Pennsylvania’s Auditor General has lambasted the state’s Public School Employees’ Retirement System (PSERS) for paying fees that were “woefully unfair to taxpayers and PSERS members.”
The findings come from Auditor General Eugene DePasquale’s recently released 151-page audit report of PSERS, which covers July 1, 2013, to March 31, 2017.
“One of my most significant concerns from this audit is that PSERS doesn’t seem to think spending more than $416 million on investment management fees in 2016 is a big deal,” he said. “It is mind-numbing that they want a pat on the back for reducing the fees from $441 million in 2015.
In 2000, PSERS was overfunded by 24% and remained above 100% funded until 2003, according to the auditor general’s office. As of June 30, 2016, PSERS was down to 57.3% funded with an unfunded liability of $43 billion, and invested assets of $49.2 billion.
“There should be a never-ending focus on driving the fees paid by PSERS to the absolute lowest level possible,” DePasquale said, noting, “Every investment fee dollar saved remains in the pension fund for the benefit of the retirees and the accrued savings of the taxpayers.”
But PSERS defended the investment fees it pays, and shot back at the “unfair” accusation, calling it “unsubstantiated and untrue.” It said that over the past 17 years, the fund had benefited from an additional $12.1 billion in incremental performance that would not have been possible without active management.
It also said that for every $1 spent on investment management fees during the past 17 years, active managers returned $3 in excess performance over their benchmarks.
“PSERS hires top-tier investment managers for top-tier performance because the beneficiaries (and taxpayers) deserve the best,” the fund said in a statement. “Hiring the second- or third-best may be penny wise, but it is pound foolish, as those managers generally don’t deliver.”
PSERS also said that it “hears the drum beat for lower fees and continues to aggressively negotiate fees to obtain a fair, equitable agreement with these investment managers.” It added that, from PSERS viewpoint, the beneficiaries, and taxpayers by extension, are $12 billion better off today relative to cheaper, passive alternatives.