Pa. Gov. Wolf, treasurer Torsella clash with school pension board on cost-cut plans
The treasurer says it is "deeply concerning" that investment professionals would say "high fees are associated with alpha," or above-average profits
Trustees of Pennsylvania's biggest pension plan, feeling pressure to explain the half a billion dollars they pay each year to private money managers, couldn't quite agree on the solutions presented at its meeting last week.
Teacher, retiree and legislative reps on the $50 billion Pennsylvania Public School Employees' Retirement System (PSERS) combined to pass a list of recommendations, called the "Fee Reduction Plan." It includes a proposal to spend more than $3 million a year on nine new staffers charged with cutting costs by negotiating lower charges and moving more money management in house.
The state's elected treasurer, Joe Torsella, and two representatives of Gov. Wolf voted no. In a strongly worded letter to fellow trustees led by Melva Vogler, the retired Wallenpaupack High School math teacher who chairs the PSERS board, Torsella objected to the idea that PSERS staff expressed in the report, that "you get what you pay for" when hiring private investment managers. In fact, higher returns "cannot … be bought," Torsella shot back. He cited data from Boston College Center for Retirement Research to argue that fees give little prediction of long-term investment performance.
PSERS maintains it can save more than $2 billion over 20 years by replacing some private money managers with state employees and negotiating lower fees from the hundreds of outside firms that compete to manage state investments.
Torsella called that claim "misleading" and "inaccurate," because it does not include details of the formulas that PSERS would use. He also questioned PSERS' attempt to spend more than $3 million a year to add new staff to manage investments without first imposing "internal audit safeguards" to make sure private investments are properly managed.
"The treasurer has provided feedback and it will be discussed along with any other feedback we receive from other trustees at the October meeting," said PSERS spokeswoman Evelyn Williams. "The report is fluid and changes can be made. It is a long-term plan."
Williams noted that October deadline should allow PSERS to consider changes recommended by the Public Pension Management and Asset Investment Review Commission, headed by State Rep. Mike Tobash (R., Schuylkill Haven), with Torsella as his lieutenant. The commission is holding a second hearing on pension fees and cost-cutting on Sept. 20 and plans to make a report later this year.
In an interview, Tobash, who attended the PSERS meeting, said he appreciates any pension system effort to save money — but added that is commission will make its recommendations in "only a few short months, and it's important for the teachers not to lock themselves into any long-term positions here."
The discussion matters because PSERS has only about $56 for every $100 it expects to pay for future pensions. To keep the plan from running out of money, Pennsylvania state taxpayers and local school district property taxpayers are assessed a surcharge of more than 30 cents for every dollar paid to teachers and other school employees.
PSERS says the deficit was fed by governors and legislators of both parties in the 2000s when they failed to pay steady "employer contributions" to keep the system solvent. Torsella says the use of a wide variety of private asset managers has drained pension assets without boosting returns, and has served to corrupt public officials, including two of his recent predecessors who have been found guilty of federal criminal charges in connection with their actions towards money managers seeking state fees.
Does PSERS pay too much to private contractors? Investors calculate net investment income, after fees are paid, when they measure money managers' performance. So high fees could be worth paying, if the managers that collected them also generated higher-than-average profits.
Like the Pennsylvania and New Jersey state pension systems, PSERS has chased investment returns by expanding beyond publicly traded stocks and bonds into private buyout, hedge, real estate, commodity, venture capital and other "alternative" funds. These investments have tended to underperform US. stocks — while outperforming bonds, whose yields have been depressed by low U.S. interest rates since the real estate bubble of the mid-2000s, PSERS annual reports show.
Torsella has generally supported hiring low-fee index-fund managers such as Vanguard Group, whose founder, John C. Bogle, chaired the National Constitution Center when Torsella was executive director there in the early 2010s. Torsella did not challenge the use by PSERS of staff money managers to make publicly-traded stock index investments. His letter urged PSERS to "consider the availability of low cost alternatives" such as "broader use of index strategies."