HARRISBURG — Wall Street investors have gotten rich at the expense of Pennsylvania state workers and retirees. That was the blunt assessment from Auditor General Eugene DePasquale Thursday morning.
“We’re not getting our money’s worth,” DePasquale said of the fees paid by the State Employee Retirement System to investors to actively manage funds.
Similar criticisms have been lodged by Gov. Tom Wolf and Treasurer Joe Torsella, but DePasquale’s team audited SERS between 2013 and 2017 and he offered specific numbers to back up his complaint.
DePasquale said the audit found that in 2016, SERS spent $167 million in fees for Wall Street investors and got a 6.5-percent return on the markets, net of fees.
The problem is that the target rate of return was 7.25 percent, so they didn’t hit their goal, DePasquale said. The national median return was 12.4 percent, he said.
“So we have some of the highest management investment fees in the country and we were below the national average rate of return,” DePasquale said.
He applauded SERS for reducing its reliance on Wall Street managers in recent years. In 2007, SERS spent $345 million on investment managers. In 2016, that number had dropped to $167 million, according to auditors.
Still too high, Depasquale said.
“Every single dime going to Wall Street managers is a dime not going into pension funds that desperately need it,” he said.
SERS has also reduced the percentage of its funds being actively managed on Wall Street. In 2016, it was 68-percent active and 32-percent passive. By 2017, that number shrunk to 54-percent active and 46-percent passive.
“There are reasons to have actively managed funds,” said SERS spokesman Jay Pagni, who added the agency has been and will continue to implement the auditor general’s recommendations.
Pagni said those managers are trying to hedge against economic downturns and minimize the damage should the markets go south. Pagni also said it’s unfair to judge based on the snapshot of a single year’s returns. Those active Wall Street managers are focusing on 30-year yields, he said.
“You don’t want to put all your eggs in one basket,” Pagni said. “You want to have a diversified portfolio. When the times are good, ride the market. When times are bad, what are you gonna do?”
What troubles DePasquale is that times have been good on the markets for several years; really good, in fact. Some states have enjoyed double-digit rates of return. Pennsylvania has not, and DePasquale said that makes its funds especially vulnerable.
“If there is a downturn in the stock market anytime soon, we are in big, big trouble, which is why every single dime has to go into these stock market funds,” he said.
The audit also found that SERS has re-upped consultant contracts without publicly bidding them. It’s a practice DePasquale calls “insane.”
He also recommends that lawmakers toughen the law that allows convicted felons to continue receiving pensions.