Tough queries likely at pension powwow

From the Inquirer

PhillyDeals: Tough queries likely at pension powwow
By Joseph N. DiStefano Posted on Sun, Jan. 11, 2009

Jeffrey Clay runs the $55 billion Pennsylvania Public School Employees' Retirement System, which cuts checks worth more than $4 billion a year for retired teachers and other public-school workers.

It's the biggest investment fund in Pennsylvania, which means that, like other investment funds, it's not as big as it was last year.

Clay is starting to gear up for the annual pilgrimage by state agencies to Harrisburg's stone-domed Capitol.

He'll explain to senators and representatives what his staff plans to spend this year, and how much more it will cost the citizens of the state to keep the checks coming to 170,000 school retirees and survivors.

I've gone to those hearings a couple of times. When markets were up, you didn't see tough questions. The reps accepted what they were told by Clay or his counterparts at the State Employees' Retirement System. Though there's always someone who wants to know: If you're doing so well, can we increase benefits to my constituents?

Clay has attended these hearings since he joined PSERS as deputy chief legal counsel in 1990. But at this year's hearings in early March, he's expecting there'll be more than the usual interest. Maybe some sparks.

"My guess is we'll hear about the rate cycle, hedge funds, and the bonus issue," Clay said.

The "rate cycle" means the formula by which this state has chosen to finance public pensions, usually by pushing the expense as far into the future as possible and hoping the market does really, really well next year.

The school pension "employer-contribution rate" is a big deal for PSERS at the moment. The state subsidy is paid partly by state taxes and partly by local school districts. So when the rate goes up, so do property taxes.

The subsidy is currently projected to quadruple, to $2.3 billion a year, by 2011-12. And that assumes markets recover during the current fiscal year.

The losses of hedge funds are in the news, but they are more an issue at PSERS's smaller, more radical twin, the SERS, which has more of its money invested with hedge, private-equity and other alternative investments than any other major pension fund, and hasn't told us yet how much they all lost last year.

As to bonuses, Clay's agency has been beaten up for giving managers $854,000 in bonuses this year, despite the fund's falling 17 percent for the 12 months ended Sept. 30.

The way investment pros look at the world, even though PSERS shrank, it did better than many of its peers. To private-sector fund managers, who are paid a lot more than the civil servants who run PSERS, "relative outperformance" means you did a good job, and deserve something extra.

But to the tax-paying public angry over its own shrinking 401(k) and IRA accounts, a loss is a loss, and Republicans like State Sen. John Rafferty, who represents parts of Chester, Montgomery and Berks Counties, have asked for the bonuses back.

I'm less worried about the thousands PSERS pays its staff than the hundreds of millions it pays outside managers, whose performance is not recorded in its annual reports.

Better to ask how the state plans to either boost subsidies or to cut benefits for future retirees - and why SERS and PSERS should keep trying so hard to boost investment returns, exposing taxpayers to risk, and hiring expensive outside managers to run those assets, if it doesn't have more to show for the effort.

Add the $1 billion teachers pay PSERS in payroll deductions every year - which rises every year with contracted teacher salaries and new hires - plus the $2.3 billion PSERS is supposed to raise from state and local taxpayers by 2011-12, and

we're getting to where the amount spent to finance PSERS each year approaches the amount it spends on pensions.

If those lines cross, why not just scrap all the fancy foreign investments and commodity pools, spend down the existing funds, and pay the checks as they come due?

"There is a pay-as-you-go system," Clay told me. "It's Social Security," and "it's out of control," as the number of retirees explodes, compared with workers paying into the system.