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Federal prosecutors have been investigating D.C.’s pension board, responsible for $10 billion retirement fund

Channing D. Phillips, acting U.S. attorney for the District of Columbia at the time, issued a subpoena in August seeking records of the D.C. Retirement Board. (Jabin Botsford/The Washington Post)
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Federal prosecutors have been investigating the financial transactions of the D.C. Retirement Board, which manages the city’s $10 billion pension fund for retired teachers, police officers and firefighters.

The fully funded municipal employee pension plan has long been the jewel in D.C.’s financial crown, the envy of other cities and a signal of the trustworthiness of the District’s finances to the credit rating agencies that issue municipal bond ratings.

From 2013: D.C.’s pensions are looking pretty, ‘perhaps the most enviable municipal finances in the nation’

Channing D. Phillips, who was at the time the acting U.S. attorney for the District of Columbia, issued a subpoena in August, The Washington Post has confirmed. The subpoena asked the retirement board, which is responsible for maintaining the multibillion-dollar trust fund used to disburse pensions to more than 25,000 retirees who have worked for the District’s public schools and its police and fire departments, to turn over records sought in a criminal investigation.

The request seeks documentation of a variety of financial transactions, including, specifically, records of payments to investment managers and investment consultants.

Spokespeople for the U.S. attorney’s office and the FBI declined to discuss the subpoena, saying their practice was to not confirm the existence of any ongoing investigation.

Although the focus of the federal inquiry is not clear and it is not known whether the probe remains active, public records show that the retirement board has a long-standing practice of reporting only a portion of the investment management fees that it spends, and that the board did not mention the existence of a large fund for its outgoing executive director to the D.C. Council when it successfully sought a pay raise for the director position and the board’s members last year.

“If it’s correct that they’re understating their expenditure, what is going on with the accounting? I don’t think the U.S. attorney is looking at the retirement board for benign reasons,” the council’s chairman, Phil Mendelson (D), said in an interview. “I think the U.S. attorney is concerned about what is behind what appear to be misstatements in the accounting.”

The retirement board is made up of 12 trustees — six elected by the active and retired teachers, police and firefighters of the District, three appointed by the D.C. Council, and three appointed by the mayor. Thanks to a deal reached in the 1990s, the federal government provided much of the money in D.C.’s pension fund. The District becomes responsible for a larger share of the cost of the program over time, but still will not become fully responsible for the pension fund for more than a decade. D.C.’s fully funded pension plan is a key reason the city enjoys favorable ratings for its municipal bonds and can borrow money at an advantageous rate.

From 2018: D.C. upgraded to highest bond rating, citing pension fund as evidence

The existence of the investigation was disclosed in a whistleblower lawsuit filed in December against the D.C. Retirement Board by Erie Sampson, the agency’s general counsel since 2008.

Sampson alleges that she was placed on administrative leave in October in retaliation for alerting officials at the retirement board and in D.C. government, including the city’s chief financial officer and members of the D.C. Council, about problems in the retirement board’s accounting and governance — as well as for cooperating with the federal investigation.

A spokesperson for the retirement board declined to comment, citing the ongoing litigation.

Sampson claims in the lawsuit that as the retirement board’s general counsel, she received three subpoenas, two in 2020 and a third — the one confirmed by The Post that asks for documentation of investment management fees and other financial transactions — in August. She said she supplied the documents requested in the first two subpoenas but was placed on administrative leave before she could comply with the third.

She alleges in the lawsuit that the board’s executive director, Gianpiero Balestrieri, suspended her to prevent her from complying with the subpoena. It is unclear whether other retirement board employees have since answered the subpoena. An attorney at the law firm Jones Day who is defending the retirement board in the suit declined to discuss ongoing litigation.

Part of Sampson’s lawsuit focuses on what she alleges is a gulf between the amount the retirement board is paying the many professional investment managers who each invest tens or hundreds of millions of dollars of the pension fund’s money, and the amount the board reports spending on those fees.

Experts on public pensions say best practices recommend reporting all fees so that credit rating agencies can evaluate whether the funds are making unwise investments — as can the tens of thousands of retirees who depend on the fund for their retirement income. An opaque listing of fees could hide an unwise investment or even an improper one, such as a conflict of interest or a bribe.

“Do you have to disclose these fees, and should you be having these super-high fees? I think it’s a huge problem when they’re doing that,” said T. Leigh Anenson, a University of Maryland professor who has published papers on states’ varying rules for public pension funds and advocated stricter state laws mandating transparency measures such as listing all fees.

The D.C. Retirement Board’s annual report documents the amount spent on investment management fees, but it generally notes that those fees tallied in the report are mostly paid to “traditional investment managers,” and that some nontraditional managers’ fees — such as to private equity firms — are not reported.

The fiscal 2020 annual report went into slightly more detail, explaining that fees paid to private equity investment managers were simply subtracted from the net performance of the investment rather than reported separately as fees, like those paid to the managers who invested in stocks, bonds and real estate.

Private equity made up 6.6 percent of the fund’s holdings in fiscal 2020, amounting to $595 million.

But in her lawsuit, Sampson claims that proportionately, private equity investments cost the board much more in management fees than other types of investments.

Sampson alleges in her suit that the board spent $93 million on investment management fees in 2018, despite reporting just $15 million in fees in the fiscal year in its annual report.

The Post has not been able to independently verify those fees, but a comparison with other public pension funds shows that the District reports paying far less in fees.

The D.C. Retirement Board’s comprehensive annual financial report for fiscal 2019, when the plan had $8.6 billion, reports $18.5 million in fees and commissions. Similarly sized funds spent much more: Rhode Island’s $8.5 billion fund reported $84 million in fees that year, and Wyoming’s $9 billion fund reported $50 million in fees.

In response to questions from the D.C. Council during budget hearings last year, the retirement board said that it spent $17.5 million on investment management fees in 2020, without mentioning any additional fees for private equity investments. In response, the council — which has the power to authorize the board’s annual spending, though the money comes out of the fund rather than taxpayer dollars — budgeted $20 million to cover those fees for the following year.

“There are two parts to my concern over the investment fees,” Mendelson said. “One is, is it reasonable? And the other is, why are the books wrong?”

In response to a question from the council last year about “any ongoing investigations” of the agency, the retirement board did not mention the U.S. attorney’s office inquiry, naming only a review of the board’s procurement processes by the city’s inspector general’s office.

Sampson’s lawsuit also alleges that trustees of the retirement board misled the D.C. Council last year when the trustees successfully sought emergency legislation to raise the salary of the board’s executive director, already one of the highest-paid employees of the D.C. government.

Sheila Morgan-Johnson was retiring as executive director, and the board was seeking a new candidate. In response to written questions from Mendelson, the retirement board said that Morgan-Johnson received a salary of $270,496 in fiscal 2020 and a bonus of $23,521.

But minutes of the board’s meetings show that on top of that salary, Morgan-Johnson also received $237,000 through a deferred-compensation plan, using a financial vehicle called a 457(f) to put aside money that she received after three years of work. The board did not include that amount, equal to almost an entire year’s salary, in its answers to Mendelson about the executive director’s pay.

Mendelson wrote in a memo to fellow council members that a qualified professional with the expertise to run D.C.’s large pension fund was hard to find, and recommended emergency legislation to raise the salary to about $300,000. One-quarter of peer government pension funds pay more than $300,000 per year, he wrote.

Though some council members expressed qualms and Mayor Muriel E. Bowser (D) urged them to vote no, the council ultimately voted unanimously in favor of raising the salary cap for the next executive director. Bowser let the law go into effect without her signature, writing in a letter to Mendelson that the salary was high enough without raising it.

Mendelson said that even if he had been fully informed at the time about Morgan-Johnson’s compensation, he would have voted for the pay raise to attract a competent successor.

The trustees also successfully lobbied the council to raise their own salaries. In the District’s latest budget, the council increased the trustees’ annual pay from $10,000 each to $15,000 for each member and $25,000 for the board’s chair, Joseph Clark.

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