Pension Follies, Resumed




Maryland has, just, preserved its AAA bond rating, though with a negative outlook from Moody’s. Moody’s has issued a publication reporting that Maryland is one of the ten worst states in terms of the burden of pension debt, Maryland’s pension obligations being almost exactly equal to one year’s gross revenues, 99.5% of revenues, to be exact. By contrast, Virginia’s pension debt is the 31st largest in the country, amounting to 35.5% of annual revenues. Moody’s has recalculated the funding status of state plans; the average state plan, instead of being 72% funded, as assumed heretofore, is really only 48% funded. See the article by Michael A. Fletcher ,”State pensions face larger than usual funding gap,”in the Washington Post for June 27, 2013. Moody’s intends to value future pension gaps by assuming a 5.5% rate of return on investments.


Maryland’s pension board, at the beginning of 2013 put off doing anything about Maryland’s projected rate of return on its pension fund, an absurdly high 7.75%, at the behest of State Treasurer Nancy Kopp, a Montgomery County politician who could not be more sensitive to the interests of government workers, federal and state. When the administration’s tepid pension reform was before the legislature, she actually incited unions to modify it. In late 2013, the Board finally acted on a proposal to reduce the projected rate of return from 7.75% to a still grossly inflated 7.55%. This was too much for State Budget Secretary Eloise Foster, who was also State Budget Secretary during the Glendening Administration, when the State adopted its notorious ‘corridor-funding’ plan for systematically underfunding pension contributions beneath even the level called for by the absurd actuarial assumptions. Ms. Foster successfully proposed, with only member Thurman Zollicoffer dissenting, that the .20% decrease be phased in over four years, so that the bills will fall due after the O’Malley administration leaves office. Mr. Zollicoffer at least has learned something from experience. He was Mayor O’Malley’s point man on one of the Baltimore City pension boards when the Mayor engaged in happy talk about City pensions during his first campaign for Governor, leaving behind a legacy of City fiscal crises and closed recreation centers, fire houses, and other facilities.


If the Pension Board has taken one-quarter of a baby step in its actuarial assumptions, it has continued on its erratic course on issues surrounding fund investments. Even as university pension funds have become disenchanted with ‘alternative investments,’ the Maryland fund continues to rush into them. The O’Malley Administration successfully sought legislation removing the previous cap on manager’s fees so that Maryland could enter the wonderful world of hedge fund investing, in which managers are accustomed to fees of 2% of principal and 20% of capital gains Justification of such fees is possible only where managers greatly out-perform the market, a phenomenon usually due to abuse of insider information. Now that the SEC has begun cracking down on hedge funds, they have begun to produce unspectacular, indeed sub-normal, investment results.


On July 16, 2013, the Pension Board (which recently hired a new public relations man) issued a joyful press release reporting that in the most recent year it had achieved a 10.6% return, a return in excess of the 7.75% actuarially assumed return. Needless to say, the release did not point out that in the preceding year the fund had produced virtually no return at all. Nor did the release compare Maryland’s return with that of other funds that had reported annual results when the release was issued. The Calpers fund and the California Teachers’ Fund, among the nation’s largest, reported returns of 12.5% and 13.8% respectively; the Worcester, Massachusetts fund had a yield of 14.1%. The difference in yield–3.5%–between the Maryland and Worcester funds translates to lost yield on the Maryland fund of approximately $1 billion annually.


Maryland had 20% of its portfolio invested in ‘hedge fund’ Real Return and Absolute Return investments, which respectively yielded -1.5% and 3.4%. Another 6.2% of the fund was invested in ill-liquid (and dubiously valued) private equity, supposedly yielding 11.7%. Few other large funds have 26% of their portfolio in ‘alternative investments. A long series of articles by Mary Williams Walsh in the New York Times is instructive in describing their experience, but Maryland’s managers seem to confine their newspaper reading to the hagiography of the Baltimore Sun.


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