PhillyDeals: 'A real mistake' on Pa. workers' retirement plan

A wrong decision involving multimillion-dollar investments on Wall Street can cost a lot.
A wrong decision involving multimillion-dollar investments on Wall Street can cost a lot. (JIN LEE / Bloomberg News)
Posted: September 16, 2013

 If you want to watch people gamble their own money, head to the casino.

To watch people bet your money, go see a monthly board meeting of the $25 billion Pennsylvania State Employees' Retirement System (SERS), where the trustees - elected officials and government appointees - are always learning on the job.

SERS has a problem: Funded partly by the state (which is to say, taxpayers), partly by state worker payroll deductions (also from taxpayers), and partly by investments, it now has less than 60 cents set aside for every dollar it expects it will have to pay more than 100,000 retired public servants and the smaller number of active workers when they retire.

The shortfall means taxpayers have to give SERS more money each year. And that means tax increases, or budget cuts for schools and roads. That's why Gov. Corbett has called SERS "a tapeworm." And why some SERS trustees have been sitting up and asking questions.

It wasn't always like this. The system showed a surplus as recently as 2007. Then the stock market fell. But it recovered. SERS hasn't.

Why not? SERS doesn't own just stocks, or bonds. Since Philadelphia lawyer Nicholas Maiale, a former state representative, became chairman in 1991, SERS has invested big in high-fee real estate, venture, buyout, and hedge funds. Unfortunately, these assets have mostly returned less than stocks in recent years.

If you're a state trooper, social worker, or college football coach, and you don't do your job the way the boss expects, you can expect a stiff talking-to. Is losing money different?

When he was hired two years ago, SERS' chief investment officer, Anthony Clark, who makes more money than Corbett but less than a lot of the private investment managers he contracts, urged the board to pump up to $1 billion into high-fee hedge funds that both buy and short stocks and other investments. Trustees gave $250 million to Tiger Asset Management, based in New York, to buy a special collection of related hedge funds just for SERS, and another $250 million to a more experienced hedge-fund picker, EnTrust Capital, also of New York.

Clark's goal was for the hedge funds to earn a stock-market-type return of 8 to 12 percent a year, "but with less volatility," spokeswoman Pamela Hile told me.

EnTrust has so far turned the state's $250 million into $280 million. The stock market did better. But at least EnTrust made money.

Tiger has lost money, turning $250 million into $249 million, thanks mostly to a big bet on gold.

"It's a real mistake, and it cost the fund real money," James Voytko, SERS' hedge-fund adviser at the Oregon-based consulting firm R.V. Kuhns & Associates, acknowledged.

This was too much for some trustees. "How did we ever agree to lock up a gold position for three years?" asked Oliver C. Mitchell, former general counsel at Carpenter Technologies in Reading. "How will Tiger ever recover those losses?"

"To say this fund has been a major disappointment is greatly understating," said John Lisko, who attended the meeting for trustee Rob McCord, the state's elected treasurer and a potential Corbett challenger for governor next year.

Lisko estimated Tiger managers have so far won more than $10 million in fees on the state's investment, while SERS has "yet to make a single penny."

Clark, raising his hands to his shoulders, asked, "What do you propose?"

"Finish with this investment. Admit your experiment didn't work and be done with it. We're not going to get back this money," said Lisko.

Maiale wouldn't go that far. His advice: Stay with Tiger, and pay Voytko's firm extra to watch it more closely, from now on.

Trustees grumbled, then agreed. Then they hired two more hedge-fund managers. And broke for lunch.

A second column on this topic will appear in the Monday business section.


Contact Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, or @PhillyJoeD.

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