District of Columbia Retirement Board could undergo a makeover in its asset allocation and money manager lineup when the federal government takes over the bulk of its $4.5 billion in assets, along with its entire $4.8 billion accrued unfunded liability.
After the takeover, the retirement board will be left with just $1.275 billion - little more than one-fourth of its assets - which will be used to fully fund a new, smaller plan to pay for future retirement benefits of the district's current police officers, firefighters and teachers, as well of those hired after July 1 this year. The new plan also will pay for disability benefits of workers forced to retire early.
The federal government's takeover of the pension fund's liabilities, and most of its assets is the crux of legislation signed into law by President Clinton on Aug. 5 to relieve the city of some of its fiscal burdens.
Under the District of Columbia Retirement Protection Act of 1997, the federal government will assume responsibility for all pension benefits for 12,366 city workers and retired employees accrued up to June 30, 1997. The federal government also will assume full responsibility for the pension plan covering 120 Washington judges and beneficiaries. Through the new plan, the district will pay for all future benefits current workers accrue after June 30, as well as for all new workers. The plan was first announced by the Clinton administration in January (Pensions & Investments, Jan. 20).
The new legislation also gives Treasury Secretary Robert E. Rubin the authority to appoint a sole trustee to set up and oversee management of the new federal fund, to be called the District of Columbia Federal Pension Liability Trust Fund. That fund will be used to pay out retirement benefits for current and retired workers until the entire $3.2 billion taken from the existing retirement board is depleted, after which the federal government will start paying in to cover the accrued pension liabilities.
Based on the retirement board actuary's projections, and estimating a 7.25% annual rate of investment return on the assets, the $3.2 billion will be depleted in 10 years, according to Jeanna M. Cullins, executive director.
Ms. Cullins declined to discuss any of the impending changes. But in written responses to questions, stated the capital's pension fund probably will conduct an asset allocation study to determine how best to invest the assets it will be left with.
The pension fund uses RogersCasey & Associates Inc., Darien, Conn., as its investment consultant, and probably would seek its help in conducting an asset allocation study, Berna Gunn-Williams, chairwoman of the investment board said.
The pension fund had 52.1% of its assets in domestic stocks, 16.6% in foreign stocks, 20.5% in domestic bonds, 5.1% in global bonds, 1.6% in venture capital, 1.5% in real estate and the rest in cash at the end of March, according to information provided by Ms. Cullins.
That compares with a 45% target for domestic stocks, 20% for foreign stocks, 22.5% for domestic bonds, 7.5% for global bonds, 3.5% for venture capital and 1.5% for real estate.
The fund has an extensive manager lineup: $2,431.9 billion in domestic stocks with 11 managers; $755.9 million in foreign stocks with four managers; $858.8 million in domestic bonds with five managers; and $214.1 million in global bonds with one manager. At the same time, the fund has $65 million in alternative investments with 11 managers, and $61.6 million in real estate with four advisory firms.
Ms. Cullins did note, in her written response, that the fund will not halt manager searches and changes already under way. The fund is searching for new minority fixed-income managers to run between $20 million and $25 million, according to Ms. Gunn-Williams.
The law gives the federal government up to a year to transfer the assets, letting the existing retirement board administer the assets in the meanwhile. But because the law gives Mr. Rubin the authority to pick which assets should be transferred to the federal government and which should be left behind with the retirement board, board officials do not know whether any investment portfolios will be liquidated and managers terminated, or whether the Treasury Department would simply shift assets and retain current managers, Ms. Cullins said.
"Until such time as the board receives instructions . . . regarding the disposition of assets, we are unable to determine the specific impact of the legislation on the board's money managers," Ms. Cullins wrote.
Treasury Department officials have not yet had formal discussions with the retirement board's staff or trustees. But Ms. Cullins said in a telephone conversation that she had received an informal request for a list of current money managers and their investment styles.
Meanwhile, Larry A. King, deputy city administrator and director of personnel for the district's government, designed a new, smaller replacement plan, and hopes city lawmakers will approve it before the Oct. 1 deadline.
Under the blueprint, the new plan would "wrap around" the existing plan, continuing the defined benefit plan structure already in existence for the city's police officers, firefighters and teachers.
Under Mr. King's plan, all workers already on the payroll, as well as new workers, would contribute 8% of pay, and could retire with 25 years of service, regardless of their age. (The retirement system now has three different tiers with different contribution rates and retirement requirements.)
Under the new plan, the city's contribution cost will drop to $57 million in the fiscal year ending Sept. 30, 1998, from $307 million the city otherwise expected to pay, Mr. King said.
Meanwhile, Treasury Department officials said it is too soon to comment on the selection process for a sole trustee and the creation of the D.C. Federal Pension Liability Trust Fund.
"The Treasury Department is in the process of developing a plan to do all the things that have been laid out for the future of the D.C. Retirement Board," a spokesman said.
