Gov. Wolf is trying to push Wall Street out of Harrisburg.
He wants the two big employee retirement systems, SERS (for state workers) and PSERS (for public school staff), to reverse their long reliance on high-fee managers.
These firms collected more than $600 million in fees from the plans last year - plus a share of liquidation profits from the state's private-equity investments, which Pennsylvania doesn't count.
Despite all the creative investing, years of underfunding have left SERS and PSERS with multibillion- dollar gaps between the assets they own and the checks they will owe. The shortfall has been addressed in recent years by increasing taxpayer "contributions," which Wolf wants to stabilize.
In his budget proposal, Wolf calls for "pension investment reforms to significantly reduce excessive management fees and overreliance on high risk investment strategies," in favor of "less costly passive investment approaches where appropriate."
"Montgomery County is the star example," Randy Albright, Wolf's budget secretary, told me. In 2013, the county started firing higher-fee "active" managers and buying Vanguard stock, bond, and real estate index funds.
How's that going? The county commissioners chairman, Josh Shapiro, cheerfully told me on March 3 that Montgomery County's $500 million pension system saw its investments return 7.7 percent for 2014, beating its 7.5 percent target.
By contrast, on March 11, citing "a difficult second half of the year," Tom Brier, chief investment officer for the $27 billion-asset SERS, reported its investments returned only 6.4 percent in 2014, below the system's 7.5 percent target.
SERS's stocks, bonds, real estate, and hedge funds all returned below that 7.5 percent target. Only "alternative investments" did better, thanks in part to bull-market private-equity valuations. Even those alternative investments lost value in the fourth quarter, as the stock market fell.
But two days after SERS's disappointment, PSERS chief investment officer James H. Grossman Jr. announced that "we were very pleased with our calendar year 2015 returns of 8.83 percent," beating both the 7.5 percent target and Montgomery County's index funds.
PSERS attributed its strong returns in part to specialized energy investments in pipelines and tanks. By contrast, SERS blamed oil and gas for dragging its results down. Both systems will issue more detailed reports later this spring.
Looking back, Montco says its mix of Vanguard index funds would have outperformed its actual investments over the last three, five, 10, or 20 years. But the county's data also show its former "active" investments lost less than index funds in 2008 and other down market years, an important consideration for pension funds that have to pay in good years and bad.
SERS and PSERS say their mostly active investments have done better than fixed portfolios of stock and bond index funds would have done. Albert, the state budget secretary, says those comparisons merely measure against "straw portfolios based on a faulty premise."
The governor appoints two seats on the PSERS board, which is dominated by legislators and public employee reps who have been comfortable with active managers, many of whom donated freely to state elected officials before federal law limited that practice in 2010.
Wolf hopes to persuade. If that doesn't work, could he or his allies in the state treasurer's office block payments to outside managers?
"At this point," Albright told me, "we don't want to start making these kinds of threats."