Skip to content
Link copied to clipboard

PhillyDeals: Pa. pension plan's woes are costing taxpayers

The Pennsylvania State Employees' Retirement System (SERS) spends a quarter of a billion dollars a year on private money managers, in hopes they'll make more money to pay future pensions.

The Pennsylvania State Employees' Retirement System is receiving taxpayer subsidies as its investment returns fail to keep pace with pension costs.
The Pennsylvania State Employees' Retirement System is receiving taxpayer subsidies as its investment returns fail to keep pace with pension costs.Read moreCAROLYN CASTER / Associated Press

The Pennsylvania State Employees' Retirement System (SERS) spends a quarter of a billion dollars a year on private money managers, in hopes they'll make more money to pay future pensions.

Under Nicholas Maiale, a former state representative from South Philadelphia who has been chairman of SERS' board since 1992, and especially since then-Gov. Tom Ridge boosted pensions in 2001 without raising more funds to pay for them, SERS has become one of the most intensively managed public pension systems in the nation.

SERS planted nearly half its assets in hedge, real estate, buyout, venture capital, and other funds you can't buy in the stock or bond markets.

And what did these fees buy? An average 4 percent annual investment return over the last 10 years, according to last year's annual report to state legislators.

SERS would have spent a lot less, and made more, by giving the money to, say, Vanguard Group's Wellington stock-and-bond fund.

Stock prices and other assets rebounded last year, so SERS' numbers should look stronger by the time Maiale brings his next annual report before the Senate Appropriations Committee in March.

But it still won't be strong enough to keep pace with rising pension payouts. Taxpayers gave SERS $300 million last year, twice as much as the fund needed in 2007. The subsidy is projected to rise to $2 billion by 2020, competing with schools, prisons, and other programs for scarce public funds.

Rich and richer

Some of the hired investors made money for SERS, some lost money. But the people who run them always seem to get paid.

Take, for example, TL Ventures (it stands for Technology Leaders), a Main Line investment firm run by former Fidelity Bank executive Robert Keith, which hoped to strike it rich way back in the Internet bubble.

SERS invested $87 million in three TL funds in 1997-2000. (In all, TL said it raised about $1 billion from various investors.)

Ten years later, SERS has gotten back only $56 million of its investment. No net profit.

Yet during that same period, SERS alone paid more than $10 million in fees to TL managers, including $400,000 in 2009, the most recent year reported. (Total fees to TL would top $100 million if other investors paid like SERS.)

By 2008, SERS and other TL investors had given up on expecting any more back from TL's 1997 fund.

But they recalled that TL had collected some profit from the fund when some of its investments made money during the Internet bubble. They asked TL to give investors some of that profit, since the fund had gone on to lose money on its other deals, costing investors dearly. Such payments are known in the business as "clawbacks."

TL told its millionaire managers and ex-managers to come up with the clawback money. Some resisted. Last year, an arbitration panel told ex-TL manager Robert Fabbio, a veteran Texas technology investor, to repay TL $1.2 million, and his former colleague Stephen Andriole, now a Villanova University professor, to return about $250,000.

In court filings and testimony, Fabbio and Andriole said they didn't object to paying what they owed.

But they complained that TL boss Keith and an inner circle of colleagues weren't having to pay their own clawbacks. Instead, TL was paying for them, from management fees TL had collected from SERS and other investors.

Instead of using clients' fees to expand its operations and support new investments, TL had closed its satellite offices and dumped the fee money into a holding company, which then reimbursed SERS so Keith and others didn't have to pay their own clawbacks, Fabbio and Andriole argued. They wanted TL to pay their clawbacks, as it did for Keith.

The lawyer representing the two, Cindy Olson Bourland, of Texas, asked SERS chairman Maiale to explain why he let TL use SERS' own fees to pay the clawbacks.

According to court records, Maiale said he'd known Keith since Maiale served in the state House and Keith was a prominent Philadelphia banker, and trusted him. When Keith left the bank to start TL's predecessor company, he went to Maiale to see if he could get state money to invest. SERS invested in TL, and Maiale served on TL's investment-valuation committee.

Bourland asked Maiale if he realized TL was banking fees from SERS and other investors and making them available for Keith and other partners to use for personal expenses, such as the clawback payments, instead of using them to improve TL's investment returns.

"Yes," Maiale said. And he didn't object? "No," he said. "We never micromanage how our investors handle their management fees. I mean, that's their decision."

Bourland told me that Maiale's testimony shows SERS and TL formed an "old boys' club," where firm fees and personal funds can be mixed in ways no publicly traded company's investors would allow.

But as far as SERS is concerned, TL's fee - 1.5 percent of assets managed, per year, profit or loss - was within the investment industry's usual range, and it's not SERS's business what TL did with that money. When it's time for clawbacks, SERS attorney Samuel Yun told me, "it really doesn't matter to us what pocket they take it out of."

Last month, Common Pleas Court Judge Mark Bernstein ruled he had no standing to reverse the arbitrator's decision. Fabbio and Andriole are appealing, according to Bourland. Aaron Krauss, attorney for TL, declined to comment on the case.

SERS has helped keep a high-paid cottage industry of firms such as TL in business. It has had a tougher time keeping pensions funded.

Newly elected Gov. Corbett, who controls several seats on the SERS board, hasn't yet said if he'll continue backing Maiale or change direction - after all these years.