WILKES-BARRE — Auditor General Eugene DePasquale this week said his performance audit of the State Employees’ Retirement System found more room to cut fees to Wall Street investors while working on legislative reform and operational improvements needed to help ensure that the system can meet its obligations to retirees and protect Pennsylvania taxpayer interests.
The 119-page audit report, which covers Jan. 1, 2013, to March 31, 2017, includes 18 findings on six issues and makes 36 recommendations — 23 directed at SERS, 13 directed at the General Assembly.
“SERS is moving in the right direction by starting to address many of the issues I’ve been pushing for in the past four years, including reducing investment fees and using more passive investments,” DePasquale said in a news release. “However, there is still room for improvement.
“Every dime going to Wall Street managers is not going into the pension funds that desperately need it, and adds additional stress to Pennsylvania’s budget situation,” he said, noting that SERS’ investments returned 6.5 percent in 2016 which is below its expected return of 7.25 percent and significantly lower than the national median return of 12.4 percent.
The audit also highlights the need for the Public Employee Pension Forfeiture Act to be legislatively broadened.
“The language of the … Act is outrageously restrictive and creates loopholes where workers can be convicted of a sex crime and still keep their pensions,” he said.
As with many public retirement systems, SERS faces a large unfunded liability. In 2000, SERS was overfunded by 32 percent and remained over 100 percent through 2004. Legislative changes in 2001 to increase benefits and to allow underfunding of employer contributions, coupled with economic downturns, reduced the funding level to 58.7 percent with a projected unfunded liability of $19.5 billion this year.
Lower investment costs
SERS contracts with external investment managers to manage all of its $27.5 billion of investments. In the past 10 years, SERS reduced investment manager expenses from $345 million in 2007 to $167 million in 2016.
Since October 2016, SERS moved $3.9 billion of assets into passive investment strategies, which reduced annual external investment management fees by approximately $17 million. As of April 26, 2017, SERS’ investments are 54 percent active and 46 percent passive.
Auditors noted that while SERS procured investment consultants in accordance with its written procedures, it did not adequately pursue competitive offers and failed to document fee negotiations.
In 2015, SERS extended the contract with its real estate consultant for two years without considering other qualified consultants. The scope of work in the contract was expanded to cover SERS staff turnover, and the annual retainer more than doubled from $348,000 to $728,000.
Prior to the 2015 contract extension, SERS approved a new contract with the same contractor every five years since 1994; it was last competitively bid in 2009.
“When you are spending public dollars it is critical to ensure you are getting the best value for every single dollar,” DePasquale said. “Rubber stamping a contract without competitively bidding is an affront to everyone paying into the SERS fund.”
Fix pension forfeiture law
“As highlighted in my Public School Employees’ Retirement System audit in May, it is clear there are problems with the language of the Public Employee Pension Forfeiture Act,” DePasquale said.
Statutory language in the 2004 amendment to the act limits pension forfeiture to school employees who commit crimes against students, which does not apply to the majority of SERS members. Auditors found three instances where a SERS member was convicted of one of the sex crimes listed in the act, but the individual was able to keep their pension benefits because the victim was not a student.
Auditors found that between Jan. 1, 2013, and Oct. 31, 2016, SERS identified and closed 109 pension forfeiture cases resulting in 40 pension forfeitures.
Improve board policies
Auditors found that SERS did not have a formal education program in place to assess and document the investment knowledge and skills of each board member and designee.
Prior to June 2017, neither the State Employees’ Retirement Code nor the SERS board bylaws required trustees to possess a minimum level of investment or financial knowledge.
In June, the General Assembly enacted Act 5 of 2017 which amended the SERS and PSERS retirement codes to require board members to obtain eight hours of mandatory training in investment strategies, actuarial cost analysis, and retirement portfolio management on an annual basis.
Diversify board makeup
The SERS board is made up of 11 members, which is slightly larger than its peer state systems where the average board size is nine to 10 members.
Unlike its peer state public pension system boards, including PSERS, where at least some board members are elected by the membership, no SERS board members are elected by SERS membership.
Also, unlike PSERS, the governor has unusually strong control over the selection of SERS board members, including selection of the chairman. Until Act 5 of 2017, a majority of the board members, six of the 11, were appointed by the governor. Act 5 changed the composition to give the governor five appointments and added the Secretary of Banking and Securities as an ex-officio voting member to both SERS and PSERS boards.
Acting Secretary of Health and Physician General Dr. Rachel Levine, Insurance Commissioner Teresa Miller, and Executive Deputy Secretary of the Pennsylvania Department of Education Dr. David Volkman this week took time to remind parents to have their children vaccinated before the new school year.
A recent change in state regulations altered the provisional period in which students could attend school without their vaccinations from eight months to five days. Children in grades K-12 need the following immunizations for attendance: tetanus, diphtheria, polio, MMR (measles, mumps, rubella), hepatitis B, and chickenpox.
Children entering the seventh grade also need additional immunizations of meningococcal conjugate vaccine (MCV) and tetanus, diphtheria, acellular pertussis (Tdap). If a child does not have at least one dose of the above vaccinations, he or she risks exclusion from school.
These requirements allow for the following exemptions: medical reason, religious belief, or philosophical/strong moral or ethical conviction. Even if your child is exempt from immunizations, he or she may be excluded from school during an outbreak of vaccine preventable disease.
Under the Affordable Care Act, most insurance plans, including those bought through the federal Marketplace, are required to cover school vaccinations as a free preventive service without charging a copayment or coinsurance.
For more information, visit www.dontwaitvaccinate.pa.gov or call 1-877-PA-HEALTH.