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by George Liebmann
Defined Benefit Plans. The case for conversion of the deficit-laden defined benefit
plans to defined-contribution plans is manifest. Making this change eliminates
government’s responsibility to manage retirement fund investing, a responsibility
that many governments have failed to meet. Many other states are making
this change; Montgomery County has already done so with respect to all
employees save public safety personnel.
Hedge Fund Investing. The Calvert Institute warned against moves toward high risk
hedge fund investing by the Retirement Systems’ essentially amateur
boards. These warnings have not been heeded. The most recent Baltimore
City ERS report discloses that approximately $69 million, or 6 percent of the
portfolio, was committed to hedge funds, which returned 12.91 percent as
against 18.33 percent for the portfolio as a whole. The Fire and Police fund
committed $136.3 million to hedge funds, 7.1 percent of the portfolio, achieving
a yield of 15 percent as against 19.8 percent for the total portfolio.
A recent report by the Maryland Tax Education Foundation reaffirms these
warnings. The MTEF report emphasizes that hedge fund investments are rendered
unprofitable by the high commission rates paid to their managers, typically
2 percent of corpus and 20 percent of gains. As if in perverse response to
this report, the 2008 General Assembly repealed a preexisting 1.2 percent cap
on compensation of real estate and alternative investment managers. This
statute boldly declares: "The Board of Trustees is not limited in the amount of
investment manager fees that the board of trustees may pay as necessary for
external real estate or alternative investment management services." The effect
of this change will not be to improve the state’s investment return but to further
endow hedge fund managers with personal incomes in the hundreds of millions
a year, nearly all taxable as capital gains as a product of the 20 percent
profit sharing. There are few if any provisions, however, for repayment of 20
percent of the losses produced by hedge fund managers in recession years.
The State Retirement System, though slower in moving into hedge funds,
now has 1 percent of its portfolio, or $386 million, in private equity as of June
30, 2007, and has a new affirmative action Emerging Manager program containing
$340 million as of June 30, 2007.
Inadequate Fiduciary Standards. The 2006 Calvert Report urged extension in Maryland
of the Uniform Management of Public Employees Retirement Systems Act
with its duties of loyalty to preexisting as well as new systems. This has not
happened: see section 40-101 of the State Personnel and Pensions article as
enacted by Chapter 146 of the Acts of 2005, which exempts both the state system
and pre-existing local systems.
Politically-Influenced Investing. The 2006 Calvert Report urged a ban on ‘affirmative
action’ investing. Instead, the General Assembly has encouraged it, and the
state comptroller has attended a convention of the Jesse Jackson Wall Street
Project and has urged affirmative action for minority investment bankers.
Amateur Boards. The 2006 Calvert Report urged that boards be constituted primarily
of financial professionals. Governor O’Malley’s appointments to the
Board of the State Retirement Systems, including that of Thurman Zollicofer,
his former ‘point man’ for politicizing City investment policy, do not further
that objective. Union agitation in Montgomery County seeks to end the tradition
of apolitical investing there, despite its excellent results and the inferior
results of union-controlled funds demonstrated in the Farber report referenced
above.
Industry Entertainment and Travel Abuses. The 2006 and 2007 Calvert Reports
criticized the practice of the Baltimore ERS board of extensive travel to industry-
sponsored conventions. Although cosmetic reforms were instituted, limiting
attendance at foreign conventions to one per member per year, and limiting
to three the number of board members at any conference, proposals to reduce
the $10,000 travel allowance per member to $7,500 or $8,500 were rejected at
the board’s meeting on July 20, 2006. The ERS budget for "Trustee Education"
for its small board is still twice that of the larger Fire and Police Board ($43,328
for seven members as against $22,213 for nine).
Brokerage and Management Fees. The 2006 report urged in-house internet execution
of trades and replacement of investment advisers by index funds. This has
not happened. The Baltimore Fire and Police fund in 2006–2007, with $2.3
billion in assets, spent $1.3 million on brokerage fees and $7.5 million on managers’
fees; the ERS with $1.5 billion in assets spent $0.6 million on brokerage
fees and $5.6 million on managers’ fees. The State Retirement Systems spent
$9.7 million on brokerage commissions in 2006-2007.
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