Md. pension system gains $3.5 billion

Once last-ranked fund returns 16%

`We cleared up some problems'

Change in managers credited for revival

August 05, 2004|By Michael Dresser | Michael Dresser,SUN STAFF

Maryland's state employee pension system, which had such poor investment returns three years ago that it finished last in a national ranking, now falls among the top half of its peers.

The state's 46th-percentile ranking in a Wilshire Associates survey comes after a period of reform in which the system's top officials were replaced and investment procedures were overhauled. The survey results, announced yesterday, compare the system against other large public pension funds for the fiscal year that ended June 30.

The pension system's fortunes changed significantly as it posted a $3.5 billion gain for the fiscal year - a 16.16 percent rate of return on investments. That allowed it to reach the $30 billion asset level for the first time since 2001. And the survey results showed pension officials that the fund's performance was at last above average.

Executive Director Thomas K. Lee said he was pleased by the results. "When you go from last barely three fiscal years ago to the 46th percentile, I think that's a very significant improvement," he said.

The improvement comes as a relief to state officials. The system's failings have been aired in the federal trial of Nathan A. Chapman Jr., the Baltimore investment banker charged with committing fraud while managing money for the retirement system. The jury is scheduled to continue deliberations today.

When Chapman's use of state pension money to invest in his company's stock was disclosed in early 2002, the retirement system had already come under scrutiny because of its dead-last rating in the Wilshire survey for the year that ended June 30, 2001.

General Assembly leaders expressed concern when they learned that the Maryland system also ranked at or near the bottom for its investment return over the long term.

Legislators were especially concerned because consistent losses by the system - which provides pension benefits for more than 95,000 retired state employees, teachers and law enforcement officers - could force the state to increase its contribution to the fund.

An investigation by The Sun found that the system's poor performance arose from a combination of bad luck and poor leadership during the chairmanship of state Treasurer Richard N. Dixon, who retired in 2002.

Among other moves that backfired, the pension fund shifted aggressively into stocks at the very point in March 2000 when the stock market boom of the late 1990s went bust.

With a portfolio chock-full of international and technology stocks at a time when such investments were being hammered, the Maryland system lost $3.5 billion in 2001. It lost another $3 billion the following year, while its performance edged up to the 81st percentile.

In 2003, it halted the losses and posted a positive 3.22 percent return but still ranked in the 79th percentile.

Under pressure from legislators, the pension board began a process of change in 2002 after Dixon resigned and state Comptroller William Donald Schaefer became chairman.

Among other moves, the pension board changed the top leadership, ousting Executive Director Peter Vaughn and Chief Investment Officer Carol Boykin.

The trustees also gave in to legislative demands to hire an investment consultant. With the help of that consultant, Chicago-based EnnisKnupp, the system retooled its strategy for allocating assets.

Schaefer said factors in the turnaround included Gov. Robert L. Ehrlich Jr.'s appointments to the pension board and the hiring of Lee to head the retirement agency's staff.

"I think we cleared up some problems that we had," Schaefer said. "We got a very good executive director and that made a big difference."

James Hardesty, president of Hardesty Capital Management in Baltimore, called the state's 46th-percentile performance a "gentleman's C or C-plus," but added that the trustees shouldn't be aiming for the top of the rankings.

"It's a bad thing to be at the top because that probably means you're taking excessive risk," he said. "Risk is symmetrical and if I'm at 10, I might have a good chance of going to 90."

Hardesty said it's better for a pension fund to perform like "Steady Eddie."

"Your goal should be to get in that consistent sweet spot - somewhere between the 40th percentile and the 20th percentile, and that goal should be measured over a 10-year moving-average period," he said.

Because the Maryland plan has under-performed the market for many years, last year's results barely budged its long-term rankings. For instance, Maryland still ranks in the 99th percentile for performance over the past seven years.

"It's going to be a long time bringing that average back up," said Joseph M. Coale, spokesman for the retirement system.

Schaefer said that while he's encouraged by the improved investment performance, that's not the first thing on his mind.

"The main thing I'm concerned about is getting the pension checks to the pensioners on time. That is the No. 1 priority for me. The second is to make money," Schaefer said.

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