The Public School Employees’ Retirement System (PSERS) is a pension fund for public school employees in the Commonwealth of Pennsylvania. Eligible members include all full-time public school employees, part-time hourly public school employees who render at least 500 hours of service in the school year, and part-time per diem public school employees who render at least 80 days of service in the school year in any of the 770 reporting entities in Pennsylvania.
, the System had nearly 251,000 active, 250,000 retired, and 27,000 vested inactive members, with an estimated annual active payroll of $15.3 billion. The annuitant membership is over 250,000 retirees and beneficiaries who receive over $552 million in pension and healthcare benefits each month. The average yearly benefit paid to annuitants is $26,197.
Under the Internal Revenue Service (IRS) Code, the PSERS pension plan is classified as a 401(a), governmental defined benefit plan. A defined benefit plan means that your retirement benefit is determined by a formula which includes a retirement factor, years of credited service, and the final average salary. PSERS’ role expanded upon the passage of Act 5 of 2017 to include oversight of two new classes consisting of defined benefit (DB) and defined contribution (DC) components and a stand-alone DC class.
History PSERS was established on July 18, 1917, and officially began operations on July 1, 1919, to provide retirement benefits to public school employees of the Commonwealth of Pennsylvania.
Investments , the fund holds $72.8 billion in assets.
In a 2018 report, the bi-partisan Pennsylvania Public Pension Management and Asset Investment Review Commission found that the fund under-performs because it holds poorly performing, private "alternative investments" that command high investment fees. When compared with other state funds ranked by investment returns, PSERS ranked 50 out of 52.
In September 2021 the PSERS board voted to reject two "alternative investments" proposed by Chief Investment Officer James H. Grossman. In a 8–7 vote, the board denied a $235 million investment into ICG Europe Fund VIII and $100 million into LEM Multifamily Fund VI. This was the first time the board has voted to reject high-fee alternative investments. Voting against these investments were PSERS board members Muth, Mains, Torsella, Garrity, Vague, Ryan, Bradford and Ortega. Voting in favor were Davis, Volger, Beck, SantaMaria, Lemmo, Browne, and DiTullio.
After years of disagreements among board members about the fund's investments in hedge funds, private equity and "alternative investments", board members agreed by a voice vote during the October 2021 board meeting to sell its holdings of hedge funds and instead invest in U.S. stocks. The board will vote on a detailed proposal at its December 2021 meeting.
Fees In 2020 the fund reported paying substantial fees to private fund managers since 1980, amounting to $5 billion in fees and expenditures and $5.1 billion paid in previously unreported performance fees or "carried interest."
The fund has been criticized for its high-fee and private equity investments. It spent $740 million in calendar 2019 on money managers alone; $293 million in fees and expenses plus $448 million in "carried interest."
The FY 2020 Investment Expenses Report shows "Total Investment Expenses: FY 2014 – FY 2020" on page 8, and "Private Equity, Private Credit, & Private Real Estate Management Fees, Carried Interest, & Other Expenses" for calendar 2018 and 2019 on page 5. Neither table appears to include all investment expenses. The calendar-year expenses ($741 million for CY 2019; $729 million for CY 2018) are consistently higher than the fiscal-year expenses ($515 million for FY 2020; $450 million for FY 2019), apparently because the calendar year table includes substantial "carried interest" from private equity investments that is not included in the fiscal year table, which reports private equity "profit sharing" of zero on page 7. Conversely, the fiscal year table includes public investment types that are not included in the calendar year table, which explicitly includes only private investment types. The $515 million in fees shown for FY 2020 on pages 7 and 8, which apparently excludes private equity carried interest, matches the total investment expenses reported in the FY2020 annual report, pages 44 and 82.
Holdings
Alternative Investments In 2008 the fund began investing in alternative investments, which are riskier investments outside the traditional stock market that often carry high fees. , 51% of the fund was invested in alternative investments. In 2018 the fund increased its investment in a trailer-park venture owned by Stockbridge Capital Group, citing "its demonstrated track record of increasing home rental rates." It also invested in a prisoner phone use service owned by Platinum Equity. In 2016 it invested in an asset owned by Glencore called "Oilflow SPV 1 DAC." With this financial vehicle, Glencore wanted to make loans to Kurdistan in Iraq, backed by oil in the region. In September 2018 an announcement was filed with the Cayman Islands Stock Exchange claiming that the oil exports of the Kurdistan Regional Government had fallen by 50% after the Iraqi Army took over the Kirkuk oil fields.
, 63% of the fund is invested in alternative investments.
Real Estate The fund has put about 10% of its money into real estate. In fiscal year 2014 it directly owned at least $286 million in real estate. It has owned farm land and commercial fruit farms in Florida, Washington and California and apartments and gated communities in Florida. It bought the Atlanta Airport Marriott hotel in 1987 and The Galleria at Fort Lauderdale for $125 million in 1993.
It has spent $13.5 million acquiring properties near to its Harrisburg headquarters since 2017. The fund spent $1.6 million acquiring the former Patriot-News newsroom and printing plant from Alden Global Capital, which had acquired the properties for $644,000 only six months prior.
PSERS owns part of Yes! Communities, a real estate management company that owns over 200 mobile home parks.
The fund has invested in LEM Multifamily Fund VI from Philadelphia-based LEM Capital, owned by former Penn State University board chair Ira Lubert. The strategy of the LEM fund is to "add value and increase rents" by buying and renovating aging apartment buildings. Over 20 years, PSERS has paid more than $200 million in fees to funds owned by Lubert.
Investment Groups Since 2006 the fund has invested $1.6 billion in funds managed by The Blackstone Group. Blackstone has collected more than $300 million in fees from PSERS.
Thomas Tull The fund has invested $200 million in ventures owned by billionaire Thomas Tull. In 2018 the fund invested $100 million in holding company Tulco LLC. In a closed door session on September 14, 2020, the PSERS board voted to invest another $100 million in a venture code-named "Project Newton." Reporting in the Philadelphia Inquirer revealed this as an investment in another Tull-owned company named "Figs", which sells boutique hospital scrubs.
Incidents Inflated Return on Investments Figure In December 2020 PSERS investment managers told the board that the fund's growth had averaged 6.38% over the last nine years. This figure was just 0.02% above the 6.36% threshold that would trigger increased pension plan payments to 8% per paycheck from approximately 100,000 school employees hired since 2011. Regarding the calculation, chief investment officer James Grossman said, “We did our due diligence. We covered it. I’m not worried about it.” This performance figure was calculated by Buck Global, LLC from PSERS data supplied by consulting firm AON Investment Consulting. The board thought that the fund's performance in 2020 would be poor and might trigger a pension payment increase and hired another consultant, ACA Compliance Group to calculate the performance figure independently. ACA confirmed the 9-year market value return of 6.38%.
The 9-year performance was calculated as the geometric average time-weighted rate of return, net of fees, per pages 8-9 of the Valuation Board Presentation as shown in the "Rate used" column of the following table. The 6.36% threshold for the shared risk determination is based on the 9-year geometric average of the target rates, minus 1.0%, per pages 9–10, as shown in the "Target" column. The "Historical" column, except FY2020, is based on the 49 Year History of PSERS Fiscal Year Rates of Return. Journalist Joseph DiStefano compared the rates used with the historical rates from annual fiscal reports and observed "While the differences were often tiny, the upgrade was sharp for one year, 2015."
+ Comparison of Target rate, Rate used in calculation, and Historical rate Year Target Rate used Historical FY2020 7.25% 1.11% 1.11% FY2019 7.25% 6.66% 6.68% FY2018 7.25% 9.26% 9.27% FY2017 7.25% 10.20% 10.14% FY2016 7.25% 1.33% 1.29% FY2015 7.50% 3.41% 3.04% FY2014 7.50% 14.82% 14.91% FY2013 7.50% 7.95% 7.96% FY2012 7.50% 3.44% 3.43% Geom Avg 7.36%-1.0 6.38% 6.34%
At the Board of Trustees meeting in January 2021, 35% of the board voted against the investment proposals of PSERS staff in an apparent show of dissatisfaction at the administration of the funds under the direction of Glen Grell. The board also voted to hire an outside law firm to investigate an apparently inflated investment return target that may have cost taxpayers at least $25 million.
In March 2021 the FBI began an inquiry into the pension fund. The fund's audit committee hired law firm Womble Bond Dickinson to investigate how the inflated investment return figure was approved. It hired law firm Morgan Lewis to review re-balancing the payments teachers and taxpayers make into the fund and to determine if the fund may have lost some federal tax exemption status due to its investments. In 2019 and 2020, PSERS budgeted $227,000 for legal expenses. It has requested $352,000 for 2021.
On April 6, 2021, state treasurer Stacy Garrity acknowledged that the fund was under federal investigation. The PSERS board voted unanimously to hire New York law firm Pillsbury Winthrop Shaw Pittman LLP to deal with the investigation.
On April 9, 2021, a fourth law firm became involved, when the PSERS board resolved to retain the law firm of Sidley Austin LLP to represent and advise the Board in matters involving PSERS and its employees related to a Federal Investigation and related issues. Sidley Austin was replaced by Morgan Lewis in this role on April 19, 2021, by PSERB Resolution 2021–15.
On April 19, 2021, the PSERS board passed PSERB Resolution 2021–16, amending PSERB Resolution 2020–52, to increase the contribution rates for certain teachers, "certifying the actual nine-year performance figure of 6.34%". The amended performance figure in this resolution triggers an increase of the annual deduction from the paychecks of approximately 100,000 public school employees. Teachers and educational staff hired since 2019 will contribute 8.25% of their pay, the remaining employees will contribute 8%, up from 7.5%.
After its March 5, 2021 meeting, "The Board subsequently ordered a total review of all performance data to identify any additional errors." This concern over possible additional errors appears to be justified, as not only the erroneous 9-year return but also the 3-year, 5-year, and 10-year average returns of 5.62%, 5.64%, and 7.70% respectively, reported on page 92 of the FY2020 annual report are consistent with having used the inflated "Rate used" column. Using the historical column instead, gives 5.63%, 5.63%, and 7.66%, respectively. The reported FY2011 return of 20.37% is used for both 10-year calculations.