Frankly, it’s surprising that it’s taken this long for an investigation of a public pension fund over allegations that it lied about its returns. But it’s not a surprise that it took Federal investigators, as in the FBI, to saddle up, in this case against a Pennsylvania Public School Employees’ Retirement System, aka PSERS.
Readers regularly lament how CalPERS regularly and obviously runs roughshod over the law and board members openly violate their fiduciary duty by not even pretending to oversee staff adequately and undermining anyone who dares to do so. That’s because CalPERS has the deficient governance structure that is pervasive among US public pension funds: boards captured by staff and a dearth of other local or state supervision and enforcement. So things have to get really bad, as with CalPERS former CEO Fred Buenrostro taking bribes, to get the FBI to go after misconduct. And yes, Buenrostro is now in Federal prison.
The incentives are obvious: most public pension funds base staff bonuses on investment performance. But a second, powerful motivation is that raising pension contributions to shore up pension funding is deeply unpopular. Even at CalPERS, where any increases fall on employers and not on the paychecks of beneficiaries, the giant pension fund clearly regards more realistic funding assumptions, which would mean higher employer contributions, as anathema, and so is moving slowly and reluctantly in that direction. [Clarification: The mechanism is more complicated. CalPERS sends annual contribution requirements to employers. While the employer can/does pass costs on to employees, they are also required to “bump” employee pay in “classic” CalPERS contracts. This is at risk of being rescinded in collective bargaining. The typical short-term adaptation is to cut government staffing, usually of the most junior employees].
By contrast, at PSERS, who bears the pain of shortfall is more complicated and is directly tied to the fraud allegations.
As the Philadelphia Inquirer, which broke this story, explains, even in the event that the PSERS’ investment performance meets or exceeds its investment target, only taxpayers will be on the hook to make up for a funding shortfall. If it falls below the target, both employees and taxpayers pony up. As the Inquirer explained:
PSERS must abide by a so-called risk-sharing rule that requires public school workers to pay extra when the pension fund falls short of an investment target. If the target is met, but the fund still needs more money, taxpayers alone pay more.
We don’t yet know how big the adjustment was but it pushed the returns just over the line:
The target was a return of 6.36%. In December, the board endorsed a report from the plan’s experts that the fund had actually grown by 6.38% — just enough to spare teachers an increase.
State and local taxpayers are expected to pay $5 billion to keep PSERS finances on an even keel this year, slightly more than last year. School staff were to pay $1.1 billion.
And the article explained which population was being protected via these bogus figures:
The mistake, if uncaught, could have improperly spared 100,000 teachers and other employees from a hike in pension paycheck deductions, leaving taxpayers to cover more of the rising gap between the fund’s assets and future payments to working and retired public school staff…
Any bump in payments into the pension system by teachers and other education employees would only apply to staff hired after 2011 — about 100,000 of the 250,000 workers paying to support the fund. This focus on newer employees reflects legal bars on changing the state contracts with older ones.
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. This section comes close to saying the majority of the board chose to lie:
In its December meeting, the board acknowledged investment profits had not met the system’s own target, but found them just barely good enough under state law to avoid an increase in teachers’ deductions.
WTF? This earlier section gives just a tad more color:
The Pennsylvania Public School Employees’ Retirement System also disclosed it is investigating an error by an unnamed outside consultant as well as the response by the consultant and its own staff once the error was discovered.
The error was incorporated into a report approved by a majority of PSERS board members in December after executive director Glen Grell, investment chief James Grossman, and chief financial officer Brian Carl assured board members it was accurate. Even with their assurances, three board members who raised questions about how it was calculated declined to approve the report.
The governor is engaging in a big handwave, demanding that any trustees who breached their fiduciary duty need to resign immediately, and everyone is lawyering up:
On March 19 the board hired two law firms — one to investigate the error in its performance report, the other to review the impact of correcting the error on payments by taxpayers and teachers, and also any resulting impact on PSERS investments’ tax-exempt status.
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.