduced in the state legislature this year that would reform PSERS, which invests $67 billion for school worker pensions.

“I feel very good about four or five new laws moving this year,” predicted State Rep. Frank Ryan (R., Lebanon), a CPA who took over last year as PSERS’s vice chairman and head of its audit committee.

What’s different? “It came about, because of what’s going on now,” Ryan said, referring to the agency’s myriad challenges.

The bills under review would increase transparency and disclose more 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 educate pension trustees.

The most radical bill would combine the investment arms of PSERS with that of its state employee counterpart known as SERS. Ryan acknowledges that the bill will be the hardest one to move but says he has the support of Republican leaders, who control both the state House and Senate, to put these measures up.

He cited backing from House Speaker Bryan Cutler (R., Lancaster), Majority Leader Kerry Benninghoff (R., Centre), and the state government committee chair, Seth Grove (R., York).

Ryan also credited State Sen. Pat Browne (R., Lehigh), a fellow PSERS trustee who has backed the agency’s current managers, as “my mentor” on figuring out how to smooth legislators’ concerns and get bills moving.

Mike Straub, spokesperson for state House Speaker Cutler, didn’t discuss the merits of individual proposals but said that “as more of these disclosures come out,” House leaders see it’s time to go beyond the “cycle of talking” and update the pension governance laws.

A wild spring for PSERS

In March, The Inquirer reported that the U.S. attorney in Philadelphia and the FBI are investigating PSERS’s Harrisburg land purchases and the agency’s exaggerated profit report. That probe continues, and the pension plan has hired lawyers to defend the agency and advise top staff.

Later that month, Ryan’s audit committee hired another law firm to run its own investigation of the agency’s actions, still in progress.

The PSERS board has already made some changes. It recently agreed to alter its travel policies and no longer allow staff to stay at ritzy hotels where Wall Street financiers host meetings, regardless of the cost. The changes came after an Inquirer article detailed a pattern of costly travel, ranging from $1,178 for one person to stay overnight in New York to $15,627 for a round-trip fare to London.

In June, Ryan joined with other PSERS critics to reject staff recommendations and vote down $1 billion in hedge fund and private real estate investments. Critics say those high-cost investments are a prime cause for the agency’s poor investment performance.

Ryan, however, has not gone as far as other PSERS trustees. He declined to support the six fellow trustees who in June demanded the firing of executive director Glen Grell and chief investment officer James H. Grossman Jr.

In July, 100,000 younger school workers started paying more from their wages to fund the pensions, as required by state law. That change occurred after a corrected report exposed PSERS’s below-target investment performance for 2011 to 2020.

No guarantee of reforms

PSERS has taken a pounding in past years without getting much legislative pushback. A state commission in late 2018 unleashed a scathing 420-page report on high costs and low profits at Pennsylvania’s public pension plans, including PSERS, formally the Public School Employees’ Retirement System.

Legislators did pass a couple of comparatively minor measures last fall — a law mandating “stress tests” to warn when investments fall (the plans said they already do this); and another making it easier to compare SERS and PSERS results.

Whether the current effort will have much effect is questionable. The current proposals do not appear to take aim at the agency’s private investments, which critics say are the prime cause for its poor performance.

Here are the additional laws Ryan says leaders have agreed to support when the legislature returns later this summer:

Transparency: State Rep. Brett Miller (R., Lancaster) and his cosponsors have resurrected what’s now House Bill 1671. It would force the plans to make video records of their public meetings available for seven years, post easy-to-compare returns for private as well as publicly traded investments, and detail five kinds of fees paid to money managers, who collect hundreds of millions from SERS and up to $1 billion from PSERS each year. They’ll also have to disclose travel paid for by investment managers. The plans have already agreed to some of those steps.

The bill includes significant loopholes for “sensitive” investments and other concessions to Wall Street demands for secrecy. And it does not renew a call to make all investment contracts public.

Still, Ryan says the compromise bill rates a “95” on a transparency scale of 0 to 100.

National standards: Ryan’s House Bill 1698 imposes the Global Investment Performance Standards (GIPS) ethics and disclosure norms on state pension staff and trustees. These standards, developed by the Chartered Financial Analysts Institute that certifies investment analysts, are designed to ensure users fully disclose their actual returns and expenses.

Most large stock and bond managers — such as BlackRock, Fidelity Institutional and Wellington Management — say they endorse GIPS. But many private real estate and hedge fund managers do not. These include Apollo, Blackstone, Bridgewater, Carlyle, KKR and LLR funds, which have each invested billions for Pennsylvania pensions.

Only one other state — Ohio — has adopted similar rules, and Pennsylvania should learn from Ohio’s experience that higher standards may not be enough to boost performance if the state keeps hiring outside investment managers who don’t also observe those standards, warned public pension consultant Chris Tobe.

“Almost no ‘alternative investment’ managers comply with GIPS, and dozens of the private equity and hedge funds that manage money for the Ohio teachers’ plan refuse to be GIPS-compliant themselves,” Tobe said. “They use what I call the ‘Bernie Madoff policy’: if you ask too many questions, you are not allowed to have the ‘hot’ investments.”

Fraud audits: Ryan’s House Bill 117 gives the state’s elected Auditor General the power to perform fraud or investigative audits of PSERS, SERS and other state agencies — if requested by the agency, the governor, or appropriations leaders from either party in the state House and Senate. Ryan says this year’s state budget includes $1.5 million to train new hires to do these audits.

‘Collars’: HB 1578, from State Rep. Dawn Keefer (R., York), removes old limits on how much taxpayers have to pay PSERS and SERS if their investment values suddenly collapse.

The biggest change

Two other proposals are still in the works: A fiduciary training bill would require pension trustees and some other state-appointed investment overseers to submit to professional education classes.

And Ryan says there’s no schedule yet for the most controversial change in the pension plans’ century-long history — merging the investment arms of SERS and PSERS into one office, under a board of paid financial professionals. That would be in stark contrast to the current mix of political and interest-group trustees, who serve unpaid.

PSERS staff in particular have resisted a merger, suggesting a new investment agency could boost costs instead of reducing them.

But a properly designed, expert office, Ryan and other advocates say, would insulate decisions from interest-group politics and costly investing fads.

Are the agency bosses ready for change?

SERS’ top jobs are open: Chief investment officer Seth A. Kelly resigned last month after less than a year in the job, for a post in his native Missouri. Executive Director Terrill J. Sanchez had planned to retire July 1, but has agreed to stay on as caretaker for now.

Their PSERS counterparts, chief investment officer Grossman and executive director Grell, survived that June call from their firing by six trustees. They seem determined to stay on the job, while the investigations grind on.