Broad changes proposed for state pension board


A General Assembly committee recommended sweeping changes yesterday in the structure of the state pension board, seeking to beef up its financial expertise after a financial scandal and two years of heavy losses.

The Joint Committee on Pensions decided to sponsor legislation that would unseat about half the members of the board and eliminate the election of employee representatives.

The recommendations, which were adopted unanimously, will go to the House of Delegates and state Senate for hearings.

The committee's proposal follows a series of management lapses that have been chronicled in The Sun. Officials failed to notice that money manager Alan B. Bond was investing state funds in companies controlled by his supervisor at the pension system, Nathan A. Chapman Jr. And when Bond was indicted on charges of defrauding other pension plans, Maryland's trustees failed to order that he be fired.

State Sen. Edward J. Kasemeyer, co-chairman of the committee, said much of what went wrong with the pension system can't be fixed through legislation. "I can't legislate [against] poor judgment, improprieties or bad management," the Howard County Democrat said. "However, I can legislate the membership, the qualifications, the background and the experience of the people appointed to the retirement board."

The $25 billion pension system invests and administers the retirement benefits of more than 250,000 teachers, police officers and other active and retired government workers.

The proposed legislation would make several potentially controversial changes in the composition of the system's 14-member board of trustees:

The superintendents of schools and the state police would be removed from the board. The state comptroller, treasurer and budget secretary would be the only three ex officio members.

Employee representatives, who are elected by law, would instead be chosen by the governor from lists submitted by organizations that represent state employees. The committee's staff members recommended abolishing the elections because of their cost and concerns about low participation, among other reasons.

State police and other law enforcement officers would lose a board member to bring their representation on the board into proportion with their numbers.

Three gubernatorial appointees would replace the three trustees removed from the board. The proposed bill would require the governor to select experts "in the administration and operation of pension systems and trust funds."

The chairman of the pension board, state Comptroller William Donald Schaefer, said he had not seen the legislation and could not comment.

The proposed changes brought criticism from the largest union representing state workers, but were applauded by several independent experts - and one of the trustees who would lose her post.

State Schools Superintendent Nancy S. Grasmick said she agrees with the recommendations and believes that they would help "professionalize" the pension board.

Sue Esty, lobbyist for the American Federation of State, County and Municipal Employees, protested the proposed end to employee elections. "These people are there to represent employees, and the only way to determine who can represent them is through an election," she said.

Several experts familiar with the Maryland pension system's problems gave the proposal generally high marks.

"It sounds to me like these changes are for the better," said James D. Cox, a professor of corporate securities law at Duke University. "This will help [the system] get out of some very questionable practices. ... It's all about getting people to own up to their responsibilities."

Although employees may fear a loss of representation, strong financial oversight should supersede such concerns, said Warren L. Dennis, a senior partner with the New York law firm Proskauer Rose.

"Part of the function of boards like this is to be representative," said Dennis, an authority on the role that boards play. "But their major function is to be a fiduciary. It's much more important to be a fiduciary than to be representative in a political sense."

Among other proposed changes, the pension committee's legislation would require that appointed trustees maintain an attendance record of 80 percent - with exceptions for illness or emergencies - over the course of a year. A trustee who failed to do so could be removed by the governor.

In November 2001, The Sun reported that several board members - including school superintendent Grasmick and then-State Police Superintendent David Mitchell - had missed more than 40 percent of board meetings since 1999.

With significant absenteeism, a board of trustees cannot maintain the kind of scrutiny that keeps small problems from becoming big ones, said Baltimore investment adviser James Hardesty.

"Without a substantial number of people attending [meetings] on a regular basis, the consistency of oversight breaks down," said Hardesty, president of Hardesty Capital Management, a local money-management firm. "In light of the ethical lapses that have come to light recently, ... oversight has become much more critical to the successful operation of the state pension plan."

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