Q&A with: Retirement Board Chair Lisa Shapiro
The New Hampshire Retirement System has been going through some rocky times. First there was the ouster of long-time chairman Edward Theobald because of conflict of interest issues arising out of his own investment business. Then there was the discovery that the system was underperforming and would not be able to keep up the current level of benefits without a massive rate hike. And now a crisis on Wall Street that threatens to undermine the system’s viability further.
Lisa Shapiro took over in the middle of the Retirement System’s transformation. An economist with the Concord law firm of Gallagher, Callahan & Gartrell and an adviser to the Federal Reserve Bank of Boston, she was appointed chair of the Retirement Board by Gov. John Lynch in 2007, and began shepherding a massive reform bill through the Legislature.
We caught up with Shapiro on Sept. 29, the day the Dow plunged nearly 800 points after Congress failed to pass a $700 billion rescue plan.
Q. What got you involved with the Retirement System?
A. About a year and a half ago, the governor approached me about whether I’d be interested in serving on the commission to help make recommendations, and I thought this was an opportunity for public service. It was a volunteer position and used my skill set as a economist and looking at data but also at complicated public policy that really involves people. I thought here was an opportunity to give back.
Q. In terms of Ed Theobald’s long reign, what were the lessons to be learned?
A. You really need good governance to take place to make good. During that time frame, there was very weak governance at the board level. There were ethics codes that were pretty good but not a clear understanding of how to enact them and follow them. It wasn’t really acted upon aggressively and appropriately when, for example, a conflict of interest would be disclosed. The decisions that were made during that time didn’t actually have a direct negative impact. The report cleared the organization from that. But that’s faint praise (laughs) for there needs to be structural changes.
Q. As a lobbyist, you are trying to persuade the Legislature to do certain things. Do you feel, at times, “What hat am I wearing?”
A. As a firm, we think it is important to disclose whenever you are doing anything related to legislation, and we’ve always taken a very strict definition of that.
So a number of the clients that I registered to lobby for, it’s really for strategic and economic analysis and expert testifying. I do have good relationships with people over the years by giving good information to a very diverse group of legislators, and most of my time is delivering the information and to really explain that to people.
I’m not hanging out in the halls very much. I had a couple of important clients. I worked on the RGGI issue for the Business and Industry Association. They are their own spokespeople, their own lobbyists, but I’m an expert witness.
Q. What are the problems with the Retirement System?
A. The New Hampshire Retirement System has among the lowest funding ratios of any public fund in the country, about 67 percent. Average is about 80. You don’t get into that situation overnight or because of one mistake. That happens because of a number of different factors over many years. And that’s why it’s going to take several years to really turn it around, although a number of things have already been turned around. We just hope to continue to accelerate the pace of those changes.
In the early 1990s the Legislature adopted actuarial methodology that saved costs to employers, but over time led to artificially low rates and hid the true health of the system. Whenever the system had a good year, instead of reinvesting to prepare for poor market years, those so-called excess earnings were used to expand benefits. So, inevitably, when market downturns hit you are going to be underwater, and now we are in the next one.
Also during that time frame of 15 years, there was the same actuarial consultant, the same investment consultant and the same outside legal counsel. Nobody was minding the store to point out that tough decisions had to be made.
In 2006, this really started to change. The Legislature in 2007 changed the law get the correct actuarial method. But that also then shifted the areas of concern to the beneficiaries and retirees to cost-of-living increases and health care.
Q. In the 2008 legislative changes, what did you support and how is what passed different compared to what you support and what still needs to be done?
A. The Retirement System’s priority in that bill was centered on correcting the legal and accounting treatment of health-care benefits. It did not match what the law said. Once that became apparent that the Retirement System would make sure the level of benefits that was in statute was fully funded, rates on employers were going to go up by 50 percent and the Legislature wanted to look at alternatives to that.
Q. There were proposals from the House and the Senate. Did you have any preference?
A. The one area that I felt did need change was on the board structure around investment. There has been criticism of the Retirement System that there was weakness in investment experience on board and weakness of investment experience among the staff. I feel that a smaller group, where all the members of the committee had strong background in investments and financial matters, would make better decisions over time.
Q. You think the board should have the final say over investments?
A. The Legislature ended up compromising. You had a Senate version, which expanded the board to bring on new people, and you had the House version, which reduced the board size and changed the relative number of people with experience. The legislation that passed empowers the independent investment committee to be the overseers in making those decisions.
Q. How is the current crisis in Wall Street affecting the system?
A. We are handling it as well as anybody else in the market. There is a diversified portfolio that is able over time to withstand these types of market disruptions. That said, we are taking a hard look at opportunities as well.
Q. How much has been lost in this mess so far?
A. It changes every day. In terms of the fiscal year that just ended, June 30, 2008, we were about 4.6 percent down from our earnings from the year. The investment results are smoothed in over five years. So we are not expecting at this point a big change in the funding ratio, because in 2007 we had a 16 percent rate of return. If we are in an extended downturn, then that’s going to end up having some impact on rates over time.
Q. The recent controversy about Constance Donovan, the system’s former chief executive officer who resigned after less than five months on the job, and her $90,000 severance. What do you have to say about that?
A. Ms. Donovan was offered the job before I was nominated and appointed, but there needed to be someone on the other end of the phone. Timothy Crutchfield, our in-house chief legal counsel, was doing two jobs at a time of high risk. We signed a contract that was standard in the industry. We are disappointed that it didn’t work out, but hopefully we will be able to be in a better position to bring on somebody new.
Q. What’s next?
A. We have an independent investment committee that needs to be appointed and get integrated and be able to continue to weather the market to insure the long-term financial viability of the system. That remains our number one focus. There are two outstanding issues that are not resolved for the longer term — cost of living increases and health care — and there are two commissions set up out of the 2008 legislation. I serve on both of them.
We also need a new CEO. There has been five CEOs in five years, and I’m the third board chair. There needs to be continuity. We had a workforce assessment study done last summer and it suggests there are a lot of trust issues.
Q. What do you do as an adviser to the regional Federal Reserve?
A. A couple of years ago they wanted to make sure that the Federal Reserve was reaching out and providing a good analysis of public policy challenges in the area of public finance and in the labor market and demographic changes that we are going through as a country and in New England with the aging workforce and smaller population growth.
Q. As an economist, what do you think caused the current financial and credit market mess?
A. The credit cycle and real estate cycle issue got exaggerated to the point of the colossal failure we are seeing because of mistakes on preventative regulation. That doesn’t mean we turn our back on it, throw up our hands and say, “Tough.” That might not be the best solution, but I do think there was a lack of controls.