The first thing to know about Attorney General Cuomo's pension bill is that it doesn't exist, at least not in public. Or if it does, it hides extremely well.
The bill was announced on 8 October 2009, in this Press Release of the Office of the Attorney General. Entitled the “Taxpayers’ Reform for Upholding Security and Transparency” (T.R.U.S.T.) Act, the bill's main feature is the replacement of the State Comptroller as “sole trustee” of the Common Retirement Fund (CRF) with a Board.
But the bill doesn't appear to actually exist yet, as far as I can tell. I can find no bill number, no public language. (And when I say “exist” I mean “exist in public.”) Senator Foley, alleged to be the bill's prime Senate sponsor, doesn't have the bill on his introduction record, and a search of two New York State bill databases, here and here, with the search terms “Transparency” and “Retirement” (separate searches) comes up with no relevant legislation. The former term I used because, often, when a bill has a popular name, like this one does, the name will appear in the bill's first Section, or in the Sponsor's Memorandum in Support. And the latter term because the bill's likely to amend New York State's Retirement and Social Security Law.
Either way, the point is that those searches were likely to have found the bill, if it were introduced. I must conclude therefore that the bills are not yet introduced. The Attorney General has spent a lot of time and money drumming up support for his bill, in suburban downstate, and on Long Island, and in Rochester, and in Western New York, but not one of these Press Releases features a bill number. The Attorney General has managed to build a lot of bipartisan support for a bill that does not, as far as I can tell, actually exist.
If someone knows the bill number, please E-Mail me with it at Albany_Exile at Yahoo.com. I'd love to take a look at it.
We are not assessing a bill, as there isn't one. Rather we're assessing a concept.
The best-known piece of this proposal, and apparently its centerpiece, is the proposal to dump the “sole trusteeship” of the CRF and replace it with management by a board of directors. So that's what this article is devoted to.
• Backdrop
The CRF is the pool of money that pays for the pensions of most State and local employees, including pretty much everyone except for most teachers. Teachers are covered by the fund of the New Yorks State Teachers' Retirement System (NYSTRS). The CRF has the money from 2 separate retirement systems, one for police, one for everyone who is neither a cop, nor a firefighter (they seem to be in the police system), nor a teacher.
The NYSTRS fund is managed by a Board, the CRF is run by the State Comptroller as a sole trustee.
The Attorney General's policy concern for this issue arises from multiple scandals that have arisen revolving around former Comptroller Alan Hevesi.
I make no claims to know the facts of the various Hevesi matters in any kind of detail. In broad terms, however, the scandals revolve around the exchange of money or employment of certain individuals to encourage certain pension fund investments. Effectively it's a form of lobbying the Comptroller to invest in certain ways. Some of these lobbyists were honest, some less so. The system has come to be known as “pay to play.” The investments themselves may have been legitimate in many cases, but the system itself is obviously questionable at best.
Some allege that the sole trusteeship system, which places sole responsibility for a rather large pile of money with one person, encourages corruption by providing a readily available point of entry for those who would engage in corrupt practices. The Attorney General thus proposes establishing multiple points of entry. The bill has this as its specific, explicit purpose. The following is a quote from the Press Release linked to above:
“For decades, the State pension fund has been weakened and corrupted by the sole trustee model,” said Attorney General Cuomo. “The model has allowed pay-to-play to flourish in a system meant to protect the retirement accounts of thousands of hard-working public employees. To put it simply - the model doesn't work. It’s about as sensible as having a single lock on Fort Knox. Today’s legislation will ensure that the fate of our public retirement fund isn’t decided by one individual, and that the entire system is rid of the kind of pay-to-play that infected and derailed it in the first place.”
That's the policy purpose of the bill. Obviously it's quite possible, and I'd go so far as to say it's likely, that the bill also has a political purpose: To undermine the current State Comptroller (Thomas DiNapoli, a potential rival, though for what I can't really guess), and add to Attorney General Cuomo's emerging reputation as a fighter of corruption in all its forms.
• The Sole Trusteeship
Having established that the explicit, deliberate purpose of the Cuomo proposal (we can't quite call it a bill yet, regrettably, as seen above), is to lessen corruption, judging the bill is thus heavily contingent upon its ability to do just that. That's only fair.
The CRF may or may not be unique among public pension funds in having a sole trustee, but it surely is at least nearly so. As described above the teachers' retirement fund, the NYSTRS, is managed by a board, as are the 5 pension funds for New York City employees. Jun Peng, in his 2009 book State and Local Pension Fund Management, does refer to the CRF's sole trusteeship system as “unique” (page 93). So, even allowing for the fact that Peng might be wrong, at the very least we can fairly say that the sole trusteeship system is very rare.
Now keep in mind I am fairly certain that in most cases it isn't the Comptroller actually running the CRF on a day-to-day basis. He likely has staff who does most of that. In fact they are likely career civil servants who are highly-paid, highly-skilled, very good at what they do, and largely invisible to us. But the point is that the Comptroller is responsible for the fund. (Such terms as “trustee” and “fiduciary” are made to imply responsibility as much as they are made to imply day-to-day duties.) And, further, that he could steer investments in certain directions regardless of what his likely-capable staff tells him.
I went through some of the writings on management of pension funds. For the most part, the writers assume it is a board or committee of some kind managing the fund. The sole trusteeship is rare enough that the issue of the relative advantages and disadvantages of sole trusteeship versus board management hasn't come up all that much. That doesn't mean, however, that the issue hasn't come up at all.
In 1968, a conference on pension fund management was held, and in 1969 a book was produced based on this conference, with the awkward title of, Pension Fund Investment Management: Proceedings of the CFA Research Seminar, Sep 13-14, 1968, Charlottesville, VA. For some reason, when this book was published, all the conference participants were assigned 3-letter false names, and those false names were then randomly-rotated, thus keeping everyone anonymous. (Why people would participate in a conference and think they had some kind of expectation of anonymity is completely beyond me.)
At a panel discussion at that conference, the following relevant exchange was had:
“HAP: Isn't the conclusion that somebody should act alone, either the company or the bank? It's a joint management that runs into trouble, it's the centralization of responsibility that produces the best results in performance, whether it be company-operated or bank-operated.”
“VAL: The closer you get to one man doing it, the better. Get away from the committee. You've got to get down to one man. Get the right man, give him responsibility, and let him go. Not only in investment, but in anything you do.”
“KEN: That's true. That works in the bank too. You must get away from the committee system.”
“TED: The investments that two people are going to agree on, are going to be insipid investments. They are the ones that are not going to be very bad or very good. But the investments that they're going to disagree on may be those that make a lot of money.” (Pages 10-11)
On page 12, all of the participants in the panel again agree that unitary management of a pension fund is best.
Jun Peng's 2009 work has already been mentioned. The following quote is telling:
This brief story of the New York pension system offers two lessons. First, the unique pension governance structure [the sole trusteeship] limits to some extent the reduction in pension contribution by the State government, which can be best appreciated in comparison with New Jersey. The independence of the New York pension system trustee allows it to be more willing to challenge any government attempt to reduce pension contribution. Second, even such independence cannot render the system impervious to the temptation of pension contribution reduction in times of strong investment return and, thus, the risk of volatility to state and local government operating budgets. (Page 164)
Peng, mostly by accident, does point to a specific disadvantage of the sole trusteeship system, which he curiously fails to consider seriously. On Pages 162-163 he considers then-Comptroller H. Carl McCall's reduction of local government employer pension fund contributions to near-zero levels, which occurred in the late 1990s and early 2000s. Peng considers this move solely in the context of that the fund was doing quite well at the time, and didn't necessarily need a great amount of money from the employers. Investment returns were funding the system quite well. He fails to consider, however, the obvious fact that Comptroller McCall was preparing for a run at the Governorship in 2002, for which the support of perpetually cash-strapped local government officials would surely have helped.
Based on these writings, it appears as though the best thing that can be expected from switching to a board system is an at-best neutral result. So, I must ask, why spend the money to establish a board and then staff it up and then make it work on a day-to-day basis for a result that's at best neutral.
What kind of analysis did Attorney General Cuomo engage in to produce this proposal? Did his policy people find writings that I didn't find?
Well, perhaps he studied the fund management of other States, which by and large do not have the sole trusteeship system, and discovered it to be corruption-free or nearly-so.
• Pension Fund Corruption in Other States
So, are pension funds managed by boards corruption-free or nearly-so?
In a word, no. In and of itself, that fact didn't surprise me, but what did surprise me was to find this article on the website of Governing magazine, dated 5 November 2009, detailing a “pay-to-play” scandal in California's CALPERS retirement system, which is run by a board. I must admit that I expected to find the occasional scandal or corruption involving other states' pension funds, but I hadn't expected to find something that similar to New York's scandals, that quickly, dated that recently.
In the Spring of 2009 a civil trial began related to an odd, multi-layered scandal involving the city of Milwaukee's public pension funds, as detailed in this article on the website of the Milwaukee Journal-Sentinel, posted 2 May 2009. This scandal didn't involve investments, but still.
Here, the Heartland Institute discusses the under-funded and “scandal-plagued” nature of the State of Illinois' public pension funds. And, also involving Illinois, here is an April 2009 proposal from the Illinois State Treasurer to reform the Illinois pension funds in the wake of various scandals. The funds at issue are all managed by boards, but it hasn't helped Illinois remain scandal-free. In an interesting twist, the Treasurer has proposal involved consolidating the State's 5 pension funds into a single entity. While this isn't quite the same as his having proposed a sole trusteeship, it does provide some evidence against the “more is better” idea underlying the Cuomo proposal.
It is clear that, at least at first glance (and second glance, for that matter), that neither the body of writings on pension fund management nor a cursory analysis of other states' funds so much as suggests that changing the management system would exclude corruption from the system. At most it would offer the potential, sooner or later, for a pay-to-play system to emerge with multiple points of entry.
If the Attorney General and his policy staff have some kind of specific reason to think this measure will work, if they have some analysis indicating why their idea will succeed where other board management schemes have failed at forestalling corruption, if they have some kind of analysis showing that corruption in other states' pension funds, while it does happen, is measurably less than in New York? If they have any of that? They are for some reason keeping it a secret. To rely on “common sense,” is a bad idea. As journalist (or is he a “humorist?” I'm not sure honestly) Charles Pierce points out in his darkly humorous 2009 work Idiot America: How Stupidity Became a Virtue in the Land of the Free, common sense “rarely is common and even more rarely makes sense” (page 35). At the very least, it is fair to say that common sense alone is not enough to justify this conclusion.
• Conclusion
Why do something like this in the middle of a fiscal crisis when the State might run out of money for normal operations in under a month? From the body of writings on pension fund investment, the move from sole trusteeship to board management would be a neutral one, and that's being rather generous. It would doubtlessly be expensive, and disruptive. How could it not? The board will need staff. The board will need to be elected. The board will need to do a lot of report-reading in order to come up to speed.
And is there anything New York State needs less at the moment than to enact a policy potentially expensive, doubtlessly disruptive, and unlikely to achieve its specified aims?
In any other time, if the money was there, the answer would be a “why not?”
But, not now. This measure ultimately has a lot more to do with Attorney General Cuomo's quest to become Governor of New York (and why anyone would want that job is beyond me) than it does with policy.
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