Pennsylvania Gov. Budget Proposal: Overhaul Pension Investment Strategy and Cut Fees, Managers

Tom Wolf

Pennsylvania Gov. Tom Wolf released his first budget proposal last week, and there were several items of interest related to pensions.

On Wednesday, Pension360 covered Wolf’s proposal for issuing $3 billion in pension bonds to attempt to shore up the funding of the state’s two major pension systems.

But Wolf is also proposing an overhaul of the systems’ investment strategy.

Specifically, Wolf is calling for the systems to take a more passive approach to investing and to cut down the fees it pays to managers.

The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

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The “commonsense reforms” mean its two state pension plans would have to “seek less costly passive investment approaches where appropriate,” according to the budget.

Pennsylvania’s employee and teachers’ pensions together have upwards of $50 billion in unfunded pension liabilities. Wolf’s budget blamed the growing gap primarily on “repeated decisions by policy makers to delay making the required contribution to fund our future pension obligations.”

The state has not paid its full pension bill for more than 15 years, the budget document noted.

While the proposal was light on specifics for reforming pension investment strategy, the outcome would “significantly reduce taxpayer costs for professional fund managers,” it claimed.

The state largest plan, the $52 billion Public School Employees’ Retirement System, already managed roughly a quarter of its assets in-house, as of June 2014. Its portfolio included relatively standard allocations to fee-heavy asset classes, such as private equity (16.3%) and real estate (13.8%).

Net-of-fees, the teachers’ pension returned an annualized 10.3% over the last five years.

The executive director of the state’s Public School Employees Retirement System defended the fund’s investment strategy in a newspaper piece last year.


Photo by Governor Tom Wolf via Flickr CC License

Pennsylvania Gov. Wolf Proposes $3 Billion Pension Bond

Tom Wolf

Pennsylvania Gov. Tom Wolf unveiled his budget proposal on Tuesday, and it contained a number of pension-related items.

The biggest was undoubtedly the proposed issuance of $3 billion in pension bonds, to be used to pay down the liability of the Public School Employees Retirement System (PSERS).

As is always the case with pension bonds, the state runs the risk of worsening its financial position. But if PSERS’ investment returns exceed the bonds’ interest rates, the state will come out on top.

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“A portion of the current unfunded liability for PSERS would be refinanced to take advantage of historically low interest rates, with all savings reinvested to reduce that liability.” Wolf wants to borrow $3 billion and give it to PSERS so it can reduce the recent increase in pension subsidies by school districts and the state treasury.


Given recent bond prices and Pennsylvania’s bond rating (third-worst of U.S. states after Illinois and New Jersey), rates for taxable Pennsylvania pension bonds “would be about 3.25% (for 10-year bonds) and maybe 4% in 30 years,” Alan Shanckel, municipal bond strategist for Janney Capital Markets in Philadelphia, told me. Pennsylvania would have to pay that percentage and beat its self-imposed 7.5% investment return target each year to make the bond pay.

Pennsylvania’s state-level pension plans are about 62 percent funded, collectively.

Pennsylvania Pension Director Defends Investment Management After Op-Ed By Lawmaker


Late last month, Pennsylvania state Rep. Tom Caltagirone and financial advisor Richard Shuker took the state’s pension systems to task over the management of pension assets and fees paid to Wall Street.

[Read their arguments here.]

Now, the executive director of the state’s Public School Employees’ Retirement System (PSERS) has fired back in his own op-ed, defending the system’s investments. An excerpt from the piece, published in the York Dispatch:

1. PSERS is a well-managed, professionally run pension system that is audited by an independent, private sector auditing firm every year and follows all accounting standards issued by the Governmental Accounting Standards Board and all reporting requirements as required by the Securities and Exchange Commission.

2. PSERS received 15 recommendations from the Department of Auditor General’s 2006 Special Performance Audit. PSERS has resolved 13 of those recommendations and the two remaining address governance issues that are long-term projects and are currently in process.

3. Under Section 8521 (a) of the Retirement Code, PSERS is subject to the Prudent Investor Standard, which is a higher level standard than the Prudent Person Standard mentioned in the editorial.

4. Rep. Caltagirone and Mr. Shuker appear to use simple math to subtract the plan’s net asset values at two periods of time and imply that $48 billion is missing. For the 10-year period noted, we paid out $48.7 billion in benefit payments which they fail to even recognize. Evidently they are not aware that PSERS is a defined-benefit pension plan that currently pays out over $6 billion in pension benefits each year to over 213,000 retired members, including over $184 million in pension benefit payments in Berks County, where Rep. Caltagirone’s legislative district is located.

Read the full piece here.


Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons –

Pennsylvania Pensions Will Get $15 Million Piece of S&P Settlement


On Tuesday, credit rating agency Standards & Poor’s entered a $1.375 billion settlement with 18 states over the alleged inflated ratings it gave mortgage-backed securities which eventually turned toxic.

Pennsylvania is receiving a $21.5 million chunk of the settlement. Of that money, $15 million will be distributed among state agencies, including pension systems.

Two of Pennsylvania’s pension systems – the Public School Employees Retirement System and the Pennsylvania Municipal Retirement System – will receive a slice of the $15 million.

More from PennLive:

Pennsylvania is to receive $21.5 million from a proposed $1.38 billion nationwide settlement over misconduct allegations against Standard & Poor’s Financial Services LLC, the country’s largest credit ratings agency, [Pennsylvania] Attorney General Kathleen Kane said Tuesday.


“We contend that Standard & Poor’s set aside its independence and objectivity in order to increase its profits, which led to disastrous results for consumers and the economy,” Kane said in a press release. “This historic settlement ends years of litigation against an industry giant and holds this company accountable for its role in the financial crisis. Attorneys General from across the country and the federal government joined together in a bipartisan fashion to show that no company is above the law.”


She said $15 million of the settlement is to be distributed to the state treasury, Public School Employees Retirement System, Pennsylvania Municipal Retirement System and the Turnpike Commission, agencies that purchased the S&P rated securities. The rest will pay litigation and investigation costs, Kane said.

The Justice Department statement on the settlement, which includes a list of the states receiving money, can be read here.


Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons –

Pennsylvania Teachers’ Pension Commits $150 Million to Industrial Real Estate


The Pennsylvania Public School Employees’ Retirement System (PSERS) has invested $150 million in the Cabot Core Industrial Fund.

From IPE Real Estate:

Pennsylvania Public School made the commitment based on strong operating fundamentals for industrial properties, with the sector enjoying its lowest vacancy rates since 2001 and rents rising 4% year on year.

The fund is Cabot’s first core vehicle, having previously invested in industrial properties through value-add funds.

Pennsylvania Public School participated in the funds with a $100m commitment to Cabot’s Industrial Value Fund III in 2008 and $75m to the Industrial Value IV in 2013.

Cabot has been active in Atlanta, Chicago, Dallas, Florida, Los Angeles, New Jersey and Pennsylvania.

Courtland Partners, which advises Pennsylvania Public School, said the fund would target net returns of 8-10%, with an initial current yield of 5-6%.

Around 70-80% of returns are expected to come from current income, with the balance from appreciation.

PSERS managed $51.9 billion in assets as of September 30, 2014.


Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons –

Pennsylvania PSERS Offloads Nearly $2 Billion of Funds-of-Funds As Part of Plan to Decrease PE Exposure


The Pennsylvania Public School Employees’ Retirement System (PSERS) has sold its stake in 17 buyout funds-of-funds. The stakes were collectively worth $1.75 billion, and the sale was part of a plan to reduce the system’s private equity portfolio from 16 percent of assets to 15 percent.

From Chief Investment Officer:

The Pennsylvania Public School Employees’ Retirement System (PSERS) has sold a $1.75 billion package of private equity investments to secondaries player Ardian.

The deal—one of the largest in 2014—included 17 limited partner stakes in private equity buyout funds-of-funds. Most of these investments focused on US large cap and middle market spaces, according to the public relations firm representing Ardian.

The $53 billion pension fund and Paris-based secondaries firm closed their transaction last month.

“PSERS is endeavoring to reduce its exposure to private equity to 15% of the fund’s size,” said the pension’s CIO James Grossman. “The depth of the secondary market makes possible a large asset sale that will bring us closer to our long-term target.”

Private equity accounted for 16.3% of the fund’s total portfolio as of September 30, 2014, according to PSERS’ documents. The pension began shedding exposure to the asset class last summer, reducing its total portfolio value by $415 million between June and September.

Last month’s deal with Ardian would bring PSERS’ private equity allocation down to roughly 12.7%.

Pennsylvania PSERS manages $53 billion in assets.


Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons –

Newspaper: Pennsylvania Pension Funding and Shale Tax Shouldn’t Be Linked

Pennsylvania flag

Last week, a Pennsylvania lawmaker proposed levying a shale tax of 3.5 percent on the state’s frackers. The revenues – estimated to be $400 million annually – would then go to paying down the Public School Employees’ Retirement System’s (PSERS) unfunded liabilities.

One Pennsylvania newspaper agrees that paying down pension liabilities should be a top priority. But it disagrees that a shale tax is the way to do it.

From the Pittsburgh Tribune Review editorial board:

The GOP-controlled state Legislature must make Pennsylvania’s biggest financial woe — $50-billion-plus in unfunded pension liabilities — its top 2015 priority. And it must do so without linking pension reform to Democrat Gov.-elect Tom Wolf’s proposed natural gas severance tax.

Incoming Senate Majority Leader Jake Corman, R-Centre, during a Pennsylvania Manufacturers Association forum at the Pennsylvania Society gathering in New York earlier this month, said he’s willing to consider the severance tax if Wolf will negotiate on pensions. Going beyond compromise, that sets up GOP lawmakers to capitulate to Wolf’s taxing agenda.

Allegheny Institute scholar Frank Gamrat reminds that the extraction tax would have to compensate for the state-mandated elimination of the impact fee, a levy that has brought counties and municipalities nearly $130 million over the last three years. And for the tax to yield the Wolf-estimated $1 billion-plus at current gas prices, “production would have to rise by more than 50 percent.” It’s a quite iffy proposition given current market trends.

A too-high severance tax “could have adverse consequences for Pennsylvania,” says Gamrat. GOP leaders must take heed when he urges that the Legislature not spend “a great deal of (its) time and political capital” on a severance tax and focus instead on “pension reform” to address “the principal cause of the commonwealth’s budget problem.”

The Public School Employees’ Retirement System was 63.8 percent funded as of June 30, 2014.

Pennsylvania Lawmaker To Propose Shale Tax to Fund Pensions

Pennsylvania flag

A Pennsylvania representative is planning to introduce a bill in January that would levy a 3.5 percent tax on companies that frack in the state. The revenues – estimated to be $400 million annually – would then go to paying down the Public School Employees’ Retirement System’s (PSERS) unfunded liabilities.

From Main Line Media:

The way state Rep. Kate Harper sees it, a shale tax could ensure drillers are paying their fair share and help solve the state’s pension crisis at the same time.

Harper, R-61, began circulating a memo Dec. 17 to get co-sponsors for a bill she plans to introduce in January calling for a 3.5 percent shale tax, with the proceeds estimated at $400 million annually, going toward the state’s $32 billion unfunded Public School Employees’ Retirement System liability.

“If we don’t get pensions under control, everybody’s school taxes are going up,” Harper said. “My bill adds a severance tax to the existing impact fee and uses it for education, specifically pensions.

“I believe the majority of Pennsylvanians are OK with fracking,” she said, but they want two things: regulation of the industry to ensure the water stays clean; and, if the money is needed that the drillers pay their fair share.

The bill is similar to one introduced last session by state Rep. Madeleine Dean, D-153, that Harper co-sponsored but didn’t even get out of committee, in that it would keep the current impact fee in place, she said.

Those fees are used to address infrastructure and other impacts in communities where drilling takes place, and to contribute to several statewide environmental programs, a press release from Harper says. So far, the impact fee has generated more than $630 million.


“If the tax is too high we will lose jobs, so I’m trying to have them pay at a reasonable level and not discourage them so they leave the state,” Harper said. The 3.5 percent tax she is proposing “is not onerous on the drilling industry” and “compares favorably with the 5 percent tax in West Virginia,” she said.

PSERS was 63.8 percent funded as of June 30, 2014.

Pennsylvania Public School Pension Commits $200 Million to Senior Housing, Other Real Estate

Pennsylvania flag

The Pennsylvania Public School Employees’ Retirement System (PSERS) has committed a total of $200 million to two different real estate funds, one of which will invest in senior housing and assisted living properties. The other fund will invest in REITs.

Details from IPE Real Estate:

The fund has made $100m commitments to Prudential Real Estate Investors’ Senior Housing Partnership Fund V and Almanac Realty Investors’ Securities VII fund.

Laurann Stepp, senior portfolio manager at Pennsylvania, said the fund was attracted to senior housing in the US, where she said there are 19m 75+ seniors – an age group expected to grow in the next decade.

Stepp said Pennsylvania was also motivated by the fact senior housing construction had stalled since 2007 as a consequence of a lack of financing during the financial crisis.

PREI is targeting a $500m raise for Fund V, which will focus on US for-rent, for-profit, private-pay independent living, assisted living and memory care assets, with up to 20% to be invested in Canada.

The fund will invest mainly in income-producing assets with minimum 50% occupancy.

Some investments may be structured as forward equity commitments on newly constructed properties.

Almanac, which is looking to raise $1bn for Securities VII, has so far received $765m in commitments, according to sources.

The fund, which will provide growth capital for either US real estate operating companies or public REITs, will structure its investments as either convertible debt or preferred equity.

Targeted returns for Securities VII are 12-14% net IRR, with no leverage.

PSERS managed $53.3 billion in assets as of June 30, 2014.

Pennsylvania Teachers’ Pension Puts $2 Billion of Private Equity Stakes Up For Sale

SALE signs

The Pennsylvania Public School Employees’ Retirement System (PSERS) is attempting to sell a significant portion of its stakes in various private equity funds.

The pension fund is looking to sell off $2 billion of such investments, a total that amounts to about 22 percent of its private equity holdings.

PSERS is putting the stakes up for sale to cash in on high prices.

From Bloomberg:

Pennsylvania Public School Employees’ Retirement System is offering about $2 billion of private-equity fund stakes for sale after prices for such investments reached the highest levels since the 2008 financial crisis

The $53.3 billion system, known as Psers, hired Dallas-based investment bank Cogent Partners to manage the sale process, said three people with knowledge of the matter, who asked not to be identified because the information is private. The amount for sale is less than a quarter of the plan’s $8.7 billion private-equity holdings as of June 30.

“We are considering a secondary sale since we are overweight in our long-term allocation to private equity and have been since coming out of the financial crisis,” said Evelyn Tatkovski Williams, a spokeswoman at the plan.

The pension system’s level of private-market investments was near its 21 percent target as of June 30, according to data on the Psers website. Private markets includes private equity, private debt and venture capital.

Bill Murphy, a managing director at Cogent in New York, declined to comment on the sale process.

The pension plan reported a net investment return of 3.3 percent for private markets during the quarter ended June 30 and 14 percent for the latest fiscal year.

PSERS manages $53.3 billion in assets and is 63.8 percent funded.


Photo by  Simon Greig via Flickr CC License

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