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Could a third treasurer be the charm? [Commentary]

The state pension system is Maryland's financial Achilles heel and has been for decades.

All bond rating services have noted that rising pension debt endangers the state's AAA bond rating, and the Pew Center on the States rates Maryland as among the most under-funded states.

The pension board is a semi-professional board made up of 15 people, a third of whom have investment expertise. It is presided over by the state treasurer, who is elected by the General Assembly. Traditionally, state treasurers were boring but capable bankers. Beginning in 1973, however, the legislature began electing politicians to the post, paving the way for Richard N. Dixon, a former stock broker and state delegate to take on the job in 1996.

Mr. Dixon was an exponent of equity investments, frequently risky ones. The same can be said of his choice in managers. One such group, an entity called Progress Investment, lost 43 percent of the assets confided to its care. Two other managers, Nathan Chapman and Alan Bond, went to jail after losing millions of dollars for Maryland pensioners.

By 2002, according to Gov. Parris Glendening's budget, the annual investment return for the preceding five years with Mr. Dixon as treasurer was 3.21 percent compared with a national average for peer funds of 5.13 percent. The Maryland fund ranked dead last in the nation, and the 1.92 percent shortfall translated to $2.5 billion in lost earnings over the five years.

Mr. Dixon was replaced in 2002 by the present treasurer, Nancy Kopp, a well-regarded Montgomery County delegate with limited investment experience. The probity of her regime has not been assailed. Its vices have been bureaucratization and a following of the crowd. Its new and dubious, but fashionable, initiatives have included a law removing the previous 1.2 percent ceiling on compensation of managers; a program to encourage minority investment bankers; a neo-conservative sponsored program to remove multinational oil companies doing business with Iran from the state's portfolio; and a rush into risky and opaque private equity, currency management and hedge fund investments.

As of June 30, 2012, Ms. Kopp's 10th anniversary as treasurer, average annual fund yield was 5.9 percent compared with 6.4 percent for the average peer fund, translating to a 10-year total of $2 billion in lost yield. The fund ranks at the top of the lowest quartile of funds in yields — an improvement over Mr. Dixon's record, but not much of one.

For the year ending June 30, 2013, the fund's yield was 10.57 percent as against an average for peer funds of 12.43 percent, the yield shortfall for the year amounting to $762 million. Management fees have also increased from $52 million in 2002 to $273 million in 2013.

The cause of this is not obscure. The fund rushed into hedge fund investments producing a 3.4 percent return in 2013 and into other alternative investments. Hedge funds performed well in a period in which they freely used inside information; the Maryland fund embraced them just as a series of scandals brought that advantage to an end.

The fund now employs no fewer than 352 investment funds as managers or sub-managers — a number beyond any possibility of supervision by its board. This ever-growing horde appears from its results to be a confederacy of dunces. The board now proposes to grow it further by extending the affirmative action program to private equity investments.

A document headed "Bang for the Buck" distributed to the board by former delegate John Douglass, one of its members, demonstrates that had the fund been invested in the Standard and Poor's 500 index for the last 10 years, it would contain $5 billion more than it does now.

Ms. Kopp has had an honorable career, but her resignation would be becoming. Her replacement should be a senior or retired banker, resistant to the blandishments of Wall Street salesmen, who has lived through several business cycles. Such a person would be better positioned than Ms. Kopp to make necessary changes, including an exit from most "alternatives," a drastic reduction in the number of managers and the elimination of distracting side shows.¿

George W. Liebmann, a Baltimore lawyer, is the volunteer executive director of the Calvert Institute for Policy Research. He can be reached at

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Copyright © 2015, The Baltimore Sun
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