Dec. 21. 2012
By Iliya Atanasov
Anyone driving to work in the morning, cup of joe in hand, knows the temptation to rush ahead between the other cars before the road gets clogged up. But we also know that we would rather spend an hour in a traffic jam than wind up in a pile-up on the highway, so we keep closer to the speed limit.
Public retirement funds’ managers, who have hundreds and thousands of retirees and taxpayers riding in the back seat, should be equally prudent — especially when their cars haven’t been repaired from the last crash.
During the 2008-2009 financial crisis, Worcester’s pension fund declined by a whopping $125 million, its funded ratio dropping from a healthy 86 percent to about 68 percent. The city’s unfunded pension liability jumped from $130 million before the crisis to $300 million, where it remains today.
Despite the market’s rebound since the worst days of the crisis, the city’s retirement fund had recovered to just over 70 percent funding at the end of last year and its annual return was negative.
To avoid catastrophe, the Massachusetts Legislature has been making changes to the pension system almost every year since the big crash, putting up new speed-limit and warning signs left and right. The latest round of reforms includes basic educational requirements for board members and a rigorous search process for investment managers and consultants.
The state’s public-pension regulator, the Public Employee Retirement Administration Commission, which is in charge of implementing the legislation, must now approve every search for vendors.
Cue the much expected grumbling by retirement board officials, who say the state’s onerous regulations are consuming fund managers’ precious time. They have to pursue higher return targets in what is anyway a very challenging investment environment. Opportunities are being missed. The road is buckling under heavy traffic and they need to speed up to get us to the destination on time.
Worcester’s city auditor and ex-officio chairman of its retirement board, James DelSignore, has eagerly joined that choir. As the new rules were being rolled out this summer, he complained that the new vetting process might force Worcester to miss out on timber and private-equity investments it had lined up. At a Harvard Kennedy School roundtable on the underfunding of public pensions last year, Mr. DelSignore asserted that “a lot of that liability is going to disappear” if we only let the market work its magic.
That is precisely the type of attitude the new regulatory requirements aim to avert.
Apparently, Mr. DelSignore thinks traffic will clear up just ahead and we’ll get to our destination safe and sound. But who can predict what will happen in the next five or 10 years — the minimum time needed to make a meaningful dent in the unfunded liability even if returns improve? And would that matter if we ended up in a lethal crash before we got there?
But assume Mr. DelSignore is right; he can do better without the state’s burdensome new regulations. Only weeks ago, he had to be begged by the city to stick around for another year after a presumably rigorous search process did not yield any candidates with sufficient experience in public service to replace him.
What is the city — and its retirement board — to do next year when he finally moves on?
That’s what the new regulations are meant to address: putting in place the right policies to protect Worcester’s pension fund from future mismanagement. If he wants to leave behind a solid legacy and help the city, the auditor should focus his experience and expertise on leading that effort.
Like localities statewide, Worcester is strapped for cash. Just last month, the city had to announce budget cuts because of poor revenues. With continued market volatility and public-employee contributions near record highs, especially for entry-level workers, pension funds cannot afford costly mistakes.
Any crash could be fatal. We all need a speed limit — and a decent seatbelt to boot.
Iliya Atanasov is Senior Fellow for Finance at the Pioneer Institute in Boston.