Dec. 13 (Bloomberg) -- First Selectman Ken Flatto and other elected officials in Fairfield, Connecticut, thought the 58,000- person town’s pension fund was holding up well amid the worst financial crisis since the Great Depression.

The 18 percent decline in total assets since the end of June looked smart compared with the 31 percent plunge in the Standard & Poor’s 500 Index, and total assets of $286 million left a cushion over the $270 million of estimated liabilities. Flatto’s mood darkened yesterday when he heard Bernard Madoff, a Wall Street executive who oversaw $42 million of the assets, had been arrested and charged with fraud.

“We classified this on our portfolio as one of the more conservative investments,” Flatto said in an interview. “You rely on your experts and your managers to be honest.”

Madoff, 70, confessed to employees this week that Bernard L. Madoff Investment Securities LLC was “a giant Ponzi scheme” that cost clients $50 billion. Yesterday, a federal judge in New York ordered any remaining assets frozen while the FBI and other investigators try to determine what happened and where the money went.

The town government oversees the pension fund on behalf of about 800 police officers, firefighters and other municipal employees, Flatto said. Employees contribute about 4 percent to 5 percent of their annual pay. Because the fund was running a surplus in recent years, no town contribution was required, he said.

If returns don’t improve, and the pension fund remains underfunded by more than a margin of 5 percent, Fairfield probably would have to contribute “a few million dollars” from its annual budget, Flatto said.

Assets Left

Officials are trying to determine whether some money might be recovered through insurance or other assets that may be left in the account or discovered by investigators, he said. Assuming a total loss, the fund still would have $244 million of assets, or 90 percent of liabilities -- better than some pension funds that are only 50 percent funded, he said. And better than some individual investors who have lost their life savings.

“We’re thankful we’re not in a position that unfortunately many of his other investors may be in, where they risked major portions of their assets,” he said. “This was a total shock. We read about it just like everybody else.”

Madoff’s other investors included Sterling Equities Inc., the investment firm led by New York Mets baseball team owner Fred Wilpon.

Maxam Capital

Fairfield’s investment in Madoff was through the $300 million Maxam Absolute Return Fund, Flatto said. The manager is Sandra Manzke’s Maxam Capital Management LLC, a fund of funds based in Darien, Connecticut. Madoff was the investment adviser over all the Absolute Return Fund’s assets, Flatto said.

The $42 million represented cash contributions of $22 million plus growth over the years, Flatto said. The town first came into contact with Madoff through an earlier investment with Tremont Capital Management Inc., which had been founded by Manzke.

“Our pension board had been told by many people that he was one of the finest members of the community, and some of our pension-board members actually know people in the Madoff firm,” Flatto said.

Maxam provided audited financial reports showing that the assets were held in custody at Bank of America Corp., Flatto said. Flatto said he learned this week that the reports were wrong: The assets were kept in custody at Madoff’s firm.

Yesterday, Madoff quit his post on the Yeshiva University board of trustees and was put on leave from a board post at Hofstra University.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net.

Last Updated: December 13, 2008 00:00 EST