An outside review of New York’s $150 billion pension fund for public workers showed Tuesday that it fixed the ethical problems that led to a “pay-for-play” scandal.
The three-year review by Michigan-based Funston Advisory Services said the Common Retirement Fund’s 2009 decision to ban paid placement agents, which are used by other pension funds, does not appear to have kept it from accessing qualified outside investment managers.
New York Comptroller Thomas DiNapoli, the fund’s sole trustee since the 2007 scandal, is meeting all applicable ethical and conflict-of-interest standards and is acting solely for the benefit of its 1 million workers and beneficiaries, Funston said in the 161-page report. However, the review noted the fund is thinly staffed for its size and complexity, depending more on external consultants, and needs better computer infrastructure including a centralized document management system.
“Investment-related practices are robust and appropriate,” Funston reported. “The comptroller manages the fund in accordance with the applicable ethical, professional and conflict-of-interest standards.”
DiNapoli said the review, the first of the outside reports now required every three years, validated reforms that followed the scandal and confirmed the in-house feeling that banning placement agents didn’t close out many investment options.
“The reality is so much of what went wrong under the prior administration had so much to do with that relationship,” DiNapoli said. “My feeling was the only way to be sure that kind of corrosive relationship won’t happen again is to not do business with placement agents. I think the findings confirmed we have not suffered because of that.”
Former Comptroller Alan Hevesi was paroled in December after 20 months in prison for a felony conviction of official misconduct. An attorney general’s investigation showed that pension fund officials and cronies, including Hevesi political adviser Henry “Hank” Morris, got fees and favors from financiers seeking chunks of the fund to manage.
DiNapoli acknowledged areas for improvement the agency is working toward, like more integrated information management systems. About staffing, he said that while the pension fund itself is a separate trust, the staff is part of the public work force subject to state budget and civil service limitations.
According to the report, the pension fund in the three years through March 2012 was largely transparent, disclosing both data and policies, and its investment operations were well run, but limited staffing has slowed development of new investment strategies. “Evolution of the fund and adaptation to the growing complexities of the financial markets will be required, especially in an environment where achieving assumed returns will be difficult,” Funston said.
The fund dropped from its historic high of about $154 billion in spring 2008 to $110 billion a year later as the economy stopped growing and stocks tumbled. It has since regained most of that, while also paying pensions to about 400,000 retirees and beneficiaries.
It has adjusted its estimated annual return on investment from 8 percent to 7.5 percent.
“Given what’s happening in the markets now, with a lower return on fixed income investments, that’s going to be a challenge. We understand that,” DiNapoli said. The great debate right now is whether the current bubble in the stock market will continue and for how long; because of its limitations as a public pension fund, New York’s pension fund will continue to have significant exposure there, he said.
The report noted that the comptroller’s office has also established an internal office of inspector general, with full authority to investigate complaints of wrongdoing from any source, take testimony, require documents and refer cases to outside prosecutors. It recommended according confidentiality to complainants, specifying where to file a complaint against the inspector general, requiring prompt completion of valid complaints and extending protection from retaliation beyond the agency’s officers and employees to outside service providers and investment candidates.
Over five years, the inspector general has reviewed and given guidance on 229 cases, the vast majority if not all unrelated to the pension fund, comptroller’s office spokeswoman Jennifer Freeman said.