By Len Lazarick
A legislator who has spent his career as a financial advisor and investor is seeking to force the state pension system to limit what he sees as risky investments in private equity, hedge funds and other alternative assets.
The investment managers at the State Retirement Agency told the House Appropriations Committee Tuesday that Del. Steve Schuh’s legislation, HB819, will mean lower returns on investment and less diversification for the $40 billion fund that pays for pensions for teachers and state employees.
“Our pension system has underperformed over the last decade,” Schuh, R-Anne Arundel, said, and the fund managers have engaged in “extraordinarily risky strategies to make up for lost ground.”
Growing portfolio of alternative investments
Five years ago, the state pension investment held only 4% in alternative investments, such as hedge funds, credit/debt shares, and private equity, which are shares in companies not traded on public stock exchanges. Schuh said 21% of Maryland’s pension funds are now in such assets.
He wants to limit those assets to 10% of the portfolio.
“I’m not saying we should have none,” Schuh said.
States have added more alternative assets in attempt to match unrealistic rates of return, such as Maryland’s expectation of 7.75%, which is has not been able to achieve over the past 10 years, he said.
Melissa Moye, chief investment officer for the State Retirement Agency, said Schuh’s proposal “would have a negative impact on returns” and “it would reduce diversification benefits.”
“This program has made us a lot of money,” Moye said. “There would be substantial transition costs” to unload these investments.
In his policy note on the bill Michael Rubenstein, a legislative analyst with long experience on pension issues, essentially agreed with the investment managers.
“The series of asset allocation changes that began in fiscal 2008 have generally improved the system’s expected returns while reducing portfolio risk,” Rubenstein wrote.
Committee kills bill on pension rate of return
Another Republican-sponsored measure affecting Maryland’s pension investments has already been killed in the House Appropriations Committee.
Del. Gail Bates, R- Howard, wanted to lower the expected rate of return on pension funds, because they were likely to fall short of past returns due to the weak economy.
Pension officials who attended the hearing rejected the bill on the grounds that it wasn’t a sustainable solution to the problem.
The bill was rejected 15-7. All seven supporters of the bill were Republicans.
Becca Heller contributed to this story.
Work on this story and other articles related to pensions has been supported by a grant from the Abell Foundation.
Delegates Shuh and Bates are correct. The anticipated rate of investment return should reflect reality. A return of 6.0-6.5% is mmore appropriate than the fantasy of 7.75%. Using a lower, realistic rate will illustrate how badly the State has deliberately shortchanged our employees and taxpayers. The percentage of alternate, and managed investments should be relatively small. Their risk, poor performance, and exorbitant costs are significant. The investments should be predominately in broad based index funds, which have consistently out performed managed funds. The Maryland State pension funds have been underfunded for the past 12 years, End Corridor Funding and make the Actuarially Recommended Contribution, and get out of the current downward death spiral.