How Not to Run a Public Pension Plan: New York City
I cannot imagine being the chief investment officer of New York City’s five public pensions. While you work for the city comptroller and have $160 billion in assets, every investment decision has to go before five separate boards of trustees. From what I can tell, most of the trustees have little investment expertise. All too often consultants and politicians drive the process, according to The New York Times. I know from many years of experience that the city’s pensions are extremely slow in making investment decisions. A trend has to be firmly established before the city’s pensions finally make a commitment. As a result, they’ve missed many an investment opportunity. Nonetheless, this dysfunctional process seems firmly entrenched.
However, the governance structure is only one part of the problem. Up until 2006, the pensions used an accounting technique that smoothed out the pensions’ returns so that it appeared that they were 99% funded. This enabled the state and city to avoid making sizable contributions. When this accounting technique was finally disallowed, the funding level immediately dropped to 64%. Moreover, the pensions maintained an unrealistically high 8% expectation for investment returns. As you’d expect, New York City is now spending vast amounts of money (12% of their budget) to try to fill the hole. Even so the hole is getting larger.
Here’s the saddest part of this saga. In 2006 The New York Times reported virtually the same story. Mary Williams Walsh was the co-author of both stories and was probably able to recycle a great deal of her previous research. At the time, city officials and the outside accountants defended the financial practices and soundness of the plan, despite the growing deficit. In the article, the actuaries warned that the city would have to make large contributions in the coming years if changes weren’t made. Mayor Bloomberg attempted to put forward some reforms, but they went nowhere. According to Ms. Walsh’s current reporting, the City’s pension problems are not high on Mayor De Blasio’s list of priorities.
A quick aside to my friends in North Carolina. Our state treasurer is proposing to use outside accountants to audit the North Carolina plans because the state auditor does not appear to have the resources to do the job. In New York City they used outside auditors, and their involvement didn’t ameliorate any of the financial issues facing the City’s pensions. My guess is that the outside auditors gave the politicians cover to avoid addressing the city’s pension problems. Moreover, New York City’s pension shows what happens when legislators, unions, and consultants become too involved in pension investments. While New York City needs to extricate itself from this position, North Carolina seems intent on joining them. See, “Reasonable Goals in a Poorly Constructed Bill: Unnecessary Requirements (June 17, 2014).”
I’ve written about the problems with the city’s pension plans in previous posts. For example, the city has chosen the path of least resistance by increasing their allocation to alternative investments (“New York City Pension Seeks More Alternatives [June 6, 2014])”. I’ve also looked at the role of politics (“Politics and Investing in the NYC Mayor’s Race: Disclosing the Usual [September 6, 2013]).” And I’ve examined the financial condition of the plans (“No Time for Corporate Governance: What Eliot Spitzer Inherits If He Runs and Wins [July 11, 2013)]).”
The New York City pensions are the perfect place to study how not to run a pension plan. Mary Williams Walsh will get to write about the New York City pension plans again in a few years. However, next time she may be writing about a crisis instead of a problem.