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By Angela Couloumbis of Spotlight PA and Craig R. McCoy and Joseph N. DiStefano of The Philadelphia Inquirer
A dissident group of trustees for Pennsylvania’s largest pension fund on Wednesday was seeking to gain majority support to fire the retirement plan’s chief executive and top investment officer, as the fund grapples with an FBI investigation and management mistakes.
The dissidents have drafted and are circulating a detailed seven-page letter castigating the investment strategy and governance of Glen Grell, the former Republican state legislator who leads the PSERS fund, and investment chief James H. Grossman Jr., a fund veteran who is the highest-paid employee in state government.
A draft of the letter, obtained by Spotlight PA and The Inquirer, says that Grell and Grossman must depart now to fix “an irrevocable loss of trust and confidence that is a consequence of persistent underperformance and repeated governance failures.”
Leaders of the ouster would not talk publicly Wednesday. Nor would PSERS’ official spokespeople. While the number of trustees on the 15-member board favoring an ouster was in flux, people familiar with the proposed move say as many as six may have endorsed firing the two executives.
In an unusual bipartisan twist, the sources identified Republican state Treasurer Stacy Garrity and the Democrat she defeated, former state Treasurer Joe Torsella, both board members now, as working closely together to drum up support for the change. The sources also identified state Sen. Katie Muth (D., Montgomery) in particular as firmly committed to the effort.
The situation appears nearly set for a boardroom showdown as the fund leaders plan to conduct two days of meetings on Thursday and Friday. The ouster plan is emerging as Grell and Grossman are pushing for the PSERS board to green-light nearly $1.2 billion in new investments that would double down on the pair’s signature “alternative” investments.
This is the very investment approach that critics say has led to the lackluster performance of a fund crucial to 265,000 retired public school teachers. In a sign of growing dissatisfaction with Grell and Grossman, five members of the board voted against the investments staff recommended at PSERS’ March board meeting. Those still passed, each with nine votes, including that of board chair Christopher Santa Maria.
The proposed ouster comes after federal prosecutors and the FBI launched an investigation in the spring into the $64 billion fund — the Public School Employees’ Retirement System — which sends $6 billion annually to retirees.
Grand jury subpoenas have been sent to the fund and to top officials and were obtained by Spotlight and The Inquirer. Those documents reveal that authorities were investigating the fund’s $5 million appropriation to buy Harrisburg properties near its headquarters and the board’s botched adoption last year of a false and exaggerated figure for investment performance. Critics have also focused on the luxury worldwide business travel by its investment staff. And on Monday, the fund’s management disclosed that it had filed numerous error-filled forms with the IRS misstating the role of investment staffers on nonprofits that own the system’s real estate investments.
In the draft letter, though, the dissidents refer only briefly to the federal probe. Instead, they marshal figures and charts to say that the PSERS fund has been poorly managed for years by executives and an investment staff who have shrugged off board oversight to pursue unsuccessful strategies.
The letter notes PSERS now has 63% of its money in so-called alternative investments, whose true value is hard to measure because they aren’t traded on public stock markets. This is more than double the “alternatives” bet made by other public pension plans as a group, it said.
If the plan had been more conventional, the draft letter says, PSERS would have spent much less and profited far more. By the critics’ math, it would have $81 billion to pay future pensions, not $64 billion, had the plan kept pace with the top group of public pension plans over the last decade.
In a mistake now under FBI scrutiny, the board in December endorsed what turned out to be an incorrect number for its performance returns. It did so after skeptical board members, led by Torsella, questioned the management’s math — and after Grossman said: “We did our due diligence. We covered it. I’m not worried about it.”
In April, the board reversed course, abandoned the December number as a flawed calculation, and adopted a new one that fell slightly beneath a target. A state law links teachers’ payments into the fund to performance results. Thus, the miss on the target meant that 100,000 teachers and other staff hired since 2011 will have to pay $26 million more into the plan yearly, the letter says.
Yet, the dissidents write, even after the calculation debacle, PSERS management continued to give raises to the 50-member investment staff headed by Grossman.
Grossman is paid $485,000 yearly, more than twice the governor’s salary. He joined the fund’s staff 24 years ago and became the investment chief eight years ago. Grell, who is paid $227,000, served in the state House for a Harrisburg-area district for 11 years before taking the helm at PSERS.
In a long list of complaints, the draft letter portrays PSERS staff as dominating the PSERS board. It said executives provided key material to the panel only at the last minute, hired staff without board approval, wrested control of the choice of consultants, and talked down board dissidents to the media.
In a sign of the schisms on the board, Muth on Tuesday sued the agency itself in Commonwealth Court, accusing it of improperly keeping her in the dark about the fund’s policies.
On Wednesday, PSERS managers hit back. The agency is “aware of and disappointed by Sen. Muth’s unnecessary action in filing her meritless lawsuit,” spokesperson Evelyn Williams said. She added that managers look forward to getting the suit thrown out.
But Garrity and Torsella rallied behind Muth. “Withholding important documents from a trustee is outrageous,” Garrity said in a statement. “Much of what Senator Muth has requested are either past documents already provided to the Board, internal investment memoranda prepared to support recommendations to the Board, or documents that are public records.”
Said Torsella in a separate statement: “I have long believed that PSERS management should embrace, rather than resist, transparency and robust board oversight. I am disappointed but not surprised they are taking this unfortunate approach.”
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