Internal PSERS docs show how Pa. pension fund got key financial calculation wrong


In sum, while the pension fund had easily cleared two earlier “shared risk” exams, in 2014 and 2017, the test for 2020 was a nail-biter. PSERS managers were nervous.

In a memo. Morgan Lewis, one of at least three law firms hired by PSERS after the scandal broke, said Aon was told about the fund’s anxiety about whether it would fall short, or as the Philadelphia law firm put it, “Aon was made aware of this sensitivity.”

Lavenberg questioned why Aon had been so alerted, saying that might have telegraphed the leaders’ desired outcome to the consultant. “Wink, wink. Nudge, nudge,” he said.

The board was also anxious enough that it hired ACA, based in New York, for $60,000 to check up on Aon’s work.

The board majority in December 2020 said it had cleared the key hurdle — albeit barely. It voted to state officially that annual investments had grown by 6.38%.

Torsella and two others on the 15-member board abstained from the vote, expressing doubts about the number. But the fund’s management insisted the new result was solid.

In fact, fund leaders in a PowerPoint presentation to the board and in a statement to the media said Aon and ACA had both endorsed the figure.

“ACA confirmed the nine-year market value return as 6.38%, which is higher than the 6.36% risk-share threshold,” the board was told.

But had ACA, in fact, verified the number?

In an April 16 private memo to the board, ACA explained its method was a sampling, not a verification. In the same memo, ACA explained why it had failed to catch the error. It said it sampled the math in only 40 of the 108 months over the review period from 2011 to 2020.

“April 2015 was not one of the months in ACA’s sample selection and therefore ACA did not detect missing cash flows in the AON calculations for that month,” the firm wrote.

As it happens, Torsella has long raised doubts about how the fund was measuring performance for the year 2015 — doing so months before the December vote.

Torsella first asked about the 2015 figures in a letter last August to Grell, noting skeptically that the fund staff was using unaudited figures and boosting performance for the year “five years after the fact.”

Grell’s reply was that the fund had new and better data for the performance of some investments in private companies. Experts say the valuation of such private investments is inherently subjective, unlike the explicit values placed on firms sold on stock markets.

John McLaughlin, an auditor who runs his own firm in Newtown Square after stints with Aramark and BDO, said the fund’s managers seemed in too much of a rush to approve the new numbers. “The board needs to push back [against management] if you need more time to get the right answer,” McLaughlin said in an interview. “Don’t blame the accountant. Blame the management.”

None of the documents obtained by The Inquirer and Spotlight PA explore or even mention the role of PSERS management in the reevaluation of the 2015 figures.

But according to experts who reviewed the documents, ACA in the end corrected PSERS’ data to the numbers its auditors had approved.

Said Lavenberg: “Why you would ever use an estimate, if you had an audited number for that same period, makes no sense whatever.”

Spotlight PA is an independent, non-partisan newsroom powered by The Philadelphia Inquirer in partnership with PennLive/The Patriot-News, TribLIVE/Pittsburgh Tribune-Review, and WITF Public Media.



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