Error exposed pension fund to $4.5 million loss
Mistake caught, but repayment still sought by state
By Kathleen Gallagher
Milwaukee Journal-Sentinel, May 9, 2003
What a difference a decimal point makes.
A slip of the pencil two years ago at the State of Wisconsin Investment
Board that put a decimal point two places further to the left than it should
have been nearly cost the now underfunded state pension plan $4.5 million.
Luckily for taxpayers, who are responsible for promises the pension plan
makes, a state auditor caught the error in March during a routine audit.
Unfortunately, the Wisconsin Retirement System has only recovered $3.2
million of the money, from the Milwaukee Public Schools' supplemental early
retirement plans. The other beneficiary of the error, the City of Milwaukee
retirement fund, is no longer in the plan, so the retirement system has
requested the return of the money.
While the $4.5 million error is small compared to the billions in assets
the three pension plans manage, it raises questions about the reliability of
figures provided by the state investment board and about how all three
pension plans check performance numbers.
More negative than stated
The board told the pension plan administrator that the February 2001
return for its all-stock variable fund was negative 0.089% when it was
actually negative 8.90%. It said the return for the fixed fund, which
contains a stock and bond mix, was negative 0.046% when the return was
actually negative 4.6%.
MPS was in the variable and fixed funds. Milwaukee was only in the fixed
fund and had been gradually withdrawing money from the state pension fund
since 1996.
The Department of Employee Trust Funds, which administers the state
pension plan, adjusted the Milwaukee Public Schools retirement plan account
as soon as the auditor pointed out the error. The department took back only
$2.7 million to reflect the decline in the investment's value since February
2001.
Administrators of Milwaukee's retirement plan are waiting for an opinion
from a city attorney about whether they have a right to keep their $1.3
million overpayment. Rudolph Konrad, special deputy city attorney, said
Wednesday he hoped to issue an opinion about whether the city has to
reimburse the money in "a week to 10 days."
But if Milwaukee decides to pay up, the state pension plan will receive
$200,000 less, or $1.1 million, reflecting the loss in the value of the
investment.
MPS also is in discussions with the city attorney's office.
"If the city or MPS decides they do not need to pay the money back
to us, we'll explore our options with legal counsel," said Robert
Willett, the controller for the state pension plan. "We believe we have
a fiduciary duty to recover that money."
Mistake was human error
The state board, which made the original error, received $5.4 million in
the state's 1999 budget to use for technology upgrades and three additional
information technology employees. But the technology wasn't involved in the
decimal mistake, said Ken Johnson, the state board's chief operating
officer.
"It wasn't the technology that wasn't performing correctly, it was a
case of human error," Johnson said. "The decimal point was put in
the wrong spot when the person read the return off the report - the number
e-mailed . . . had the decimal point in the wrong spot."
The return figures for Milwaukee and MPS were e-mailed to the
administrator separately so the administrator could break out their
performance from the rest of the state pension fund. The return figures for
the state pension fund weren't affected by the error.
Johnson said the mistake was the investment board's responsibility and
that his organization now has "extra sets of eyes" reviewing the
source documents and e-mail before it goes to the state pension plan
administrator.
The investment board may have made the mistake, but the pension plan
administrator and the Milwaukee and MPS retirement plans all failed to
notice the huge discrepancy between their February returns and those of the
market.
Pension plans and their administrators, along with their consultants,
typically use benchmarks to monitor investment performance. For example,
consultants at Alpha Investment Consulting Group LLC in Milwaukee build a
custom index to match a particular portfolio, then every quarter compare
that portfolio to the benchmark and other portfolios with similar
allocations.
If the portfolio's quarterly performance diverges by one percentage point
or more from that of the benchmark or the similar portfolios, they
investigate further.
"If you're not benchmarking, that's wrong," said Jim Wenzler,
research director at Alpha Investment Consulting Group LLC in Milwaukee.
"But if you are benchmarking and you're so different from the
benchmark, you've got to have a good reason for that - and typically it's a
calculation error."
The Department of Employee Trust funds wasn't checking performance
against the benchmarks at the time the error occurred, but it is now,
Willett said.
From bottom 10% to top
The Milwaukee retirement plan was comparing the fixed fund performance to
the Mercer balanced fund universe, said Jennifer A. Shannon, chief
investment officer for the city retirement plan. The fixed fund landed in
the bottom 10% of the Mercer balanced fund universe in the fourth quarter of
2000 and rebounded to the top rank in that universe in the first quarter of
2001, she said.
"Given an unusually dramatic quarter in 2000 when they performed in
the bottom 10 percent, it didn't seem unreasonable they would recover
significantly in the next quarter," Shannon said.
The amount Milwaukee had in the fund was less than 1% of its assets, she
said.
The MPS retirement plan has no money managers or investment consultants
on staff and does not compare the performance of fixed and variable funds
against benchmarks on a quarterly basis, said Chris M. Toth, director of
benefits and insurance services for MPS.
"With the volatility in the market in general and the performance we
get reported monthly, there was nothing that showed up as a major deviation
- especially when we pretty well look at benchmarks on an annual
basis," Toth said.
The state's Legislative Audit Bureau found the error during a routine
audit of the Department of Employee Trust Funds. It notified the involved
parties immediately but has not yet completed a report regarding the
discovery.
"It's an audit in progress - we're in the process of writing up our
findings and we do intend to report to the Joint Legislative Audit
Committee, the Employee Trust Funds board and the (investment) board,"
said Janice Mueller, state auditor.
The state retirement fund at the end of 2002 - the most recent data
available - had $50.9 billion in assets, enough to pay for only 84% of the
$60.5 billion in promises it has made to current and retired employees,
according to the Department of Employee Trust Funds.
The nearly 500,000 participants in the plan include current and retired
public employees of the state and nearly every county, city, town, village
and public educational institution.
Only the City of Milwaukee and Milwaukee County, which have their own
pension systems, are not part of the state plan - although Milwaukee County
school districts, suburban governments and technical colleges are covered by
it.
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