Mehmet Oz speaks at a 3/15/22 press conference in Harrisburg (Capital-Star photo by Stephen Caruso).
Pennsylvania’s $72 billion teacher pension fund and its investment strategies are at the center of a new war of words between GOP Senate hopefuls Mehmet Oz and David McCormick.
Stories about the Pennsylvania Public School Employees Retirement System, known as PSERS, and its penchant for offbeat investments — from Iraqi oil fields to prison phone calls — and globe-trotting travel have raised teachers’ and good government advocates’ ire for the past few years.
Meanwhile, a financial misstep last year means almost 100,000 teachers are paying extra to the fund to cover a poor performance in 2020, while other critics have claimed that the fund’s investment strategy has forced property tax owners to pay at least $460 million more in property taxes to local school districts.
Now, all of this has become political fodder in the heated Republican primary for Pennsylvania’s open Senate seat as Oz, a heart surgeon-turned-television host, has argued that McCormick, a billionaire hedge fund manager, helped cause these problems.
“Dishonest David got rich, we got stuck with the bill,” Oz, who lived in New Jersey until at least 2020, said at a news conference outside the pension fund’s Harrisburg office last week.
The argument goes something like this: Starting in 2012, PSERS, which pays for 500,000 former teachers, principals, and other school employees retirements, decided to make a new investment in Bridgewater Associates, a Connecticut-based financial services firm that McCormick worked at from 2009 until 2022 — first as president, then as CEO.
Under the deal, PSERS put a little more than one percent of the fund’s assets into a special Bridgewater fund meant to perform well in a down market, known as “risk parity.”
At first, it seemed to be performing fine. The system even started a separate, similar fund with Bridgewater in 2015. By 2020, about $1.2 billion in pensioners dollars were Bridgewater-run risk parity funds.
But then, during the first few months of the COVID-19 pandemic, as markets responded to the health crisis, the funds did not live up to expectations. In fact, according to an August 2020 PSERS board presentation, Bridgewater’s two risk parity funds were now a net loss for PSERS.
So, in August 2020, the fund’s board voted unanimously to reduce the portfolio, pulling $2 billion in total from Bridgewater and fellow hedge fund giant BlackRock, whose risk parity investments also underwhelmed.
Oz further connects this bad investment with another snafu later that year, when the pension’s board affirmed a yearly rate of return on its investments that was actually off by a few decimal points.
The difference only mattered because the fund’s returns were just barely above where they needed to be to prevent teachers from paying more money to cover the poor investments.
A few months later, in April 2021, the board voted to rescind its certification, forcing about 94,000 teachers and other school professionals to pay about $180 more in pension payments each year, totaling about $17 million.
All told, Oz argued that Bridgewater and McCormick, a former Bush administration official who joined Bridgewater soon after leaving D.C, are to blame for these twin predicaments.
“People on the Wall Street-Washington revolving door that leads to the swamp of Washington, they continue to charge us and make their money no matter what happens,” Oz said Tuesday, surrounded by retired school employees.
All told, PSERS still has $2.4 billion in two funds managed by Bridgewater, according to PSERS documents.
For McCormick’s part, campaign spokesperson Jess Szymanski downplayed Bridgewater’s role in the fund’s woes, arguing that the system hasn’t lost a penny due to Bridgewater’s management.
“Bridgewater was one of several managers selected to execute on this approach,” Szymanski said in a statement. “This conservative approach reflected the risk PSERS wanted to take for its retirees and delivered results in line with expectations.”
Fund spokesperson Steve Esack added in an email last week that Bridgewater’s management from 2004 until Feb. 2022 has earned PSERS $4.1 billion, after paying Bridgewater $678 million in fees.
But to the board’s dissidents, it’s not about how much PSERS did make, but how much extra may have been left on the table.
In a bipartisan June 2021 letter to their fellow PSERS board members, six trustees claimed the system’s over-reliance on Wall Street firms cost the pension fund at least $5 billion in growth, compared to how the market and other pensions funds had performed during the 2010s.
The letter, which did not name any specific firms, also claimed that Wall Street firms had charged the system $4.3 billion in just the past four years.
But this week, state treasurer Stacy Garrity, a Republican and a signer of the June 2021 letter, started naming names.
In a statement to the Capital-Star, Garrity — who endorsed Montgomery County businessman Jeff Bartos in the U.S. Senate race last year — said that the fund’s “zealot-like devotion to Bridgewater’s ‘risk parity’ investment philosophy” significantly contributed to the pension’s overall underperformance.
“Bridgewater’s investment model favored expensive, non-traditional investments, and it was sold as a hedge against broad market downturns,” Garrity added, but “it didn’t work. Instead, PSERS over-relied on alternative investments for a decade, making it an outlier among peer funds in both performance and allocation.”
For school districts, that money left on the table amid rising markets costs $460 million paid to the pension system, rather than kept in classrooms or taxpayers’ pockets.
On a whole, Oz argued that McCormick should be held accountable for the role Bridgewater’s investments played in this chain of events.
“When tax burdens, especially real estate tax burdens, are through the roof [and] you don’t know where you’re paying the money to? It’s getting paid to the rich people on Wall Street,” Oz said.
As a senator, Oz added he’d support closing a loophole that allows hedge funds, such as Bridgewater, and private equity firms to skip out on millions in federal income taxes each year.
Known as the carried interest loophole, it allows these firms to pay a lower tax rate on income they get from the companies they own or invest in.
The McCormick campaign did not address specific questions about the loophole.
For outside observers, watching PSERS struggles get dragged into a national debate was gratifying, although their takeaways may differ.
Arthur Steinberg, president of the Pennsylvania chapter of the American Federation of Teachers, said in a statement that it’s “despicable that a vulture capitalist billionaire is using our members’ retirement money to flood broadcast and cable news with dishonest ads and try to buy an election.”
But Steinberg, who represents some 36,000 educators, paraprofessionals, and public employees across 64 local unions, added that “the answer is transparency and reform at PSERS, and certainly not to elect a celebrity quack to the US Senate.”
The primary election is on May 17. The seat is open because incumbent Sen. Pat Toomey, a Republican, is not running for reelection.
Other Republicans in the race are Bartos, attorney George Bochetto, former ambassador Carla Sands, right-wing influencer Kathy Barnette, and attorney Sean Gale.
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