It would be great if pension fund administrators for fire, police and other non-elected city employees could invest funds locally and earn above-market returns. It would also be great if the city could hire local fund managers ? with a priority to hire more minorities and, importantly, meet pension fund performance targets. And it would also be wonderful if the city could keep adding pension benefits without respect to cost.
But all of those lovely wishes would be, and are, a foundation of bad policy for city employees ? 60 percent of whom are minorities ? hoping to retire with full benefits, according to a recent report from the Calvert Institute for Policy Research. We agree.
With those “lovely” rules, city employees have fared poorly. The report shows that from 2000 to 2005 fund surpluses of more than $140.7 million morphed into a $168.1 million actuarial deficit. (The actuarial deficit is smaller than the real deficit because losses are phased in over time.)
The two funds, one for fire and police employees and another for other non-elected employees, are worth $3.3 billion and provide benefits for about 14,000. The funds are not in the hole right now ? but they are $168.1 million short of what they ultimately must pay to pensioners. (The Examiner?s Stephen Janis broke a story about the shortfalls at the Fire and Police Employees? Retirement System pension fund on April 7.)
The report shows that the Employees? Retirement Systems fund, which employs politically connected managers and advisers, has not met its targets in the last three years.
Had it met them, it would have $33 million more in its coffers than it did on June 30, 2005. That figure would have reduced by half its $63.7 million actuarial deficit ? the amount it needs to fully cover the retiring employees.
That still would not cover the city?s liability to pay for new benefits added in 2001, however. The city didn?t allocate extra money to pay for these benefits but elected to pay the $63.2 million cost for them with excess earnings from an earlier date ? a cushion no longer there.
The Fire and Police fund, which in 2003 scrapped its poorly performing chief investment adviser, Callan Associates Inc., has turned its results around, surpassing its benchmarks in the last two years. Callan ? which has offices in Denver, Chicago, Atlanta, San Francisco and Florham Park, N.J. ? is the one charged with finding successful and competent managers for the fund. Amazingly, the employee fund still retains Callan, which has been sued by the city of San Diego for not disclosing consulting payments accepted from 213 different money managers ? including 14 of the 16 funds it recommended to the city.
Firing them was a good start. The employee fund should follow the lead.
But a number of reforms are needed to ensure that the funds are focused on delivering the best possible returns for employees and retirees vested in the fund according to the report.
Public pension fund problems, of course, are not just Baltimore?s. Poor stock market performance following the dot-com bubble burst has hurt public and private retirement funds across the nation.
But Baltimore can take steps to eliminate political patronage from deciding the fate of the $3.3 billion in its trust.
First, and possibly most importantly, the city should transition to a program where employees decide how much to contribute to their retirement from one where the city administration decides. That would end politically generated ? and unfunded upgrades to pension plans. It would also make the pension board and any managers more accountable to employees by making gains and losses personal instead of institutional.
The second-best option would be to fire the current managers. The pension system could then invest directly in index funds. Those funds, which could be administered internally, have performed better than those of expert advisers and brokers hired by the city for about $12 million per year.
Third, the legislature should amend the 2005 Uniform Management of Public Employee Retirement Systems Act so that it applies to pension systems that existed before it went into effect last July. Baltimore?s funds should comply with rules that put employee accounts first, not political connections.
That means at the very least that investment adviser Callan Associates Inc. and one of its poorly performing ? and politically connected-fund of fund managers, FIS Funds Management of Philadelphia, should be fired.
To contact the city official who oversees the funds, you can reach Councilman Keiffer Jackson Mitchell, the chair of the Taxation and Finance Committee, at 410-396-4816 or [email protected].
