Auditor General Eugene DePasquale Thursday said his performance audit of the State Employees’ Retirement System (SERS) 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 January 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. “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 Public Employee Pension Forfeiture 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.
State Treasurer Joe Torsella welcomed the Auditor General’s performance audit, saying, “I thank Auditor General DePasquale for conducting a complete performance audit of now both of Pennsylvania’s largest pension boards. His report reflects my fundamental concern: SERS has historically paid a substantial amount in high Wall Street fees on investments that are underperforming.
“Like the Auditor General, I commend recent steps SERS has taken to reduce fees while urging the system to accelerate and intensify those efforts.
“Simply put, we are paying too much while underperforming,” said Torsella. “I echo the Auditor General’s call for SERS to become a national leader in full fee transparency, and to build on recent improvements to lower Wall Street fees. If we simply lower SERS’ fees to the national average paid by comparable funds, we will keep more money in the hands of Pennsylvania retirees and taxpayers.”
Click Here for a copy of the audit report. Click Here for the complete announcement by the Auditor General.