Pension board kept in the dark


Maryland's state employee retirement system has ranked near the bottom in returns on investments in three of the past four years, but top officials of the fund never brought that information to its board of trustees.

The system was in the bottom quarter in 1998, the bottom tenth in 1999 and dead last in 2001 in a national ranking of 38 large public retirement funds by Wilshire Associates.

But members of the board said they never knew the ranking existed before reading about it in The Sun this week.

Again yesterday, state Treasurer Richard N. Dixon, chairman of the pension fund board, did not return calls seeking his comments.

George R. Tydings, a six-year board member, said he was "shocked" to learn that the $29.5 billion pension fund, which lost $3.5 billion last year, had been ranked last in the survey.

"My impression had been that we would have been a top-performing state fund," he said.

Tydings said board members sometimes asked fund executives how Maryland's fund compared with its peers.

"We got answers that we were a top-performing fund," he said. Tydings said board members "absolutely" should have been told about the ranking.

Peter Vaughn, executive director of the fund, said he "believes" Dixon knew about the survey and thinks it might have been shared with some trustees. But the four trustees - out of 13 members of the board - contacted by The Sun this week, including Comptroller William Donald Schaefer, said they had never been given the data.

Vaughn said he and Carol Boykin, the chief investment officer, were aware of the fund's ranking, but he said comparisons with other public pension funds were not critical information for trustees.

"That's not how the board chose to judge themselves," he said. Vaughn said the board measures its performance against a self-determined actuarial benchmark. For the past several years, it has been set at 8 percent.

Thus, Dixon could proclaim it a great achievement when the system produced a 15.6 percent return in 1998. What the board was not told was that the median performance that year was about 18 percent and top-performing funds posted gains of about 22 percent, according to Wilshire Associates.

Carl D. Lancaster Jr., a Dixon critic who represents teachers on the board and its influential Investment Committee, said trustees should have been told about such figures.

"If the chief investment officer or the chairman have had this data, I'm very disappointed that none of it has been shared with the trustees or the investment committee," Lancaster said.

Tydings said that if Dixon knew about the rankings and didn't share them, "he should have." But he said he doubted the failure was deliberate.

"Dixon wouldn't be able to keep us in the dark, and Carol Boykin and Peter Vaughn don't operate that way," Tydings said.

But Howard P. Colhoun, a longtime professional adviser to the Investment Committee who was ousted by Dixon last year, said, "Dixon's the kind of guy who when the news is good, he'll tell you and when the news is bad, he doesn't give you the news."

While board members said the rankings were news to them, pension fund officials have been providing the ranking to legislative analysts for the past four years. The analysts had heard about the rankings several years ago and decided they would be useful information for legislators.

Fund officials have insisted that the rankings are not a valid measure, but they could not deny the information to the General Assembly, which controls the agency's budget.

The analysts have faithfully published the data in reports to the legislature's Joint Committee on Pensions since 1998, where they attracted little notice before this week.The data show that the system posted a good year in fiscal 2000, when it achieved a 28 percentile on a scale in which 1 is best and 100 worst.

Perhaps more troubling than the system's score of 100 for 2001 is that the system ranked low in long-term performance as well. Both the five-year and 10-year scores were in the bottom tenth.

Even before last year's losses, the system was a laggard. The 1999 ranking shows Maryland's fund at the 95th percentile for the year, in the bottom tenth over the past five years and in the bottom quarter over a decade.

Vaughn said he did not know how long the system had been getting the data, but he thought the rankings became available when the state hired Boston-based State Street Bank & Trust Co. as its custodian in 1994.

He said yesterday that he could not provide the data for the years preceding 1998 because they were not quickly available.

The system's investment loss for the fiscal year that ended June 30 - amounting to a negative 9.4 percent rate of return - does not pose a threat to retirees' benefits. But it does force the governor and the legislature to come up with an estimated $55 million to $68 million at a time of serious revenue shortfalls.

Board members said the realization that they had not been given information about the fund's relatively poor performance could give impetus to proposals to hire an independent outside consultant - a move legislative analysts advocate but Dixon has fought.

Tydings said that at least, with an independent consultant, "we would have known about it before [The Sun] or the legislature."

Colhoun said Dixon has resisted hiring a consulting firm precisely because it might bring such information to light.

"He doesn't want a consulting firm because they would challenge him," Colhoun said.

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