Between roughly 1997 and 2009, legislators decided to pay less of the employer contribution amount than statisticians deemed necessary. In kitchen table terms, those legislators chose not to pay their bills.
Now that creditors are demanding those bills be paid, critics are claiming the payouts are undeserved, and too generous.
It’s really a shame so many seem to feel it’s OK to not pay bills from the past because the interest is too high. I bet few business owners would accept nonpayment because customers chose to not pay when billed and now claim payments are too high.
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.
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.
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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.
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“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.
The article points out that the PSERS investment office regularly violates state travel policies, which require employees on Commonwealth business to hew to Federal guidelines for airfare and lodging. Eight PSERS officers have been granted waivers from this policy.
PSERS defends the travel costs by saying staff traveled business class and the fares were typically refundable and sometimes bought at the last minute.
My issue isn’t with the cost of the flights but their necessity, and with the hotel costs. Public servants should be staying in Westin/Marriott level rooms. These prices are consistent with five star hotels, like the Four Seasons or St. Regis in New York City.
The board in December found that PSERS yearly investment returns had averaged 6.38% over the last nine years — just above the 6.36% threshold needed to avoid an increase in pension payments from 100,000 school employees hired since 2011.
In 2010, the state adopted a so-called “risk sharing” mandate that requires school staff to pay more, as taxpayers do, when PSERS investments underperform. The law mandated that the review in 2020 look at average returns over the past nine years.
Officials atop Pennsylvania’s largest public pension system have received subpoenas from federal investigators, although the $64 billion Public School Employees’ Retirement System has yet to publicly discuss the nature or scope of the newly disclosed inquiry.
In addition to giving few details, pension system officials and board members — which includes state lawmakers, two members of Gov. Tom Wolf’s Cabinet and state Treasurer Stacy Garrity — have declined to answer questions publicly about what information federal investigators are seeking.
Garrity told lawmakers at a Senate Appropriations Committee hearing Tuesday that “federal subpoenas have been served on several PSERS management officials.”
The bills are high because PSERS for years has operated under a system in which it often never knew the true costs of travel. The fund repeatedly left the job of booking tickets, hotels, and meals to the outside money managers who invest the fund’s money. The charges were later buried in overall travel bills that the managers submitted to the fund to be paid by taxpayers and teachers.
In recent years, the fund has been roundly criticized for its lagging investment performance, especially given that the plan, underfunded by many governors and legislatures, is $44 billion short of the money to pay all future retirees
PSERS is trying to depict the performance overstatement as an error but its body language says otherwise. It has launched an investigation of its three top staff members and has gone from denying that PSERS has any information that anything criminal had taken place to ducking the question.
The Inquirer described how three of PSERS’ 15 board members voted against a staff effort to say the return numbers were fine after some sort of not fully disclosed brouhaha with an outside consultant.
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The “impact on PSERS tax exempt status” is alarming, and it’s frustrating that the article does not probe what the issue might be.
Needless to say, expect more shoes to drop as the FBI keeps digging. A friend who was the DA for Bridgeport, the most corrupt city in Connecticut, said the FBI aren’t the brightest bulbs but are relentless and as a result generally take down their targets.
Since I can’t find where they define time-weighting the best I can do is assume that the 3.04% rate of return for June 30, 2015 was mistakenly augmented to 3.41% which was enough to drop the rate of return below the 6.36% barrier.
Uri Monson, the chief financial officer of the Philadelphia School District, the state’s largest, in a social media posting called for “an independent investigation” by State Attorney General Josh Shapiro or newly elected Auditor General Timothy DeFoor.
“If there is any evidence of board members or anyone else directing staff to create a false report,” Monson said, “they should be fired and charged with Honest Services Fraud.”
In a reform imposed by the legislature and governor, the fund adopted a so-called risk-sharing rule some years ago that requires education workers to pay extra if their pension fund falls short of its investment target.
