When one is in a hole, it is usually sound practice not to dig deeper. Maryland is in a very large hole deriving from its habit of paying its employees with future benefits rather than current salaries. Governors and county executives of both parties have made promises, the bills for which do not fall due until the politician in question has left office or ascended the next rung of the ladder. The result is huge liabilities and an immobile work force too many members of which are serving time until their benefits fall in.
Former Montgomery County Executive Douglas Duncan fueled his abortive campaign for governor with large new police and fire benefits. The county now has a pension deficit of $600 million, though it had none eight years ago. Former Gov. Robert Ehrlich failed to resist Democratic efforts to fatten teacher pensions in an election year. In the year after the new measure took effect, state unfunded pension liabilities increased by $4 billion. Ehrlich and current Gov. Martin O’Malley withheld a combined total of $600 million in actuarially required pension contributions beginning in 2003. The state actuarial pension deficit is now $11 billion and rising. For good measure, O’Malley allowed the $200 million per year budgeted to reduce the state’s $15 billion retiree health deficit to be cut in half in each of the last two fiscal years.
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O’Malley has now altered state pension policy for the worse by signing three bills. Chapter 601 of the Acts of 2008 mandates affirmative action in the selection of pension advisers. Parris Glendening’s administration’s adventures along these lines gave rise to two criminal convictions; in addition, an adviser that was not indicted lost more than 50 percent of the fund confided to its care.
Investment results from 2000 to 2005 were 2 percent per annum under those of peer funds, producing an income shortfall of $2.5 billion. Chapter 342 requires divestiture of stock in oil companies and others investing in Iran. How reducing Iran’s oil exports benefits the United States is not clear; what is clear is that the expenses of Maryland’s fund will go up and its yield will go down as a result of this neo-conservative political posturing.
Worst of all, Chapter 506, enacted for the benefit of hedge fund managers who frequently charge 2 percent capital and 20 percent gains for their services, repeals an existing 1.2 percent limit on their compensation, declaring in capital letters: “THE BOARD OF TRUSTEES IS NOT LIMITED IN THE AMOUNT OF INVESTMENT MANAGER FEES THAT THE BOARD OF TRUSTEES MAY PAY.”
Baltimore City’s hedge fund investments have yielded less than its ordinary portfolio. There is no reason to believe that such managers can regularly outguess market yields by more than the 2 percent base commissions they receive, and much evidence to the contrary. Extraordinary hedge fund commissions, and the new class of hedge fund billionaires resulting from them, are at the root of a good deal of today’s market turbulence. Managers who receive 20 percent of gains have perverse incentives to take excessive risks, particularly since their contingent compensation is taxed only at the 15 percent capital gains rate, an outrage protected both by the Bush administration and New York’s Democratic senators. These underprivileged hedge fund managers now have a friend in the Maryland State House — the state’s taxpayers and pensioners do not.
George Liebmann is volunteer executive director of the Calvert Institute for Policy Research and the co-author of a forthcoming study of Maryland’s retirement liabilities.
