NY DFS Report on Pension Investments


Earlier today, the New York State Department of Financial Services (DFS) released a report finding that the New York State Common Retirement Fund (CRF) — the massive investment arm of the New York State Local Employees’ Retirement System and the New York State and Local Police and Fire Retirement System (“collectively, the System”) —  has “for years . . . invested pension system funds in high-cost underperforming hedge funds and nontransparent private equity funds.”   The press release announcing the report and summarizing its findings is available here.  A copy of the full report is available through the same link.

The report takes aim at the New York State Comptroller’s investment decisions on behalf of the CRF.  As the DFS press release points out, the Comptroller is the “sole trustee with complete authority and responsibility for the System addressed in the DFS report.”  In a nutshell, the report alleges that current Comptroller Thomas DiNapoli has over-relied on so-called “active” management by outside hedge fund managers who consistently have underperformed low-cost diversified index investments while charging huge fees.  The report also alleges that the CRF has paid out $1 billion in fees to hedge fund managers over the last eight years, costing the system $3.8 billion in excess fees and underperformance.

The Office of the Comptroller — and the Comptroller’s use of alternative investments in the CRF — has been in the news before.  Students of New York politics will recall that back in 2010, former New York State Comptroller Alan Hevesi pled guilty to a felony charge over his role in a pay-to-play scandal involving the CRF.  Hevesi admitted to taking more than $1 million in gifts in exchange for approving a $250 million investment in Markstone Capital Partners LP using money controlled by the CRF, according to then-state Attorney General Andrew Cuomo.

We expect that the CRF — and the Comptroller’s efforts to balance between risk with potential reward — will remain front page news in New York.  There are many reasons for this — including practice of fully funding CRF obligations (and debate over what it means to be fully funded), the use of accounting practices (e.g., the methodologies for discounting liabilities) that continue to invite scrutiny, etc.  We at IFMR will continue to watch this play out.

Christine Chung