How should Pa. invest $80 billion?

A year ago, General Assembly Republican leaders and Gov. Wolf signed off on a Pennsylvania pension reform law, which is starting to have an impact on what had been looking like a budget-busting public expense.

The law, Act 5 of 2017, doesn’t close the multi-billion-dollar gap between what the state has promised retired public workers, and what they’ve set aside to pay those pensions, which will have to be paid by the commonwealth eventually.

It does stop the growth in that gap, which had depressed the state’s credit rating and forced taxpayers to pay millions extra in annual borrowing costs. It also slows the relentless annual cost increases that add more than 30 cents in pension payments, from every dollar paid to state and school workers in salaries, up from close to zero in the early 2000s.

The law cut future obligations by ending the state’s guarantee to pay retired staff pretty close to what some of them made when they were working. Starting this month, new hires (when they retire many years from now) will get smaller guaranteed pensions, plus additional private-sector-style retirement plans whose values rise and fall with Wall Street.

Lawmakers in Harrisburg agreed they had to stop owing so much more for pensions every year, or Pennsylvania could end up with a government as bloated and broke as New Jersey‘s.

But lawmakers disagreed on whether the $50 billion Pennsylvania Public School Employees’ Retirement System (PSERS) and the $30 billion Pennsylvania State Employees’ Retirement System (SERS) are:

A) Models of sophisticated private investing, as their chairmen, executives, annual reports, consultants, and industry associations assure us; or

B) Bumblers, whose political boards hire friendly vendors, hide what their private contractors actually collect, and present investment performance in an overly rosy light, while racking up persistent deficits; and failing to stop the corruption of public officials, such as the two recent Pennsylvania treasurers forced out due to criminal charges involving payments from would-be pension-fund managers.

So last year’s law set up a five-member, all-male Public Pension Management and Asset Investment Review Commission and gave it until this fall to come up with a better plan, if they’re so smart.

They’ve been asked to “recommend improvements” for fee reporting; to review risk management (or “stress testing”) so the next crash won’t cost the billions lost in the last one; to check how much money firms working for the state actually collect, and whether it’s worth it; and to find “$1.5 billion in cost savings” (but only over “30 years”) for each of SERS and PSERS. There will be hearings, data, experts, and recommendations.

Who will do all this? State Rep. Mike Tobash (R., Schuylkill Haven) is chairman; State Treasurer Joe Torsella, a Democrat, is vice chairman. Plus Jim Bloom, a former Philadelphia Stock Exchange trading-firm owner-turned-lobbyist and adviser to several Philadelphia mayors, Gov. Wolf, and the state Banking and Securities department; Michael J. Torbert, a Lehigh Valley investment adviser who donates, most years, to his local state senator; and Bernie Gallagher, a longtime General Assembly staffer.

I ran this list by my own panel of experts. The limited information the commission published on members “certainly doesn’t suggest any great qualifications,” Vanguard Group founder John C. Bogle told me. But he likes Torsella, who ran the National Constitution Center when Bogle was his chairman. He called the treasurer “smart, ambitious and deeply dedicated to the public interest. Knows enough about investment issues to make good judgments on strategy and manager selection” — assuming, Bogle added, that Pennsylvania really needs to keep selecting a lot of outside money managers. No surprise: Torsella is an enthusiastic advocate for Vanguard-style index funds.

The commission’s “omissions are glaring,” noted Ted Aronson, whose AJO Partners is one of the largest money-managers based in Philadelphia. (New Jersey’s new Gov. Phil Murphy has asked Aronson to serve on that state’s pension board.) Aronson asked why Olivia Mitchell, head of the Wharton School pension study center, wasn’t a member. (Mitchell declined to comment.)

“The main qualification [appears to be] the ability to play the Harrisburg game, and not get in the way of any fund-raising,” said Chris Tobe, a former trustee of the Kentucky state pension fund and author of the book Kentucky Fried Pensions, a scathing account of how financial policy sausage got made in one of the few states whose credit rating sometimes falls below Pennsylvania’s.

For his part, chairman Tobash, a property and casualty insurance salesman, has been a leader of the pension reformers in his party; he tells me he’s sure they can find the billions in savings, and promised to “dive deeper” in realistically comparing SERS and PSERS to less exotic plans. He told me Torsella’s office has data showing Pennsylvania pension profits are mediocre for the high fees we’re paying. He plans three public hearings to review the record.

Bloom told me the panel is a challenge: It’s so small that no more than two members can converse at a time without calling a public meeting. He’s all for better fee disclosure: Even PSERS, which unlike SERS provides some data on the fat profits that hedge fund and real estate managers keep along with their fees, “is not giving us all the information. We should publish the fees. That would change the industry.”

The commission has named a consultant, Ashby Monk, who heads the Stanford Global Projects Center and comments a lot on public pension management. Monk sounds like something Pennsylvania pensions haven’t seen for awhile: an advocate of hiring neither the most expensive private money managers, nor the Vanguard-style index funds, but of states building up in-house expertise to make their own direct pension investments.

In a 2016 interview with Chief Investment Officer (CIO) magazine, Monk described American public pension investors, as a group, as mediocre. He said their high-fee private-equity profits were juiced by “cheap debt” — in markets that were already “pointing upward” — enriching private managers so they can buy pro ball teams and go “laughing all the way to the bank.”

Speaking to Pensions & Investments magazine last month, Monk said the California state pension plans are getting ready to make more direct investments, because the high-priced outside firms are not giving the plans “what we want.”

As I recall, Pennsylvania pension plans had an unfortunate record when they made direct investments — such as the more than $25 million they blew in the 1990s on a Norristown soda-bottling company that fizzled. Or the millions lost on ethnic banks in Philadelphia.

But Monk doesn’t see public pension overseers as over-aggressive. Rather he sees them as too consevative: “The consultants, service providers, and non-expert board members were a toxic mix of status quo bias,” he told CIO. Looks like the commission will be challenging that status quo, at least.