August 22, 2007
Where Investing $154 Billion Is One Man’s Job
By MARY WILLIAMS WALSH and DANNY HAKIM
NY TIMES

Warren E. Buffett may be a multibillionaire and a legend among investors, but he cannot do everything by himself. His holding company, Berkshire Hathaway, has 13 directors on its board besides Mr. Buffett, the chairman, to watch over its $269 billion in assets.

In Albany, State Comptroller Thomas P. DiNapoli concedes he is no Warren Buffett; he owns just a handful of telecom stocks, an I.R.A. and some mutual fund shares. But he professes few doubts about whether he, as comptroller, can ably serve as the sole trustee of the state pension fund, with assets of $154 billion.

“As comptroller, the ultimate accountability is at the ballot box,” Mr. DiNapoli said in a recent interview, echoing a sentiment widely heard across Albany. If the voters, including hundreds of thousands of pension participants, believe he has failed to protect their interests in the fund, they can throw him out in the next election, he said. It would be much harder to unseat an entire board.

Many in the Legislature agree, and show no sign of wanting to use their authority to increase the oversight of the state pension fund, the nation’s second-largest. Still, only two other states, Connecticut and North Carolina, rely on sole trustees to safeguard their workers’ retirement money. Most have boards.

The idea of a single trustee draws the disdain of many academics, governance experts and a few pension officials in other states, who argue that sole trusteeships are a risky anachronism. They doubt whether one person should be responsible for such a big block of other people’s money — especially an elected official, who may have party loyalties and personal or political goals that could conflict with the best interests of the pensioners. By law, pension trustees have a duty to put the interests of the participants first.

Sole trustees “are relics of the past,” said Richard Koppes, a former general counsel of California’s big public pension fund, known as Calpers, which has a 13-member board.

Scandals in various states have raised doubts about putting so much money into one set of hands. In Connecticut, one former sole trustee, Paul J. Silvester, was sentenced to a federal prison term of four years and three months after pleading guilty in 1999 to corruption charges involving misuse of the office for personal gain. New Jersey added a pension oversight board after a scandal in the late 1940s. But corruption scandals have also hit pension funds overseen by boards of directors.

Mr. Koppes said sole trusteeships may have made sense decades ago, when pension assets were smaller and invested almost entirely in simple investments like bonds.

But the officials responsible for investing the giant pension funds of today must evaluate complex derivatives and hedging strategies not dreamed of a generation ago. Many are struggling to re-evaluate arcane mortgage-backed securities that once appeared safe. Pension trustees must also oversee decisions on disclosures to the public, and on adequate funding levels. They can expect to be lobbied regularly to invest in special interests of politicians, citizens or campaign contributors.

Governor Eliot Spitzer and Attorney General Andrew M. Cuomo are questioning whether one person should wield so much financial clout, but they are unlikely to find support for change in the current Legislature. After the previous comptroller was forced to resign, lawmakers rebuffed the governor’s choice and went with Mr. DiNapoli, who they say should now have his own chance. “I don’t think the system is broken and requires a fix at this point,” said Assembly Speaker Sheldon Silver, the Legislature’s top Democrat.

Mr. Cuomo and the district attorney in Albany are conducting parallel investigations into whether the last trustee, Alan G. Hevesi, traded on his position to win favors for friends and family. Mr. Hevesi resigned in December after pleading guilty to defrauding the government by having state workers act as chauffeurs for his ailing wife, but he has denied any wrongdoing outside that case.

Keith P. Ambachtsheer, director of the International Centre for Pension Management at the University of Toronto’s Rotman School of Management, said the issue is not of one person’s character but of a model that is simply not workable.

He said pension trustees need a working knowledge of many disciplines: law, accounting, risk management, strategic planning, human resources and economics.

One person is unlikely to possess all those skills. Nor can one person be reasonably expected to acquire them if he or she is also cultivating a political profile or building a campaign war chest, which happens when a pension trustee is also an elected official, like the New York State comptroller.

“If you’re a politician, you’re a politician,” said Mr. Ambachtsheer, who helped establish boards at two of Canada’s largest public pension funds. “You can’t be a trustee. It’s just a contradiction.” In Canada, he pushed for retired finance professionals on the pension boards, people with adequate time and experience. He also advocated paying them so they would take the role more seriously.

“The statement is made that their work is valued,” Mr. Ambachtsheer said.

David B. Wescoe, chief executive of the San Diego pension fund, said he saw “an inherent conflict” when a trustee was also an elected official, between the fiduciary duty to the pension plan members on the one hand, and the separate duty to the state and its taxpayers on the other.

San Diego recently reconfigured its pension board after a scandal in which such conflicts played a role. Its board was dominated by city officials and employees who wanted to simultaneously rein in government spending and to offer ample pensions to workers. Unable to do both, they ended up with accounting fraud.

Elected officials who are pension trustees also tend to cite their funds’ annual investment returns to show voters that they are doing a good job. These statistics can sound impressive, but in fact they provide little meaningful information about a trustee’s stewardship of the fund, since pension returns generally follow the broader ups and downs of the stock market.

Mr. Hevesi, for instance, recently issued a statement through a lawyer calling his record as sole trustee “impeccable,” and citing the fund’s growth to $150 billion from $95 billion during his four-year tenure. But total market returns during this bullish period were roughly the same or a little better.

The lack of meaningful information is particularly acute in New York State because the pension fund has been using an unusual accounting method that has made it look perfectly balanced at all times, even in years like 2001, when it lost billions of dollars.

The Governmental Accounting Standards Board, an independent body that sets the rules for state and local governments, recently disallowed that accounting method, after articles in The New York Times questioned it. Mr. DiNapoli said the pension fund had already changed to an accepted method, which showed the fund had a small surplus.

But the improvement still does not reassure many economists, who say that virtually all public pension funds understate their obligations, whatever accounting method they use.

Pension trustees do not generally invest workers’ retirement money themselves, but farm it out to professional money managers. These professionals compete aggressively for the business. A small slice of a big pension fund can produce millions of dollars in management fees.

Any time a money manager contributes to a pension trustee’s election campaign fund, and then receives pension money to invest, it raises the question of whether the manager might have “bought” the contract when another money manager would have done a better job. These questions, about what is called pay-to-play activity, have swirled around the New York State pension fund for years.

Investigators are looking at the campaign contributions made by various money managers to Mr. Hevesi, trying to learn whether they influenced his decisions about how to invest the fund’s assets. They are also examining whether money managers improperly provided things of value to Mr. Hevesi’s sons and former senior aides.

Mr. Hevesi’s lawyer said that all investment decisions on Mr. Hevesi’s watch “were made strictly on the merits.”

The Stanford Institutional Investors’ Forum, which has been trying to identify the qualities of successful pension boards, issued a report in May saying that members of an effective board had to be ready to dismiss a colleague, in case any board member acted against the pensioners’ exclusive interests. A sole trustee could not do that, because it would mean firing himself.

Mr. DiNapoli said he was well aware of the pension fund’s need for strong, independent oversight. He said he had already created an inspector general to provide a new layer of internal control over the fund. And because campaign contributions by money managers have been such a sore point over the years, he has recommended that the comptroller’s election campaign be at least partially financed with public money.

Still, Mr. DiNapoli said he believed a sole trustee could provide more accountability than a board, and cited cases in other states where board members had failed to act independently of the governors or unions that had appointed them.

He said there was a long bipartisan tradition in New York State of governors and legislatures trying to raid the pension fund when money got tight — and of sole trustees beating them back. Arthur Levitt Sr., a past comptroller, withstood pressure to use the pension fund to bail New York City out of its fiscal crisis in the 1970s. His successor, Edward V. Regan, and later H. Carl McCall, blocked efforts by governors to reduce the state’s contributions to the fund to balance the budget.

Political realities make it unlikely that New York State’s sole trusteeship will be abolished any time soon. Doing so would take an amendment to the State Constitution, an arduous process that requires two subsequent Legislatures to enact a bill to that effect.

Senator Dale M. Volker, a Republican from the Buffalo area, sponsored a bill in 2002 that would have taken the sole trusteeship away from the comptroller but said he would not propose such a measure now. He said he had told Mr. DiNapoli he would give him a chance “to see how you’ll do.”