Despite, or possibly because of, a whole slew of troubles with the Pennsylvania Public Schools employee retirement system, including falsified returns, its executives are working with recently appointed trustee Katie Muth to gain access to the fund’s assets The basic record of efforts made to fight. , causing her to have to sue to get the information any board member needs to do her full job. We’ve embedded her file and the latest interim ruling at the end of this article.

Anyone in corporate America or investing will recognize how crazy this is…but it’s pervasive in public pension funds. Board members have the right to view any records held by the organization they oversee. Any board that encounters the provocation PennPSERS is involved in should tell the CEO that employees will be fired if they don’t follow the rules. But public pension fund boards often prioritize avoiding any controversy for fear it will help those who want to hollow out or terminate public pension funds. The result is deep-rooted corruption and poor returns.

Let’s start with a look back at the PennPSERS scandal, and then turn to the fierce battle that Muth will have to fight to fully do her job. A post from last April:

Frankly, it’s surprising how long it took a public pension fund to investigate allegations of lying about its returns. But it’s not surprising that federal investigators, such as the FBI, have taken action in this case against the Pennsylvania Public Schools Employee Retirement System, also known as PSERS.

Readers have often lamented how often and apparently CalPERS has grossed out the law, with board members openly violating their fiduciary responsibilities by not even pretending to adequately oversee employees and undermining anyone who dares to do so. That’s because CalPERS’ governance structure is generally flawed among U.S. public pension funds: the board is controlled by employees, and there is a lack of oversight and enforcement elsewhere, or state. So things would have to go terribly wrong, like when former CalPERS CEO Fred Buenrostro took a bribe for the FBI to pursue wrongdoing. Yes, Boon Rostro is now in federal prison.

The incentives are obvious: most public pension funds’ employee bonuses are based on investment performance. But a second strong motivation is that raising pension contributions to shore up pension funds is highly unpopular. Even at CalPERS, any growth falls on employers, not beneficiaries’ salaries, and this massive pension fund apparently thinks more realistic funding assumptions will mean higher employer contributions, which is anathema, so It is slowly and reluctantly moving in this direction. [Clarification: The mechanism is more complicated. CalPERS sends annual contribution requirements to employers. While the employer can/does pass costs on to employees, they are also required to “bump” employee pay in “classic” CalPERS contracts. This is at risk of being rescinded in collective bargaining. The typical short-term adaptation is to cut government staffing, usually of the most junior employees].

In PSERS, by contrast, who bears the pain of the shortage is more complicated and directly linked to fraud allegations….

We don’t yet know how big the adjustment is, but it’s pushing returns higher [From the Inquirer]:

The target is a 6.36% return. In December, the board approved a report by the program’s experts that said the fund actually grew 6.38% — enough for teachers to gain…

If the error is not caught, it could save 100,000 teachers and other employees from raising pension payroll deductions, leaving taxpayers to bridge the growing gap between fund assets and future payments to serving and retired public school workers. …..

The Inquirer describes how 3 of PSERS’ 15 board members voted against employee efforts after some under-disclosed uproar with outside advisers to signal that the payback numbers were good. This part pretty much says that the majority of the board chose to lie:

At its December meeting, the board acknowledged that investment profits fell short of the system’s own goals, but found that investment profits were barely sufficient under state law to avoid an increase in the teacher’s deduction.

what happened? The previous sections provided just a little color:

The Penn Public Schools Employee Retirement System also revealed that it was investigating the errors of an unnamed outside consultant and how the consultant and his staff responded when they discovered the errors.

The error was incorporated into a December report approved by most PSERS board members after executive director Glenn Greer, investment chief James Grossman and chief financial officer Brian Carr assured board members that it was accurate. Even with their assurances, three board members who questioned how it was calculated refused to approve the report.

Back to current post. I’ve embedded Muth’s original lawsuit and the initial post-skirmish ruling that her lawsuit was dismissed for reasons. If you read the second filing, you’ll see that the judge dismissed all of the defendants’ arguments, which is unusual, indicating a degree of desperation in their claims. Note that two other board members submitted amici briefs to differentiate themselves from the rest of the board because they believed they had different interests. The judge also agreed.

Without seeing the exhibits in Muth’s files that show the scope of Muth’s initial request for information, it’s hard to know exactly what she’s after. However, the document discusses how she delved into some specific real estate investments, which are a small fraction of the fund’s holdings (my hypothesis is that the fight over them escalated as they relate to the FBI investigation). Her argument is that she must understand how these (possibly wrong) decisions were made in order to keep them in mind when the board considers similar investments. However, the document makes extensive claims about her recording rights:

48. Pennsylvania law already recognizes the right of company stakeholders to inspect and view complete company records in other circumstances. 15 Pa. CS § 1508; see also reapplication of TRS for nonprofit corporations. Mandatory Inspection of Company Information, 157 A3d 944, 1001 (Pa. Commw. Ct. 2017). That doesn’t mean staff can only parrot senators what those documents contain.
She has the right to inspect them.

49. Likewise, Senator Muth is empowered to examine the records of the Board of Directors in order to discharge its statutory duties and obligations to administer the Fund in the best interests of system employees. 24 Pa. CS § 8521(a, e).

50. Without full access to the Committee’s records, Senator Muth cannot meet her statutory obligations.

51. The Board Legal Counsel failed to provide Senator Muth with effective legal support to support his outspoken assertion that the investigation would immediately cease to provide all information to Board members charged with protecting the Fund. Instead, the board counsel wants board members to remain silent and wait for the final outcome of the investigation, but continue to vote and act as if the federal investigation did not exist. Blind obedience, especially given the mistakes that contributed to this investigation, is simply reckless.

While respondents deployed some real rants (latches? unclean hands?), one of the arguments they attempted was to impose on public pension funds across the U.S. that individual board members have no rights, only the full board (or sometimes board committees) do. This is obviously absurd because board members are jointly and severally liable.

In leverage, Matthew Cunningham-Cook talks to Moose, in which she described how she was also seeking broader information about the fund’s holdings and was being held back. Muth is troubled by the low returns on opaque, complex, high-fee investments such as private equity and hedge funds, and that PennPSERS may be funding socially disruptive investments, such as outsourced hospital human resources firms that engage in predatory billing practices. Note that the interview indicates that Muth seeks a full list of alternative investments, which means the investment level, not the fund level. For example, this would mean portfolio companies currently on Apollo 8, not “Apollo 8.” From leverage:

But Moose said when she asked the fund’s investors for more information about its high-risk investments, she was turned down — so in June 2021, she sued the fund for basic information about its investments .

“[I asked them to] Give me a comprehensive list of all the alternatives and traditional to see if we have private equity in ambulances and hospitals,” Moose told The Lever. “Their response was, ‘We have over 495 portfolios, no way Track what’s in it. ‘ That’s nonsense…that’s why I’m suing: I don’t know where the money is going. As a trustee, I have an obligation to make informed decisions. “

That response, if Moose was right, would be terrible. PennPSERS as a trustee must know what they are investing in. Said: “Oh, we invested in all this complicated stuff, don’t let us know what we did, it’s totally against its fiduciary duty.”

The only possible excuse here is that some holdings are too dynamic (such as hedge funds with active trading strategies) to take snapshots in time to indicate significance. However, there is zero reason for not providing a complete list of all private equity portfolio company investments… but former CalPERS board members JJ Jelincic and Margaret Brown confirmed that staff would never allow board members to make such a request, among other things to assert The entire investment committee will have to ask, they’ve been trained never to do this. (Note that in the second embedded document below, respondents made a similar argument that only the audit/compliance department could seek information, which the judge rejected).

Speaking of Jelincic and Brown, they got a nod in The Lever’s story:

Terry Mutchler, a well-known transparency attorney hired by Moose to assist her in her lawsuit, said: “This is a very special case. You have a board member who is placed in a position to sue to get the records to come back. Do her job. We believe this is the first time in the nation that a current board member of a public fund has had to take such action.” …

Muth is taking real risks through this fight. Pension fund trustees who ask too many questions can be at odds with powerful interests—just ask JJ Jelincic and Margaret Brown, former board members of the California Public Employees Retirement System, the largest public pension fund in the U.S.…

Jelincic and Brown said they witnessed the same type of activity that Muth challenged in Pennsylvania. In 2020, CalPERS’ chief investment officer resigned amid conflict of interest allegations surrounding private equity firm Blackstone…

“The trustee is basically indoctrinated by the staff,” Jerincic said. “Frankly, my experience is that when the trustees question what’s going on, there’s a coalition that says, ‘No, you can’t question employees. We’re here to support them. If you ask questions, you’re probably on the board. bring a bad reputation.'”

Brown agreed. “Other board members try to bring you down when you ask questions about healthcare investing or any topic,” she said. “I keep reminding them: you have fiduciary duties; supervisory duties. You shouldn’t just listen to what the staff tells us.”

An issue that works against board members engaged in tough transparency battles is not just the cost of legal action, but the fact that judges are often respectful to state institutions. PennSERS is currently mired in scandal, and the fact that a judge has ruled decisively against the staff’s initial pushback gives reason to hope that Muth will turn the tide against transparency.

00 Muth v PennPSERS Complaint

00 Muth v PennPSERS Preliminary Decision