Actuary defends pension system

But lawmakers OK outside consultant for state workers' fund

9.4 percent loss in 2001

November 28, 2001|By Michael Dresser | Michael Dresser,SUN STAFF

The actuary for the state employee pension system told lawmakers yesterday that the retirement fund is sound and that the impact of its investment losses has been overemphasized.

Gene Kalwarski, a principal in the Milliman USA actuarial firm, defended the system's investment strategy, which was criticized by experts contacted by The Sun. He said the large investment in international stocks, while costly in the fiscal year that ended June 30, had been successful the year before.

"My feeling is that this is a very strong system," Kalwarski told the General Assembly's Joint Committee on Pensions.

Despite the actuary's reassurances, the committee voted to endorse recommendations by legislative analysts to change the way the pension system does business - including that it hire an outside consultant to evaluate its procedures and strategies.

Kalwarski delivered welcome news when he estimated that lawmakers would have to come up with an extra $53 million - not $55 million to $68 million, as previously estimated - to fund the system in next year's budget. He added that $32 million of that can be attributed to investment losses.

The retirement system lost 9.4 percent on its investments in fiscal 2001, ending the year with about $3.5 billion less in assets than a year earlier. That performance gave the $29.5 billion fund a last-place ranking in a national survey of big public pension funds.

Kalwarski said he knew of no other large funds that posted such a loss, but said the one-year performance was "overemphasized."

"There's been one blip down and a steady progression up," he said.

Some lawmakers seemed relieved by his statement. "We're being presented with the facts of the balanced picture," said Sen. Nathaniel J. McFadden, a Baltimore Democrat.

Experts who reviewed the pension system's investment performance for a recent article in The Sun criticized what they called an excessively risky strategy that put too much emphasis on global and high-risk domestic stocks.

The Milliman firm presented data yesterday showing that the plan was 98.3 percent funded last year. That compares with 101.2 percent in fiscal 2000, when the system achieved full funding 20 years ahead of expectations set by the Assembly. At full funding, a pension plan can meet the actuarial estimates of future obligations.

Kalwarski said the system is not among the best-funded in the nation, but is far better off than many. "You're in the middle of the pack," he said.

The system has been shaken in recent weeks by reports that its staff had not fully shared information - including the national survey - with pension board members. When Sen. Edward J. Kasemeyer, a Howard Democrat, asked what the system could do to improve, Kalwarski said: "Everybody ought to be improving the way they communicate with each other."

In addition to approving the analysts' call for an outside consultant, the committee urged the pension system to devise performance goals that compare its investment returns with those of other large plans.

The committee also called on the retirement agency to develop a comprehensive investment policy statement and to make it easily available to the public.

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