Latest Dissidents back off on move to oust PSERS top leaders
Short of votes, dissident members of the PSERS pension fund board decided not to push Friday for the firing of the fund’s top leaders.
The board adjourned around 5 p.m. without taking up the issue. But the dissidents succeeded in postponing a management plan to put an additional $1 billion into so-called alternative investments that critics say are driving down the agency’s returns.
And the issue will be raised at future meetings.
— Joseph N. DiStefano
PSERS sees ‘record asset growth,’ though $40 billion gap remains
PSERS got some good news on Friday afternoon although it’s unlikely to convert its critics.
Thanks to large and rising contributions from taxpayers and the recovery of investment values, “we are on track to show record asset growth,” said PSERS chief financial officer Brian Carl, with assets reaching $66 billion, the highest since 2007, before the Great Recession.
Of course that is in constant dollars, and doesn’t count the lost purchasing power from inflation. And the pension obligations are much higher today than in 2007, thus the $40 billion plus gap between assets and liabilities.
“These [gains] don’t come along very quickly,” Carl added, noting PSERS could finally return to where it was in 2007 by the end of June, if market gains continue.”It feels good to be back where we were so many years ago,” said trustee Melva Vogler, a retired teacher from the Poconos.
— Joseph N. DiStefano
In a surprise, pension board tables new investment proposals
In a surprising move, the PSERS board has tabled action on almost all the new investments proposed Friday morning.
The investment committee, headed by Jason Davis, an economics teacher at Penn-Trafford HIgh School east of Pittsburgh, decided not to hold a vote, after a closed-door meeting to review fee arrangements for those fund managers.
Only the smallest investment on the list, up to $80 million for Capstone Investment Advisors, passed over dissents from state Treasurer Stacy Garrity and State Sen. Katie Muth (D., Montgomery).
PSERS spokesman Steve Esack confirmed the investments won’t be voted on during this meeting. He declined to elaborate. Two board sources familiar with the closed-door discussions said the investments lacked support from a majority of members.
Garrity, Muth and four other board members have criticized PSERS’ emphasis on high-fee private investments such as the five that were review at the meeting. As a group, the critics say, these investments have performed poorly.
— Joseph N. DiStefano
Is this the day change comes to the Pennsylvania pension board?
A day after six board members urged colleagues to fire executive director Glen Grell and his chief investment officer, James H. Grossman Jr. — whom they blame for poor results and an inaccurate profit report — agency leaders and trustees were unsure about whether big changes could happen at the $64 billion retirement fund, at least before day’s end.
”You’re wasting your time,” Grell said in response to a reporter’s question about a sharply critical letter, sent by Stacy Garrity, the state’s elected treasurer. The letter was signed by five colleagues who have opposed the staff’s “alternative investments” program as too expensive and not sufficiently profitable.
Garrity sounded downbeat about the prospect for major changes at PSERS today. Proceedings may “not be very interesting,” she warned.
“It’s always interesting at PSERS,” countered state banking secretary Richard W. Vague, another letter-signer. Board chairman Christopher Santa Maria, the Harriton High School teacher and past union local president who received the rebels’ letter, said that he had no comment “at this time” but that there may be more to say later in the meeting.
So for the second day of PSERS’ every-other month, two-day meeting, proceedings have taken place largely behind closed doors, as board members claimed “executive privilege” exempting them from public deliberations. The board frequently expels reporters and members of the public when it takes on sensitive financial, investigative or personnel related matters.
Arriving or escaping for bathroom breaks, trustees answered questions with brief remarks. “Anything can happen,” said State Rep. Frank Ryan (R., Lebanon) who has voted with Garrity and other dissidents against Grossman-backed investments. But Ryan also sided with Santa Maria in a statement denouncing a lawsuit by dissident State Sen. Katie Muth (D, Montgomery) as divisive and warning against public factions on the 15-member board.
Ryan also did not sign the “termination” letter, despite efforts by other critics of Grossman’s investments to encourage him to do so. The letter included a legal memo Garrity obtained from a team of four lawyers headed by Thomas Decker of Philadelphia’s Cozen O’Connor firm.
It stated that pension fund trustees not only had the right but the obligation to remove management who performed poorly and produced bad data — in the face of an ongoing internal investigation, such as the one Ryan is overseeing as head of PSERS’ audit committee. The FBI is also investigating PSERS.
— Joseph N. DiStefano
Fate of PSERS top executives up in the air ahead of Friday’s meeting
Six board dissidents, upset at the PSERS fund’s lackluster returns, called Thursday morning for the 15-member board to fire its executive director, Glen Grell, and its investments chief, James H. Grossman Jr.
The critics says Grossman, a 24-year PSERS employee paid $485,000 yearly, the most in state government, and his 50-member investment team have put together a mindbogglingly complex investment portfolio that puts far too much money into private-equity firms, hedge funds, venture-capital projects, and start-ups. They say this kind of investment is difficult to value, hard to get your money out of, and comes with excessive fees
In short, they recommend simpler index-based investments, akin to those pioneered byVanguard.
But Grossman came out swinging Thursday afternoon at the board meeting at the PSERS fund’s office in Harrisburg that began only hours after his detractors delivered to the board’s chairman their written demand for his dismissal.
Grossman told the board that one of his bets had just hit the jackpot — on paper, at least. An $85 million PSERS investment, Grossman said, in a California maker of high-fashion nurses’ uniforms was worth $329 million now that the start-up had sold its shares to the public. Grossman acknowledged that PSERS, as an insider, could not sell its shares and cash in the winnings until November, at the earliest.
Such a dismissal vote is not on the agenda today, but any board members can call for votes on any issue. It remained unclear whether the six critics had picked up the two votes needed to form a majority on the 15-member board and force the terminations.
On Thursday, when Grell was asked about the campaign to oust him and Grossman, Grell responded, “I don’t know what you’re talking about,” and walked away.
— Joseph N. DiStefano and Craig R. McCoy
Two controversial investments totaling $1.2 billion up for consideration Friday
With a demand that PSERS top executives be fired hanging in the air, those beleaguered leaders on Thursday continued to urge Pennsylvania’s largest pension fund to double down on their controversial investment strategy — by pouring $1.2 billion more into “alternative” investments promoted by high-fee Wall Street advisers.
Among the investments up for consideration Friday, one involves a company that is Philadelphia’s largest private-equity investor. Another drew attention for its deals involving a New York skyscraper once owned by the family firm of former President Donald Trump’s son-in-law, Jared Kushner. Here is a look at those two proposed deals:
LEM Multifamily Fund VI. This is the latest fund from LEM Capital, the big Philadelphia private-equity firm that invests in aging apartment complexes. LEM says its strategy is to “add value and increase rents.” Its owners include Ira Lubert, a principal in the Rivers Casino in Pittsburgh and a former board chairman for Penn State University.
PSERS has invested $210 million in other LEM funds over the last 15 years and gotten back $232 million, as of last June, with hopes of more to come. As with other private deals, it’s hard to say how good the final returns are until the investment is complete. The fund paid the firm more than $8 million in fees in fiscal 2019, the last year reported.
LEM is just a sliver of PSERS’ involvement with Lubert. Over the last 20 years, it has paid more than $200 million in fees to a variety of funds he has founded.
Brookfield Strategic Real Estate Partners IV. This is the latest fund from Brookfield Asset Management, a giant Toronto-based hedge-fund manager. PSERS has committed more than $600 million to earlier Brookfield funds since 2012, and as of June 30 gotten about $400 million of that back. Last year, PSERS paid Brookfield more than $14 million in fees.
Brookfield invests in office buildings around the world. One of Brookfield’s best-known investments, by an earlier fund that included money from PSERS, was its reported $1.3 billion payment in 2018 to a company connected to the Kushner family for control of a troubled office tower at 666 Fifth Ave. The Kushners had paid $1.8 billion for the tower back, but were having trouble keeping tenants.
PSERS put $80 million in the Brookfield fund that invested in 666 Fifth, one of many properties in that fund. PSERS estimates the value of its stake had fallen to $77 million.
To be sure, PSERS investments in earlier Brookfield funds, in 2012 and 2015, have earned double-digital profits as real estate prices went up in recent years, the pension plan says. Much of that gain is still just on paper, as Brookfield has yet to sell the those properties at their estimated new, higher prices.
— Joseph N. DiStefano and Craig R. McCoy
What is PSERS?
PSERS is the Pennsylvania Public School Employees’ Retirement System.
It sends out more than $6 billion in checks yearly to 265,000 former teachers and other retired staff from public schools.
About 250,000 working employees pay into the fund, in unusually hefty deductions.
Though it has $64 billion in assets, PSERS is chronically underfunded with a deficit of $40 billion.
Much of its fiscal troubles dates back to 2001 when state lawmakers sweetened all state workers’ pensions — including their own — thinking that the hot stock market of the 1990s would never cool down.
They were wrong about that, but never enacted measures to pay for their promises.
Currently, the plan takes in about $10 billion a year — $5 billion from taxpayers, $1 billion from working teaches and $4 billion from investment profits.
Even so, the long-term deficit looms and retirees haven’t had a cost of living increase in nearly 20 years.
— Craig R. McCoy
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