A new era in the decade-long battle by retirees and whistleblowers to halt massive transfers of wealth out of retirement funds and into Wall Street firms could be at hand, thanks to the case of Katie Muth.

Muth, a Democratic Pennsylvania state senator, is one of 15 trustees who oversees Pennsylvania’s largest public pension fund, the Pennsylvania Public School Employees’ Retirement System. Not long after her February 2021 appointment to the board, Muth began questioning the fund’s investments in areas like private equity, hedge funds, and real estate.

Over the past 30 years, public pension funds have moved $1.4 trillion of retiree savings into such high-risk, high-fee “alternative investments,” enriching finance industry moguls like Stephen Schwarzman of the Blackstone Group and Robert Mercer of Renaissance Technologies while often shortchanging retired public employees and teachers.

But Muth says that when she asked the fund’s investment staff for more information about its high-risk investments, she was rebuffed — so in June 2021, she sued the fund for basic information about its investments.

“[I asked them to] give me a comprehensive list of all alternatives and traditionals, and find if we have private equity in ambulances and hospitals,” Muth told The Lever. “Their response was, ‘We have over 495 portfolios it would be impossible to track what’s in it.’ That’s BS… That’s why I’m suing: I don’t know what the money is spent on. I have an obligation as a fiduciary to make informed decisions.”

The emergence of internal board member complaints like Muth’s could signal a sea change in the fight to stop Wall Street from preying on public pensions, said Ted Siedle, a former attorney for the Securities and Exchange Commission (SEC) and pension whistleblower.

“It’s long been known these board members lack investment expertise, but increasingly they are going the whistleblower route,” said Siedle. “This is a new development. Every public pension I’ve investigated lies about their fees and lies about their performance. But now, the board members are coming forward and are being stonewalled and threatened.”

Other People’s Money

Muth’s whistleblower lawsuit comes as state and federal regulators have begun to look more critically at pension funds’ forays into high-risk, high-fee alternative investments.

In March 2021, PennPSERS disclosed that it had overstated its returns, which prompted an FBI and grand jury investigation that was reported the following month. The probe began with a look into the fund’s real estate purchases, and has since turned into a broader examination of possible bribery or kickbacks, in which the FBI was joined by the SEC.

Last fall, the Ohio State Auditor launched a special audit into the state’s teachers pension fund after a forensic analysis by alternative investment critic Edward Siedle. Then, this past January, news broke that federal prosecutors were investigating unreported investment fees being siphoned from Washington, D.C.’s pension fund.

The following month, the Securities and Exchange Commission proposed a batch of new regulations to protect investors from alternative investments, implicitly acknowledging that pension funds are struggling to effectively manage their money in the space.

Mismanagement at Pennsylvania’s teacher pension fund in particular has recently taken on new weight, thanks to the high-stakes race in the state to replace Republican Sen. Pat Toomey.

In the tight Republican primary race, Mehmet Oz, more popularly known as “Dr. Oz,” has used problems at the fund to attack his opponent, David McCormick, a former official at the hedge fund Bridgewater & Associates. As Oz pointed out, while McCormick worked at Bridgewater, the hedge fund earned more than $500 million in fees for its work for the pension fund, but delivered returns so poor that the pension moved to divest its Bridgewater holdings in 2020.

“We All Deserve To Retire Peacefully”

According to Muth, her concern about how pension funds were managing workers’ retirement money began as soon as she joined the cloistered, deferential pension fund board.

“Once I learned about the pensions, I learned that our dollars are being invested in really horrible things,” said Muth. “ And the returns just aren’t good.”

Indeed, Pennsylvania’s $72.5 billion teacher pension fund would have $4 billion in additional money had it instead invested in low-cost index funds for the 10 years ending June 30, 2021.

The retirement system’s questionable investments in high-risk funds is just one example of the fund’s controversial moves. The fund’s executive director, a former Republican state representative, and the chief investment officer stepped down in November, after the fund’s March 2021 misstatement of its investment performance, which concealed a mandated increase in contributions from local school districts that would have cost taxpayers, employees, and retirees millions in annual costs.

Muth’s advocacy could signal a new direction for the fund, and her efforts have been celebrated by the relatively small group of teachers watching the scandal.

“There is something particularly galling about Wall Street fleecing the retirements of a bunch of teachers,” said Dan Symonds, an eight-year Philadelphia high school teacher. “There’s more to life than money, but we all deserve to retire peacefully. Katie Muth is doing the right thing.”

“Thanks to Katie Muth for being a fucking spine at the table,” he added.

Retired Pittsburgh-area teacher Dave McDonald added: “It seems as if a number of [Muth’s] colleagues on the board refuse to communicate with her and are hiding things. It’s scary.”

Terry Mutchler, a prominent transparency lawyer who Muth has retained to assist with her lawsuit, said, “It’s a very special case. You have a board member being put into position to have to file suit to obtain records to do her job. We believe this is the first time in the nation where a sitting board member on a public fund has had to take such action.”

On March 15, an appellate judge in Pennsylvania ruled that the teacher’s pension fund’s preliminary objections to Muth’s lawsuit were invalid and that the case could proceed.

“There Is No Transparency Or Accountability”

Muth is taking on real risks by waging this fight. Pension fund trustees who ask too many questions can run afoul of powerful interests — just ask J.J. Jelincic and Margaret Brown, former board members who tangled with staff leadership at the California Public Employees Retirement System, the largest public pension fund in the U.S.

Jelincic, a CalPERS investment officer, was elected to the fund’s board in 2009 and criticized the system for its dealings with private equity firms. Jelincic, who had been accused of sexual harassment in 2011, lost a 2019 bid for an at-large seat on the fund’s board by a 2-to-1 margin after the California Service Employees International Union spent heavily to defeat him.

Brown, too, had been a vocal critic of the fund’s use of high-risk, high-fee investments and the fund’s relationship with private equity — until the service employees union supported a candidate who defeated her in the 2021 contest for her at-large seat.

Jelincic and Brown said that they witnessed the same type of activity that Muth is challenging in Pennsylvania. In 2020, the chief investment officer for CalPERS resigned in the wake of conflict of interest allegations that centered around private equity firm Blackstone; the following year, the fund announced plans to boost its private equity share to 8 percent of total investments.

But according to Jelincic and Brown, the $469 billion pension fund was resistant to criticism of its actions, despite that it has been in the center of an enormous scandal that resulted in its former CEO being sent to prison in 2016 for accepting bribes from agents of alternative investment managers.

“Trustees are basically spoon-fed by staff,” said Jelincic. “My experience, quite frankly, is that when a trustee questions what is going on there’s a coalition that says, ‘No, you can’t question staff. We’re here to support them. If you ask questions you can bring ill repute on the board.’”

Brown agreed. “When you ask questions about an investment in health care or whatever the subject matter is, the rest of the board members try to shut you down,” she said. “I kept reminding them: You have a fiduciary duty; a duty of oversight. You are not supposed to just take what the staff tells us.”

Brown is especially troubled about the lack of transparency around the fees being charged by private equity forms and the values of the resulting assets. “My biggest concern is, how do we know what the book value of the asset actually is because we’re relying on the managers to tell us what it is and there is no verification,” she said,

Since leaving the board, Brown and Jelincic have launched CalPERS Watchdogs, an online monitoring group.

Muth, meanwhile, has pledged to continue her fight in Pennsylvania — since she says it’s time for the pension fund to change its behavior.

“You could be investing in things that have a positive impact on society,” she said, “but you actively choose not to.”

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