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Assets of 35 pension systems are targeted

State's intention is to boost results

The assets of 35 pension systems, including those of Plymouth County, the Essex Regional Retirement Board, Newton, and Andover, would come under the control of a state trust in a proposal by the Patrick administration to boost returns, improve pension management, and provide fiscal relief to cities and towns, according to a new analysis prepared by the state retirement commission.

Governor Deval Patrick sketched the outlines of his proposal last month, as part of a package aimed at increasing financial assistance to cities and town. The analysis identifies the pension plans that do not meet the criteria for local management outlined by Patrick and may generate concern among local officials who would be stripped of responsibility of investing millions of dollars of public money.

Cities and towns with underperforming funds must budget millions of additional dollars each year to catch up with future obligations they face for retirees, a burden that could be reduced if they earned higher returns on their pension funds.

Several of the worst-performing systems have begun moving into the state fund. On Jan. 1, the city of Fitchburg, for instance, put $44 million of its total retirement assets of $86 million under state control. For the five-year period ending in 2005, Fitchburg posted one of the worst investment performances in the state, 3.35 percent a year. By contrast, the state retirement fund posted average annual returns of 7.04 percent during the same period.

Richard N. Sarasin, chairman of Fitchburg's retirement board, said one goal is to reduce the $6 million a year the city currently must commit to future benefits, a significant part of the city's roughly $90 million annual budget. The greater the returns generated by investment, the smaller the contribution the city must make out of its annual budget.

"If you can't beat them, join them," Sarasin said.

Other pension systems that posted worse returns than Fitchburg include Andover (1.74 percent), Natick (2.26 percent), and Lawrence (3.19 percent).

Proposals to centralize control of the state's 106 separate pension system institutions have gained traction in the past year, partly since only a few systems have beaten the state's overall performance. Some systems also have been criticized for lavish spending or poor controls. The state inspector general, for example, charged that a bidding process for a new headquarters for the Middlesex Retirement System was rigged and that a member of the system's board billed thousands of dollars in fraudulent expenses. Middlesex has denied wrongdoing, but also has moved some of its assets into the state fund.

Under the proposed law, all the retirement systems would be required to meet certain performance standards to continue to manage their own money. The standards were chosen so that the assets of roughly the worst 30 percent of the systems would become part of the larger state fund, said Lydia Hill, Patrick's director of local policy.

"We're not the Big Brother state here coming in to take over everyone's system," she said. "We want to make sure the systems are appropriately managed.

The state fund returned 16.7 percent in 2006, growing to $46.7 billion, making it one of the top-performing large public pension funds in the country. In 2005, it returned 12.8 percent, compared with a median return of 7.5 percent for the 78 local systems on their own for all of that year.

Hill said her office's calculations of which systems would be moved roughly match those in a memo from Joseph E. Connarton, executive director of the state's Public Employee Retirement Administration Commission, dated Feb. 21. It shows which pension plan assets would be transferred to state control if Patrick's proposal had been in effect from 2001 to 2005. The rules would move funds that underperformed the state's fund by 2.25 percentage points or more for the past five years and currently hold less than 80 percent of the money they need to cover future payments owed to retirees.

Boston's retirement system would remain under local control if the Patrick administration standards were applied to its performance from 2001 to 2005. Boston had 20,456 active members and 14,034 retirees, according to its most recent figures as of Jan. 1, 2006. Its funded ratio, the money needed to cover future payments to retirees, was 62.4 percent, well below the 80 percent level required to remain independent by Patrick's proposal. It also earned significantly less on its $3.7 billion portfolio -- 4.96 percent a year over the five years -- than the state's return of 7.04 percent. But under Patrick's proposal, only those systems earning 4.79 percent or less over those five years would have be taken over.

Boston retirement officials referred questions to the city's chief financial officer, Lisa Signori, who said the system's results for 2006 are not final.

"The governor's legislation creates a constructive dialogue," she said. "If you have an external benchmark that keeps you focused on how you're doing, that's a good thing."

Patrick's plan has drawn fire from some local pension board members and union officials concerned about losing local control or about the state's mix of holdings.

Pension attorney Michael Sacco, who represents more than 10 of the boards on the list, including Natick , Plymouth County , and Andover , defended the performance of the boards. He called the administration's method for weaning out poor-performing systems "an overly simplistic approach to a complicated issue."

For one thing, he said, the smaller boards are restricted from certain types of riskier, high-return instruments that the state can invest in such as hedge funds or real estate portfolios. Also, nearly every board in the state is on track to meet a requirement that they fully fund their plans by 2028 , he said.

Lilli Gilligan, chief operating officer of the Essex Regional Retirement Board, which could also lose control of its funds under the new standard, said a fairer benchmark would be to allow local boards to invest in hedge funds for a four-year period, then compare results. Currently, the state fund is "at an unfair advantage," she said.

Like other communities on the list, however, Essex has begun to move some assets under the control of the state fund.

In Peabody , Patricia Schaffer, the city's finance director who is on the retirement system's board , said the board has voted to turn over the remainder of its assets to the state at the end of March. The state already invests three-quarters of the city's assets, and officials don't miss the responsibility of hiring and overseeing investment managers, she said. "I don't see that we lose anything, quite honestly," she said.

Officials in Arlington say they are in talks with the state board to take over retirement assets. Citing the state's healthy returns, Town Manager Brian F. Sullivan said, "You have to question why wouldn't it be to the town's advantage to do that."

Ross Kerber can be reached at kerber@globe.com; Matthew Carroll at mcarroll@globe.com.

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