Pension fund reports loss of $3 billion

State employees' system sees 7.6 percent decline in investment portfolio

`The way the marketplace is'

Results are improvement over FY 2001, when it ranked last in survey

July 24, 2002|By Michael Dresser | Michael Dresser,SUN STAFF

Maryland's state employees' pension fund took a beating in the stock market for the second straight year -- closing its books on fiscal 2002 with a $3 billion drop in the value of its assets.

The retirement system announced yesterday that as of June 30 it had $26.5 billion in assets -- down from $29.5 billion a year before -- after posting a 7.6 percent loss on its investment portfolio.

Joseph M. Coale, spokesman for the retirement system, said veteran employees believe the fund's two-year performance has been the worst in its history -- a reflection of the bear market that began in the spring of 2000.

While this year's investment performance contributed to the steep decline in the fund's assets, its showing was an improvement over the previous year. In fiscal 2001, the system reported a 9.4 percent loss and was ranked last in investment returns among a peer group of public pension plans.

Rankings of the Maryland fund's fiscal 2002 returns as compared with other large public pension plans will not be available until next month, Coale said. However, a professional investment adviser said the fund's performance appears to be in line with market conditions.

"I don't think that loss is an outrageous loss," said Robert Mewshaw, president of Van Sant & Mewshaw Inc. in Lutherville.

The hammering the pension fund has taken over the past two years, which resembles that of many private investors' 401k plans, will not endanger the benefits of the 89,000 retired state employees and public school teachers covered by the plan, Coale said.

If the erosion of assets continues, it could make it more difficult for the General Assembly to consider raising benefits for retirees and the 186,000 working members of the system. Maryland's state employee pension benefits have been ranked among the nation's lowest.

"When you're losing money, you can't spend more money," said Sen. Edward J. Kasemeyer, co-chairman of the Joint Committee on Pensions. "I suspect we're going to have to stabilize the situation before you see any substantial improvement in the benefits."

The losses also set back the system's hopes of achieving full funding, which would let it pay its current and future obligations without legislative appropriations. The system was briefly overfunded in fiscal 2000, when it closed the year with $33 billion in assets. Since then, it has seen its asset value decline by nearly 20 percent and its funding level slip to between 95 percent and 100 percent.

If the losses are not reversed in future years, they could eventually force the governor and the General Assembly to kick additional money into the state budget to make up for the decline. But that requirement would be triggered only if the system's funding slips below 90 percent.

The state pension agency has undergone significant changes during the past year after adverse publicity about its poor investment performance rankings and communications lapses that at times left its board members out of the loop.

The decision to announce yesterday's bad news in a news release represents a change at the system, which recently hired an official spokesman for the first time. Previously, Treasurer Richard N. Dixon, who resigned for health reasons early this year, kept a tight hold on information released to the public. The previous year's loss was not announced and came to light only after legislators were briefed about the fund's performance.

Comptroller William Donald Schaefer, who replaced Dixon as pension board chairman, said in the statement that "uncertain times" would require a more conservative investment strategy.

"We are prudently rebalancing our equity/fixed income positions, researching additional real estate opportunities, have hired a general investment consultant and relieved several under-performing managers," Schaefer said.

Despite the grim bottom line there were some signs that the system's performance might have improved.

The fund's overall performance was dragged down by a 14.5 percent loss on its stock market investments, but that was partially offset by a 6.4 percent gain on bonds and a 10.3 percent return on real estate.

The fund's stock market performance compared well with that of the S&P 500, which posted a 18 percent drop for the period. Last year, the state's stock market returns were worse than that broad market measure.

The system might also have mitigated its losses by adopting a more conservative strategy than that used under Dixon's leadership. It ended the year with 64 percent of its assets in stocks, compared with 67 percent at the beginning of the fiscal year and 72 percent two years ago.

"Now that we've got a bear market, we're going to have to be a bit more prudent and more diversified," Coale said.

Kasemeyer, a Howard County Democrat, said he has noted "a new spirit" in the leadership of the pension board. While the senator said he is concerned about the losses, he did not blame system officials.

"It's just the way the marketplace is, and they were a victim of Enron and WorldCom," Kasemeyer said.

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