On March 24, 2000, Maryland Treasurer Richard N. Dixon was riding high. The stock market was at near-record levels, pouring money into the state pension fund he chairs.
So Dixon - ignoring warnings from legislative analysts and other market watchers - persuaded his fellow pension trustees to increase the fund's already aggressive position in the stock market.
The timing could not have been worse. The market closed that day at its peak. Soon after, it tanked, sending the pension fund to a $3 billion loss on investments for the next fiscal year.
Dixon's initiative did not create the loss. Almost every pension system posted a decline that year. But his action ensured that Maryland's would skid to the very bottom of a widely watched ranking of public pension investment returns.
It was a performance that invited scrutiny, and Maryland's $29.5 billion pension fund does not stand up well under close examination.
A review by The Sun of the fund's record - including interviews with pension consultants, academics and other experts - found a system burdened by failings in investment strategy, internal procedures and leadership:
The fund, which lumbered through the mid-1990s with too few stocks to fully profit from the market's heady rise, found itself with too many - and the wrong ones - when the bull market collapsed. Its return for fiscal 2001 was negative 9.4 percent.
The system lacks a comprehensive, written game plan for investments, suggesting inadequate attention to the risks of various choices. It appears that the trustees chased a hot market in pursuit of big gains at the expense of stability.
The portfolio's aggressive investment posture is at odds with the fund's stated goal of a stable and conservative return.
Analysts for the General Assembly have expressed concern about the fund's investment practices for four years, but the system's staff never shared the reports with board trustees.
Over the past five years, the fund has achieved an average annual return of 8.7 percent. That compares with 10.3 percent for the state fund in Wisconsin, where legislative analysts have excoriated the system for weak long-term performance.
Dixon, who took much of the credit when the fund made money, refused to talk to The Sun for this article.
"I don't see how you could deliberately put together a portfolio and get these kinds of returns," said Grady Perdue, an associate professor of finance at the University of Houston-Clear Lake whose specialty is investments.
John R. Nofsinger, an assistant finance professor at Washington State University who has researched public pensions, said the Maryland board went too far with "equity" investments, chiefly stocks.
"They are getting way too much into equities, and they are not achieving an adequate return from the equities they have," Nofsinger said. "You should expect some bad returns now and then if you are going to run over 70 percent stocks. But even the stocks they have are not that good."
The retirement benefits of Maryland's 300,000 active and retired participants - teachers, police officers, judges, prison guards and lawmakers from more than 100 state and local agencies - are safe, because contributions from the state and the other employers automatically go up in down years. Worker contributions don't change.
"It's a sound system. It's a safe system, and the participants should not be worried," said state Comptroller William Donald Schaefer, who is vice chairman of the fund's board.
But the costs of keeping it sound may be high. The state and other participating employers pay into the system each year according to a formula that includes money gained or lost in investments. In up years, the annual tab falls. Not so for the coming fiscal year: Auditors estimate that the system will need an additional $55 million next year in state and local tax dollars.
Dixon, a decorated Vietnam veteran and strong-willed executive, has said that critics of his stewardship don't understand investment. In the long run, stocks will bring in more money than dowdy alternatives, such as bonds, he says.
"People say the stock market goes up and down. That's not true. The market goes up - particularly when you invest in quality," Dixon said last year.
As chairman, he has pushed the portfolio's value to record highs, managing to get the plan fully funded in fiscal 2000, two decades earlier than required by law.
The fund has already lost that status because of its investment losses, but Dixon insists that his strategy is sound. "This is not the time to get out of stocks," he said in a televised interview last week.
A push into stocks
Dixon has often bragged of his investment prowess. He holds an MBA in finance from Morgan State University, and he worked for the investment firm Merrill Lynch for 26 years, rising to assistant vice president and financial consultant before retiring five years ago.