Mayor Michael R. Bloomberg of New York City entered St. George’s Theatre on Staten Island in late January as if he were entering the chambers of Congress. It was his annual State of the City address, given a week before President Barack Obama would do the same for the nation, and it could have passed as a dress rehearsal. The baroque announcement of his arrival. The dignitaries lining his pathway. The cheering. The handshaking. The pleasantries exchanged in passing.
The closer to the podium Bloomberg got, the more important the people were. There was former Mayor David Dinkins, he of New York race riot fame. Then Ed Koch, another former Mayor known for running the city during its recovery from the financial debacle of the 1970s. Then John Liu, City Comptroller, the man who controls the city’s pension management and a frequent Bloomberg critic. Perhaps the 100th person the Mayor had faced in the previous two minutes, Liu reached out his hand. Bloomberg reached back and turned his head from Koch—realizing too late whom he was about to greet. His gaze immediately shot upward, as if to avoid eye contact. Their hands touched, briefly—no Clintonesque double clasp or hand on the shoulder—and Bloomberg moved on.
Such awkward interactions occur daily in city politics, but the tepidness with which Bloomberg treated Liu was all the more telling because of what the Mayor was about to say. He would, as in all such addresses, touch upon the quotidian issues of city life. Unemployment. Spending reductions. Parks. Roads. The attraction of intellectual capital. Education. However, 30 minutes into his speech, the topic turned to something John Liu cares very much about: the city’s $113 billion public pension system. “Most important—most important of all—allow us to reform our pension system to make it fair for workers and taxpayers,” the Mayor said in his accent, an unusual mix of Boston and New York. “City workers deserve a safe and secure retirement but, right now, they receive retirement benefits that are far more generous than those received by most workers in the private sector—and that provide for a much earlier retirement age. It would be great if we could continue to afford such generous benefits, but we cannot.”
To save the city worker’s retirement system, he went on to say, it must be reformed. With Ed Koch leading the charge in Albany—which must approve much of the changes New York City wants to make—Bloomberg named his wish list. He wants to “save $8 million a year right off the bat by consolidating pension systems.” He will “seek a new tier for employees hired in the future that would raise the retirement age to 65 for non-uniformed workers,” saving the city an estimated $1 billion over eight years, and “eliminat[e], for future uniformed retirees, what is effectively a $12,000 annual bonus, paid on top of full pension benefits every year,” which would save $1 billion each year. He wants to bring collective bargaining regarding retirement back to the City level, something New York has with all other benefits—salary, vacation, even health—but not pensions. “All together, the reforms we are asking of Albany would allow us to save billions of dollars in the years ahead,” he concluded. With that, the Mayor moved onto other subjects.
Sitting in the audience, John Liu knew there were some things Mayor Michael Bloomberg did not say.
ii.
What Michael Bloomberg did not say is this: Besides attempting to force, through public shaming and private negotiation, benefit concessions, the Mayor also is attempting to professionalize the investment side of the pension equation—at the expense of Liu’s domain.
Currently, Comptroller Liu—elected in 2009 and seen as likely to run for Mayor in 2013—controls the team that manages, in totality, billions of city pension capital. His chief investment officer is Lawrence “Larry” Schloss, the former head of CSFB’s Private Equity unit as well as the CEO of private equity firm Diamond Castle Holdings. Schloss was brought into the Comptroller’s office after Liu fired the former CIO, Rita Sallis, within days of taking office. Supporting Liu and Schloss is the City’s Bureau of Asset Management—or BAM, as it is universally known.
With recent Bloomberg moves, however, this structure is feeling pressure. In August 2010, the Mayor hired the city’s first chief investment advisor: Ranji Nagaswami, an ex-AllianceBernstein chief investment officer and UBS Asset Management US fixed-income co-head. He also brought on board a senior investment officer focused on risk management, Kurtay Ogunc, whose résumé includes stints in the endowment investment management (Louisiana State University Foundation), consulting (Watson Wyatt Worldwide), and venture fund (Stowbridge Partners) worlds. (However, Ogunc quit under unclear circumstances in the last week of February.) By dint of being the Mayor’s appointee, Nagaswami is now the Chair of the New York City Employees Retirement System (NYCERS), the second largest of the five funds that comprise the city’s pension system. She also acts as the Mayor’s representative on the four other boards. (Interesting note: Nagaswami replaces lawyer and political operator Joey Koch—the niece of the former Mayor whose hand was so affectionately shaken in St. George’s—as Bloomberg’s representative on the firefighters pension investment board).
Part of the motivation for Bloomberg’s recent interest in pension management is to take a more holistic approach to investing, focusing less on choosing individual money managers and more on an overall approach to risk management and asset allocation. According to Mayoral Spokesman Frank Barry, “Ranji and her team are focused on working with the boards and Comptroller’s staff to make more strategic policy and manager selection decisions, which includes reframing the conversation on risk assessment and asset allocation.” Yet, sources close to the recent hires and the Mayor’s thinking say that the real order of business is to educate and advise board members, often lacking in financial expertise, and to make sure that the overseers of the five funds don’t run them off a cliff before the Mayor can renegotiate contracts and put the City’s pensions on more stable ground. The official line is that both sides are happy with this arrangement. Sources close to the Mayor’s people say differently, however. “Naturally, it is going to cause some awkwardness that there is a Mayoral CIO on floor five and a Comptroller CIO of floor seven in the same city building,” one source said.
Thus, Michael Bloomberg’s pension action is more pincer movement than frontal assault. On one side, as he publicly acknowledged in his State of the City, he is attempting to alter benefits for current employees and create a new tier of benefits for future ones. On the other, he is attempting to alter the way the capital currently in the system is managed. The longest running advocates of such reforms are New York’s good government, or “goo-goo”, groups, which have been pushing for a more apolitical, “professional” bureaucracy since the days of Boss Tweed and Tammany Hall. “We completely support the reform efforts the mayor is making, and think it’s time to bring the pension system under control,” says Maria Doulis of the Citizens Budget Commission, a nonpartisan group focused on New York fiscal matters. “The problem for the city is that pension costs have been on an upward climb that’s ultimately unsustainable. Over the last two years, the Mayor has been aggressively cutting city agencies, and it’s starting to show in the level of city services. But there’s this one item in the budget,”—pension costs—“that continues to grow despite all these cuts, and it’s something we really need to bring into line.” Like any military pincer, however, the opposing forces aren’t entirely pleased with developments.
iii.
While Mayor Bloomberg delivered his speech to an enthusiastic audience, Martin T. Fullam sat in a downstairs room in his modest house on the other end of Staten Island, breathing hard.
Fullam, a 54-year old retired fire lieutenant, enjoys a disability pension, which gives him three-quarters of his $89,000 salary tax-free. “I know a lot of people don’t have it so well,” he says of his guaranteed retirement income, “and there are things about the pension that could be changed. Maybe it would be more fair if overtime didn’t count toward your pension, or maybe if guys have to start paying more into their own retirement, but a big attraction for becoming a fireman or police officer is that pension. When I came on the job, [police and fire] paid less than other jobs, and that security was a big attraction. I worked for years in the 1990s without a pay raise, and if you worked on the outside in a private business your salary probably went up. Now it seems like the shoe is on the other foot, and it was better to have the pension, but that was part of the deal. You work for that pension.”
While that three-quarters-salary-for-life pension looks good on paper, Fullam’s story is more complicated. At noon on September 11th, 2001, Fullam’s fire company arrived in Lower Manhattan to a sunny day turned dark by the floating debris of the collapsed World Trade Center. “As soon as you smelled that air, you knew there was stuff in there that wasn’t good for you,” he says, “but it wasn’t something you thought much about. We had a job to do.” For the next six months, Fullam worked 10- and 12-hour days “on the pile,” digging, searching for, and recovering dead bodies. In 2005, medical tests found his lung capacity had diminished significantly, and he started having serious pains, attributed by doctors alternatively to middle-age, lupus, and arthritis. Fullam finally was forced to go on sick leave. He hoped he would recover and be able to go back on the job, but was eventually diagnosed with an inflammatory disease, polymyositis, that attacked his lungs. (When Fullam was diagnosed, at least six other FDNY members who responded to Ground Zero were suffering from this extremely rare disease). In December of 2008, he officially retired with his disability pension and, in May of 2009, doctors removed his diseased lungs and replaced them with an organ donor’s. Since then, his body attacked the donor lungs four separate times. Fullam has recovered each time, but every attack leaves his lungs with more scar tissue. A trip up the stairs to his bedroom is a step-at-a-time ordeal that requires five liters of pure oxygen. His wife has had to quit her job to take care of him, and with a home and three daughters (the oldest now enrolled in college) that $65,000 a year doesn’t sound quite so lucrative. “I consider myself lucky,” says Fullam. “I have friends with terminal cancer. Me, hopefully I’ll be able to get another lung transplant soon and still be kicking around in 10 years, maybe more. Living on one income now, we’ve had to cut back a lot, but we can pay our bills.”
Fullam’s health and pension situation is a result of the dangerous realities of fire and police jobs, and decades of bargaining between the powerful New York unions and City and State officials. Police and firemen die and are seriously injured on a regular basis, and as early as the 1860s the city was offering life insurance policies and some aid to the wives and children of men killed on the job. The benefits were scant (police and firefighters set up their own private widows funds, and many widows worked part-time cooking and cleaning in firehouses). During the Depression, President Franklin Roosevelt’s New Deal (which he’d already experimented with as the governor of New York State) gave newfound power to unions across the country, particularly under Secretary of Labor Frances Perkins (who was a New York labor activist before becoming the country’s first female cabinet member). In 1937, the New York City firefighter’s union was able to insert an amendment into the state constitution that made pensions a contractual requirement for state employees. Since then, pensions for New York City workers have been largely the realm of the state government, with Albany eventually taking over the sole right to negotiate pension benefits for City unions. Since then, those municipal unions have largely outplayed the City in Albany’s lobbying and political back-scratching ground game.
“We knew everyone in Albany,” says one former union lobbyist. “Democrat, Republican, it didn’t matter—we actually got more from the Republicans than from the Dems, which people forget. If a state senator somewhere needed help with his campaign, we rented a bus and filled it with [union members] to knock on doors and hand out flyers. It gave us access.” One union lobbyist even helped a high-ranking state senator keep his love life quiet by bringing the senator’s girlfriend out for dinners where the senator would join them, so that it looked like a business dinner and not a date.
Despite Albany’s technical control, the City still can negotiate pension benefits with the unions informally, along with salary and health benefits—and if the City and union both agree on terms, Albany generally will rubber stamp the deal. That’s what happened with what the Mayor, in a savvy public relations move, has taken to calling the “holiday bonus”: an annual $12,000 allotment paid (at the end of the year, around the holiday season) to cops and firefighters on top of their standard pensions. In the 1960s, the City wanted to move from investing all of the police and fire pension fund money in bonds to a mix of bonds and equities. In return for the extra risk, the unions negotiated a deal where, if the pension fund investment portfolio outperformed a standard rate of return on bonds (thus saving the City contribution costs), a percentage of the extra investment income would go into a Variable Supplements Fund (VSF) that would be distributed to retirees on standard pensions (anyone on a disability pension doesn’t qualify).
With the Dow Jones running essentially flat from the mid-1960s to the early 1980s, the VSF didn’t add up to much, but during the bullish 1980s, retirees were collecting thousands of dollars each year. To save more money, the city then proposed switching to a defined benefit VSF plan, starting at $2,500 per year and rising each year until it reached $12,000 in 2007. Retirees would make a lot less money in good years, but they’d have more security in their retirement income. The police and fire unions also gave the City more than $100 million dollars as part of the deal, to help close a City budget gap. With stocks continuing to rise through the 1980s, 1990s, and most of the 2000s, the City saved billions of dollars with the defined benefit VSF, and City Hall wags joked that the city negotiators should have their statues erected next to Nathan Hale’s—he of “I only regret that I have but one life to lose for my country” fame—at the west entrance of City Hall.
The deal hasn’t looked so good to the City since the market collapse of 2008, and now costs about $600 million annually but, as far as the unions are concerned, the mayor’s recent calls to end the VSF for not only new hires, but also retired cops and firefighters who already are receiving it, is tantamount to reneging on a contract. “We gave them billions of dollars with the promise of a stable annuity,” says fire officers’ union President Al Hagan, “and now not only are they trying to wiggle out of paying that annuity, but also they want to walk away with the original payment we made.”
iv.
How New York City’s pension benefits arose may seem more political compromise than principled stand. It will surprise few, then, that a similarly convoluted system has arisen to manage the capital already in the fund—and that this structure is now under reform pressure from Michael Bloomberg.
The investment structure and its problems have been known for some time. Turnover at the city CIO position has been frequent—Des McIntyre, now-CEO of Standish Mellon Asset Management, left after just two weeks on the job in 2003, reportedly appalled at the hopelessness of instituting change. (McIntyre declined comment on this story). Others are willing to speak ill of the governance “nightmare,” as one put it—although none is willing to go on the record in doing so. “It’s a complicated system created by law—it doesn’t make any sense to anyone, and no one claims it does,” says one former CIO, echoing the sentiments of the many.
While Mayor Bloomberg might be the man to change this, questions remain about his own investment practices. Now the richest man in city, trained in the Darwinian scrum of Salomon Brothers and potentially the most independent, professional investor out there, Bloomberg might be considered by the unseasoned eye to be above reproach with his own capital. Yet when he set up a $5 billion blind trust in 2008, whom did Bloomberg pick to handle his money? His friend Steven Rattner, who at the time was in the midst of the largest pay-to-play scandal in recent memory after reportedly paying middlemen (some now jailed) in return for large allocations from the New York State pension fund to his investment firm, the Quadrangle Group—exactly the kind of scandal the Mayor’s reform push is meant to prevent. (Rattner has settled with and is currently suspended from trading securities by the SEC, and has settled with the New York State Attorney General’s office to the tune of millions). It might be understandable, then, that there is some skepticism regarding any Bloomberg-led changes to the system. As one commentator put it: “[The New York City pension system] is a strange structure, but it’s like Winston Churchill’s line about democracy being the worst form of government, except for all the other ones that have been tried. The idea that you can somehow have an apolitical board”—which, hiring financial experts such as Nagaswami to sit on numerous oversight boards, Bloomberg clearly desires—“well, who does that board answer to? What are their biases?” They may not be experts or apolitical, the source is saying—but they’re at least looking out for the pensioners.
However, this somewhat loose style of investment governance may not be the best way to run a $110 billion fund, says Skip Halpern, President of Washington-based consulting firm Independent Fiduciary Services. Specializing in fund governance, Halpern’s firm conducted a 400-page governance review for the New York City funds in 2003, shortly after then-CIO McIntyre’s swift departure from the system. The report proposed a number of enhancements: no fundwide written investment policy statement existed at the time (although it has been produced since), a serious flaw in the eyes of governance experts in general. The manager selection process was considered to be unnecessarily lengthy, and there were too many managers used. Benchmarking was not sufficiently rigorous. The investment staff was overtaxed and underresourced—an assertion supported by news reports at the time of McIntrye’s departure—and the result, overall, was an inefficient system.
“I can’t speak to what’s happened since we produced that report,” Halpern says, noting that, in this case, his firm’s purview did not include implementing the changes they recommended. He can speak about what good governance is meant to look like, however, for Halpern is regarded as an expert in this field. “I think about the question of good governance for public pension funds in terms of a grand bargain,” he says. “On one hand, governing fiduciaries should be granted extensive autonomy and discretion— – but this needs to be within a framework of responsibilities, and checks and balances.”
In terms of autonomy, Halpern breaks down a pension into several categories, “the most obvious of which is the investment program. On the operational and administrative side, however, decisions over budget, personnel, and procurement should be autonomous, though within a framework of various checks and balances. In terms of personnel, hiring and firing should be at the board’s discretion and, very importantly, so should compensation.” Halpern believes, like many a pension observer, that investment professionals at such funds should be exempt from the “usual civil server rules that often broadly apply” and limit salaries. “What I’m talking about is sufficient discretion with regard to salaries to attract and retain sufficiently qualified candidates,” he says. “It’s also about the structure of compensation—for example, having performance incentives, although that’s a black art, and it’s certainly littered with pitfalls. It takes great care to design and operate a program of incentive compensation.” To balance this out and create the “grand bargain” that Halpern speaks of, he believes that there need to be sufficient auditing powers by and sufficient disclosure to outside authorities, as well as rigorous standards of fiduciary responsibility.
As to the board composition, Halpern believes that “it is a best practice to have substantial institutional investment expertise on the Board—not requiring all board members to have financial expertise, but at least a substantial amount on the Board is very healthy.” If this is impossible, an advisory committee should be in place to give advice to nonprofessional board members. Halpern cites the example of the State of Virginia and the Teachers’ Retirement System of Texas, which “historically have had advisory boards that assist the boards of trustees.”
New York City’s pension system does not fair well when compared with Halpern’s El Dorado. For one, the investment team’s salaries are not competitive. Larry Schloss makes $224,000 per year—a fortune by most standards, but a pittance in Wall Street world. (The salary issue also extends to the Mayor’s appointments: Nagaswami makes even less than Schloss at $175,000 annually). There is no performance pay, a common staple in public funds in other countries. Certainly, not all board members possess financial or legal expertise, also common at other institutions such as this. It’s for these reasons, observers say, that Bloomberg is trying to add his own dose of investment excellence, above and beyond what the five funds currently get out of their consultants, to the New York City pension system.
v.
The biggest advocates of the current system are, of course, the unions themselves, which enjoy a good deal of influence over investment decisions. This is particularly true of the police and firefighters’ unions, which have as many votes as the City does on the pension boards (other unions, like the teachers, have a large minority). “It’s a specious argument to say that people that aren’t professional are making decisions,” says firefighters union Vice President James Slevin, who sits on the pension board. “I’m an attorney and take fiduciary responsibility seriously. We have people with investment backgrounds on the board, and outside consultants who are pros. This is the members’ money that’s being invested here and we’ve been elected to represent them; you need to have that balance of perspective on these issues.” (There are, of course, shadier, unspoken reasons for the unions’ hesitance to give up their influence over investment decisionmaking. “They come out of the woodwork, these Wall Street leeches,” says one former city union boss. “Investment conferences in Florida, free golf outings at firefighting conventions, all of that. I never threw any money their way and most of our guys stayed out of that whole business, but I can’t say that for everybody.”) Perhaps Hagan of the fire officers union says it best. “Last I checked,” he notes, “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].”
Bloomberg is not the first mayor or governor attempting to change the way cities and states pay their public employees after they have left active duty. He is, however, one of the only true national figures doing so—and, although he’s denied interest, it wouldn’t be the first time someone refused to consider the Presidency before very much considering it. (Another potential contender for the title of Pension Reformer in Chief is Chris Christie of New Jersey, who—surprise!—also denies any interest in the Presidency; the competition between these two to see who can out-blunt each other when speaking on public finances may be a boon to the national pension debate). People talk about the perfect storm of asset values falling as liabilities rose in 2008. In 2011, there is another perfect storm. This time, it is low funding ratios (caused, among other things, by historically low interest rates) and a political environment in which unions are public enemy number one. So, when Mayor Michael Bloomberg entered St. George’s on Staten Island in late January and spoke on pension reform—omitting some essential parts of his plan, of course—it reverberated far beyond the walls of that renovated theatre. Of course, Bloomberg’s reign has been characterized as a series of grand ideas followed by weak execution, of principled stand meeting political reality. Whether his pension reform will be any different is unknown, but this is a national debate—an international one, really—and, whether or not one agrees with him, it can be easily argued that it is in everyone’s interest to see this issue go far beyond a simple speech.
<none>