The proposal, later dropped, was made by Richard C. Harris, a Merrill Lynch vice president who serves as a PSERS board member and as its Finance Committee chairman, because he said Mansfield had the necessary expertise and would do the job for far less money than other outside firms.
Other board members expressed concerns about the proposal to give Mansfield the contract, citing a potentially negative public appearance and a state ethics law that prohibits former public employees from doing business with an agency within one year of leaving it.
Board members, discussing why someone was not simply hired to replace Mansfield and handle the $400 million portfolio as part of the chief investment officer's regular duties, cited the difficulty of finding someone with the necessary expertise at the salary offered by the state.
The PSERS board filed a request for an opinion from the Ethics Commission concerning the proposed arrangement with Mansfield. The request was withdrawn and the proposal dropped altogether one day after it was questioned by a reporter.
"Mr. Mansfield decided he didn't want to go through the hassle," said James A. Perry, the PSERS' executive director. He noted that some concerns over the proposal had been raised and that Mansfield did not want to jeopardize the integrity of the board, adding, "We don't need any bad publicity."
Mansfield could not be reached for comment.
There was not yet a telephone number listed for his new firm, Mansfield Investment Advisors Inc., which records filed with the Department of State showed was incorporated Dec. 21, 10 days before his resignation from the PSERS.
His home phone in Lancaster was picked up by a machine whose message was a John Wayne impression that began, "Hi Pilgrim . . ." Messages left on the machine were not returned.
The PSERS is a government agency in charge of managing teachers' retirement
funds, which are expected to reach $14.9 billion by the end of this fiscal year. The state will contribute $529.5 million to the fund this year.
Members of the PSERS board of trustees need not be state employees, although the board includes the state treasurer, education secretary, two members appointed by the governor and four legislators who serve as nonvoting members. Several other members are chosen by teachers and school administrators.
The proposal to hire Mansfield privately after he resigned from his job came at a meeting of the board's Finance Committee held Jan. 8 at a hotel in Philadelphia. Four of the board's 15 members attended, and the idea was presented by Harris.
Harris once worked with Mansfield at Merrill Lynch in Philadelphia, but Harris said that was years ago when Mansfield was only a trainee. Harris is 58. Mansfield, who started with the PSERS in May 1984, is 40.
Harris' position on the board has been questioned in the past, notably by board member and former Treasurer G. Davis Greene Jr., because he works at Merrill Lynch. The brokerage house was the leading commission earner for the PSERS in the last fiscal year, earning $444,608.
Harris said that he works for Merrill Lynch's retail division, which is distinct from the institutional division that handles investments such as PSERS funds.
Harris, who has worked for Merrill Lynch 25 years, also said this week that he planned to retire from the company effective tomorrow.
The board is scheduled to meet Friday to elect a chairman and conduct other business.
When asked last week about the contract proposal for Mansfield, several board members expressed concern about such an arrangement.
"In all likelihood I would have voted against it" if it reached the full board, said Greene, "not on the basis of the guy's qualifications but what I would have seen as the public perception of it."
James M. White, general counsel and spokesman for state Treasurer Catherine Baker Knoll, said the treasurer also had a "serious question in her mind about the propriety of this," one she had raised at the Jan. 8 Finance Committee meeting.
"The treasurer also had concerns with the possible bad perception of this," White said. "You have someone who's going from a job that pays about $60,000 and a few weeks later to a job that pays $200,000." The sum of $200,000 was the fee proposed by Mansfield.
Sen. M. Joseph Rocks (R., Phila.), a nonvoting member of the PSERS board, said he would not condone such an arrangement so soon after Mansfield resigned
from "the employ of the very fund that awards the contract."
"I think anybody who would condone it would be begging for the public wrath that would be well deserved," he said.
Mansfield, as chief investment officer of the PSERS pension fund, had not only run the $400 million government-mortgage portfolio since 1987 but also, according to Perry's letter to the Ethics Commission, was in charge of overseeing the nearly $15 billion fund and its 35 money managers.
Perry and Harris said Mansfield had lined up other business and had a contract to advise a substantial liquid-assets fund. Perry said he did not know the identity of the fund, and Harris said Mansfield would not disclose it until Feb. 1.
Perry, in his letter to the Ethics Commission, lauded Mansfield's performance managing the $400 million portfolio in-house and said that awarding him a $200,000 contract to continue doing so could save the PSERS $500,000 a year. An outside manager, he said, could charge as much as $700,000.
That view was shared by Bernard J. Freitag, a Bucks County high school teacher who serves as chairman of the PSERS board.
"There was a vast savings if we would go with Clay," he said. "Nobody questioned Clay's expertise, and everyone was impressed with the savings differential."
Board members said it was difficult to attract top-notch investment officers such as Mansfield to the PSERS because of a salary that was relatively low by industry standards.
The PSERS' annual financial report for the last fiscal year, ending June 30, lists portfolio managers and shows that only 15 - including the state treasury - handle more than $400 million, while 25 invest smaller sums.
Had Mansfield landed the $400 million government-mortgage investment, his portfolio would have been larger than those handled for the PSERS by Morgan Stanley, Pittsburgh National Bank, Bankers Trust, Fidelity Bank and CIGNA.
Perry discussed the issue of "being able to compensate Clay" in a Dec. 11 letter to Harris in which he included a copy of a 1986 Ethics Commission ''advice of counsel" that appeared to provide an exception to the one-year rule.
That opinion, however, dealt with an employee of a state advisory council who wanted to do outside work while retaining his post - and remaining a public employee - until a replacement was hired.
In a later case, one addressed in April 1988, the commission barred a former housing authority board member in the town of Shamokin, in Northumberland County, from performing housing inspections for his former governmental body - even though he was qualified and offered to charge $10 per inspection instead of the $35 being paid by the authority.