Fees Falling
Last week, Gov. Wolf applauded Pennsylvania's underfunded retirement plans - SERS (state employees), PSERS (public school employees) - for trimming the fees they pay private money-management firms. Those fees are down $103 million at PSERS and $16 million at SERS from the levels of two years ago.
Last week, Gov. Wolf applauded Pennsylvania's underfunded retirement plans - SERS (state employees), PSERS (public school employees) - for trimming the fees they pay private money-management firms. Those fees are down $103 million at PSERS and $16 million at SERS from the levels of two years ago.
As it was, the state paid about $600 million last year to JPMorgan, BlackRock, the Independence Capital funds, and hundreds of other portfolio managers to direct $75 billion in pension investments.
It's nice the fees are down by millions. Too bad investment profits have dropped by billions.
There is so much unpleasant financial news out of Harrisburg these days that you can see why the governor sought to associate himself with what looks deceptively like progress.
For all their billions, the pension systems are badly underfunded, their actuaries tell us. That forces tax collectors to add a pension surcharge to every dollar we pay teachers and state workers. The surcharges have been growing a lot faster than tax collections.
Wolf and Republican lawmakers can't agree on what to do about the resulting squeeze: Do we raise taxes? Or close colleges? So they haven't passed a budget. That's why Pennsylvania has one of the Union's lowest credit ratings. And why taxpayers now have to pay extra interest to get investors to buy Pennsylvania debt.
But Wolf said in the past that he is for lower pension-management fees. Now that fees are down, he's taking credit.
In a statement spokesman Jeff Sheridan sent me, Wolf also promised "to work with both pension systems to reduce fees even more"; he offered to sign laws that would "permanently reduce these excessive Wall Street fees," presumably by enacting his proposal to fire the money managers and replace them with low-cost index funds, as Montgomery County has done with 90 percent of its pension portfolio.
What's wrong with this picture?
Profits dropped, too. Pennsylvania pension investments have a target return of 7.5 percent a year. But in 2015, SERS returned just 0.5 percent. (The teachers' fund fell short, too, but we don't yet know how short; PSERS hadn't released a number at presstime. Takes them awhile to do the books.)
It was the second year in a row returns had fallen. So we would expect fees to have fallen in the last two years because some of them are performance-based. (PSERS notes it has also sold some of its expensive private-equity funds, has moved stock investments to indexed accounts, and been more aggressive in negotiating fees with new managers.)
Pension systems aren't reporting all their fees. "There is no standard for reporting fees," PSERS spokeswoman Evelyn Tatkovski points out.
PSERS doesn't report the "carried interest" (shared profits) pocketed by private equity and real estate investors. SERS also doesn't report the submanager fees it pays to the folks who run money for its "fund of funds" managers, which can also add up to many millions.
Though those fees aren't "required" for public disclosure, "we appreciate the transparency that data could provide" and are looking into reporting it in the future, said SERS spokeswoman Pamela Hile. If that happens, reported fees will rise. Don't expect any governor to take credit.
Index funds aren't a cure-all.
As noted above, SERS, with its complex array of U.S. and foreign stocks, bonds, commodities, real estate, private equity, and other investments, returned a modest 0.5 percent last year.
But Montgomery County, which put 90 percent of its pension investments into low-fee Vanguard Group index funds at the behest of Wolf ally Josh Shapiro, the County Commissioners chair and a state attorney general hopeful, returned just 0.3 percent on its pension investments last year.
People who hate the idea of Wall Street sucking up the people's money may be gratified to see private managers fired and fees reduced. But if investment results don't improve, taxpayers end up more broke, not less.
There is, however, another advantage to firing private managers: You get rid of most of the mysterious, unreported fees collected by those firms, and also the political interests of the wealthy managers who profit from them and the "placement agents" paid to market them.
Professional investors are barred by a 2010 federal law from giving money to state and local candidates. But they are still free to give to national campaigns. Indeed, investment managers have been generous to national campaigns supporting New Jersey's governor, Chris Christie.
That state's badly underfunded pension system, burdened by underperforming hedge-fund investments and other assets, returned just 0.6 percent last year.
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@PhillyJoeD