Guts, Glory and Granny's Pension


Among America's conservative public-sector retirement systems, Baltimore's are sparkling performers. Totaling $2 billion, the three funds have averaged an annual return of close to 12.5 percent in the past five years.

The beneficiaries of this success are about 9,380 retired municipal employees, fire and police officers and elected officials. Their benefits have increased more in recent years than the salaries of active city employees, according to Ernest J. Glinka, the systems' administrator.

Yet the question remains: How can this past record of investment success be maintained or exceeded in today's environment of slow recovery and low interest rates?

Every American saving for retirement faces the same problem. They must find a happy medium between risk and return. Because of inflation and the growing life-expectancy, they must have hefty growth built into their retirement nest egg.

This dilemma was on the minds of the pension systems' 13 trustees in October 1992, when Nathaniel A. Chapman Jr. presented his plan.

A graduate of Poly and the University of Maryland, the Baltimore City native had a promising career with Alex Brown before forming his own company in 1986. His decision to go solo coincided with the passage of a city law that required 20 percent of all municipal contracts to be channeled to blacks and other minorities and 3 percent to be given to women. Other cities were enacting similar measures.

"All over the country there are opportunities now for minority firms to penetrate the public-pension market and become a part of accessing public capital," Mr. Chapman told the city trustees.

If the pension systems agreed to invest $10 million in his firm, he said, "it would make the Chapman Co., based in Baltimore, the largest financial service company, black controlled and minority controlled, in the United States. There would not be a minority-controlled bank, or insurance company, or investment bank that would be as large as we would be on a capital basis."

Mr. Chapman pointed out that minority-owned businesses were a dynamic growth sector in the United States. And overseas markets offered untapped opportunities.

"You've got money in Japan, you've got money in Europe, but where's your Caribbean money?" he asked the trustees. "We can't dominate Asia. We can't dominate the European funds. But Trinidadian funds, Cayman funds, Jamaican funds -- that's our market niche, and it's a growing market niche and we're going to be one of the first people to bring it to you and to pension plans throughout the country."

According to a transcript, trustee Harry Deitchman then asked: "Am I to understand that five years from now this $10 million investment will be worth $22.5 million?"

"Yes, sir," Mr. Chapman replied.

"OK, that's utopia, I guess. Isn't it?" retorted Mr. Deitchman.

"Well, when you say utopia, we feel that's very conservative," Mr. Chapman explained. "If we just achieve what we're telling you, it would be conservative."

After several meetings and conflicting expert opinions, the trustees agreed unanimously to shell out up to $10 million into the Chapman Co., thus becoming the firm's largest investor.

In return, they were to get as much as 30 percent of the firm's stock plus subordinated notes. In other words, if disaster struck, they could take a bath.

So far, this deal has not been completed. There are complications requiring a ruling by the Securities and Exchange Commission. Furthermore, because City Comptroller Jacqueline F. McLean championed the scheme, her indictment on unrelated irregularities has raised questions about her motives. Mr. Chapman is distressed by the delay.

At the time the Chapman deal was approved, the trustees had no policy on high-risk investments.

Last November, the trustees adopted a comprehensive policy on alternative investments. They voted to limit them to 3 percent of the total $2 billion portfolio but raised the cap to 5 percent at the urging of an outside fiscal adviser.

"No guts, no glory" is an American investment maxim that has made and unmade fortunes. Acquiring equity in minority businesses is fine. A brokerage is not an ordinary business, however.

The question is whether it is prudent for a retirement plan to risk funds trusted to it in a venture as inherently chancy as a securities underwriting firm.

Antero Pietila writes editorials for The Baltimore Sun.

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