Pension fund could change roles of top managers

Ehrlich names 3 to panel that oversees state system

October 22, 2003|By Michael Dresser | Michael Dresser,SUN STAFF

Trustees of the state pension system are considering significant reforms that would strengthen the authority of the executive director while putting restraints on the chairman's role.

The proposal - drafted by an outside consultant at the board's request - seeks to prevent management failures that came to light amid poor investment performance and an embarrassing financial scandal involving former money manager Nathan A. Chapman Jr.

Those management lapses, documented in articles in The Sun, in some cases left pension trustees in the dark while former state Treasurer Richard N. Dixon made key decisions unilaterally as chairman of the board.

The changes would create "a clear line of communication and authority in the system," said state Treasurer Nancy K. Kopp, who led a committee that worked with the consultant to develop the proposal.

The proposal was presented to the pension board yesterday as Gov. Robert L. Ehrlich Jr. announced his appointment of three new trustees, all with substantial experience in the world of finance and investment. The appointees, who are subject to confirmation by the state Senate, are:

Kenneth C. Holt, senior vice president of investments at Smith Barney in Baltimore and a former Republican state delegate from Baltimore County. He is to serve the balance of a term that runs until 2005. The seat was held by Debra B. Humphries, who pleaded guilty in August to a perjury count stemming from the Chapman investigation.

A. Melissa Moye, first vice president of Amalgamated Bank in Washington and a former union pension analyst and economist. Her term will run until 2007.

Patrick A. O'Shea, director of equity capital markets at Deutsche Bank Securities in Baltimore. His term also will run until 2007.

O'Shea and Moye fill positions created by the General Assembly this year to add financial expertise to the board, which oversees a $27 billion system that is responsible for the pensions of more than 250,000 teachers, police officers and other active and retired government workers.

The board deferred discussion of the reform proposal yesterday until the new trustees join the 14-member panel next month. But the recommendations drew a positive response from Comptroller William Donald Schaefer, who succeeded Dixon as board chairman.

"The chairman before sort of ran everything," Schaefer said. Under the changes, he said, "we'll look to the executive director for much more discipline, and I like that."

The proposal would strengthen the role of the state retirement agency's executive director while setting up formal guidelines for evaluating that official's performance.

Under Dixon's chairmanship, then-Executive Director Peter Vaughn exercised limited authority over some of the system's most important functions - including investment performance. In some cases, Carol Boykin, former chief investment officer, reported directly to Dixon, who decided whether to share the information with other trustees.

Problems with that arrangement became apparent after Alan B. Bond, who was hired by Chapman to manage millions of dollars for the system, was indicted on federal fraud charges in December 1999. At Dixon's direction, Boykin talked with Chapman about the indictment and received assurances from him that the charges against Bond were "trumped up."

According to fellow trustees, Dixon decided to accept that explanation without seeking a formal discussion by the board about whether Bond should continue to handle the system's money. Bond went on to steal millions of dollars from the system in a second fraudulent scheme - a crime for which he is in federal prison.

Chapman is under federal indictment on charges of defrauding the pension system and plundering his company. The charges include that he induced Bond, whom he supervised, to purchase shares in Chapman's companies using state pension fund money. The board didn't learn about the improper investments for months.

The proposed policy, if adopted, would give current Executive Director Thomas K. Lee explicit authority over the chief investment officer and all other staff members. The proposal would further dilute the chairman's powers by requiring consultation with the vice chairman on "all matters pertaining to board governance."

The draft spells out rules that replace decades of informal procedures that often led to confusion and disagreements among trustees. Among other changes, the proposal also would:

Require trustees and the executive director to share pertinent information in a timely manner.

Encourage consultation by the chairman or staff with as many trustees as possible before public announcements.

Require trustees to take courses across a wide range of topics affecting the pension plan. The provision sets minimum levels of outside training.

Guarantee a public right to comment on issues before the board and to videotape or record its proceedings.

State Sen. Edward J. Kasemeyer, co-chairman of the legislature's Joint Pension Committee, praised the proposal as described to him by a reporter. "It sounds very positive to me, and they're heading in the right direction," the Howard County Democrat said.

The proposal was developed with the help of Cortex Applied Research of Toronto. Tom Iannucci, managing director of Cortex, told the trustees that adoption of the policy would put them "at the forefront of the industry."

"The vast majority of [pension] systems do not have this kind of framework," Iannucci said. "You're even leading the private sector in self-evaluation."

Joseph M. Coale, spokesman for the pension system, said all the proposed changes were generally aimed at "avoiding the mistakes that were made in the past."

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