LEONARDTOWN — St. Mary’s County is changing how it invests the nearly $140 million it has set aside to pay retired county workers’ health care. The committee that oversees the money told its consultant Oct. 23 to plan an exit from private equity and real estate and a move into private debt, a mix the consultant said should hold up better when markets turn bad.
The stakes reach the county budget. When the trust’s investments fall short of their 6.5% target return, the county has to put in more money, often in the same downturns that squeeze tax revenue. A second committee, overseeing about $25 million for the county’s Length of Service Award Program for volunteer firefighters and rescue workers, met the same morning and held off on a stock shift of its own.
Both committees are chaired by County Administrator David Weiskopf and include the county’s chief financial officer, its human resources director, a deputy finance director who serves as plan administrator and a citizen representative. Both are advised by the investment consulting firm Marquette Associates.
Winding down the old bets
The retiree health fund, known as the OPEB trust for “other post-employment benefits,” still holds legacy private real estate, private equity and private debt investments that are winding down and handing money back. In the second quarter, those funds returned about $1.2 million to the trust, Marquette’s Patrick Wing told the Retiree Benefit Trust Committee, nearly enough to cover a full quarter of the trust’s payments to the county.
Their returns have been weak, though. Real estate holdings were marked down about $106,000 in the quarter, a 2.2% loss, while the broad real estate market gained a little more than 1%, Wing said. Private equity gained about $188,000, or about 1%, but lagged its benchmark. All told, the legacy funds gained about $84,000, or 0.4%. Wing said the program worked well when it began in the early 2010s but has struggled since the pandemic.
As those funds shrink, private equity has fallen to about 11% of the trust against a 14% target. Wing said that gap could push the trust outside its allowed ranges within about a year if the targets aren’t updated, which is why the committee has been studying a new mix since April.
Three options, one direction
Marquette laid out three ways to reinvest the 18 percentage points now targeted to private equity (14%) and real estate (4%):
- Option A splits the money evenly between core bonds and U.S. stocks, 9 points each.
- Option B doubles the infrastructure target from 4% to 8% to keep a hedge against inflation, and spreads the rest between bonds and U.S. stocks.
- Option C also raises infrastructure to 8% and adds a 5% target for private debt, trimming international stocks slightly to keep U.S. and foreign stocks at about a 2-to-1 ratio.
In Marquette’s simulations of the next 10 years, Option C had the smallest share of outcomes falling below the 6.5% target and the best results in bad-case scenarios. In a worst-case outcome, it would leave the trust about $9 million better off than options A or B, Wing said. Stress tests replaying the 2008 financial crisis, the 1987 crash and a 2022-style year when stocks and bonds fell together pointed the same way.
The tradeoffs are higher fees and less ready access to cash, Wing said. That’s why the recommendation hinges on the county resuming regular contributions to the trust. If contributions don’t resume, Wing said, the committee shouldn’t go further than Option B.
A county finance official said staff will include the contributions in the baseline budget, but whether they are funded is ultimately up to the Commissioners of St. Mary’s County. Two committee members then said they were comfortable with Option C. No vote was needed. Marquette will draft an updated investment policy statement for the committee to adopt at its next meeting, Dec. 4, and Wing said the actual shift may be a year or more away.
The committee also unanimously approved a smaller rebalancing. About $500,000 will be trimmed from a U.S. large-cap value index fund and another $500,000 from a short-term bond fund, and $1 million will go into a core-plus bond fund. Bond yields near 5.5%, among the highest in about 20 years, make longer bonds more attractive now, Wing said.
The trust’s fiscal 2027 budget to reimburse the county for retiree health costs is $5.5 million. The first-quarter reimbursement, posted in October, was just under $1.3 million, Plan Administrator Joy Satt reported.
Volunteer awards fund waits on timing
The Length of Service Award Program, or LOSAP, pays service awards to volunteers in the county’s fire and rescue system. Its fund holds a little more than $25 million, according to Marquette. The county has not planned any contributions to it for fiscal 2027, Satt said, while the plan reimburses the county $1.89 million this year for award payments. The first-quarter payment was $456,605.
The LOSAP committee adopted a new investment policy last year that drops a 4% target for real estate investment trusts in favor of U.S. stocks and replaces a 5% high-yield bond target with private credit. Paperwork with the private credit manager, TPG, has been executed, and Wing said the firm is expected to call the money around the second quarter of 2027.
The REIT money has not moved yet. With a handful of companies tied to artificial intelligence dominating the stock market, Marquette recommended putting about three-fourths of the shift into a mid-cap index fund rather than the plan’s total-market fund. Technology makes up nearly 35% of the broad market but only about 15% of mid-caps, Wing said, and mid-caps have outperformed large companies over 25- and 35-year periods.
Wing advised waiting, though, because U.S. stocks have outrun REITs this year and moving now would mean selling low and buying high. “Why delay?” one member asked. Wing said the goal is to make the switch after REITs have a strong stretch, possibly by the December meeting, and that the committee could move half at a time. He acknowledged no one gets the timing exactly right.
Both committees next meet Dec. 4. The volunteer program is also in front of the commissioners in other forms; earlier this month, the Chronicle reported that deputy fire chiefs could join a St. Mary’s volunteer rewards program. In neighboring Charles County, officials recently reported gains in the county’s pension plans and sped $1.15 million to its own volunteer retirement fund.
