Mary Williams Walsh of the New York Times mashed together three unrelated stories—and some misleading financial numbers—to produce a hit piece on the Pennsylvania School Employee Retirement System under the inflammatory headline, “F.B.I. Asking Questions After a Pension Fund Aimed High and Fell Short.” Seven paragraphs into the story we learn the FBI is “asking questions,” according to anonymous sources, about 2017 land purchases near PSERS headquarters. There’s no suggestion the fund did anything wrong, and any FBI interest seems unrelated to the fund’s financial performance and investment strategy.
Those facts made the subhed, “The Pennsylvania teachers’ retirement fund put more than half its assets into risky alternative investments. The math didn’t work out, spurring an investigation,” seem worse than misleading, since Walsh can’t link investments or math to the investigation, if indeed there is an investigation. The FBI will not comment and the anonymous sources only allege that someone from the FBI asked some questions of some unidentified people.
For a welcome change in a story about pension funding, I can lead with good news. The controversy involves the most recent fund annual report reporting as of June 30, 2020. The private equity investments are reported at a one-quarter lag, meaning they are valued at the low of the short-lived pandemic crash. The 35% losses the fund reported in Master Limited Partnerships (strongly linked to oil prices) from July 2019 to June 2020, and the 5% losses in private equity, have likely been turned around into large profits by now, and the anemic 2% returns in real estate and commodities have likely soared for the June 2021 fiscal year.
Calling anonymous allegations that the FBI asked questions a “story” is a stretch, but the second story Walsh tosses into her stew is real. PSERS restated its nine-year annualized return by 4 basis points—from 6.38% to 6.34%--due to consultant’s error. The lower return number forces higher contributions—from 0.5% to 0.75% of gross pay—from school employees hired since 2011. Naturally, some people wonder if it was an innocent error.
Walsh is content to let suspicion simmer to add fragrance to her concoction, but a little digging would make a conspiracy theory seem unlikely. The fund restated each of the last nine years, mostly by small amounts, but by a large amount in 2015. Someone cooking the books in late 2020 could not have changed the previously reported 8 years of numbers, she could only have meddled with the 2020 ones. Whatever mistake was made was made more than nine years ago and could not have been aimed at moving the 2020 figure just below a key threshold—one that didn’t exist nine years ago.
The third story is the inaccurate claim that the fund put “more than half its assets into risky alternative investments.” 57% of the fund’s assets are in stocks and bonds. 15% are in alternative investments—private equity and venture capital—and these are indeed risky, but have done quite well for the fund in the long-term, and almost certainly since June 2020. The rest of the portfolio is in relatively low-risk investments like real estate, commodities, infrastructure and absolute return funds, which some people call “alternative,” but (a) don’t amount to “more than half,” (b) reduce overall portfolio risk and (c) are doing very well.
Most of the article consists of describing private equity projects Walsh considers unsavory—trailer parks and phone systems for prison—or risky—energy loans in Kurdistan. The objection to funding trailer parks is that “the worker poor are being priced out of trailer parks,” which would seem to be an argument supporting additional investment in construction. The objection to prison phones is making money from prisons. While its possible that PSERS made some investments that offend some ethical principles, and the promised 12% return on the Kurdistan energy-backed loans was too low to justify the risk, this seems to have little connection to the claimed focus of the piece—the FBI investigation. And without numbers about the investments Walsh dislikes, there’s no tie to fund performance either.
One person is quoted complaining that private equity valuations are less reliable than public equity. That’s true, and it’s the flip side of the complaint that public companies focus too much on quarterly earnings and minor short-term news that roils the stock price. You can have reliable independent daily mark-to-market valuations of your investment, or management freed from short-term measurement, but not both. PSERS, like most sophisticated investors, chooses a mix of both for diversification.
In a minor bit of misinformation, Walsh blames the 2000 decision by the Pennsylvania legislature to raid the pension fund on a mistaken idea than the stock market would continue its late 1990s gains, an idea Walsh thinks was contradicted by 9/11. But the stock market crashed in March 2000, a year and a half before the terrorist attacks. The decision to cut contributions and raise benefits came a year after the crash. 9/11 caused only a minor, short-lived dip.
PSERS; story is simple. In 2000 it was adequately funded to pay all future benefits. In 2001, the legislature slashed contributions and raised benefits so the fund paid out $1.5 billion more in benefits than it got from employee and government contributions. Every year since, $1 billion to $4 billion more goes out than comes in. Overall 20-year investment returns have been decent—if unspectacular--but no plausible returns could have made up that difference. Too much money going out, not enough coming in. The problem was baked in 20 years ago, with tweaks every year or two either to cover up the problem or to make small stabs at reducing it. That’s the real boring story.
