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Wednesday, April 5, 2000

Auditor: State

Employees' Retirement System
officials blame state and U.S.
agencies, say funds were not at risk

By Peter Wagner


Poor management of the state's retirement fund put $7.5 billion at risk, cost the state $17 million in overpayments, and shortchanged retirees -- some of more than $15,000 in pension benefits -- a new report by the state auditor says.

"It could be doing a lot better for its members and its members' money," said state Auditor Marion Higa of the $11 billion Employees' Retirement System.

But system officials say that the fund's investments were not at risk and that many problems identified by the audit are due to other state or federal agencies beyond its control.

The audit, released yesterday, says a five-month delay in executing a contract with New York firm Bankers Trust Co. in 1997 left $7.5 billion in investments without a clearly defined custodian. During the interim, from March 1 to July 24, the fund's assets were unmanaged and lost an estimated $1 million in potential income, the audit says.

"The system's investments were placed in jeopardy and would have been at risk had any legal problems arisen," the report adds.

Koren Dreher, chairman of the fund's board of trustees, said yesterday that the delay was due to slow response by the state Attorney General's Office, a signatory to the contract.

"A lot of it had to do with the fact that the Attorney General's Office was remiss in doing a lot of our contracts on a timely basis," she said. "That's since been rectified."

Dreher said the system's investments were not at risk despite the lack of a contract because banking laws impose the same fiduciary standards on the custodian.

The audit found that numerous lapses and errors by Bankers Trust were overlooked by retirement system managers, a breach of fiduciary responsibility that saddled state employees with accounting work contracted to the custodian, the report says.

Among the lapses was a failure to reconcile the fund's asset statements for two years.

"Such a neglect of fiduciary duty by Bankers Trust Co. raises serious questions about the system's management and its ability to monitor and enforce critical contract provisions," the audit says.

Among irregularities uncovered by the fund's staff was Bankers Trust's failure to record the purchase of a fixed-income security executed on June 23, 1999, amounting to $5,028,906, the report says.

The audit -- for fiscal year July 1, 1998, to June 30, 1999 -- recommends that the fund management closely monitor the performance of its investment custodian and report regularly to the fund's board of trustees.

Dreher said the board has concerns about Bankers Trust and that they have been addressed.

The audit also says the state has overpaid $17 million into the fund since fiscal year 1995-96 -- money that could go into other programs in the state's cash-strapped budget.

"We recommend that the system refund excess employer contributions to the state general fund in a timely manner," the audit says.

Yet another problem identified was timely and full payment of pension benefits to retirees, 1,100 of them waiting as long as two years for full benefits to be calculated. Under the current system, pension payments are initially calculated on an estimated basis, waiting until an employee retires to make final adjustments for vacation and sick leave.

The audit indicated that 99 percent of retirees were underpaid, generally $100 to $3,000 but as high as $15,870 in some cases.

Dreher said the retirement system's goal is to calculate a retiree's final pension benefit within six to nine months of retirement. One problem, she said, has been the slowness of individual state departments to provide needed information to make pension adjustments.

Finally, the audit highlights a future shortfall in the retirement fund unless adjustments are made to a 1999 state law that reduced payments into the fund. The law says that fund investment earnings over 10 percent must be used to offset contributions by the state and counties.

"The law change reduced employer contributions for the next two years, but will likely increase future contributions from the state and counties to fund the system," the report says.

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