Methuen Turns Pension Funds Over to State Management

By Edward Mason, The Eagle-Tribune, North Andover, Mass.

Jul. 31–BOSTON — A standoff between state pension officials and the Methuen Retirement Board is over, as the city’s retirement board narrowly agreed to succumb to state demands that it liquidate its $80 million investment portfolio.

The board voted 3-2 to comply with a 2007 state law that requires underperforming local retirement boards to hand over their assets to the $52 billion state fund overseen by the Pension Reserves Investment Management Board.

“In weighing its options, which included the uncertainty of protracted and costly litigation to resolve this good faith dispute, the board majority believed that at this time it was in the best interests of the members of the Methuen Retirement System to comply with PRIM’s request,” said Michael Sacco, the board’s attorney, in a statement.

The board will instruct its investment managers to liquidate the investments within the next 30 days.

Board member Michael Hennessy, who along with Albert Trott voted against the move, wanted the Methuen board to resist.

“I’m hoping for the best,” Hennessy said, “but I’m not happy at all.”

Hennessy said the majority — Robert DeLuca, City Auditor Thomas Kelly, and Sharon Cutter — argued that a protracted legal battle would be costly. And the longer the board waited, the greater the risk would be that the portfolio’s value would diminish.

According to the law, local pensions would be underperforming if their 10-year rate of return was 2 percentage points less than the state’s and their funded ratio less than 65 percent. Methuen’s 10-year rate of return was about 8 percent, while the state’s return was just over 10 percent, while the funded ratio was 55 percent.

Hennessy said Methuen could have done better had it been more aggressive.

“We’re being punished for being prudent,” Hennessy said.

The vote, taken Tuesday but not announced until yesterday, ends a nearly eight-month dispute between the Methuen board and the Pension Reserves Investment Management Board over cashing out millions of dollars of securities.

The Methuen board, which is not part of city government, argued the city would pay dearly to sell off $80 million in securities during a time of considerable stock market tumult. Board members contended that it would make more sense to turn over the actual securities for the state to manage, and believed that satisfied the state law.

The pension law was part of a Patrick administration plan to save communities money. By investing in the better-performing state fund, underperforming city and town pension systems could more quickly and inexpensively meet their obligation to retirees.

The law says “assets” must be turned over, but doesn’t describe assets. State pension officials argued they meant cash, while Methuen officials said the law was vague.

Michael Travaglini, the Pension Reserves Investment Management Board executive director, refused to take securities. He said he would only accept cash, as he had for other municipal pension funds whose assets were absorbed under the 2007 law.

The reason, Travaglini said, was that it didn’t make sense to manage investments that were performing poorly. Moreover, it would upset the state fund’s own delicately balanced asset allocation.

Methuen went so far as, in June, to ask Attorney General Martha Coakley to intercede. The board was prepared to ask her to rule on whether the 2007 law required municipal pension systems to turn over cash or securities. That request was never made.

Because Methuen is voluntarily liquidating, it can regain control of its investments in five years. In the meantime, Methuen city employees and retirees can still contact the retirement board with questions about their investments.”

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