ANNAPOLIS – Maryland’s state retirement and pension system lost $3.6 billion in fiscal 2001, but the fund’s managers told legislators they do not plan to change their investment strategy based on one year’s performance in a turbulent stock market.
That did little to satisfy some members of the Special Joint Committee on Pensions, who were told that, during the fiscal year that ended June 30, Maryland had the worst performance of 38 public pension funds with more than $1 billion in assets.
The value of Maryland’s pension fund, which is heavily invested in stocks, fell from $33.1 billion to $29.5 billion over the fiscal year as the stock market tumbled.
“I am concerned,” said Delegate Joan Cadden, D-Anne Arundel, at a Tuesday evening hearing of the joint committee. “Sometimes I think you need to change your strategy when you find it’s costing that much.”
When Sen. Edward Kasemeyer, D-Howard, asked what the board would do if it lost billions again this year, the system’s chief investment officer said she would do “the same thing I’m doing right now.”
“I’m not a market timer,” said Carol Boykin, the investment officer.
The fund’s supporters noted that the board’s aggressive investments over the past decade have allowed the pension fund to become fully funded years earlier than expected. They said lawmakers should not rush to change the board’s strategy based on one year’s poor performance.
Arthur Caple, the board’s investment committee chair, pointed out to legislators Tuesday that the state’s losses at this point are on paper, not in dollars, and “the markets have always come back.”
All of the 38 public pension funds ranked in the Wilshire Associates report were hurt by the poor performance of the stock market this year, after years of unprecedented growth.
But Maryland was particularly hard hit. The state has more than 72 percent of its assets in common stocks and short-term investments, more than double the commitment it made to such equities in 1990, when its portfolio was 32 percent equities.
“That’s a little on the aggressive side,” said Meg VanDeWeghe, an executive-in-residence at the University of Maryland’s Robert H. Smith School of Business. “But it looked very smart through most of the 1990s.”
While it is somewhat riskier to invest more heavily in equities rather than fixed-income securities, such as bonds, the move also allowed the system to be more than fully funded in 2000. In 1990, the pension system was only 70 percent funded.
“It’s that aggressive strategy that got us to full parity 20 years ahead of schedule,” said Sen. Martin Madden, R-Howard. He did not want to criticize the fund’s management Tuesday based on one year’s performance.
After the fiscal 2001 losses, the system is 97.5 percent funded. State Treasurer Richard Dixon has estimated that Maryland might have to put as much as $68 million into the fund for next year to bring it back to parity.
Dixon, chairman of the system’s board of trustees, was out of the office this week and unavailable for comment.
It is unclear where that additional pension money will come from, with the budget already overextended. But a spokeswoman for Gov. Parris Glendening said the law requires that the system be funded and it will be.
“They’ve got to put the money in,” said Comptroller William Donald Schaefer, vice-chairman of the pension system board.
Schaefer wanted to reassure state employees and retirees that the fund is sound. But he also said that the pension system may be too heavily invested in equities and perhaps “should go to 68 or 70 percent.”
Others said this might be the time to hold on to stocks, however.
“This has been a very tough year,” VanDeWeghe said. “But I’m not sure this is the time to get out of equities.”
But lawmakers pointed out this week that they can’t wait for long-term results — they will have to find money to restore the fund to parity when they sit down to craft next year’s budget.
“They created a problem that I’m going to have to find a solution for and we don’t have the reserves,” said Delegate Martha Klima, R-Baltimore County, who added that Dixon did not seem to have the instincts of when to pull out.
“I just didn’t feel any better when I left there,” Klima said. “It’s not a problem for them (the board) because they don’t have to find the $68 million.”