Study: MBTA Retirement Fund Failings a Cautionary Tale

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Study Finds Poor Governance Structure, Lack of Accountability and Transparency at Heart of MBTA Retirement Fund Failings

MBTARF dramatically underperforms state retirement fund, is plagued by cronyism and endemic conflicts of interest

A poor governance structure that gives control over hundreds of millions of dollars to a board of directors and senior managers who aren’t required to have investment experience, the absence of independent oversight and the apparent lack of a coherent investment strategy make the MBTA Retirement Fund (MBTARF) a cautionary tale for other pension funds and institutional investors, according to a new study published by Pioneer Institute.

Hard Lessons for Institutional Investors from the MBTA Retirement Fund

With three MBTA appointees, two union designees and one member elected by nonunion employees on its board and without meaningful regulatory oversight, MBTARF’s governance structure breeds conflicts of interest and fails to protect either plan members or taxpayers, according to Iliya Atanasov, author of “Hard Lessons for Institutional Investors from the MBTA Retirement Fund.”

“Neither board members, nor senior managers are required to file public statements of financial interest,” says Pioneer Institute Executive Director Jim Stergios.  “The people running the fund may also be eligible to collect a pension from it, meaning those entrusted with keeping costs down have an interest in maximizing benefits.”

Atanasov adds that since the union representatives on the retirement board are appointed by the union local rather than elected by its members, they are more likely to follow union leaders rather than serve the rank and file, whose pensions are at stake.

The Pension Reserves Investment Management (PRIM) Board, which manages the assets of the state and teachers’ retirement systems as well as of dozens of local retirement systems in the commonwealth, publishes a 25-page investment policy statement.  The public has no conclusive evidence that the MBTARF has a comparable document or what might be in it.

It’s equally unclear whether the MBTARF has a proper recruitment policy for senior managers. The fund’s incomplete financial statements do not demonstrate that there is a coherent risk-mitigation strategy either.  Such lack of transparency and accountability make the MBTARF particularly susceptible to cronyism, failure of fiduciary responsibility and poor investment returns.

The poor returns already are a stark reality.  One thousand dollars invested with PRIM in 1985 would have grown to $15,198 through 2013, whereas the same investment in MBTARF would have yielded only $12,251. This is just one of many benchmarks on which MBTARF underperforms dramatically.

Investing the money contributed to the fund by the MBTA and its employees from 1991 through 2012 in two broad index funds would have yielded nearly $873 million in additional assets.  The extra money would be more than enough to cover MBTARF’s $726 million unfunded liability as of yearend 2011.

When MBTARF falls short, the T is responsible for three quarters of any additional contributions that might be needed, while the rest is assessed on MBTA employees.  The extra returns from passive investing would have been enough to slash employee contributions to the minimum 4 percent of pay required by the pension agreement. Meanwhile, the additional money would have cut the MBTA’s pension contributions by some $40 million annually as of 2012.

The passive investment strategy would have also saved an estimated $100 million in management fees from 2000 to 2012.

“A more accountable governance structure with an appropriate investment policy could have prevented disasters like the fund’s recently disclosed $25 million loss on a hedge fund investment proposed by a former executive director after he left MBTARF,” Atanasov said.  “At a minimum, the fund should create an advisory board of investment professionals working on a volunteer basis to help improve portfolio management.”

As of the end of 2012, none of MBTARF’s board members and senior managers had had substantial practical investment experience before joining the fund.

About the Author

Iliya Atanasov is Pioneer’s Senior Fellow on Finance, leading the research tracks on pension management, data analysis and municipal performance. He is a PhD candidate in Political Science and Government and a former Presidential Fellow at Rice University. He also holds BAs in Business Administration, Economics and Political Science/International Relations from the American University in Bulgaria.

About Pioneer

Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government.