Troubled Md. Pension Plan Gets New Chief, Direction

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Troubled Md. Pension Plan Gets New Chief, Direction

By Susan Levine
Washington Post, May 12, 2003

A new guy takes charge today, promising a sharp break from the past: clear communication, sound investment and the "highest ethical standards" for the agency that protects the pensions of 275,000 Maryland teachers, police officers and government workers.

They should expect no less, says Thomas K. Lee. But that's hardly what the state retirement system has delivered.

For the past several years, the system has been roiled by poor management, questionable if not sub-par performance and finger-pointing over its supervision of an outside money manager now under federal criminal investigation. It lost billions of dollars as the stock market nose-dived. Since January 2002, three top officials have resigned or been pushed out.

There may be only one direction to go from here. And the consensus, from the new executive director and board chairman to legislative critics, is that things slowly are turning around.

"We're not going to get to the head of the class for the next several years," acknowledged state Comptroller William Donald Schaefer (D), who is nearing the end of his first year as chairman. "But we're moving up."

He offered similar thoughts in April in a letter that sought to reassure beneficiaries. He's heard from them plenty as the bad news has piled on, some retirees genuinely worrying whether their check was going to be in the mail.

"Our standing among our peer groups of other state pension funds has improved from last place" to the 77th percentile, wrote Schaefer and his vice chairman, state Treasurer Nancy K. Kopp (D). "Progress yes, but it's still not acceptable. We need to do better."

Better does not just mean performance rankings, though Maryland's abysmal numbers were one of the issues that triggered legislative hearings and action starting late last fall.

It also means better investment guidance, now provided by a professional consultant who has helped overhaul the system's strategy and asset allocation, and tighter controls on those handling the money. In November, for example, Progress Investment Management Co. was fired after losing $53 million of $128 million in pension funds in barely two years; previous managers would not have dumped the firm, critics and agency officials themselves say, or at least not with such dispatch.

A top-to-bottom study of the system's organizational structure, staffing, governance and resources should be completed by summer. Schaefer and Kopp have pledged it will receive "immediate consideration" by the 14-member Board of Trustees.

"No question they've taken some steps to correct and improve the situation," state Sen. Edward J. Kasemeyer (D-Howard) credited this month.

The 39-year-old Lee, deputy budget secretary since 2000, pledged to keep progress on track. His choice of words reflects the challenge ahead: stability, integrity, credibility.

The system bears an "important fiduciary responsibility," he said. "For every state employee who is a beneficiary or a future beneficiary, every county teacher, every judge, [it has] a direct impact on a lot of lives."

Lee, who has spent most of his career dealing with the General Assembly, said he understands what lawmakers expect: "Annapolis is a tough town. You have very few opportunities to show you know what you're doing and can do it well. . . . It's not a bad standard."

The problem is, the agency repeatedly has fallen short. Even in the bull market of the late '90s, as the state retirement agency shot from $20.6 billion in assets in fiscal 1996 to $33.1 billion by fiscal 2000, Maryland often didn't measure up compared to its peers. Once the downturn began, the same held true. Since 2000, its portfolio has fallen by more than 27 percent, to $24 billion.

One reason is that under previous chairman Richard N. Dixon, the system was far more aggressively invested on Wall Street than many of its counterparts. At one point, nearly three-quarters of its assets were tied up in domestic, international and private equities.

"The stock market was the be-all and end-all," said former state delegate Robert Neall (D-Anne Arundel), one of the General Assembly's leading pension experts, who became increasingly skeptical of Dixon's leadership despite boom times. These days, he and others have harsh assessments of the former stockbroker's style and approach -- as autocratic and myopic. Neall recognizes now how much lawmakers' attention waned.

"When your portfolio is making 18 to 20 percent . . . you presume everything is just ducky," he said. "The fact is, a blind person could have made money by just putting money in an index fund and not even making an individual decision."

Dixon counters his detractors on all points and maintains that Maryland's retirement agency "took a bad rap." He said he believes that he's also taken an unfair hit, saying his role in pushing the fund's massive growth has been overlooked.

And on the issue of fired investment manager Nathaniel A. Chapman Jr., a longtime ally of former governor Parris N. Glendening (D) and past chairman of the University System of Maryland's Board of Regents, Dixon is totally dismissive. Federal officials are investigating Chapman's business dealings and relationships, which the agency's top people knew while entrusting him with state funds.

"It's been blown way out of proportion," Dixon said. "A minor issue."

Few agree. Much of the agency's emphasis in the past year has been on strengthening how it monitors outsiders like Chapman -- and passes on that information to its board. "It's amazing, if you listen to [past] testimony, what the board was not aware of," Kasemeyer said.

Not that the senator is convinced trustees can reform completely on their own. As co-chairman of the Joint Committee on Pensions, he successfully pushed to change the composition of the group that meets in the wood-paneled boardroom on the 16th floor of the SunTrust building in downtown Baltimore -- where the carpet is the color of money.

His bill, which would require financial expertise in people in certain trustee positions, garnered virtually unanimous support in the Senate and House and awaits the signature of Gov. Robert L. Ehrlich Jr. (R). Schaefer, however, pushed a board vote asking for a veto. He faults Kasemeyer's measure as essentially knee-jerk -- a response that, given recent history, left lawmakers shaking their heads.

The dispute threatens to mar the otherwise encouraging news. In their April letter, Schaefer and Kopp stressed again that the system has 94 percent of the assets required to meet all liabilities -- its future pension obligations -- "far ahead of projections made several years ago that required the agency to be fully funded by 2020."

They committed to "a much higher standard of performance" in the future. Finally, they made clear their bottom line: "This is the people's business, and they should know how and what we are doing."