A $66 billion Pennsylvania state pension fund under scrutiny for errors in calculating investment returns has been asked by securities regulators to turn over records related to possible gifts exchanges with dozens of Wall Street firms, according to a subpoena reviewed by Bloomberg.
SEC Enforcement Division Senior Counsel Heidi Mitza asked that the pension fund supply “all Documents and Communications Concerning any compensation, remuneration, money, gifts, gratuities, trips or anything of any value” exchanged between representatives of investment managers, advisers, and consultants and any representatives of PSERS or the state, according to the subpoena.
The calculation error that upended the state’s largest pension fund has been traced back to a single month in 2015, according to an investigation from Spotlight PA.
The discovery came to light in a trove of documents obtained by reporters that found a tiny discrepancy that boosted the $64 billion Public School Employees Retirement System (PSERS) by a third of a percentage point in April of that year.
The consultant firm hired to review PSERS’ investment returns between 2011 and 2020, ACA Compliance Group, performed limited checks that skipped over the month in question, according to the report. The company that crunched the actual numbers, Aon, blamed the discrepancy on a data entry error.
No matter the fault, the miscalculation unraveled PSERS’ rate of return, dropping it from just above the mandated 6.36% threshold to prevent a contribution increase down to 6.34%. Now, about 100,000 workers who joined the system in 2011 or later will pay more beginning on July 1.
The board of trustees overseeing the $62 billion Pennsylvania School Employees Retirement System has spent more than $1 million so far to investigate and contain fallout from an inaccurate report on investment results delivered late last year. The report led to a mistaken conclusion that no increase in employee pension contributions would be needed this year.
The system’s trustees have hired batteries of lawyers since the mistake was revealed. The board said in April that it had hired law firms to conduct an investigation into the miscalculation and to respond to a federal grand jury subpoena requesting documents. It couldn’t be determined whether the subpoena relates to the miscalculation.
However, in March the pension system said that the actual nine-year return came to 6.34%, triggering an increase in employee pension contributions reportedly affecting some 100,000 workers whose contributions will increase by 0.50% to 0.75% starting July 1. For instance, a school worker who earns about $45,000 annually would have roughly $8.65 withheld from each biweekly paycheck, the system’s website explains.
Subpoenas indicate that the FBI and federal prosecutors are seeking evidence of kickbacks and bribes in an investigation of the $62 billion Pennsylvania Public School Employees’ Retirement System (PSERS)’s misstatement of its 2020 investment performance and its real estate investment in Harrisburg, Pennsylvania, according to The Philadelphia Inquirer.
In December, PSERS’ board of trustees certified the contribution rates for its members. The board was told by its general investment consultant and another firm that the retirement system’s nine-year performance figure was 6.38%, which was just high enough to avoid triggering additional contributions under state law.
The court orders reportedly reveal that the FBI and prosecutors are investigating possible “honest services fraud” and wire fraud. Under a 2010 US Supreme Court ruling, federal prosecutors need proof of illegal payments to seek criminal charges against state officials for not providing honest services, the Inquirer reported.
No one at PSERS, including the executives who received subpoenas, has been accused of any wrongdoing.
And according to a report in The Wall Street Journal, PSERS’ board of trustees has spent more than $1 million and counting in its investigation of the reporting error.
Investors’ appetite for attractive new stocks appears to have paid off for Thomas Tull, a billionaire tech investor and Steelers part-owner, by more than $20-$1, while quadrupling the PSERS pension fund’s investment — if it can cash out its shares at today’s bullish prices.
Early private investors typically face a “lock-up” period, often six months, before they can sell all shares. The stock could gain value or crash before the shares are sold.
Still, a big Figs payday would be a boost to beleaguered PSERS chief investment officer James Grossman. His team’s complex and often secretive investments have been criticized by a growing reform faction of PSERS trustees who say the fund could do better in low-cost index funds.
Now The Inquirer and Spotlight PA have obtained new internal fund documents that shed light on that consequential mistake. The material traces the error to “data corruption” in just one month — April 2015 — over the near-decade-long period reviewed for the calculation.
The error was small. It falsely boosted the $64 billion PSERS fund’s performance by only about a third of a percentage point over a financial quarter. Even so, it was just enough to wrongly lift the fund’s financial returns over a key state-mandated hurdle used to gauge performance.
The documents reveal that a fund consultant, Aon, blamed the mistake on its clerical staff for inputting bad data. The material also shows that even though the fund hired a consultant, the ACA Compliance Group, to check the calculations, the consultant made only limited checks, and skipped over the month with the critical errors.
Author(s): Joseph N. DiStefano, Craig R. McCoy, Angela Couloumbis
A union that represents 61,000 schoolteachers statewide called on most of the board of the Pennsylvania State Employees’ Retirement System to resign amid an ongoing FBI investigation.
“Through alleged errors and omissions, and under a shroud of secrecy, this PSERS Board appears to have jeopardized the present and future financial security of our Commonwealth’s most dedicated public servants,” Arthur Steinberg, president of the Pennsylvania chapter of the American Federation of Teachers, wrote in a letter to PSERS board members.
In the letter, Mr. Steinberg called for every board member appointed prior to January 2021 to immediately resign. That would reduce the 15-member board to two: the newly elected State Treasurer Stacy Garrity, a Republican, and state Sen. Katie Muth, D-Montgomery County.
Forced to cover the higher pension checks, state and local taxpayer funding for PSERS, the big retirement plan for public-school educators, has risen year after year, soaring from just over $600 million in 2010 to $5 billion this year.
Now a little-noticed provision of a reform passed in 2010, known as the “shared risk” rule, has come back to haunt PSERS officials — and teachers, too.
Under the rule, teachers, not just taxpayers, must pay more into the $64 billion pension system whenever profits fall short on investments.
In an embarrassing admission, its board said on Monday that the policy meant many teachers will face a hike in their payments this year. This was the first time this has happened since the law was adopted.
The board for PSERS — the Public School Employees’ Retirement System — acknowledged it had previously endorsed an inflated number for investment returns, a figure it incorrectly thought was just high enough to spare teachers any increase.
What you see in that graph is a data point for each of the plans I know their asset allocation for, with the median, 25th percentile, and 75th percentiles marked out so you can see the allocations increasing.
That pattern does not make me feel good.
Allocating more to alternatives doesn’t seem to get asset managers higher returns. But the group is generally sliding upwards in their allocations, and I’m very unhappy about this.
The search for high returns takes many pension funds far and wide, but the Pennsylvania teachers’ fund went farther than most. It invested in trailer park chains, pistachio farms, pay phone systems for prison inmates — and, in a particularly bizarre twist, loans to Kurds trying to carve out their own homeland in northern Iraq.
Now the F.B.I. is on the case, investigating investment practices at the Pennsylvania Public School Employees’ Retirement System, and new questions are emerging about how the fund’s staff and consultants calculated returns.
The error in calculating returns was a tiny one, just four one-hundredths of a percentage point. But it was enough — just barely — to push the fund’s performance over a critical threshold of 6.36 percent that, by law, determines whether certain teachers have to pay more into the fund. The close call raised questions about whether someone had manipulated the numbers and the error wasn’t really an error at all.
“If you can’t change the benefits, and you can’t change the contributions, the only lever left for these people to pull is investment policy — that’s it,” said Kurt Winkelmann, a senior fellow for pension policy design at the University of Minnesota’s Heller-Hurwicz Economics Institute. “And that exposes younger beneficiaries and taxpayers to a lot of risk.”
The $64 billion Pennsylvania Public Schools’ Retirement System made the “emergency” hiring of an outside manager yesterday to take on the duties of chief investment officer James Grossman, the Philadelphia Inquirer reports.
Seattle-based Verus Investments will now handle “monitoring and oversight of investment” as the embattled pension system deals with “internal and external investigations,” including an FBI probe into its investing, PSERS says.
The fund’s investment of millions of dollars in real estate deals in Harrisburg is under federal investigation, while outside lawyers are looking into an “error” that inflated PSERS’ investment returns.
The board of Pennsylvania’s biggest pension fund adopted an inflated number for its investment performance even after the state treasurer raised skeptical questions about the calculation last summer, newly obtained documents show.
That decision by the PSERS board has emerged as a costly and disruptive mistake, raising the possibility that the $64 billion pension fund for teachers may soon have to hike their payments to support the mammoth but underfunded plan. The panel is to meet Monday to consider doing that.
In his August 2020 letter, then-Treasurer Joe Torsella raised doubts about a decision by the fund’s professional staff to go back almost a decade to revise — and improve — figures for past investment performance.