Md. retirement fund: Paying for poor performance

Twenty percent of the money dedicated to paying state employee pensions evaporated in 2009. But the man in charge of investing that money took home a $15,978 "effectiveness" bonus.

This year Chief Investment Officer Mansco Perry III also earned a performance bonus of $79,892, bringing his total salary to $335,570. The reason: returns at the $31.9 billion fund exceeded the yearly target. When he leaves October 31 for Macalester College in Minnesota, the state's funds will be $4.7 billion less than what they were in 2008, the year he arrived.

Worse, the Board of Trustees overseeing the fund wants to "smooth" the billions lost between 2008 and 2009 under Perry's watch over 10 years, according to meeting notes from July 20. George Liebmann of the Calvert Institute for Policy Research highlighted the proposal in a new report. Usually, the fund averages returns over five years to lessen volatility. On down years the smoothing disguises how much the state must contribute to the retirement system. In this case the board, which includes Comptroller Peter Franchot, State Treasurer Nancy Kopp and Budget Secretary T. Eloise Foster, wants to create new accounting rules for one year to make the picture look even rosier.

Altering the rules for one year may not be illegal, but the Securities and Exchange Commission might not look favorably on the practice. The agency recently charged New Jersey with securities fraud for hiding information from investors showing it was underfunding two of its largest pension plans. Dean Kenderdine, executive director of the State Retirement and Pension System, said the market value of the state's funds are available for all to see, so the state is not hiding anything. If that is the case, then why create new rules for one year?

The accounting trick can't hide the state fund's lousy performance over the past decade in both absolute terms and relative to peer funds, however. Over the 10 years ending June 30, the fund gained 2.1 percent annually compared to the 7.75 percent the state assumes. If the fund had performed as anticipated, it would be worth $69.8 billion instead of $31.9 billion. As a result, it had 65 percent of the money it needs to fund employee retirement over the next 30 years at the end of 2009.

And as Jeff Hooke of the Maryland Tax Education Foundation shows, the state has lagged behind peers by about $3 billion over the last decade. Virginia, North Carolina, Pennsylvania and Kentucky all had higher returns than Maryland. He recommends swapping investment advisers for index funds that track the market to save money on fees.

Mr. Kenderdine has said Maryland's returns are in the middle of the pack for pension plans of comparable size.

That's hardly cause for celebration, despite what Treasurer Kopp, chairwoman of the Maryland State Retirement and Pension System Board of Trustees, says. In announcing a 14 percent return for the year ending June 30, she said, "The board is very pleased with the fund's performance, due in no small part to the excellent team headed by Mr. Perry and to the system's prudently diversified asset allocation that they manage." She added, "This offers further proof to our more than 367,000 members that they can rely on the professional staff of the State Retirement Agency to look after their interests. We should all be pleased with the results."

One year of good performance does not fix underlying problems. Poor returns over the decade combined with chronic underfunding of the pension plan since 2002 means state taxpayers are on the hook for $18 billion. The reason for the underfunding is that legislators created an accounting trick called "corridor funding" to spend money on other things and legally if not actually "balance" the budget. To their credit, the state pension board wants to end the practice.

Many states in similar situations have already altered their retirement plans. According to the National Conference of State Legislatures, 19 states have reduced benefits for employees or increased required contributions this year. And many are changing benefits for new employees. Maryland ducked responsibility by appointing a commission this year to study the issue. Unsurprisingly, its report will be ready after the election, benefiting both candidates for governor who avoid the issue as if it were bedbugs.

At the very least legislators must immediately fund the plan at appropriate levels to fulfill promises to state employees. Second, the commission should communicate clearly about the state's ability to pay for the current system and recommend alternatives. Giving a bonus to a chief investment officer for sub par performance and then trying to hide his results only shifts the problem to a later date. Taxpayers deserve to hear the truth before the election, even if it hurts.

Marta H. Mossburg is a senior fellow at the Maryland Public Policy Institute and a fellow at the Franklin Center for Government and Public Integrity. Her column appears regularly in The Baltimore Sun. Her e-mail is martamossburg@gmail.com.

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