State's pension system is ranked last among peers

With big percentage in stocks, assets fall one-fifth in 15 months

Lawmakers dismayed

October 30, 2001|By Michael Dresser | Michael Dresser,SUN STAFF

With much of its money tied up in a plunging stock market, Maryland's state employee pension system ranked last among its peers in its investment performance last year, according to a leading tracker of public retirement funds.

The State Retirement and Pension System of Maryland lost 11.2 percent of its total asset value in the fiscal year ended June 30, according to a report to be delivered to a legislative committee today.

Valued at $33.1 billion at the end of June 2000, the system was worth $29.4 billion a year later. And according to the General Assembly's Office of Policy Analysis, the pension fund's assets dropped an additional $3 billion by Sept. 30 - a loss of roughly one-fifth of its value in 15 months.

The poor investment performance will force the state to contribute more money to the pension fund in next year's budget - already under pressure from declining revenues, a Medicaid shortfall and rising security costs. The fund serves more than 80,000 retirees and includes 222,000 active participants - including state employees, public school teachers, and local police and judges.

Maryland Treasurer Richard N. Dixon, who heads the pension board, estimated last week that the state will have to contribute an extra $55 million to $68 million next year. He could not be reached for comment yesterday.

The ranking under which Maryland fared poorly is the Trust Universe Comparison Service, a widely watched evaluation of pension fund performance compiled by Wilshire Associates of Santa Monica, Calif.

In the past, state pension officials have dismissed the TUCS ranking's value, contending that it does not compare Maryland's system to plans of a similar size and with similar strategies. But legislative analysts say the retirement system has not provided any alternate studies that contradict the TUCS findings.

Legislators who heard about Maryland's most recent ranking expressed dismay at the performance.

"You come in dead last, I have a problem with that," said Sen. Barbara A. Hoffman, chairwoman of the Budget and Taxation Committee.

"I am very disappointed with our performance, which is unacceptable," said House Speaker Casper R. Taylor Jr.

In the TUCS ranking, a percentile of 1 is the best performance and 100 is the worst. Maryland's percentile for fiscal 2001 was 100 - or 38th out of 38 public funds with assets of more than $1 billion.

The state fund's performance does not look much better when viewed over the long term. While Maryland's percentile ranking was 28 last year, its two-year performance ranks in the 81st percentile. Over five years, its percentile is 92; over 10 years, 94. All of those scores were dragged down by the 2001 performance.

Steve Medvecki, product manager for TUCS at the Wilshire firm, would not comment on the performance of individual funds. But he said a poor 2001 number indicates that a fund might have too much of its money in stocks. "It indicates that perhaps manager selection is poor, perhaps their asset allocation strategy is poor," he said.

According to legislative analysts, the Maryland system had 72.3 percent of its assets in equities, mostly stocks, last year. Medvecki said that seemed high for a pension plan, adding that the mix is generally 60 percent in stocks and 40 percent in more conservative investments.

The value of the assets entrusted to one of the fund's managers, Trust Co. West, dropped 41.6 percent last year. Assets placed with six other managers were down by more than 20 percent each.

The system's investment decisions are made by the pension board, acting upon recommendations by its investment committee.

The most influential individual in making investment decisions in recent years has been Dixon, a former Merrill Lynch stockbroker. Dixon is the only individual authorized to comment on behalf of the pension system, said Carol Boykin, its chief investment officer.

Dixon has been a consistent advocate of increasing the percentage of stocks in the fund's portfolio. Although the board has sometimes disagreed, he generally has been able to rely on a working majority.

The strategy seemed to work for a time - and Dixon was not modest about taking credit for the system's gains. He proclaimed himself the "best treasurer in the nation" and declared last year, "I'm very good at what I do."

In fiscal 2000, the pension plan's returns were so generous that it became fully funded 20 years ahead of the General Assembly's assumptions when it restructured the system in 1979. But the 2001 performance has cost the plan its fully funded status, legislative analysts said.

Along the way, Dixon has not hesitated to purge dissenting voices. Last year, he used his position on the Board of Public Works to block the reappointment of Howard Colhoun as professional adviser to the pension board's investment committee.

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