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Bay State’s pension fund loses nearly $13 billion (PS)

The Massachusetts public pension fund had its worst performance ever in its modern history in the fiscal year that ended June 30, which could become a political issue for Treasurer Timothy P. Cahill, who is contemplating running for governor.

In large part because of steep declines in both US and foreign stock markets last summer, the fund lost 23.6 percent, or nearly $13 billion.

Massachusetts is accustomed to having one of the best public pension funds in the nation. But it fell to the bottom quarter of all major funds, based on one-year results. It was the first time that’s happened in 15 years, said Michael Travaglini, executive director of the Massachusetts Public Reserves Investment Management Board.

Cahill, who chairs the pension board, which determines how money is invested, has hinted he will run as an independent and challenge Democratic Governor Deval Patrick’s handling of the state’s finances and the economy. In a recent poll commissioned by The Boston Globe, 23 percent of respondents said they thought Cahill would do a better job on the economy, compared with 21 percent for Patrick.

The pension fund’s recent performance, however, could undermine Cahill’s efforts to claim the fiscal high ground.

“People want the pension fund to be a nonpartisan, nonpolitical issue, and they want it managed so it does at least as well as the rest of the market,’’ said David King, a lecturer in public policy at Harvard University’s Kennedy School of Government. “To the extent that during his tenure the pension fund has yielded returns better than others, he’ll be rewarded. If not, people are not going to look upon him very favorably.’’

The $37.8 billion fund administers benefits for hundreds of thousands of state and local government employees and retirees. At the start of 2009, the State Retirement System had 71.6 cents for every $1 it owes to current and future retirees, compared to 89.4 cents in January 2008, according to the Massachusetts Public Employee Retirement Administration Commission. The benefits employees and retirees have already earned are guaranteed, so they should not be affected by the investment losses. But the state could be forced to increase contributions to make up the shortfall.

Most public pension funds lost slightly less than Massachusetts’ fund, Travaglini said. The Rhode Island and New Jersey state funds each fell 19 percent in the last fiscal year.

It was bad year for all investors, Cahill said yesterday. “To have avoided the worst stock market crash, I mean Warren Buffett didn’t avoid it.’’

He said the fund actually recovered in the second half of the fiscal year – it was down 29 percent through December – and so far in 2009 has posted modest gains. But as for the overall loss, Cahill said: “I do take responsibility. You take credit in good times and take blame in bad times.’’