The $2.5 billion District of Columbia Retirement Board should hire a chief investment officer and an outside consultant to help improve the board's investment and ethical standards, a City Council report contends.
The report, issued by council member Harold Brazil to the full City Council, also questioned the performance of its current consultant, Callan Associates Inc.
Callan, which has served as the fund's consultant since 1984, may not be giving the board the most qualified money manager candidates to interview, the report said.
Repeated attempts to reach four different people at Callan were unsuccessful.
Mr. Brazil, who is chairman of the council's Committee on Government Operations, called for the study as a result of reports that the board was getting lower-than-expected returns on investments and that compensation and travel policies were hurting the fund.
The Committee on Government Operations held an all-day hearing in October to review the board's general operations, and the report, based mostly on testimony from that hearing, was released last week.
The pension fund is not fraught with corruption, a staffer for Mr. Brazil said, but does have its problems.
According to the report, the fund returned 8.64% for the five-year period ended Sept. 30, 1992. In comparison, the report noted, the South Africa Free Standard & Poor's 500 Stock Index returned 8.77% for the same period. The fund's four-year return for the period ended Sept. 30, 1992, was 11.21%, whereas the South Africa Free S&P was at 14.81% and the pure S&P Index was at 15.21%, the report said. (The fund had about 64% of its assets in stock as of Sept. 30, 1992.)
Roy Schotland, a law professor at University of Georgetown Law Center, Washington and a D.C. fund watchdog, said the fund would have earned $80 million more in the past five years if it had met the median performance of 60 other public pension funds found in Callan's data base.
But the fund's performance has improved; for the fiscal year ending Sept. 30, 1993, the fund ranked in the top quartile of Callan's data base of pension funds, the report said.
In addition, the fund has a $5 billion underfunded liability, said Jeanna Cullins, the fund's executive director.
Callan may not have been the reason for the fund's poor performance, but its practices did not help the fund either, Mr. Brazil said in an interview.
"I don't think (Callan) was as critical of the managers or the board as they should've been," Mr. Brazil said. He said Mildred Allstrom, vice president of Callan and the fund's consultant, was evasive and combative during the October hearing. "I think that had they given strong, sound advice, the performance would've been better than what it was."
During the October hearing, Ms. Allstrom said the board wanted to set a high standard for itself and attempted to put itself in Callan's top quartile of pension funds. Most funds, she noted, want to be fully funded and are not concerned about finishing in the top quartile.
Ms. Allstrom could not be reached to comment whether the board's wishes played a stronger part in decision-making than Callan's recommendations.
Regardless, consultants should make recommendations based on their expertise, not because of what a board wants, said Ian Lanoff, an attorney at Bredhoff & Kaiser, Washington, who is well-versed in the pension area. Often, the board will start off with unsophisticated members who depend on a consultant to explain technical investments.
"Because of the rapid change of the fund, the people who are there now are not the most sophisticated, so the consultant is very important," Mr. Lanoff said, who testified before the Government Operations Committee in October. "If the consultant is not going to take responsibility and make sure what they're doing is going to meet the highest standards, then they're wasting (the pension fund's) money."
Mr. Brazil recommended the board hire its first CIO because of the way the Committee on Government Operations viewed Callan, he said. Currently, the board has a 14-member staff that includes an executive director and a deputy director of finance.
"We thought a little bit more inside expertise, devoted to the board, would act as a buffer and help guide the board better," Mr. Brazil said.
In addition, the committee recommended the board, at its own expense, hire an outside consultant within the next month to devise new policies that would prevent abuses by the board members and would increase the fund's investment performance.
The report questioned the board's compensation and travel policies and the board members' fiduciary obligations. Currently, the reimbursement rate is $36 an hour for each board member, with no cap on what a board member may earn or what activities are considered job-related. This becomes significant for some members' income potential, the report said. Also, each board member is given a $5,000 annual travel allowance, but the allowance has not kept some members from taking trips paid for by consultants and money managers, the report said.
The outside consultant would help the board devise policies that would curb abuses in travel and compensation, and would provide fiduciary counsel as well. The consultant also would assist the board in developing requests for proposals to determine whether a new consultant is needed.
The recommendations should not cause alarm, observers said. The fund has grown from $150 million in 1980 to its current $2.5 billion and needs to address operational issues.
At press time, the board was planning to meet with Mr. Brazil to discuss the report and decide what action, if any, should be taken.