PSERS own consultant finds fund board has been misdirected and suffers from lack of trust
Pennsylvania’s largest pension fund doesn’t have a cohesive plan for how to invest its billions. He ignored calls to improve his financial reporting. And his listeners looked away as PSERS staff took on luxury trips around the world and billed retirees and taxpayers.
These are some of the findings of a new report on governance that the public school employee pension system, the giant public school pension plan, has commissioned itself.
Adding to the dysfunction, according to a report from Michigan-based Funston Advisory Services, an adviser to public pensions, the 15 members of the PSERS board are inundated with minutiae, buried each month by around 1,000 pages of official documents. – almost the size of Leo Tolstoy’s. War and peace, according to the report – in “disorganized” formats, full of financial jargon and often impossible to find.
“The more you inundate someone with minutiae, the less they get read,” said Charles Elson, a business leadership expert and newly retired University of Delaware finance professor who reviewed parts of the report at the behest of. The Inquirer. “There was a failure, of course.
The report, which cost PSERS $ 400,000, avoids hot areas that remain under federal investigation at the deep end – the FBI and the Securities and Exchange Commission have carried out months-long investigations – and it never criticizes any fund executive by name. .
But in cautious prose, it paints a portrait of a board of directors torn by internal divisions, consumed by relatively trivial questions and frozen on key decisions.
In general, the report documented a range of issues that have pervaded public opinion over the past year, from board schisms to its sometimes heated debates about how to invest.
In an apparent contradiction, the consultants urged the board to become more involved in shaping key policies – and to rely more on its large and highly paid executive staff.
State Senator Katie Muth (D., Montgomery County), who became the fund’s top public critic after joining its board last year, said giving staff more power doesn’t made no sense.
“There is so much that they want the staff to have more control over,” Muth said. “The board is not fully informed as it is.”
She continued, “Give staff more decision-making power without any input from the board? It got us where we are. There is no mystery why we have this [Funston] investigation. The board did not ask any questions.
PSERS recently released the report on its website as federal prosecutors, US financial regulators and the FBI continue to examine how the $ 73 billion fund overstated its returns on investment and made a spate of purchases. of land in Harrisburg with little public explanation. Four senior PSERS leaders, including its executive director and investment czar, recently announced their departure, culminating dissidents’ push for a reshuffle.
Funston Advisory Services, based in Bloomfield Hills, a suburb of Detroit, is run by Frederick Funston, a former executive at giant consulting firm Deloitte.
His company’s work on PSERS has been carefully circumscribed. Top fund executives were granted a veto over Funston’s findings, in accordance with its contract filed with the state.
Not surprisingly, the report does not blame individuals, instead focusing on solutions.
READ MORE: Read the Funston report here
Still, the document describes how a group of rebel members of the PSERS board grew from month to month, worried about the poor performance of the fund’s investments compared to similar public funds. The plan needs more investment profits to supplement the $ 5 billion per year it receives from taxpayers and the $ 1 billion per year from working school employees.
A minority but a growing number of administrators “had expressed serious concerns about the direction of the system; their confidence in senior management; [and] the independence of their advisers, ”says the report.
These rebels, including current and former Pennsylvania state treasurers – Stacy Garrity and Joseph Torsella – have recently started shifting the pension fund from expensive private investments to low-cost holdings, which they say have better value. performed over time. In a major move in December, the board agreed to sell the system’s hedge funds and double the equity investments.
But the PSERS still lacked “a coherent strategic plan” for its central investment role, the Funston report concluded. That said, the report did not address what this strategic plan should require or what the investment strategy should be.
Funston also noted that the PSERS board and management have been slow to adopt key recommendations to strengthen internal audit and core financial accounting, recommended by two previous elected auditors general and by an external accounting firm and a state pension review board.
Since Funston began its review, the agency has addressed some of the issues raised by the consultant. PSERS has added auditors and initiated a more intense internal audit that it is due to review this spring.
The Funston report is remarkable for what it does not discuss.
It ruled out any examination of the “miscalculation” of investment returns from 2011 to 2020 that were to be reversed and unduly delayed an increase in employee contributions for 100,000 young school staff. Several board members see the miscalculation as a case study of the agency’s failure to operate effectively because the decision was made in part on the basis of unaudited financial numbers.
The report also does not include the agency’s acquisition of three blocks of downtown Harrisburg near its office for a redevelopment project that was never built.
Miscalculation and land deals are at the center of the corruption investigation by a grand jury under the U.S. Attorney’s Office in Philadelphia, according to subpoenas obtained by The Inquirer and Spotlight PA.
PSERS leaders have repeatedly refused to discuss the agency’s growing problems, including virtually silent on ongoing investigations. In a brief statement last week, the fund said it would not discuss the new consultation report either.
He said he would wait until he received a pending internal report on the matters under federal investigation. At that point, that news may well eclipse Funston’s analysis entirely.
The report also found:
Board members spend little time reviewing basic matters, such as how much of the plan should be invested in stocks or bonds versus hedge funds, real estate and other assets. . Such fundamental “asset allocation” decisions, and not the choice of one manager over another, determine more than 90% of the difference between the best and worst performing US investment funds, according to a study by the Vanguard Group cited by Funston.
Key decisions are heavily influenced by PSERS employees working closely with Wall Street advisers recommended by staff. These outside consulting firms should be chosen by board members, the report insisted.
External advisers who recommend investments should be kept separate from those who verify the accuracy of investment returns and other data. The fact that the same company does both creates a potential conflict of interest.
PSERS is expected to “broadcast, record and archive” board meetings, which remain unavailable except for the few who attend or watch live video.
Diversity should be a factor in the composition of the board, as well as experience and skills. The volunteer group is made up of school staff and school board representatives, legislators and governor appointees. He is almost all white. One of the members, Secretary of State for Education Noe Ortega, is of Mexican-American descent.
In total, 14 of the 15 board members, or their representatives, have had at least one interview with Funston. The exception was Torsella, Governor Tom Wolf’s representative on the board and longtime critic of PSERS. He could not be reached for comment.
In its discussion of board failures, the report focused in part on travel, an area of embarrassment for the fund.
“For some time, a loss of confidence has developed within” the board of directors of the PSERS, according to the report. This discord, in turn, has delayed action on the agency’s high and uncontrolled travel bills, according to the report.
The PSERS has operated for years in a system in which it often never knew its true travel costs, The Inquirer reported. The fund would leave the job of booking tickets, hotels and meals to outside fund managers who would pay the money. But managers later buried the fees in the overall travel bills they submitted to the fund to be paid by taxpayers and teachers.
The report says the fund only had two staff to verify travel, although it promised to look into the matter in depth. The result was “a travel survey which consisted primarily of data collection and not a review of policies or forming opinions on the controls.”
As for the advice, he procrastinated. Or, as Funston put it, “the apparent incapacity of [board] reach consensus on some political issues such as investment policy and travel policy, resulting in long development delays.
After The Inquirer article was published in April, Governor Wolf and the fund acted to limit PSERS travel spending.