SALEM - Plummeting returns from two of the retirement board's three venture capital funds have prompted the mayor once again to call for the board to merge its investments with the state's.
One of the funds, run by Cutler Asia, lost about 20 percent of its value over six years, diminishing from $2 million in 2000 to $1.6 million in March 2006 - the last market update for that fund. It is now being liquidated, or converted to cash, and the value could fall much lower.
A second fund, run by Zero Stage Capital, dove from $1.5 million in March 2005 to just $140,000 as of June 2007.
Together, the funds represent nearly 2 percent of the board's $94 million in assets.
Mayor Kim Driscoll fears that bad returns on the board's investments will force the city to pour in even more taxpayer dollars to fund retirement benefits, which are already the second-fastest growing expense in the municipal budget.
"Every time these things happen, it has an impact on the annual assessment and the city's operating budget," Driscoll said. "That's one of the reasons we're looking to get into the (state) system."
Driscoll has been urging board members to consider merging its investments with the state system as a potential cost-savings measure. If that happens, the state retirement board would make the investment decisions, not the local board. The Salem board would continue to administer retirement benefits and make local decisions about granting pensions.
How much money the retirement board can recoup once the Cutler Asia fund is liquidated is uncertain. A third-party liquidator now controls the fund and is investigating not only how much the fund is worth, but whether the fund's manager committed any wrongdoing, said Rosemary Guillette of Segal Advisers, the retirement board's financial consultant.
"We'll have a better idea of the value in three to six months," Guillette said.
Other retirement boards across the country, including the Natick and Middlesex County boards, have also invested in the fund. If fraud or other illegal activity is suspected, the parties might sue to recoup the money, retirement officials said.
"It's unlikely we're going to recoup all, if any, of the money," Driscoll said. "We're not seeing any returns, no dividends. ... It's like it's in limbo."
Overall, Salem's investment returns have ranked among some of the lowest on the North Shore. The board's investments narrowly avoided state takeover under recent legislation designed to bail out local retirement boards whose funds are underperforming.
The Salem system's 10-year rate of return of 8.63 percent fell just 0.12 percent shy of meeting state takeover criteria. And that figure doesn't include the possible losses from the $1.6 million Cutler Asia fund.
Taxpayers help fund the city's pension system. So when funds underperform, both public employees and taxpayers must foot the difference. The city spent $7.2 million funding the retirement system last year - more than what it cost to pay for the city's 83-member Police Department.
Those growing costs have fueled the debate over a possible state merger.
Driscoll has argued that there's strength in numbers and that joining with the state, which oversees $50 billion in pension funds, would provide more expertise.
But Marcia Pelletier, executive director of the Salem retirement board, said the state board has had its share of problems, too. She cited reports that the state pension system will sue home-loan lender Countrywide Financial to recover between $15 million and $20 million in losses.
"Any investment has risk," Pelletier said.
Guillette, the board's financial consultant, said the Salem board took time to interview Cutler Asia and Zero Stage Capital before investing money with them and was required to follow the state's public-bid process.
"They did their due diligence," Guillette said.
By 2000, the Salem board was feeling pressure to invest in venture capital funds after several other pension systems were bringing in substantial returns, she said.
Still, the board may need better guidance on some of its investments, one financial analyst said.
"Venture is high-risk, and even the best venture funds run into trouble," said Rob Lutts, president and founder of Cabot Money Management of Salem. "I think if there's one area over the last three or four years that's done really well, it's been Asia. ... They were in a place where they should have gotten good results."
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Staff writer Chris Cassidy can be reached at 978-338-2526 or by e-mail at ccassidy@ecnnews.com.
