Told that it needs to save money, Pennsylvania's biggest pension fund says it ought to spend more first.

Pressed by Pennsylvania's elected treasurer, Joe Torsella, and the Public Pension Management and Asset Investment Review Commission — whose job is to shave $3 billion off the fees paid to hedge fund, real estate and buyout fund managers, and other financial pros over the next 20 years — the $50 billion-asset Pennsylvania Public School Employees' Retirement System issued a 29-page glossy report that says it can meet its share of that target, if it spends at least $3.15 million extra a year on additional staff.

The money would go to hire nine additional money management professionals, so they can make the investments in-house. PSERS, which already employs 300, says these new staff would enable the system to save about $39 million a year by investing some of the money currently farmed out to private firms, without cutting investment profits. The system also detailed how it expects to negotiate lower fees with some of its money managers.

The recommended steps in the report are "a continuation of PSERS' ongoing efforts to reduce investment fees," says spokeswoman Evelyn Williams. "Over the past three years, we increased the amount of assets managed internally from 30 percent to 38 percent," for example with U.S. stocks, in which "external managers provided no additional returns and were more expensive."

The state still relies on hundreds of outside firms for private investments but is laying the groundwork for moving some of those investments in-house too.

Outside firms charge up to 2 percent of the assets they manage each year, plus "sharing" in the state's profits — with payments also known as "carried interest," which the federal government considers to be capital gains, and thus subject to lower federal tax rates than workers' salaries or wages.

State pension fees have helped the managers of Blackstone and other private investment firms boost their personal fortunes into the billions, so they can afford to buy big houses, NBA teams, and other valuable assets for themselves.

State pension managers say hiring many of these firms has been worth the fees and "profit-sharing" because the state has collected big net profits on many of these investments. Torsella has questioned whether these investments are worth paying high fees, tying up billions for years, and the corruption that has led to criminal convictions for two of his recent predecessors.

After the state paid little or nothing into the pension funds during the dot.com boom and bust of the late 1990s and early 2000s, PSERS and the smaller Pennsylvania State Employees' Retirement System (SERS) have had to impose taxpayer "contribution" surcharges of more than 30 cents for every dollar paid by teachers, police, and other public workers to help close the gap between the assets they own and the pensions they expect to pay.

Torsella, who is a PSERS director, is vice chairman under Chairman State Rep. Mike Tobash (R., Schuylkill) of the pension review commission. The panel plans to hold a second set of public hearings Sept. 20 to review fee-reduction proposals, before issuing a final report.

Torsella has been an advocate of index funds, such as those managed by Vanguard Group, the Malvern investment giant whose founder, John C. "Jack" Bogle, served as chairman of the National Constitution Center in Philadelphia when Torsella was its top executive.

As an adviser, the commission hired Ashby Monk, head of the Stanford Global Projects Center, who has advocated pension reforms that seem in line with PSERS' new program: Monk wants pension systems to hire their own expert staff to make direct investments, not just in indexed funds, but in private companies and other projects.

PSERS and SERS, like state pension systems in Alabama and elsewhere, attempted direct investments in the 1980s. Disappointing investment returns resulted in the funds cutting back on direct investments and instead hiring more private money management firms. That created the current investment regime, which Torsella and Tobash now want to consider scaling back in favor of cheaper solutions.