Pennsylvania Pension Commission Flags Upwards of $1 Billion in Investment Costs for One Year

Pennsylvania's state capital building in Harrisburg.

Pennsylvania's state capital building in Harrisburg. shutterstock

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The sum earned by investment managers from one pension fund exceeded employee contributions for the same period.

Pennsylvania officials noted payments of hundreds of millions of dollars to investment managers for the state's pension funds in a report released Thursday that features recommendations for improving the health of the underfunded retirement accounts.

The Public Pension Management and Asset Investment Review Commission, which was tasked with the project under a state pension reform law passed last year, says its 393-page report includes recommendations that could result in estimated savings over three decades ranging from $8.2 billion to $9.9 billion.

In it, the panel notes investment managers for the Pennsylvania Public School Employees' Retirement System earned  upwards of $1.03 billion, including estimated "carried interest," in the 2016-2017 fiscal year. The fund's portfolio was about $52 billion during that timeframe.

Meanwhile, the State Employees' Retirement System, in 2017, reported $135 million of investment expenses for its $29.3 billion fund.

"Every dollar that we can keep from going to Wall Street, and keep working here in Pennsylvania, puts these funds in a much better place," said state Treasurer Joe Torsella, the vice-chair of the panel.

He noted noted that the funds only have roughly 60 cents for every dollar that they need to pay out in the coming years.

One recommendation in the commission's report is to establish a consolidated pension investment office—the office would be designed to "leverage" the combined size of the funds to get more favorable investment terms and reduce redundancy.

Another suggestion is that state lawmakers enact legislation mandating annual pension fund "stress-testing," which involves using computer simulations to see how investments will react and fare under various fiscal conditions.

The report also recommends passing and repealing laws to improve public reporting of information like investment expenses, fund and asset class performance, and investment manager contract terms.

Additionally, it advocates for shifting from the "active management" of investments now in use toward an "index" investment approach.

The school employee retirement system as of June 2017 was about 56 percent funded, $44.5 billion short of the projected liabilities, or benefit payment costs, it will face in the years ahead.

The SERS system was roughly 60 percent funded as of last December and $19.6 billion shy of its full funding mark.

Republican state Rep. Mike Tobash, the chair of the pension commission, said that while U.S. employers generally pay an average of about 3 percent of payroll toward employee retirement benefits, Pennsylvania is setting aside over 30 percent.

"To catch up on mistakes of the past," he said.

"Nearly 10 percent of our budget is going into this one line item," Tobash added. "It makes it very difficult to fund the other important requirements that exist in Pennsylvania today."

Bill Lucia is a Senior Reporter for Government Executive's Route Fifty, and is based in Washington, D.C.

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