Monday, October 02, 2006

State Retirement Systems Audits Identify Fiduciary Conflicts

On September 26, 2006, the Pennsylvania Auditor General's Office released performance audit reports regarding the two largest Pennsylvania retirement systems -- the State Employees’ Retirement System (SERS), and the Public School Employees’ Retirement System (PSERS).

The reports are announced in a press release entitled "Auditor General Jack Wagner Urges General Assembly, Governor To Shore Up Two Largest Public Pension Plans", found online

In general, Wagner said both funds were managed effectively and professionally. Nevertheless, he identified several areas of administrative weakness that need to be tightened. In particular the audit reports indicate that the respective boards that oversee Pennsylvania's two multibillion-dollar government employees' pension funds should improve how they handle conflicts of interest.

"To ensure that politics plays no role in investment decisions, the boards should specify when elected officials on the boards must abstain from voting on giving business to campaign contributors," Wagner said.

The auditor general also proposes forcing investment advisers to disclose campaign contributions whenever they make board presentations.

"We found instances when there was not sufficient explanation given by board members" about potential conflicts, he said.
While highlighting certain points among the recommendations, Wagner said, “I strongly urge both boards to implement all of our recommendations in order to strengthen the investment operations of both funds”:

  • Improvements to how individual board members monitor and report conflicts of interest to improve transparency in governance.
  • Formalization of professional training for board members.
  • Improvements to the structure of internal audit operations to improve independence.
  • Changes to state law and fund policies to ensure that all board members are subject to a modern legal standard for judging their investment decisions.
With the adoption of the Pennsylvania Uniform Trust Act described in a prior post here, greater emphasis will be placed on the fiduciary obligations and accountability of private trustees. Many of the same principles apply to the government-operated retirement funds, although the PA UTA is not applicable to these state-chartered plans.

An Associated Press newspaper article, by Mark Scolforo, published on September 27, 2006, in the Centre County Times, and found online
here, focused on the audit reports' findings regarding the fiduciary aspects of the state retirement plans.

UPDATE 12/06/06:

The Patriot-News (Harrisburg, PA) published an editorial entitled "
PSERS takes a first step to cut travel costs, though bare-bones approach would be better", dated December 5, 2006, focusing on the "fiduciary duties" of the Board members of the Pennsylvania State Employees' Retirement System, while considering certain expenditures made for their travel and education. The Editorial stated, in part:

Board members are responsible for overseeing $60 billion in assets to support the retirement income and health benefits of 455,000 current and former teachers and other school employees. Employee contributions, income from investments and tax dollars are the fund's sources of revenue.

We recognize that to carry out their fiduciary responsibilities properly, pension board members should be knowledgeable about finance and various forms of investment. Since many of PSERS board members do not have a background in these fields, training seminars are a valuable means of learning and keeping up-to-date on pension issues. And we acknowledge that these costs are but a small smart part of the fund's $40 million annual operating budget.

But at a time when school districts and the state are being required to make substantial increases in payments to PSERS to maintain fiduciary standards, those in charge should be leading by example and eliminating unnecessary expenditures wherever possible. Reducing out-of-state travel to the bare minimum would be a more appropriate response by the board.

The Editorial is found here.