AS New Yorkers have been reading with dread their 401k and IRA statements, Albany bureaucrats working for Comptroller Tom DiNapoli have been assessing the damage to the state pension system caused by the stock market’s fall and the bloodbath in hedge funds.
DiNapoli is the sole trustee of the $150 billion state retirement system. He recently estimated that, from April 1 to Sept. 30, the pension system had dropped 20 percent (about $30 billion) – significantly lagging the S&P 500, which fell 10.87 percent in that period.
The comptroller’s two-page release was spare on details, but it’s fairly easy to guess where the losses are. The pension fund is invested roughly 28 percent in relatively safe cash, government and corporate bonds, and 39 percent in domestic equities (a portion that should have been down about 10 percent for the period). The big drop almost surely came in the 16 percent invested in international equities and the 18 percent in hedge and private-equity funds.
This fund covers not only state pensions, but also municipal plans across New York, including those of local school districts. So, sooner or later, the system’s losses must oblige local governments to increase their pension contributions – presumably forcing hikes in property taxes.
But DiNapoli has announced that it won’t be sooner – that pensioners are secure and that local municipalities won’t have to face increases for two years. That puts any hikes off until at least spring 2010, a few months before he will presumably face statewide voters (for the first time – he was appointed to the job after Alan Hevesi was forced to resign).
The comptroller failed to explain why a 20 percent fall in pension assets won’t require new contributions from state and local taxpayers to meet the shortfall. Indeed, he has merely deferred the day of reckoning.
In this light, we should consider how much blame he deserves for these losses.
DiNapoli himself didn’t make many of the investments (some of which are under investigation by Attorney General Andrew Cuomo), including billions in hedge funds that are now under water. But he did choose some of the state’s hedge funds on his own – and also chose to keep many illiquid, highly leveraged investments that he inherited from his pre🗹deces🐽sor.
In fact, shortly after taking office a year ago, he told an Albany business journal that he “wasn’t concerned about hedge funds.”
More shocking is the fact that, as recently as August – five months after the Bear Stearns collapse, when it was clear to most that the financial markets were in crisis – DiNapoli asked the Legislature to again increase the amount of pension dollars he could invest in hedge funds to exceed $35 billion. “We need more flexibility,” the comptroller said.
This folꦯlowed a 2006 legislative change (supported by DiNapoli, then an 🦩assemblyman) that increased the percentage of hedge-fund investments from 15 percent to 25 percent. The latest available report shows that ill-timed change left about $26 billion (or 17.6 percent of the retirement fund) invested in high-risk hedge funds, private equity and directly in real estate.
Taxpayers across the state can breathe a sigh of relief that the GOP-run state Senate rejected DiNapoli’s latest imprudent proposal earlier this year.
But DiNapoli’s recent record is troubling. In the first nine months of this year, he invested more than $3 billion from the retirement system in hedge funds, private equity and in real estate. In June, for example, he put $300 million into a hedge fund controlled by a group whose earlier investment on behalf of the New York system was wiped out in the Washington Mutual debacle.
There are other s꧋imilar wipeouts sure to ꧃come. A full accounting awaits.
DiNapoli should give us a det꧙ailed explanation:
* How many billions does the state now have in hedge an🍨d private-equity funds? What is the current fair-market valuation?
* Did the comptroller take advantage of the opportunity in March, June and most recently on Sept. 30 to pul൩l investments out of lagging hedge and private-equity funds before some of them go to zero? If not, why?
* How much did the pension fund hold in real-estate h🍸edge funds that have been decimated in the market collapse?
Given the clear cause and effect between high debt levels – especially at hedge funds – and the market meltdown, DiNapoli owes taxpayers his view on whether high-management-fee hedge funds will continue to be a large part of the state’s pension investments, or whether he’ll stop new hedge-fund investments to avoid added exposure to these extremely volatile, risky unregulated investments.
When Assembly Speaker Sheldon Silver imposed DiNapoli as the new comptroller in early 2007, then-Gov. Eliot Spitzer warned, “He’s unqualified.” Those tough words reflected the reality that DiNapoli was neither an investment professional nor even someone with a working knowledge of financial markets.
That reality, together with Wall Street’s crash, dictates immediate and candid disclosure of how badly the retirement system has been hurt and why the declines in values won’t require significantly higher government contributions.
If DiNapoli has been an ineffective steward of state pension monies, all shortfalls must be made good by beleaguered New York taxpayers. I fear that, for once, Eliot Spitzer 🧔was right.
George J. Marlin is the author of “Squandered Opportunities: New York’s Pataki Years.”