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NYCRS, NYC Unions and Self-Harm

The plan to overhaul and modernize the governance and management of the New York City Retirement System died last week. NYCRS will thus keep its 58 trustees, 5 boards, 5 asset allocations, 5 consultants and more than 350 asset managers. This can’t end well…

While I was out on paternity leave, the plan to overhaul and modernize the governance and management of the New York City Retirement System died; and not of natural causes. Apparently, the reform plan was killed by New York City’s Unions:

“New York City unions, seeing the reform as an assault on their ability to oversee investment decisions, pushed back against the plan. Without a sweetener such as increased collective bargaining rights, the unions had little reason to support the proposal, a source told Reuters.”

Welcome to the insanity that is American public pension management. The unions view their oversight of pension investment decisions as just another tool to extract concessions from the government in other areas. And so they’ve decided to persist with the status quo because they weren’t given any “sweeteners”.

What about the sweetener of higher returns? There’s plenty of research to suggest that good governance can add upwards of 2% to returns each year. That’s not enough? Moreover, because their pensions are paid out of the $120 billion pool of money managed by NYCRS, the generosity (or lack thereof) of future benefits to union members will be (or at least should be) a function of how well the money is managed. So a professional oversight function should be in their interest, no?

In addition, the unions see their role on the Boards as a way to prevent Wall Street from creating more chaos (even referring to them as “leeches”). Here’s a blurb from the Fire Officers Union President:

“Last I checked, there weren't any cops or firefighters driving this country into financial ruin over the last couple of years...It was exactly the kind of 'professionals' that the mayor pals around with and wants to give more influence to [that caused the crisis].”

I understand this guy’s point. I really do. But he’s wrong. In fact, I might actually stir the pot here and say that putting cops and firefighters in charge of a $120 billion pension fund was, truth be told, part of the problem. Why? Because the ultimate governing authorities overseeing the public pensions simply didn’t have the financial acumen, numeracy or skills to hold Wall Street’s sharks accountable for their actions. To put it in terms the gentleman above will understand, you have to fight fire with fire. (And you wouldn't want finance guys in charge of fighting fires would you?)

And so NYC’s five pension funds paid hundreds of millions of dollars every year (literally) in fees to Wall Street, while getting little in the way of returns. That's the great irony in all this. The unions want to 'stick it to Wall Street', but they actually end up playing right into their hands. 

As I’ve said before, I think the current model of US public pensions is a toxic mix of ingredients that puts all the power on the side of the private sector. We force excessively high return expectations on public pension funds to spare politicians from having to increase taxes or cut benefits. Then, with these excessively high return targets in hand, we send the unsophisticated pension funds out to play with the most sophisticated players in finance. What do you think happens in this situation?

And this is why I was quite sad to see the NYCRS governance reform die. As I see it, the single most important factor determining the success of a public pension fund is the financial sophistication of its Board:

“Investing is as complex as it is dynamic. So public funds should have – have to have – people at the helm that can make resourcing and strategic decisions in full recognition of the real challenges and constraints to achieving long-term objectives.”

Alas, New York City will keep its Fifty Eight trustees, five boards, five asset allocations, five consultants and more than 350 asset managers. This can’t end well...

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