The auditors focused on one fund within the supplemental system's group of plans: the Investment Contract Pool. The plan was intended to be the most conservative option, similar to a money market fund within a 401(k) plan. The fund is intended to guard the safety of the investor's money and is "perceived by participants as the investment equivalent of a retirement 'security blanket,' " the auditors said.
Nevertheless, at the end of last year, the fund's unrealized losses had opened up a $48 million gap between the $729 million book value of its investments and its $681 million market value.
According to the auditors, the supplemental retirement plan did not disclose market losses to its participants until September 2008. As a result, they said, "the ability of existing and prospective plan participants to make informed investment decisions using basic and critical financial information was significantly impaired."
Halpin said that before last fall's changes, the plan had reported the book value of participants' assets. He said that for the first 27 years after the plans were created in 1985, there was little difference between market and book value to report.
Auditors vs. board
The auditors said that after the investigation was launched, the agency decided to disclose the percentage difference between book value and market value. However, they contend the plan should also disclose the dollar amount of that difference - a stance with which the board disagrees.
Halpin said that as of the end of last month, the conservative fund had recovered sufficiently to post a market value of $734.2 million, or 98.4 percent of its book value of $745.8 million. At its worst last October, the market value stood at only 92 percent of book value.
Auditors said they questioned how the supplemental plan could pay fund participants a relatively generous 4.4 percent interest rate during the last quarter of 2008 despite its market losses. They said the board has since reset the payout to 3.5 percent and begun to recalculate it monthly.
Hiring questions
The report also criticized the plan for its oversight of sub-managers hired by its investment manager, Deutsche Bank AG. That issue also arose in the state's earlier pension scandal, when the state pension board delegated to Chapman the oversight of a sub-manager who subsequently defrauded the fund and invested money in a company controlled by Chapman - resulting in a loss to the state when that company tanked.
