Maryland’s Pension Scandals

In March 2006, The Institute published a study, The Baltimore City Retirement Systems: Heading for Trouble, available online here.

That study pointed out that the Employees’ Retirement System of Baltimore City had consistently produced investment results below its benchmark yields based on comparisons with market indices. The shortfalls were as follows:


In 2001-02, the fund outperformed its benchmarks by .8% and in 2000-01 by 3.7 %. However in 1999-00, the fund underperformed its benchmarks by .2% , in 1998-99 by 4.4% and in the preceding four years, 1994-98, by an average of 1.1% per year. Over an 11 year period from 1994 to 2005, average under-performance was .7% per year, or a total of 7.7% for the eleven year period As applied to a $1.3 billion fund, this means that if the fund had been invested in index funds throughout the 11 year period, it would contain approximately $100 million more than it contains now In addition, it would have saved approximately $40 million in investment management fees and brokerage fees.

The fund’s annual report for 2004-05 showed an actuarial shortfall of $64.3 million as of June 30,2005, and a funding ratio of 95.7%, down from 107.5% in 2000. Because investment losses are phased in over a five-year period, this understates the true shortfall. Actuarial liability was 1.467 billion as of June 30, 2005 (page 32) and net assets were 1.288 billion (page 23) , a shortfall of $179 million, a funding ratio of 87.8%. By June 30,2006, net assets had increased only to 1.334 million; actuarial liabilities have not yet been calculated, but there will almost certainly be a further decline in the funding ratio.

The Fire and Police Retirement System, unlike the Employees’ Retirement System, changed its investment advisors in late 2002, replacing Callan and Associates with Summit Investments and dispensing with the services of Fiduciary Investment Services of Philadelphia as its fund of funds manager. As shown in our earlier report, both these organizations have been severely criticized. Callan is being sued in San Diego; FIS has received much adverse publicity in Philadelphia and Bermuda and has recently been discharged as manager in Prince George’s County. The Fire and Police Fund’s actuarial deficit as of June 30,2005 was 104 million as of of June 30,2005; its cash deficit was considerably greater. The cause of the deficit was,.found in excessive liberalization of benefits and in disability retirements; its investment results greatly improved since it changed managers (Calvert report, pg.24).

Baltimore City Employees’ Retirement System

The O’Malley administration’s response to the Calvert Report did not take the form of reform, but of abuse of the messenger. The City administration was quick to point out the Republican affiliation of some of Calvert’s supporters. But it took no action to encourage replacement of the ERS’ investment managers, despite their involvement in serious controversy elsewhere.

When it was revealed in a series of articles in the Baltimore Examiner, based on information supplied by this Institute, that the ERS’ Executive Director and all but one of the members of its board engaged in expensive foreign travel at the Fund’s expense and were extensively entertained by fund managers and others seeking to do business with the Fund, the administration and City Council’s response was to commission, at a cost of more than $10,000, a study by a “fund consultant” , the Groom law firm, of other funds’ foreign travel practices, designed to prove that “everybody does it”, even though the Board of the Fire and Police Fund and one member of the ERS Board, Ernest Glinka, forswear such favors. At the Board meeting on May 18, 2006, the Board members took turns chastising the dissenter, Ernest Glinka:

“Chairwoman Pratt asked Mr. Glinka why this issue had surfaced now when he as a former Retirement Systems Admiunistrator as well as some F & P trustees in past years, attended numerous international conferences to places such as China, Russia and Hong Kong. Mr. Glinka responded that he did. He also stated that he did not initiate the issue being investigated, has never accused anyone of any wrongdoing, and that he listed in his annual Financial Disclosure Statement to the Ethics Board things that he does not do. . Board members asked why he would have submitted something with language that would reflect negatively on the other Board members. Mr. Glinka stated that he has not made any accusation whatsoever about any Trustee or their actions and that he has only spoken about himself and what he does and doen’t do. Mr. Davis stated it is not the general perception of the public who read Mr. Glinka’s quotes or hears his televised statements. The Board voiced its mutual respect for each member of the Board and determined that it should proceed from this point on with oinly positive responses, decisions, and actions.” (Minutes,pp.4-5).

See Editorials “Wouldn’t It Be Lovely”, April 12, 2006; “ERS Board Needs to Come Clean”, April 26,2006; “Expensive Education”, April 28, 2006. After receiving the desired recommendations the Board voted at its meeting on July 20,2006 against motions to reduce the travel allowance for each member from $10,000 to $7500 or $8500, , and then re-adopted the $10,000 limit with only members Moore-Carter and Glinka dissenting. The Board added two new restrictions: 1) only one international trip per member per year and 2) no more than three trustees at any single conference.

The O’Malley administration proudly proclaimed that ERS pensions are not in danger, a perfectly true statement since the ultimate burden of investment shortfalls is channeled not to pensioners but to taxpayers through additional required contributions. It pointed with pride to a statement by the Mayor’s spokesman, Stephen Kearney, that the report’s author “knows absolutely nothing about pension systems…This is just a flimsy political attack by a Republican group.” Shay, “Report Takes O’Malley to Task on City Pensions”, Montgomery Gazette, March 31, 2006. The City’s “expert” on pension plans, former Sen.. Barbara Hoffman, former chairman of the Senate Budget and Tax Committee who also sat on a pension subcommittee, declared that the report was the product of “the political silly season.”. It is useful to recall that Sen. Hoffman was a member of the legislative subcommittee overseeing pension plans throughout the last years of the Glendening Administration. According to the 2002-03 Maryland State Budget, vol. I, 582 the average annual rate of return for the Maryland State Retirement Systems for the five-year period ending on June 30,2002 was 3.21% as against 5.13% for peer funds, translating into a return shortfall of 9.55% over the five year period, a shortfall amounting to the modest sum of $2.5 billion. The explanations given for this fiasco by the Baltimore Sun and the state’s Democratic political establishment blame it on minor defalcations by a sub-manager, Alan Bond, and mediocre management of a portion of the portfolio by Nathan Chapman, who we are assured did not actually lose money. This overlooks the fact that the larger part of the enormous fund was placed with untried managers on an “affirmative action” basis; Chapman was by no means the worst manager.

Six months having passed since publication of our initial report, it seemed desirable to take another look at this subject. Two newly available sets of documents, obtained with some difficulty, shed light on the causes of the pension shortfalls experienced by the State, Prince George’s County, and the Baltimore City Employees Retirement System. In addition, a new look at the ERS’ investment advisors and investment results shows that that fund has not changed its ways, and that, despite the example recently set by the Fire and Police Fund, the ERS Board and the City Administration at least partially responsible for it prefers not to clean house. 1.

We also include new information, obtained with difficulty through use of the Freedom of Information Act, concerning the performance and management of the Baltimore City ERS fund for the period ending June 30, 2006, and information about the present state of the Prince George’s County system as a result of prior mismanagement, some of the Prince George’s funds having funding ratios as low as 50%.

At the ERS Board meeting on June 21,2001, the Board was exhorted by the Mayor to hire more local investment firms. The Mayor’s appointee, former City Solicitor Zollicoffer “stated that the Board is doing an excellent job with its minority buness preferences, however it should hire more Baltimore-based businesses if the Board is able to do so.” On July 19,2001, it was reported to the Board that Owen Tomkin of the Mayor’s Minority and Women Business Opportunity Office “had specifically mentioned Eddie Brown and another local firm, MMG venture partners.”

On August 15,2002, Joseph Barcic, Jr. of Callan Associates “reported on his meeting with Tina Poitevien of FIS. Mr. Barcic stated that he conveyed to Ms. Poitevien the Board’s desire to establish new goals for the FIS Fund of Fund to include hiring managers best in their style discipline and asset class and to fucus on hiring minority owned and emerging firms with no constraint on the investment style. Mr. Barcic stated Ms. Poietevien’s concerns over a benchmark for FIS. Mr. Barcic stated that he also conveyed to Ms. Poitevien that more than half the firms hired must be African-American owned and all of the firms must be emerging at time of hire . Mr. Barcic stated that he will follow up with Ms. Poitevien on the Board’s new goals.”

The “benchmark” for FIS had been 50% S and P 400, 50% Russell 2000 until February 2003, when, at FIS’ request, the less demanding Russell 3000 benchmark was used. This index includes fewer dividend-paying stocks and more small stocks. For the three year period ending June 30,2006, FIS produced gross returns of 14.13% . This compared favorably to the Russell 3000 return of 12.56%, but unfavorably when compared to the Russell 2000 return of 18.70% and the Dun and Bradstreet All Domestic Equity return of 15.57%. FIS’ peer group ranking placed it in the 59th percentile for the three year period June 30, 2003-2006.

For the year June 30, 2005-2006, FIS produced returns of 8.72%, as against 9.56% for the Russell 3000 index, its chosen benchmark, 14.58% for the Russell 2000 index, and 11.63% for the Dun and Bradstreet All Domestic Equity. FIS was in the 72nd percentile of peer funds for this one-year period.

It should also be remembered that the yields quoted in reports appear not to be net of FIS’ manager’s fee, which was established by a contract dated October 14, 1998 at 90 basis points annually for the first $25 million under management and 82 basis points for the next $25 million, and 75 basis points for the next $50 million.. The net return from the approximately $57 million portfolio managed by FIS must thus be reduced in each one year period by approximately .85% and in each three year period by approximately 2.55%. FIS’ three year yield for the period ending June 30,2006 was thus 11.58%, as against 12.56% for the Russell 3000, 18.70% for the Russell 2000, and 15.57% for the Dun and Bradstreet All Domestic Equity. FIS net one year yield for the period ending June 30,2006 was about 7.87%, as against 9.56% for the Russell 3000 index, 14.58% for the Russell 2000 index, and 11.63% for the Dun and Bradstreet All Domestic Equity.

The portions of the ERS’ domestic equity portfolio not managed by FIS are also largely in the hands of minority firms with unspectacular performance records. These domestic equity funds aggregate about $500 million. Their one-year yield for the period ending June 30,2006 was 9.62% (73rd percentile); their three-year yield 12.85% (53rd percentile); their five-year yield 3.86% (60th percentile). For the fiscal year 2005-06, only one of the four principal managers placed above the 50th percentile, Palisades (34th). The others were Lomax (64th), Brown (84th) and TCW (70th).

Business as usual continues at the ERS, to the ultimate detriment of the City’s taxpayers.

Prince George’s County Retirement Systems

The picture in Prince George’s County is more illuminating. There a new county executive, John Johnson, as one of his first orders of business, engaged the Amatucci Group to conduct an independent study of Prince George’s County’s several pension plans, for which Fiduciary Investment Services had been overall consultant as well as ‘fund of funds’ manager. The ensuing report recommended that FIS be replaced, and in October 2004, New England Pension Consultants was engaged to replace FIS. The following fund managers were thereafter terminated by the Fire Service and Police Fund, the largest of the Prince George’s County pension funds, the other funds generally following suit: (the numbers in parentheses show the annual percentile performance ranking of each fund, where available)

January 2005: Fortis Investments

March 2005: TCW Asset Management

June 2005: Columbia Partners: 2004,50; 2003,37; 2002,87; 2001,93

Delancey Capital Group: 2004,43; 2003,53; 2002,13; 2001,29

August 2005: Presidio Asset Management: 2004,76; 2003,98; 2002,80

October 2005: John A. Levin: 2004,54; 2003,56; 2002,99

Principal Global Investors

First Quadrant International Equity: 2005,50; 2004,37; 2003,67; 2002,73; 2001,87

Several of the retained funds are run by minority managers with unsensational but not disastrous records, notably Edgar Lomax, a Prince George’s County firm ( 2005, 77; 2004, 83; 2003, 93; 2002, 53; 2001, 67

The fund changes following the departure of FIS have produced some positive results. During the first quarter of 2006, the Police Fund was in the top quartile of funds. For the trailing year, it was in the 62nd percentile; for the previous three years, in the 57th percentile; for the preceding five years, in the 41st percentile.

According to the June 30,2005 Report, as of July 1,2004 several of the Prince George’s County Funds were in deep difficulty, and all were underfunded, as follows:

Fund Assets(millions) Funded ratio Deficit as % of payroll

Deputy Sheriffs23.650.19%363.05%
Correctional Officers39.460.24%154.52%

Seven supplemental plans with a total of 96.1 million in assets had a funded ratio of 59.06% and a combined deficit amounting to 55.04% of payroll. The combined deficit of all eleven plans amounted to $397.6 million.

It is plain that the ERS Fund, and the Prince George’s County funds to a milder extent, continue to indulge in the luxury of ‘affirmative action’ investing, and that they have suffered thereby. By contrast, as shown in our previous report, the Baltimore City Fire and Police Fund, which renounced this approach several years ago, (Calvert report, pg.24) and the Montgomery County fund (Calvert report, pg.25 n.3), which has always renounced it, have produced superior investment results; the deficits in those funds result not from bad investing but from excessive liberality in the grant of benefits. The ERS Board, and the O’Malley administration with it, is fairly chargeable with unusually stubborn persistence in error.

Posted in: News Series, Urban Affairs