Pennsylvania's elected auditor general, Eugene DePasquale, said Thursday that the underfunded $47 billion Pennsylvania Public School Employees' Retirement System spends too much on hiring investment-management firms — $416 million last year, down from $441 million the year before. He called for "drastic" fee cuts.

Yet DePasquale's 151-page audit stops far short of criticizing the way PSERS invests. Indeed, auditors called the funds' mix of hundreds of investment managers "prudent" and commended its mix of hedge, buyout, real estate, stock and bond funds, and indexed investments.

The plan's deficit, plus a similar long-term imbalance at the smaller State Employees' Retirement System, have helped make Pennsylvania's credit rating one of the lowest among U.S. states (only New Jersey and Illinois are worse), adding millions to taxpayers' borrowing costs. But the audit recommended no sweeping changes that would make much a difference in PSERS's solvency.

DePasquale didn't endorse Gov. Wolf's past calls for state pension funds to fire private managers and buy low-fee Vanguard-style index funds. Nor did he support Republican legislators' attempts to cap teacher pensions and shift to a private-sector 401(k)-type investment plan.

"I don't think it is wise policy to put all the fees in passive [index] funds," DePasquale told reporters after releasing the audit. But he said the state should still try to push fees lower.

Responding to the audit, PSERS chairman Glen Grell, who more than doubled his state paycheck when he resigned his General Assembly seat to take the job, wrote in a letter appended to the report that "PSERS management is very pleased" it wasn't accused of breaking the law, or of any "specific finding of any fraud, waste or abuse of public funds."

But Grell lashed out at DePasquale's claim, which he said was added only after PSERS had seen the draft, that its expense disclosure is "woefully unfair to the taxpayers," That characterization by DePasquale, a Democrat,  is "baseless" and "politically motivated," putting "a stain on an otherwise professional performance audit," wrote Grell, a Republican.

DePasquale's audit didn't address the obvious question of whether, by paying higher fees, Pennsylvania earns higher returns.

Indeed, as I reported in March, PSERS in calendar-year 2016 posted returns of  more than 10 percent — beating its 7.25 percent annual target, as it has over the last three-, five- and 25-year periods.

By contrast, Montgomery County four years ago fired its private managers and replaced them with index managers Vanguard Group of Malvern and SEI Corp. of Oaks for its pension money. But Montco failed in 2016 to meet its own 7.5 percent target and has trailed PSERS since it switched.

It matters because PSERS, which pays monthly pensions to 225,000 retirees and raises money for future payments to 257,000 active school workers, has fallen more than $40 billion behind what it will need to pay retirees.

State and local school taxpayers are now paying an extra 32 cents into the pension fund, for every $1 of teacher salary, to help shore up the pension fund. That's up from 8 cents in the late 2000s. (School workers pay an additional 5 to 10 cents of every paycheck dollar to PSERS.)

Teachers' union leaders say the taxpayers' burden has plateaued, assuming investment markets don't collapse again. A group of Democratic mayors worry the bill will keep going up and want pension caps.

Auditors blamed the current shortfall on the stock market collapse of the late 2000s, plus the bipartisan 2000 law that boosted pensions while cutting state funding. Other audit findings:

  • PSERS offers its lay trustees — some appointed by the governor and General Assembly, the rest elected from teachers, school boards, and retirees — finance and ethics training, but doesn't require them to take the courses or show competence.
  • PSERS lets board members, many of them Harrisburg insiders, each decide whether they face conflicts of interest in giving and taking away investment contracts worth millions.
  • While PSERS reports at least as much investment detail as most state funds, its disclosures are less complete than the expense statements required by the pension system of South Carolina and other progressive managers. PSERS should clearly report "all fund level investment expenses, gross of fee fund performance and net of fee fund performance."
  • The audit also urged the state legislature to tighten forfeiture requirements to stop paying pensions for school staffers who rape and sexually molest students. Auditors found that PSERS could have collected an extra $1,700 by demanding two offenders (from a sample of 10) give back money received between their conviction and the time PSERS stopped their checks.