PENSION FUND SUFFERS HUGE LOSS

NOVEMBER 1998 - Not to Worry: White - After
soaring on the wings of an unprecedented three-year market surge, PRIT,
the Commonwealth’s pension fund, came back to earth with a resounding
thud, losing 10.54% of its value when the market crashed this past
August.

The fund, which
encompasses the state and teacher pension funds, plus several city,
town and county funds, lost a record $2.3 billion in August. When
combined with a July loss, this dropped the fund’s value to $21.2
billion, down from its peak value of $23.9 billion at the end of June.
The total effect of these losses meant that the fund was running a
negative 1.51% for the first 8 months of the year.

In
September, however, despite a continued sluggish market, the fund
rebounded with a 3.34% earnings, bringing the fund back in the black at
1.85% for 1998, with three months to go.

Fund Buoyed by Past Earnings

Association
President Ralph White, a PRIT Fund trustee, said that members should
not be alarmed by the fund’s losses. “Our fund is solidly buoyed by
past earnings … Its asset allocation takes into consideration that
there will be market downturns.

“For
example, in 1990 we lost 2.26% for the year. But in ‘95, ‘96 and ‘97,
we earned 24.2%, 16.3% and 18.5%, respectively. With a new treasurer
(chairman) coming aboard, we will undoubtedly be revisiting our asset
allocation, but I don’t foresee any major changes in our overall
strategy.”

Prior to 1984, at which
time PRIT adopted an aggressive investment strategy, under then
chairman Robert Q. Crane, the Commonwealth’s pension fund had been
earning less on its investments than that of other states. As a result,
our state’s pension fund was floundering, faced with a bleak future.

The
new strategy, heavily weighted in equities (stocks), when combined with
backing by the Legislature in the form of greatly increased
appropriations, saw the fund grow from $4 billion to its current level
since that time. Importantly, despite an occasional off year, such as
this year, the fund’s investment earnings have averaged 12.02% yearly
since 1984.

COLA Connection

“Under
the new pension cost-of-living law (Chapter 17, Acts of 1997),
retirement boards must consider the stability of their pension funds
when voting to pay a COLA each year. Most pension funds assume an
earnings of between 8.0% and 8.5% annualized on their long-range
funding schedules,” White pointed out.

“Since
all pension funds in this state will still be at a double-digit
annualized level at the end of this year, I see no problem for the 1999
COLA. On the other hand, if the market slump continues into 1999, this
could present an obstacle when we attempt to raise the $12,000 COLA
base to a higher level.

“Of
immediate concern to our members will be the percentage used to
calculate next July’s COLA. Since we are currently locked into the
Social Security Consumer Price Index (CPI), we will be looking at a
COLA of only 1.3%,” White added.

“I
do anticipate some grumbling within the ranks when our members are
provided with the official figure. But there is no point in fudging the
issue - we might as well get it out in the open right now.

“In
negotiating for a new law that would allow COLAs every year, a
concession was made to use the Social Security CPI for the present
time. The Legislature simply did not want to be involved in setting the
percentage each year.”

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