The plummet in value of the state’s retirement fund has slowed and might be poised to reverse course, thanks to brighter numbers in two of three markets monitored by the Maine Public Employee Retirement System.
Despite numbers that breed hope, Chief Investment Officer Andrew Sawyer of the retirement system said the fund lost about 30.5 percent of its value between Jan. 1 and Nov. 31. That equates to a $2.9 billion loss in that time period, with the value sinking from $10.6 billion to about $7.7 billion.
The majority of the loss – about 26.1 percent – occurred since the fiscal year began July 1. October was a particularly brutal month, especially the first two weeks when the fund lost about 10 percent of its value.
Sawyer said Monday that in the first 12 days of December, he saw the beginnings of what he hopes is a turnaround.
The S&P 500 was down 1.7 percent for the month, but international trading and the U.S. bond market aggregate were up 1 percent and 1.9 percent, respectively. A continuation of that trend would lead to a better month for the fund.
“It’s certainly headed in the right direction,” Sawyer said. “So far, this month is not looking like a negative month. There’s certainly been a turn. There’s been reasonably good stock market returns in the last three weeks or so.”
Asked whether the up-tick could be a result of economic activity connected to the holidays, Sawyer said that’s possible but hard to quantify. “Trying to say any single factor is driving the market ahead of time is very difficult. That’s often difficult even after the fact,” he said.
Sawyer suspects that the upswing is not what’s known in financial markets as a “Santa Claus rally,” but rather a change in investors’ attitudes.
“There’s more certainty in the marketplace right now as far as interest rates go,” he said. “Market participants are beginning to feel a little bit better and at least have stopped de-leveraging and in some instances are looking at re-entering the market.”
The Maine Public Employees Retirement system is funded by market investments as well as contributions from employees and the state budget. Because it is a “defined benefit” plan, payments to retirement fund recipients will not be affected no matter how low the market pulls the fund’s value. What could change in future years are what the state pays as well as benefits promised to current and incoming employees. The latter would require an act of the Legislature. There are about 75,000 teachers and state employees in the plan, about 41,500 of whom are still working.
The retirement system has already submitted its budget request for the next biennium, which begins July 1, 2009. The state is set to pay $288 million in 2009 and $302 million in 2010.
“While it’s possible at this point, it doesn’t seem probable that we would change those rates,” said Sawyer.
The unfunded liability for the fund – which is the result of the Legislature borrowing from it – now stands at around $3 billion. According to the Maine constitution, the state has until 2028 to close that gap, which according to 2006 census figures equates to roughly $2270 per Maine resident. The $2.9 billion lost this year due to the market is not considered part of the unfunded liability because it is hoped it will be erased in years when the fund performs above expectations, said Sawyer.
Sawyer and Gail Drake Wright, executive director of the system, said the formula is designed to weather economic downturns. Unless this downturn lasts for a prolonged period, the prediction that the fund will earn 7.75 percent long term will not change, Wright has said.
Sawyer said he’s comfortable enough with the market that he’s readjusted the fund’s investments back to its traditional split of 30 percent in bonds and 70 percent in return-seeking assets like stocks and real estate.
“Things are changing,” he said. “November was better than October by a long shot and I am beginning to think that December is shaping up to be a better month than November. But there is still a lot of uncertainty. We continue to rebalance our strategy.”
(Statehouse News Service)
