From ruins of scandal, new pension system emerged

After Chapman charges, state organization added more checks and balances

August 13, 2004|By Michael Dresser | Michael Dresser,SUN STAFF

The scandal that landed Nathan A. Chapman Jr. in federal court also forced the Maryland state employee pension system to reinvent itself.

Much has changed since officials learned in 2002 that Chapman, hired to make investments for the pension fund, had let a subordinate use $5 million of that money to buy stock in Chapman's struggling companies.

The General Assembly passed reform legislation to put more people with financial expertise on the pension board. The board agreed to hire an independent consultant to guide investment decisions.

The system adopted a detailed investment policy to help prevent future abuses. And it banned the type of sub-manager arrangement that allowed Chapman to pressure a third party he supervised to buy stock in his companies.

State officials say these are important safeguards for a system that is charged with providing pension benefits to more than 95,000 retired state employees, teachers and law enforcement officers.

Sen. Edward J. Kasemeyer, co-chairman of the Assembly's Joint Committee on Pensions, said the retirement system is now a "first-rate operation."

"They've made vast improvements, frankly, which is to their credit," he said.

Kasemeyer, a Democrat who represents Howard and Baltimore counties, gives much of the credit to Thomas K. Lee, executive director of the State Retirement Agency. Lee, who was hired last year, said the system has been developing a "culture of accountability" that will prevent further embarrassments.

"My goal is to run a boring agency," Lee said. "If I can do my job and do my job well, we won't be in the news - and that'll be a good thing."

The seven-week Chapman trial produced ample evidence of the lax oversight, questionable judgment and improprieties that kept the system in the headlines in recent years.

The jury heard testimony from one pension trustee who had an affair with Chapman while serving on the board. It heard from another who said she participated in an effort to provide Chapman more money to invest when his performance was lagging.

Present and former members of the system's staff attempted to explain how reports from Chapman disclosing the investments in his companies could have been overlooked for several years.

When trustees finally learned about the self-dealing in January 2002, the board's immediate reaction was to fire Chapman and to try to account for the near-total loss on the $5 million investment. The system was reeling from reports that its investment performance was among the worst nationally.

The roughly $30 billion pension fund had lost $3 billion in fiscal 2001, so the trustees were already under pressure when the Chapman scandal broke. As The Sun continued to report details of Chapman's dealings, the board's resistance to reforms pushed by legislative analysts weakened.

"Clearly, that was the straw that broke the camel's back," said retired State Police Maj. Morris L. Krome, a trustee.

Investments rise

The system has new governance procedures and more checks and balances. There has been a substantial turnover in the board's membership. The system's investment returns rebounded to 16.2 percent for the year that ended June 30. In a peer group ranking, the Maryland fund now scores above average.

The system didn't get to that point without changes in its top leadership.

The first to go was the system's chairman, state Treasurer Richard N. Dixon, who retired because of failing health within weeks of receiving the news about Chapman. His resignation ended a tenure that other trustees described as secretive and dictatorial.

Over the next year, the board struggled to come to grips with failures by the system's staff, which hadn't spotted the questionable investments.

Comptroller William Donald Schaefer, elected board chairman after Dixon's departure, fumed at the failure of Executive Director Peter Vaughn and Chief Investment Officer Carol Boykin to keep the trustees informed.

Nevertheless, it took him nearly a year to persuade fellow trustees that Vaughn had to go. The longtime system employee and Dixon loyalist was allowed to take medical retirement. Boykin was fired in April 2003.

Vaughn was replaced by Lee, a highly regarded former deputy state budget secretary. Steve Huber, a veteran money manager from Connecticut, replaced Boykin.

Trustee turnover

Several trustees from the Dixon era have left the board, including Debra B. Humphries, who had the affair with Chapman.

The General Assembly forced much of that turnover last year, when it passed legislation removing the state police secretary and school superintendent - who were frequently absent on other business - from the board. Also removed was a second elected trustee representing the state police. The legislature said they should be replaced by investment professionals appointed by the governor.

Joseph M. Coale, the system's spokesman, said there's now less "dissension and acrimony" on the board compared with the Dixon years. "Personalities have taken a backseat, where before they were up-front," he said.

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