By Len Lazarick
For the second year in a row, Maryland’s retirement and pension system beat its target return on investment, earning 8.06% and raising the fund that pays for retired teachers and state employees to almost $52 billion, a gain of $2.8 billion.
According to a national tracking firm, Maryland’s return was about average for large public funds, largely fueled by returns on public and private equity stocks.
Last year’s return was 10%, the highest in years, but in the long-term, Maryland still falls below its 7.50% annual target. It has earned an average of 7.15% over the past five years and 5.5% over 10 years, leaving the fund with about $19 billion more to make up for the promises it has made to provide pensions for state employees and teachers.
“Private equity provided 19.6% net of all fees and expenses and continues to be the best performing asset class for the System. Public equities provided 10.6% return, closely followed by private real estate at 9.5%,” said Chief Investment Officer Andrew C. Palmer. “At the other end of the spectrum the rate sensitive portfolio provided modest positive returns despite ten-year U.S. Treasury yields rising more than 0.5% for the year.”
State Treasurer Nancy Kopp, who chairs the pension system board, emphasized the long-term sustainability of the system. Detailed figures are not available for fiscal 2018, but last year the various pension plans for teachers, employees, law enforcement and judges paid out over $3.6 billion to 156,000 retirees and beneficiaries. The payout figure is more than matched by investment earnings plus current contributions from employees and taxpayers.
The persistent critics of the state’s retirement system at the Maryland Public Policy Institute, a free-market think tank, were unimpressed with the latest figures. They consistently criticize Maryland for its active investment strategy, its payments to outside investment managers and its failure to switch to a more flexible defined contribution retirement plan, rather than the current defined benefit plan in which the state pledges to pay employees a percentage of their salaries based on years of service.
“During the latest fiscal year, the Maryland pension fund has finally matched its 50-state peer group in terms of annual rate-of-return, after failing to do so for over 15 years,” said Jeff Hooke, a MPPI senior fellow who has studied and taught about state pension fund investment practices. “Nonetheless, Maryland, like most other states, still trails a simple, low-fee 60-40 index, like the Vanguard Balanced Fund, by a substantial margin. The pension fund is spending close to $500 million per year in Wall Street fees, and the situation bears close monitoring,”
Hooke said Maryland is roughly 1% below its peer group of large public pension funds for the past 10 years, and that peer group is about 1% below the 60-40 index for the past 10 years.
“The opportunity cost of lower returns over 10 years is in the billions, but few people in the government notice or care,” Hooke said.
Coincidentally, the policy institute Tuesday launched its Maryland pension map which details the additional pension liabilities each county owes its own employees. Maryland’s larger counties operate their own pension plans, while the smaller counties have their pension funds administered by the state retirement system.