Maryland State Retirement and Pension System

New Maryland Gov. Turns Focus to State Pensions

Gov.-elect Larry Hogan is busy constructing a budget to give to state lawmakers this week. But next on Hogan’s to-do list is a thorough examination of the state’s underfunded pension system – and how it will affect the budget his team has just put together.

From the Baltimore Sun:

The Maryland State Retirement and Pension System had only about 69 percent of the assets needed to pay for future and current retirees’ pensions in the last fiscal year — well below the at least 80 percent target that many experts consider healthy.

Robert Neall, Hogan’s fiscal adviser, called the nearly $20 billion unfunded liability in the state retirement system “an area of concern.” Hogan’s team has been busy putting together a budget to present to the Maryland General Assembly on Jan. 23, but Neall said the administration will soon begin examining the health of the pension system.

“That’s going to require higher pension contributions [from the state] probably for two decades, that’s why it’s a concern,” Neall said. “They are just facts that we have to contend with as we put together a fiscal ’15 closure and a fiscal ’16 budget to present to the General Assembly.

[…]

Michael Golden, a spokesman for the state pension system, said reforms made to the pension system in 2011, including requiring most employees to contribute 7 percent of their salaries into the fund instead of 5 percent, put it “on the road to stability.”

“We feel like were on track to get to the 80 percent funded ratio by 2024; we think that’s a good track to be riding on,” Golden said. “We have no plans at this moment to do anything differently.”

Robert Burd, the retirement system’s acting chief investment officer, said the board chose to reduce the percentage of money invested in stocks — about 39 percent was invested in stocks in 2014, less than most other states — after the recession because of concern about risk. While Maryland has not enjoyed as much of a benefit from the rebound in the stock market, Burd said, the change leaves the fund less exposed to future downturns.

“That’s why we don’t look as good as some of our peers do when it comes to rankings,” Burd said.

Maryland’s pension system manages $45.4 billion in assets for 143,000 retirees and is 69 percent funded.

Maryland Pension Fires REIT Manager, Will Transfer $311 Million Portfolio To New Firm

The Maryland State Retirement and Pension System is shaking up its domestic REIT portfolio as the fund has fired LaSalle Investment Management and will shift its $311 million domestic REIT portfolio to State Street Global Advisors.

From IPE Real Estate:

Maryland State declined to comment or provide a reason for the decision, while LaSalle failed to respond.

The $311m (€244m) domestic REIT portfolio will be transferred to State Street Global Advisors (SSgA), with a global investment strategy for REITs, benchmarked against the FTSE/EPRA NAREIT Developed Index.

Maryland State said it had a long relationship with SSgA across passive equities, core fixed income and EMD.

The pension fund also uses Morgan Stanley as a global REIT manager for a $387.6m foreign portfolio, also benchmarked against the FTSE/EPRA NAREIT Developed Index.

Maryland State has approved a $50m commitment to CBRE Strategic Partners US Value Fund VII.

CBRE Global Investors is raising $1.5bn for the US-focused fund, in which it will co-invest a maximum $30m.

The fund, which will invest in the office, industrial, hotel, retail and apartment sectors, has a targeted 15% gross IRR and a 12.8% net.

The pension fund has made nearly $280m in commitments to CBRE Investors since 2007.

The Maryland State Retirement and Pension System manages nearly $45 billion in assets and allocated 6.9 percent to real estate.

Report: Maryland Fund’s Below-Median Returns Coincide With Shift to Alternatives

The Maryland State Retirement and Pension System experienced a 14 percent return in the 2013-14 fiscal year. The fund’s then-Chief Investment Officer, Melissa Moye, touted the returns as “strong” – but a new report suggests not only that those returns were below-median level, but also that they were driven by a shift in investment strategy that put more money in alternative investments.

From David Sirota at the International Business Times:

According to [report authors] Walters and Hooke, a former Lehman Brothers executive, that shift [of assets to Wall Street] coincided with below-median returns for Maryland’s public pension system.

“Ironically, as the fund’s relative performance has declined, its Wall Street money management fees have risen,” the report says. “In fiscal year 2014 alone, the Maryland state pension fund paid out roughly $300 million in fees to Wall Street money managers. Over the past 10 years, these money management fees amounted to over $1.5 billion, according to the fund’s annual financial reports. Nevertheless this high-priced advice resulted in 10-year returns that were $3.22 billion (net of fees) below the median.”

If the fund had matched medianreturns for public pension systems across the country, “the state could have awarded 80,000 poor children with $40,000 four-year college scholarships,” Hooke and Walters wrote.

Maryland’s shift into alternative investments happened while the securities and investment industries made more than $292,000 worth of campaign contributions to Democratic Gov. Martin O’Malley, who appoints some members of the Maryland pension system’s board of trustees. Vice News has reported that the Private Equity Growth Capital Group is a financial backer of a 501(c)4 group co-founded by O’Malley. In May, Pensions and Investments magazine reported that the Maryland governor appointed a managing director of an alternative investment firm called The Rock Creek Group to head a state task force on retirement policy.

Meanwhile, the chief investment officer of Maryland’s pension system was recently appointed to a senior position in the U.S. Treasury Department overseeing public pension policy.

“Eliminating active managers, selling alternative investments, and adopting indexing for 90 percent of the state’s portfolio would ensure median performance,” his report concludes. “These actions would also save the state huge amounts in money management fees.”

Hooke has testified in front of lawmakers advocating the increased use of index funds in pension investments – a strategy that would have worked well the last 4 or 5 years, but one that offers little protection against market contractions.

Since 2008, Maryland has more than doubled its investments in private equity, real estate and hedge funds. Those asset classes made up 29 percent of its portfolio in 2013.

Maryland Fund Looking For New CIO

The Maryland State Retirement and Pension System is looking to hire an executive search firm to hire the fund’s next chief investment officer.

The fund has put the Request for Proposal on their website. The document can also be found at the bottom of this post. According to Pensions & Investments, the proposals are due by September 22 at 2 pm Eastern Time.

The fund’s previous CIO, Melissa Moye, left the fund recently to work for the US Treasury Department. Pensions & Investments reported at the time:

[Moye] is leaving at the end of August to become a senior policy adviser with the U.S. Treasury Department’s office of state and local finance. Deputy CIO Robert Burd will serve as acting CIO. The board has not begun the search process yet, spokesman Michael Golden said.

At the Treasury Department, Ms. Moye will focus on public sector pensions for the office, which was created in May to coordinate efforts to oversee developments in state and local financial markets, including public pension fund liabilities. Maryland pension board chairwoman and state Treasurer Nancy Kopp said in a statement that while the board will miss Ms. Moye’s leadership, “we are thrilled with the opportunity Dr. Moye will have to apply her wealth of knowledge and experience at the national policy level.”

Ms. Moye became CIO in September 2011 after serving as acting CIO since October 2010. Before that, she was deputy treasurer for financial policy and a trustee of the state pension system. Mr. Burd started with the retirement agency in 2001 as an assistant director of externally managed investments and was named managing director of private markets in 2008.

The RFP:

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Maryland’s Top Fund Returns 14 Percent for Year

The Maryland State Retirement and Pension System is the latest fund to release its investment performance data for fiscal year 2013-14, and the fund returned over 14 percent for the year, the System’s second consecutive year of double-digit investment returns. From the Baltimore Post-Examiner:

Maryland’s pension system for state employees and teachers had another strong investment performance for the fiscal year which ended June 30 earning 14.37%, bringing the value of the portfolio to $45.4 billion, a gain of more than $5 billion.

It was the second year in a row of strong performance due to sharp upturns in stocks, according to Chief Investment Officer Melissa Moye. The fund exceeded its target of 7.7% and its market benchmark of 14.16% — what its basket of assets would have been expected to earn.

The System is still in a hole due to its unfunded liabilities, which sit at about $20 billion. But the major credit rating agencies, even while weary of the liabilities, have commented on the improved health of the system of late as the effects of several reform measures have been positively felt. From the BPE:

These liabilities are consistently mentioned as a negative financial factor by all three bond rating agencies as they did earlier this month.

But the three New York agencies also note the improvements made in Maryland’s pension outlook after employee contributions were raised and benefits reduced by the legislature in 2011.

“The funds annual returns continue to reflect the strong market environment that has prevailed since the end of the credit crisis,” State Treasurer Nancy Kopp, chair of the pension board, said in a statement.

Typically, the System released investment performance figures by asset category. This year, the system only released aggregate returns and did not specify returns by asset category, although those figures may be released to the public eventually.

The S&P 500 returned around 21 percent for fiscal year 2014.