Pennsylvania's state retirement systems are in for a 'stress test' from the Auditor General


Pennsylvania Auditor General Eugene DePasquale said Monday he is launching a performance review of the state's two major public sector employee retirement systems.

Taken together, the Public School Employees Retirement System and the State Employees Retirement System have been one of the largest cost drivers for state government over the last decade.

They will account for more than $2.8 billion in general fund spending this year, or about 9 percent of the total budget.

That's mostly the result of poor policy decisions by the state's elected officials, starting with a lucrative 2001 increase in retirement benefits for handed out to all teachers, state workers and lawmakers.

Still, DePasquale said it is timely now to do an independent stress test of the systems, their investment strategies, and the use of external, third-party managers to try to maximize returns.

The announcement comes just four days after federal prosecutors announced charges against ex-state Treasurer Barbara Hafer - once a major player in the systems' governance - and Richard Ireland, whose firm marketed the services of private investment managers to state government and shared in the fees.

Ireland's dealings, according to court filings available to date, were mostly with the Treasury Department itself.

DePasquale said those charges are not motivating this review, which has been in the planning stages for some time.

"I have ordered this audit because we want to do everything we can to try to help with this situation," DePasquale said Monday, noting neither fund has met its investment targets for the last year and both have significant unfunded liabilities.

"The main thing we want to answer is, are there ways they can do things better that actually saves them a lot of money, so they can put that money back into the (respective) systems," the auditor general said.

DePasquale added that he's not pre-judging the funds' performance, but "obviously they're not meeting their targets and that's creating huge financial problems for the state."

DePasquale said he also will examine pension forfeitures, both to make sure that law is being applied correctly, and whether Pennsylvania's current statute should be strengthened to promote better behavior among public officials.

The systems were last put through this kind of a review more than a decade ago, ironically, after a lengthy legal fight between then-Treasurer Hafer and then-Auditor General Robert P. Casey Jr. over the AG's authority.

As of their most recent annual reports, the two systems' have a combined unfunded liability - total obligations less the value of all current assets - of $56.8 billion.

That's been driving record payment taxpayer-funded payments into the funds over the last several years, sending fiscal shock waves through the state and school district budgets.

SERS reported investment gains of just 0.4 percent for 2015, well below its 7.5 percent benchmark. The system's 10-year performance, which includes the major economic downturn in 2008, is 5.2 percent.

PSERS, meanwhile, posted a gain of 3 percent in fiscal 2015, also against a target return of 7.5 percent.

Spokesman for both funds, however, like to point out that they have met their investment return goals over longer time horizons.

The private money management contracts have been an issue in state government for some time.

The chase for contracts by money managers have been a part of long-running federal investigation into pay-to-play practices in Pennsylvania that has seen charges brought not only against Hafer, but also former Treasurer Rob McCord.

McCord pleaded guilty in February 2015 to threatening to blackball potential contractors he felt weren't making significant contributions to his failed 2014 gubernatorial campaign.

Gov. Tom Wolf has also expressed an interest in working with the systems and the Legislature to try to wring savings out of external managers' fees.

PSERS's most recent annual report shows it spent $455 million on external investment managers in the 2014-15 fiscal year.

While that cost has dropped in each of the last two years, PSERS's report also notes its managers beat their benchmarks - earnings expected from a more passive investment of the funds placed with them - by $497 million, after all fees were paid.

SERS, meanwhile, paid $159 million in fees to external managers in calendar year 2015.

DePasquale said he had no independent information that taxpayer dollars were abused. But he said one goal of the audit is to determine whether the fees paid by SERS and PSERS are in line with peers in other states.

Together, the two retirement funds serve more than 700,000 active and retired workers.

DePasquale said he hopes to be able to report his findings by early 2017.