There are serious clouds over the Maryland State Retirement and Pension System and the way the O'Malley administration has managed it. Consider the following:

1. The rate of return in the year ending March 31 was 3.18 percent, and the rate of return over the previous 10-year period was 5.40 percent, nowhere near the 7.75 percent projected by fund managers.

2. The fund's asset allocation targets are 36 percent public equity, 10 percent fixed income, 2 percent cash, and 52 percent "alternative investments" (10 percent private equity, 10 percent "credit/debt strategies," 10 percent real estate, 15 percent "real return" and 7 percent "absolute return").

3. Legislation sponsored by Gov.Martin O'Malleyremoved the former 1.2 percent per annum cap on the compensation of investment advisors.

4. The "absolute return" and private equity portfolios, $3.2 billion, produced managers' fees of $61 million, or $23 million more than would have been permissible prior to the 2008 legislation.

5. The fund paid $14 million to London-based Record Currency Management for a currency management program commenced in early 2009 and designed to hedge against declines in the value of international investments. The fund's annual report dated July 31, 2011, states: "During fiscal year 2011, the currency program detracted from returns in the international and global public equity programs as the U.S. dollar weakened significantly relative to other currencies. The cost to the system's portfolio as a result of using this systematic currency overlay policy was $362.7 million." The managers vaguely assert that the program "has served to reduce volatility and improve the risk/return profile," but no offsetting gains are claimed.

6. In the three years after 2008, the private equity portfolio generated a 3.37 percent return and the real estate portfolio a 4.40 percent loss; no results were given for the other exotic investments. After the ministrations of Record Currency Management, the International Equity portfolio generated a .51 percent loss. Boring investments — domestic equity and fixed income — yielded 4.19 percent (domestic equity) or 7.60 percent (fixed income).

7. The administration-supported legislation setting up an affirmative action program for investment bankers distributes $10 million in fees each year to 110 managers securing results no better than those of the fund generally.

On to some selected realities from outside Maryland's echo chamber:

1. New York City's actuaries have urged a reduction to 7 percent in projected rate of return; New York, California and Rhode Island have lowered their projected rates of return to 7.5 percent. Mayor Michael Bloomberg observed: "If I can give you one piece of financial advice, if somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy's name is not Madoff."

2. The Governmental Accounting Standards Board now requires applying 3 percent to 4 percent rates of return — rather than the fund's 7.75 percent — in discounting the portions of pension obligations that are not fully funded. Since Maryland's obligations are only about 64 percent funded, using this new standard would drastically escalate both the calculated deficit (probably to 50 percent) and required annual contributions.

3. If its targets are achieved, the Maryland fund would have the second-highest allocation to "alternative investments" of any large fund in the country, being surpassed only by the Dallas Police and Fire Pension System. The 10 large pension funds with the highest reliance on "alternative investments" attained average annual returns that were 1.2 percent less than the 10 large funds with the lowest share of "alternative investments" in a five-year period ending in 2011.

4. Since one purpose of international investing is to spread risk, it is hard to understand spending large sums on "currency management" to offset the benefits of this risk-spreading.

5. Many of the derivatives into which the fund is plunging are as good as the assets of the issuing firms. As readers of Michael Lewis' "Liar's Poker" know, they are often generated to earn fees. They are vulnerable to market turbulence when orders cannot be executed, and they did not do their job either in the 1987 crash or the more recent "spike" two years ago.

6. Private equity and real estate investments are difficult to value; as a wise man once advised me: "Everything is valuable, until you go to sell it." Accountability vanishes when values are not determined on public markets. The fund proposes to invest some $3 billion in "private equity," which currently flows to 80 different managers, none of whose results are publicly available. The fund is a formidable instrument for the distribution of patronage.

7. Recent changes in the pension law have been oversold and will not help the General Fund. The added revenues from first-year changes were diverted from the pension fund to balance the budget. The only change of significance is the added 2 percent of salary in contributions required of present state employees; this was immediately offset by a 2 percent salary increase, unjustified either by inflation or the state of the private labor market.

Maryland's pension problems are a legacy of the Glendening administration's mishandling of investments and deferral of contributions, the Ehrlich administration's capitulation to the teachers' unions, and the O'Malley administration's failure to face facts, capitulation to various rent-seekers, and efforts to use risky investments to reach unattainable targets. They are a cumulating drag on the state's ability to provide essential public services and will reach crisis stage when the GASB's new accounting rules become effective and bond rating agencies take note of the magnitude of the Maryland pension deficit.

George Liebmann is the volunteer executive director of the Baltimore-based Calvert Institute for Policy Research. His email is info@calvertinstitute.org.