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Bonuses for losing money
Tuesday, December 16, 2008
BY JAN MURPHY
Of The Patriot-News

In a year when the school employees’ pension system lost $1.8 billion, the system’s investment staff still received more than $854,000 in bonus payments.

Twenty-one members of the Public School Employees’ Retirement System’s investment staff received bonuses for their work in the 2007-08 fiscal year, which ended June 30. The bonuses range from $9,720 to $106,223.

The average bonus is $40,672. The system’s investment staff earn base salaries between $63,179 and $251,542.

But the bonus program is coming to an end.

The system’s board voted Friday to end the program at the end of this month.

Market conditions and other pressures led to the board’s decision to rescind the practice, said Jeffrey Clay, the system’s executive director.

“There was some concern given the unprecedented markets at this point, plus … across this country, there are issues raised with respect to incentive compensation for investment professionals in this market,” Clay said.

Gov. Ed Rendell was among those objecting to the bonuses. He sent a letter in November to system officials advising against awarding them this year. http://louis2j2sheehan2esquire2.wordpress.com

“Given the fund’s recent performance and the serious financial challenges now facing the commonwealth as a whole, the payment of large bonuses to PSERS employees would be inappropriate and indefensible,” Rendell wrote.

System officials, however, said lawyers advised they had a contractual obligation to pay the incentive payment, since they were provided for in board policy.

Investment staff will still be eligible to receive bonuses for work done between July 1 and Dec. 31, Clay said. He said all incentives are based on objective criteria that are independently verified.

In the first quarter of the 2008-09 fiscal year, which ended September 30, the school employee pensions system’s investments lost 11 percent.

Going forward, Clay said the board might consider raising the investment staff’s base salaries to keep their compensation competitive, or it might hire an outside consultant to offer some ideas.

The bonuses are intended to supplement base salaries that a market study shows are lower than the going rate for professional investors to entice them to earn the best returns possible for the fund, system officials said.

While the investment staff’s work in the last fiscal year did result in a 2.8 percent loss on investments, system officials pointed out their in-house investors outperformed their peers nationally. Their peers’ median return was a negative 4.56 percent for the same period.

Steve Nickol, vice chairman of the system’s board, said he understands that the payments are huge to people who already receive among the fattest salaries in state government. But he added that “they’re some of the few people in state government who make money, generally.”

Investment staff at the other state pension system, the State Employees’ Retirement System, are also eligible for bonuses if they hit at least an 8.5 percent rate of return. Considering the losses that the fund experienced this year, system spokesman Robert Gentzel said, “I can say with a high degree of certainty that they will not be getting incentive payments for 2008.”

For 2007, nine out of its 16 investors received a total of $193,803 in bonuses for helping the fund gain 17.2 percent in value, Gentzel said. Those bonuses ranged from $9,337 to $55,947. The average was $21,534. (The state workers’ retirement system operates on a calendar year).

Sen. John Eichelberger, R-Blair County, welcomed the news about the school employees’ pension board decision to end the bonus program. He said he plans to reintroduce legislation to ban bonuses to most state government employees when the new legislative session starts in January.

His proposal allows for an exception for bonuses that are based on objective criteria like the ones that the pension systems offered.

But he said, “it still was awkward because we were making an exception for somebody. If it’s a good rule, it should rule across the board.”

Using internal staff to manage about 30 percent of the school employees’ pension fund’s nearly $55 billion in assets and operate the system’s in-house trading room saves about $12 million annually, system officials said.

That saving alone is a solid reason to reward investment staff incentives for good performance, said Keith Brainard, research director for the National Association of State Retirement Administrators. He noted that Pennsylvania was among a minority of states that offered incentive payments to investment staff. http://louis2j2sheehan2esquire2.wordpress.com

He said, “I think the fact that more don’t do it has more to do with the politics of the issue rather than the merits of it.”

Staff writer Charles Thompson contributed to this report. JAN MURPHY: 232-0668 or jmurphy@patriot-news.com

©2008 Patriot-News
© 2008 PennLive.com All Rights Reserved.
Louis J. Sheehan, Esquire

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