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Justice Department Ends Investigation of Pennsylvania PSERS

A 2020 accounting error had prompted the investigation that lasted for more than a year.

By Michael Katz


The Department of Justice has dropped its investigation into the Pennsylvania Public School Employees’ Retirement System, said Chris Santa Maria, chairman of the $75.9 billion pension fund’s board of trustees, in a statement. PSERS made no further comment on the matter.

The pension fund had been under investigation by the Justice Department since at least May of last year, when subpoenas indicated that the FBI and prosecutors were seeking evidence of kickbacks and bribes at PSERS.

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The subpoenas were reportedly looking for information from the pension fund, its executive director, chief financial officer, chief auditing officer and deputy CIO. The court orders reportedly showed that the FBI and prosecutors were probing possible “honest services fraud” and wire fraud.

The investigation was related to an incident in December of 2020, when PSERS’ board of trustees certified the contribution rates for its members. The board was told by its general investment consultant and another firm that the retirement system’s nine-year performance figure was 6.38%, which was just high enough to avoid triggering additional contributions under state law.

However, during a March 2021 board meeting, PSERS management informed the board that there were errors in the data used to perform the calculation. As a result, the board ordered a review of all performance data and found that the actual nine-year performance figure was 6.34%, which meant an automatic increase in contributions since the number fell short of the 6.36% target. Under the state’s “risk sharing” law, school employees and taxpayers have to contribute more when the pension’s investment portfolio underperforms.

The miscalculation forced the board to recertify the member contribution rate, which led to thousands of teachers having to pay more in employee contributions. As a result, the board of trustees hired two law firms to investigate the misstatement. After the error came to light, both CIO Jim Grossman and Executive Director Glen Grell resigned late last year.

According to a report released earlier this year following an internal investigation, PSERS investment consultant Aon took responsibility for the accounting error. The report includes a letter from Aon to Grossman that said the firm had become aware of data corruption in some sub-composite market values, cashflows and returns for April 2015.

Aon attributed the data corruption to an error by an analyst in uploading net asset value and cashflow data into the performance system it uses. The company said the data corruption impacted “a few asset class composites” in the public markets.

No one at PSERS has been accused of any wrongdoing.

Related Stories:

FBI Said to Seek Evidence of Kickbacks, Bribery at Pennsylvania PSERS

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CIO, Executive Director Resign From Embattled Pennsylvania PSERS

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Home > News > Asset Allocation > Did You Enjoy the July Rally? Too Bad It Was Temporary
Asset Allocation

Did You Enjoy the July Rally? Too Bad It Was Temporary

Inflation, Fed rate hikes and an inverted yield curve are all undermining what seems like a new bull market, says Comerica’s Lynch.

By Larry Light


After a nasty first half of 2022, July provided a refreshing summer breeze—and a 9% jump in the S&P 500. Don’t get used to it: This is a respite, not the start of a bull market. That’s the advice from John Lynch, CIO for Comerica Wealth Management.

 

The market’s gains—it’s up 12% from the June low point—seem like a short-lived phenomenon, Lynch wrote in a research report. In fact, “history has shown that countertrend moves are common during periods of market distress,” he explained.

 

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In the average bear market rally, the index rises around 15% over two months, according to Lynch. Let’s not forget that the S&P 500, while improved from its low point of more than a 20% loss from the early-January peak, is still down considerably this year—negative 14.1%.

 

Lynch noted that inflation remains “stubbornly high” and “companies have yet to fully experience the drag to margins from higher input costs.”

 

It could be that the U.S. already is in a recession, he mused, referring to the two recent consecutive quarters of economic shrinkage—the rule-of-thumb definition for a recession, even though one has yet to be called by the National Bureau of Economic Research, the official arbiter of downturns.

 

If a recession is now under way, he reasoned, the Federal Reserve’s tightening policy stands to produce a second one in the near future. “This is because monetary policy typically acts with a lag of approximately 12-18 months,” he said. The economy has not yet felt the impact of the rate hikes in its past four meetings, “suggesting the potential for a double-dip recession sometime next year,” Lynch warned.

 

Another recession signal, Lynch pointed out, is an inverted yield curve. He wrote that “the U.S. Treasury yield curve is enduring its second, and more pronounced, inversion since April,” with the 10-year Treasury (2.6%) yielding less than the two-year (2.9%).

 

On the bright side, the bear market rally that Lynch sees could go on for a while. Namely, he argued, the percentage of the S&P 500 trading at 20-day highs and also of those trading above their 50-day moving average indicates improved momentum.

 

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