Corrupt Courts OK Widespread Fraud Against All

The Temptations of $126 Billion

The New York Times - EDITORIAL - December 24, 2009

Earlier this month, a California venture capitalist pleaded guilty to helping his company land a very rich deal with New York’s pension fund. In order to manage a $250 million portion of the $126 billion state pension, Elliott Broidy gave nearly $1 million in gifts to officials in the state comptroller’s office. The details are sordid. He handed out rent for the girlfriend of a state worker who helped invest pensions. He paid a management fee to a consultant. He helped an official’s relative. He paid for luxurious trips by “a very high-ranking” official — all to gain management fees worth about $18 million. As bad as it is, Mr. Broidy’s admission is only the latest distressing news about the corrupt and secret way the office of Alan Hevesi, the former state comptroller, controlled the investment of one of the biggest pools of public money in the country. Mr. Hevesi resigned three years ago after admitting to a felony. Since then, two of his top former associates are fighting criminal charges relating to the pension fund investments. Four others have pleaded guilty for security fraud, including one of the last political bosses in the state: Raymond Harding, who was a leader of the Liberal Party. And an investigation of New York’s pension scandal by Attorney General Andrew Cuomo and the Securities and Exchange Commission is ongoing. New York’s pension fund desperately needs protection. It needs to be guarded by financial experts and watched carefully by the public. It is about more than the fundamental need for good government in Albany, although that’s enough for most people. If the pension loses ground, taxpayers must make up the difference.

Here are three basic reforms that should be imposed on the comptroller’s office:

MORE DECISION-MAKERS The comptroller cannot be the sole person managing the investment of so much money. Unlike 47 other states that have boards that help with this huge task of managing workers’ pensions, New York’s comptroller can, at least theoretically, invest in a best friend’s widget factory if he so chooses. New York needs an official pension investment board, five or seven financial experts, not political hacks appointed by Albany’s leaders. Members of this group should be seasoned at managing other people’s assets and free of any business associations with the state. They should have refrained from contributing to state political campaigns for several years before joining the board. The comptroller should have to climb a high hurdle to reject their advice, mainly bringing a majority of the board with him. And the board should have a solid fiduciary duty to the pension fund rather than to the governor, the Legislature or any friends on Wall Street. One suggestion worth considering from a former New York budget director, Paul Francis: split up the investment duties. Under that plan, the comptroller would make asset allocations (so much for fixed-income investments, so much for overseas equities, etc.). The board would choose the specific fund managers within each area of investment.

LESS FAT-CAT MONEY The comptroller, who runs for public office statewide, cannot continue to be the mother lode of campaign financing for the state’s political leaders. It is too easy now for anybody who wants to do business with the comptroller’s office to donate big money to Albany’s political establishment. Ideally, the comptroller should be the first state office to receive public campaign financing. Failing that, there should be far stricter rules about contributions to comptroller candidates. For example, a contribution would automatically prohibit that person or firm from doing business with the comptroller. The Securities and Exchange Commission is putting the finishing touches on regulations that would ban any investment official from contracting with a public pension fund for the next two years. The Legislature should enact the same law immediately and make certain that lawyers who contribute will also be barred from doing business with the comptroller for two years.

MORE TRANSPARENCY Finally, there should be more transparency in the vetting and choice of investments. Comptroller Thomas DiNapoli, who replaced Mr. Hevesi, has instituted many reforms, but they could just as readily be rolled back by another comptroller more friendly to money managers. After his two-year investigation of corruption involving the state’s pension fund, Attorney General Cuomo has proposed the beginnings of a better system for investing the state’s pension money. It would establish a strong board to oversee management of the pension fund. So far, Mr. DiNapoli and other legislative leaders appear to be resisting any move to dilute the comptroller’s sole control over investing this enormous public treasure. It is time for them to recognize that New York’s pension is too big and the slide into corruption is too easy for one person to keep it safe and invest it wisely. This article is part of a series examining the political and structural crisis in the New York State government.