Gambling with city pensions

April 09, 1993

The debate over whether the retirement system for Baltimore City fire and police employees should be permitted to make a direct $10 million investment in a securities brokerage firm comes just in the nick of time.

Pension funds throughout the country are being wooed by promoters of get-rich schemes who claim they can easily guarantee higher profits than pension funds are getting through traditional investment vehicles. With little notice by the public, Baltimore's municipal pension system has already put some of its money into such investments as timber and apartment houses. "One of the reasons we have begun to look at alternative investments is that some analysts argue the stock market has reached a level where it cannot go much higher," explains City Comptroller Jacqueline McLean.

The current proposal is to allow the pension funds to take an equity position in the Chapman Co., a minority-controlled Baltimore brokerage firm, by investing up to $10 million in its preferred stock and obligations. The Chapman Co. would use that money to expand its business and finance publicly traded, minority-controlled companies.

Two legal consultants have given opposite appraisals of the advisability of the idea. On one question they agree, however: no such investment should be made until the municipal retirement systems have determined and published written standards and objectives specifically addressing private placements and other alternative investments. Earlier this month, the city's Board of Estimates gave conditional approval to the precedent-setting proposal, contingent on the adoption of such pension board guidelines.

With some $2 billion in assets, the city's pension system may have some room for symbolic investments in socially significant causes. Whether such riskier investments actually produce promised results can be a secondary consideration as long as the pension fund does not assume investment positions or liabilities of such magnitude that they could threaten the fund's stability or solvency.

There have been numerous experiences in recent years reminding us that there are no totally safe investments and certainly no free lunches. Those who exposed themselves to risks during the go-go decade of the 1980s now often are paying for it. A pension fund's primary objective is retention of its accumulated capital so that the security of retirees is guaranteed to the largest extent possible. For that reason, we urge the pension board to limit its exposure to alternative investment schemes to no more than 1 percent of its total assets.

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