One of the largest concerns of employees in Massachusetts has been the decline in the value of pension funds since the late 1980s.

Officials at several retirement funds in Massachusetts said "imprudent" investments in some of the state's high-technology industries have crippled the state employee retirement fund and the funds of several state authorities.

At least one fund, however, has prospered.

The Massachusetts Bay Transportation Authority's pension fund, under its executive director, John J. Gallahue, has cut employee contributions by 25% over the last three years, while increasing benefits to both active and retired members.

In 1982, the year before Gallahue became director, the pension fund stood at $250 million. By the end of this year, it will total almost $1 billion. The fund has grown even though employee contributions have decreased from 20.25% to 16.98% of the payroll.

Before Gallahue, a graduate of Boston State College, took over the fund, he served as president of the Boston Carman's Union. The group represents transit workers in the Boston area and makes up three-fourths of the fund's membership.

From 1989 through 1991, Gallahue served as chairman of the $2.5 billion Massachusetts Pension Reserve Investment Board.

For many years, Gallahue has been a proponent of increased disclosure of financial performance and holdings to members of pension funds. Now he has implemented an MBTA Pension Fund Bill of Rights.

According to an official disclosure from Gallahue's office, the pension fund's earnings have saved cities and towns in the state $2 million per year by allowing more employees to retire early.

In an interview with staff reporter Patrick M. Fitzgibbons, Gallahue spoke of the fund's future, the newly created bill of rights, and the greater role pension funds in general will assume in investing in different financial instruments. Q: How have you been able to efficiently manage the costs of the pension fund? You've spoken about prudent investments as one way. A: In the pension industry, you have to be extremely cautious about taking losses. You're dealing with people's pension moneys. When you have one of the members of the fund take a loss, that person will remember you a lot longer than the gains you might have made.

I think now the different areas I see developing for the fund's investment portfolio would be on the global structure, both on the equities and especially on the fixed-income side. We started our first global fixed-income portfolio two years ago. European interest rates just look so attractive versus those in the United States. Q: Does the uncertainty of the European economic situation frighten you as far as investing in Europe? Or is the credit that strong? A: Well, that's why you're going to have managers who have the research capabilities to be able to make those determinations. I certainly would not want to go below investment-grade fixed-income vehicles in any other country. We don't do much of that in this country, but I think research and quality are going to be real important.

The other thing that I think, and we're talking about the presidential election here, is that given a chance, the Democratic administration is going to turn to pension funds for investing in the nation's infrastructure. It's got to be one of their cornerstones, because it's the largest pool of assets out there. They're going to have to come up with some new investment vehicles which are going to appeal to tax-exempt investors. Q: Do you see that as a healthy change? A: Oh, sure. I think it's a necessary partnership. I mean you've got to do something to get this economy stimulated. Cutting interest rates doesn't work if nobody's working, and that's been proven. So you've got to tap that pool of assets. Q: The fund has recently instituted a member's bill of rights. How did that come about and what do you hope to achieve with it? A: The pension industry has been such that there needs to be a lot of round pegs in square holes. There was an effort in Massachusetts to place pension funds under regular state ethics regulations, which really didn't apply to our industry. I mean, you can't have the same rules for the Department of Public Works as you do with pension funds. It just doesn't work.

We want to run the fund as an efficient business which will be able to generate returns that allow for a reduction of members' contributions and improve benefits.

We have tried to address the issues that people were concerned with like disclosure, conflict of interest, and members' access to all of the fund's records. Q: One thing Gov. William Weld recently proposed to the state legislature was the creation of an agency to watch over the activities of all the state's authorities. Does this concern you? A: Well, we're trying to stay away from government. We're an example -- and we made this argument to the governor -- of something private that works.

During the last six years, we reduced contributions to the fund by 25% while improving benefits for active and retired employees.

I just put through an early retirement program at virtually no cost to the fund or the authority. We've been able to do this because we run like a private business. We have not been subjected to political interference from legislation that says you can't invest in this and you can't invest in that. If it ain't broke don't fix it. Q: What percentage or part of your portfolio is made up of municipal securities? A: Right now, the tax laws prohibit us from owning tax-exempt municipals. We do, though, have a program with the Massachusetts Industrial Finance Agency, MIFA. We're doing some taxable development bonds which come from a project that's partially tax-exempt and we can pick up from the part that's not tax-exempt.

We've dedicated $20 million to that, so far. We're also looking at an instrument right now with a local sewage treatment plant -- a pumping station type of deal -- where about 80% will be tax-free, and we'll be able to step in and invest in the remaining portion. Q: How large do you see the fund growing? It stands now at almost $1 billion. Do you see a limit to its manageability? A: The capitalist in me says I'd like to see it grow as big as it can! But I'm also pretty realistic about it. I think that as long as we continue to diversify our investments that the size shouldn't be too much of a problem.

Right away we're the only retirement [Illegible words] that's fully funded. [Illegible words] Massachusetts state employee retirement fund is huge. There was an article in one of the papers recently about the state saying they hope to be fully funded by the year 2028. That's a real time bomb ticking out there, and there are many states and authorities in the same jam. Q: One thing funds are having to address is the growth of health-care costs. Is that something you will need to be concerned with down the road? A: Absolutely. Right now the authority funds health-care coverage for its retirees. That is a huge unfunded liability right now. But with health-care costs escalating at their current rate, it will have to be addressed.

Fund managers are using actuarial tables that went into effect 20 years ago when the life expectancy was in the early 70s. Now, though, [some] people that are joining the work force are going to be living well into their 90s. So that unfunded liability is something that is going to hit us right in the face. Q: Do you see changes in the tax codes that could affect the participation of pension funds? A: I think that, especially if the federal government rolls away from taking things out of the tax-exempt area, then that's where the pension funds can step up to the plate. But again, and this is important, it's got to be pursued. It's got to be packaged so there is at least a defensible yield to our members.

We have a fiduciary responsibility and we can't give away the store just to diversify.

On the other side, though, you can't be in a solution where you're invested in really speculative-type junk paper. What we're seeing now in Massachusetts is that small companies or anybody that's got a good credit rating is still having a tough time getting loans because banks -- who have plenty of money -- are overextended in lower quality investments. Q: How has your membership reacted to the fund's bill of rights proposal? A: Generally, very favorably. The increase in benefits and the early retirement package they reacted to most favorably, because they could relate to that much more. If they're getting an increase in benefits, the ones that are retired already are also seeing improved benefits.

Basically, our level of benefits to our members have doubled the state's fund, so continued improvement is always looked at favorably. Q: Will the implementation of the bill of rights represent any substantial costs to the members? A: No. There will be no cost to either the members or the authority -- and this is important -- we'll handle it all ourselves. We're publishing right now. In our reports, we list every holding the fund has and its performance.

Everything we do is paid out of the fund, not the authority. We're self-administered out of the earnings from the fund, so there's no actual cost to the authority itself.

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