Maryland’s $20 Billion Pension Shortfall & Peter Franchot

By Mark Uncapher

As badly as your 401(k) may be doing because of this year’s COVID stock market swoon, your personal retirement account is not short as many dollars as Maryland’s state pension system.

As of last June 30th, Maryland’s pension fund was over $20 billion in the hole, with only enough assets to cover 73% of its liabilities. This year’s numbers will likely be far worse.

Nearly a decade ago, reforms enacted under then-Gov. Martin O’Malley (D) were intended to put the fund on course to reestablish good health by 2023.  The “reforms” included higher employee contributions, benefit cuts and a delayed retirement age for future employees.  A significant annual increase in the state’s own annual employer contribution was also supposed to help correct the fund’s imbalance.   

Instead of taking advantage of a decade long bull market to shore up the fund, money promised from the state was spent elsewhere.  By 2014 the legislature was already diverting money for promised employer pension contributions to their other spending programs.  As a result, instead of declining, the total dollars due for the pension deficit in fact increased since the O’Malley era “reforms.”[i]  All this while the Dow Jones Industrial Average has doubled.

Maryland’s elected official with the most direct responsibility for the pension fund has been missing in action in addressing these problems.  The state’s “chief fiscal officer,” Comptroller Peter Franchot, has instead used his position as an officer of the board of trustees for his signature political grandstanding, such as calling on the fund to divest itself from Alabama-based companies because of a local abortion law.[ii] (Spoiler alert, only two Alabama headquartered companies are listed in the S&P 500.) 

Just how lightly regarded Comptroller Franchot’s leadership has been was demonstrated two years ago. The legislature approved unanimously a law that would have prevented the Comptroller from ever moving up from Vice Chairman to Chairman of the Maryland State Retirement and Pension System (MSRPS) trustees.[iii]

The Maryland Public Policy Institute has previously concluded that Maryland state pension trustees have  lost out on nearly $9 billion in income over the past decade by paying higher-than-average investment fees to Wall Street managers in exchange for lower-than-average investment returns.

Their in-depth analysis compared pension investment performance across 33 states.[iv] Investment fees paid by Maryland were 84% higher than the median paid by the 32 other states. Maryland’s estimated fees paid to investment managers in a single year exceeded half a billion dollars, including ‘hidden’ carry fees paid to hedge fund and private equity fund managers. The MSRPS had tried to keep the total compensation secret.[v]

Summing up the past 10 years, the Maryland Public Policy Institute concluded that Maryland pension investment management fees had exceeded $3 billion. Institute study co-author Jeff Hooke, commented, “The State Treasurer and the State Comptroller got the Robin Hood myth mixed up; you’re supposed to take from the rich and give to the poor, not the other way around.”

The Maryland Public Policy Institute has made three key recommendations for pension reform:

  • Reduce the estimated $500 million Maryland pays Wall Street financial firms to manage the State’s pension investments.
  • Shift a portion of the State’s pension assets to low-cost, passively managed index investments designed to match an asset class benchmark.
  • Transition future state employees to 401(k)-style defined contribution plans like those offered to private sector employees. 

When  results for the year ending June 30, 2020 are released, the pension fund’s drag on the state’s long-term fiscal health will be even more apparent.  Pension fund trustees, including Comptroller Franchot, need to stop using the fund’s management as a patronage opportunity for Wall Street money managers. 

Note: This article previously appeared in Red Maryland.



[iii] The legislation was vetoed by Governor Hogan on procedural grounds.


[v] In 2019, HB 821,Sponsored Democrat, Delegate Kumar Barve and Republican, Delegate Robin Grammer was passed unanimously in the Maryland General Assembly to require more transparency about the investment fees paid by MSRP.

Mark Uncapher is Secretary of the Maryland Republican Party.

Montgomery County Republican Party