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State stands pat on pension return assumption

Retirement system declines to follow Baltimore County's lead

By Michael Dresser, The Baltimore Sun

7:21 PM EDT, July 17, 2012

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Declining to follow the footsteps of Baltimore County's pension plan, Maryland's state employee retirement system decided Tuesday to leave unchanged its assumption about how much it will earn on investments.

The 14-member pension board voted 11-1 to keep the rate at 7.75 percent, in the middle of the pack for public retirement plans nationwide.

By keeping the rate where it has been for almost a decade, Maryland will avoid the roughly $12 million gap that a change might have created in next year's state budget. But the board agreed to change several other assumptions — regarding longevity, turnover, salaries and other matters — that could force Gov.Martin O'Malleyto come up with twice that amount for the state's contribution toward pensions for state employees, public school teachers and law enforcement officers.

Among the range of choices presented to the board by its actuaries and investment consultants was one that would have cut the projected rate of return to 7.5 percent immediately. Other choices would have lowered the rate in stages to 7.5 percent or 7.55 percent.

State Treasurer Nancy K. Kopp, who chairs the board, said the decision reflected the trustees' best judgment of how the plan's investments would perform over a 25- to 30-year period. She said the board would revisit the issue next year.

"It honestly was a question of what we think was the most reasonable rate based on our history," she said.

Some conservative critics have contended that Maryland's assumed rate of return has long been too high. Christopher Summers, president of the Maryland Public Policy Institute, said the current assumed rate is "pie-in-the-sky." He said he would feel more comfortable had the board set it around 7 percent.

Last week, Baltimore County's pension plan decided to slash its expectations from 7.875 percent to 7.125 percent – a drastic change for a public retirement system.

The assumed rate of return is the percentage growth in investments that a pension plan projects it will earn over an extended period. It is not intended to be a specific target for any given year because of the volatility of financial markets. It is used to calculate the amount of money the state must kick in each year as the employer's contribution.

Maryland's plan has essentially matched the 7.75 figure over 20 years and exceeded it over 25 years. But the past 10 years have been a tough period for retirement plans because of the 2008 stock market debacle and the prolonged recession that followed. In response, many plans have cut their assumptions for the future. Many others, however, have kept the assumed rate at 8 percent or higher.

The county plan made its move after receiving information about the system's expected earnings from its actuaries and consultants, but the state trustees did not receive the same advice. The state's advisers told the board that either dropping to 7.5 or staying at 7.75 percent would be reasonable.

By staying at 7.75, the trustees put less pressure on the state budget than they would have had they cut the assumed rate to 7.5 percent. However, the demographic changes they adopted will add $24 million to the presumed taxpayers' contribution in the next state budget — rising to $311 million over a five-year period.

The demographic changes, which are documented in a study by a state consultant, are less of a judgment call than the rate-of-return assumption. They reflect such changes as the longer life spans of plan participants, less turnover in covered jobs and higher merit raises.

Kopp said the trustees essentially had a fiduciary duty to adopt the new demographic assumptions, while the rate-of-return decision was a judgment call.

The only dissenter on the rate-of-return vote was David S. Blitzstein, one of O'Malley's appointees. State Comptroller Peter Franchot, the vice chairman, was on vacation.

The vote occurred without much debate, and trustees at the meeting did not explain their decision. Through a pension system spokesman, Blitzstein declined to say why he voted no. Kopp said the decision was a product of extended discussion among trustees over the previous three months.

The treasurer said she had not spoken with the governor about the decision. "We're not being told what to do by the politicians," she said. "When they put on the hat of a trustee, they become trustees and vote that way."

michael.dresser@baltsun.com