Investment chief for state pension system leaves after 2½ years; critics say pension investment goals can’t be achieved

By Len Lazarick

The chief investment officer for Maryland’s $33.7 billion pension fund for the last two and a half years is leaving Oct. 31 to manage a much smaller $587 million endowment at a liberal arts college in Minnesota, where his family continued to live after he came to Maryland.

The search has not begun for a replacement to oversee the more than 180 outside advisers and consultants that help manage Maryland’s portfolio. But critics of the pension system last week said that anyone in the job would have trouble meeting the state’s annual goal of 7.75% return on investments – a goal the state has rarely achieved as it has underperformed the returns gained by half the other states.

Partially because of average returns of only 2.1% during the last 10 years, and partially because the state chose to reduce its own contributions to the pension system, the fund now is $18 billion short of the money it has promised to pay state workers over the next 25 to 30 years.

Departing chief investment officer Mansco Perry III will become CIO at Macalester College in St. Paul, Minn. The college has a $587 million endowment and a major fundraising campaign underway to increase it. The endowment has achieved a 6.7% return on investment over the last five years.

Perry moved here from the Minnesota State Board of Investment, but his family remained there.

State Treasurer Nancy Kopp, who chairs the board of the pension system, said Perry “leaves the system with a portfolio that is well-positioned to realize further gains and an investment team with a guide map to continue the upward trajectory he plotted for us post-crisis.”

Overall, in the past year Maryland achieved a 14% gain on its pension holdings. The new Terra Maria program, which Perry helped create to use the services of smaller fund managers, realized earnings of 18.5% on $2.25 billion in assets.

A new state commission to examine the sustainability of the retirement system and make recommendations for changes is scheduled to hold its first meeting Thursday.
Critical reports

Last week, the Baltimore-based free-market think-tank the Calvert Institute and the Maryland Tax Education Foundation issued reports highly critical of the state’s current retirement system.

The system represents “an enormous cloud over state and local finances,” said George Liebmann, executive director of the Calvert Institute for Policy Research. A long-standing critic of public employee pensions, Liebmann said they are “over-generous.”

“We have here a mess,” Liebmann said. “There’s no willingness to acknowledge that inconvenient fact before the election.” The new pension study commission was appointed in August, three months after the law creating it was signed.

Jeff Hooke, an investment banker and chairman of the Maryland Tax Education Foundation, produced figures showing Maryland’s pension investments have consistently under-performed other states. He said the 7.75% investment return was more likely to be about 6%, digging the hole even deeper for the state’s unfunded liabilities.

Virginia, North Carolina, New Jersey and Kentucky all had better returns than Maryland.

In an interview, Dean Kenderdine, executive director of the retirement agency, said, “We have not performed as well as some states, but we have outperformed other states. Which is not to say that we’re pleased by our investment performance, but we are confident in the asset allocation.”

Kenderdine, who has headed the agency for three and a half years, said “the single greatest reason why we have underperformed” is that Maryland has gotten into “alternative asset classes” such as private equities and private real estate “later than other states,” such as those Hooke mentioned. Those kinds of investments take a longer time to produce their higher returns, Kenderdine said.

Hooke also suggested that the state would be better off with fewer advisers and more investment in index funds that track a basket of investments such as the Standard & Poor’s 500.

“We are indexed in certain asset classes,” Kenderdine said. In domestic stocks, 45% of the holdings are “managed passively,” meaning the fund simply buys and sells to rebalance the basket of stocks in an index. In international stocks, 48% of the holdings are in several index funds.

“Our active management is largely in fixed income and global assets,” where the state is convinced that active management is the appropriate strategy, Kenderdine said.

But investments aside, Liebmann argues, the pension system has “some serious accounting issues,” which hide the true debt, and benefits need to be reduced “in one form or another.”

Liebmann said the candidates for governor should be tackling what to do about the pension problems, but “this single most important issue is not being discussed.”

Republican ex-Gov. Bob Ehrlich does raise the issue in his Roadmap to 2020, a compilation of campaign positions. “The preeminent threat to Maryland’s long-term solvency is its pension obligations,” the Ehrlich paper says. But he offers no details, other than to promise to “introduce bipartisan pension reform” after all the stakeholders, including employees, beneficiaries and taxpayers, get a chance to be heard.

Gov. Martin O’Malley, who has been endorsed by the largest unions of state workers and teachers with a stake in the pension system, occasionally mentions the issue in passing as a problem that must be dealt with in his next term.

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