Pa. Auditor General Kicks Off Pension Probe

November 20, 2002 (PLANSPONSOR.com) - Pennsylvania state officials have kicked off a probe of the pension funds for state employees and teachers in light of their combined $21 billion loss in two years and questions about their choices of money managers.

State Auditor General Robert Casey’s staff is studying how the pension funds hire and monitor more than 200 private money managers who run pieces of the $44 billion-Pennsylvania State Employees’ Retirement System and the $21 billion-Public School Employees’ Retirement System, the Philadelphia Inquirer reported.

Officials of the state employees’ fund, which has lost $9 billion since its 2000 peak, declined to comment on the audits. Officials of the teachers’ fund, which is down $12 billion, also had no comment.

According to the Inquirer, which quoted a letter to pension officials from Deputy Auditor General Peter Speaks, state auditors are also examining “potential conflicts of interest” between the funds’ overseers and the investment managers, consultants, and advisers they hire to invest the money. The funds are overseen by elected officials and state employees.

For their part, pension officials have gone on the offensive with a November 8 announcement that they would initiate their own audit – an announcement that followed 90 days of talks with Casey. The plans cover a total of more than 220,000 retirees.

In announcing the funds’ plans for their own audits,state workers’ system chairman Nicholas Maiale predicted that his system’s audit “will reaffirm to the citizens of Pennsylvania that we are efficiently and effectively using our resources.”

State Officials Unhappy With Funds Response

The funds’ reaction drew a sharp response from Casey’s office, according to the Inquirer.

“Unfortunately, [the retirement systems] have stalled and resisted us at every turn,” Richard Spiegelman, Casey’s chief counsel and chief of staff, told the Inquirer. “Their recent announcement that they’re going to undertake an audit of themselves is just their latest gambit in avoiding independent outside scrutiny.”

Casey may also review the systems’ financial projections in light of complaints by the Pennsylvania Association of School Retirees and others who fear that the systems will need ever-greater taxpayer subsidies if their investments keep losing money, Spiegelman said, according to the Inquirer.

In his initial call for audits last summer, Casey said he was uneasy that state pension managers, their lawyers and consultants include regular contributors to the campaigns of statewide candidates, such as former Governor Tom Ridge, Governor-elect Ed Rendell, Treasurer Barbara Hafer and Casey himself, the Inquirer reported.

Hafer, who is chairwoman of the teachers’ plan and serves on the board of the state workers’ plan, has insisted that managers were hired for financial and not political reasons.

Under pressure from Casey and State House Speaker John M. Perzel (R., Phila.), both funds have issued a string of news releases promising that they will pressure companies in which the state owns stock or bonds to improve their internal governance procedures and avoid conflicts of interest with Wall Street investment bankers. (See Pa. Pension Embraces ‘Merill Lynch Principles’ ).

At the same time, the Pennsylvania funds have said little about the potential for conflicts of interest in their own manager selection.

Money Firms Politically Connected

They have continued, however, to hire politically connected management firms, the Inquirer said.

The Inquirer reported that in September,  for example, the state workers’ pension system voted to switch a $12.9 million investment commitment from a faltering Philadelphia venture capital fund to Cross Atlantic Technology Fund II L.P., of suburban Philadelphia.

Cross Atlantic is part of a group of funds operated by Philadelphia lawyer Frederick Tecce, a former chairman of the teachers’ pension finance committee and leading Hafer fund-raiser, and his business partners Donald Caldwell and Glenn Reiger, who also contributed to Hafer’s campaign, the Inquirer said.

The state pension systems have invested more than $290 million in the trio’s venture-capital funds in the last three years, but have yet to receive any of it back, according to the systems’ most recent investment lists, the Inquirer said.

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