New York State Comptroller’s office evades questions about recent Goldman Sachs deal
With much fanfare, the Office of New York State Comptroller Thomas DiNapoli announced last month a “strategic partnership” between the Common Retirement Fund (CRF) and Goldman Sachs Asset Management (GSAM) to invest $2 billion in global equity strategies.
The CRF manages the assets of the New York State and Local Retirement System (NYSLRS) – some $181 billion in total. New York State pensions, including the separate Teachers’ Retirement System (NYSTRS), are unusual among US public pension plans in that they are fairly well funded because union litigation has previously prevented Albany from scrimping on required contributions.
The CRF itself is also unusual in that it is under the unilateral control of the state comptroller, an independently-elected office that has sometimes been credited with keeping the system in good shape. But the lack of transparency in portfolio management and the conspicuous absence of a board of trustees overseeing the investment process is troubling, if not perilous.
Matthew Sweeney, a spokesman for the comptroller’s office, answered some of a dozen questions about the GSAM deal. Here are a few of those he did not comment on, completely unedited:
- Which other investment management firms applied to the competitive bidding for the $2 billion allocation?
- What were the specific criteria on the basis of which GSAM was selected?
- Can you share the investment policy sheet that was publicized as part of the RfP for this portfolio segment? This would include targets like concentration risk and counterparty risk limits as well as a number of other parameters related to the asset classes included, long/short ratios, other risk metrics, geographies and other relevant characteristics of the desired portfolio.
- What are the performance targets in terms of risk and return for the performance-based compensation, if any?
- What are the benchmarks selected to evaluate the performance of this portfolio sleeve in the coming years?
Mr Sweeney did answer a question regarding the compensation structure in the contract – with the laconic: “Fees are disclosed on an annual basis.”
In fiscal 2014, the CRF paid almost $575 million in investment-management fees, an investment-expense ratio of 32 basis points. It is not clear whether this relatively low ratio includes often hidden transaction and maintenance fees within opaque instruments such as real-estate trusts and hedge funds, but even at this rate, the Goldman deal would cost the CRF $6.4 million annually, or $32 million over its projected five-year duration.
With so much pension money at stake, why didn’t Mr DiNapoli’s office publicize the selection process, a clear rationale for the investment and the performance objectives he has (or so one hopes) for Goldman? What value are Goldman’s undoubtedly well-compensated analysts and investment bankers supposed to add?
The so-called partnership “will initially focus on dynamic manager selection opportunities in global equities to enhance returns” and then provide “improved analytics and reporting on its portfolio and enhanced evaluation and due diligence on current and potential active managers.” In other words, the CRF added a potentially expensive actively managed distraction for its global investment team days before CalPERS announced ditching its $4 billion hedge-fund allocation precisely because it was too small to make a dent in overall return and too expensive in terms of time and money to manage.
The bottom line is that, because of their sheer size, most pension funds can do little but focus on efficient cost and risk management. An open and competitive bidding process is essential to keeping costs down. And a critical part of risk management is having a robust, transparent and accountable investment process, which the CRF appears to be patently lacking. One need not look far afield to see where this sort of conduct ultimately leads.
A week before New Year’s Day 2014, the Boston Globe revealed that the Massachusetts Bay Transportation Authority Retirement Fund (MBTARF) had not disclosed, in its financial statements, the potentially fraudulent loss of a $25 million investment in a New York hedge fund that had gone belly up. The investment had been recommended by the MBTARF’s former executive director months after he had left to join that same hedge fund.
While it does have a board of seven trustees, the MBTARF has become the Bay State’s poster child for lack of transparency and accountability – and the object of investigations and scandals every few years. Until 2012, it never even disclosed its annual report to the public.
Barely seven years ago, Comptroller Alan Hevesi, once a “rising star” in New York state politics, pled guilty to federal charges of defrauding the government after taking illegal kickbacks and expending public money for personal and family use.
Despite his egregious abuses of office, Hevesi was paroled after only 20 months in prison and continues to collect a $105,000 pension from the state. This is yet another reason why transparency and independent oversight should be brought to the CRF – and soon.
PS: Pioneer Institute is beginning a formal inquiry with the Office of the New York State Comptroller regarding the terms of the Goldman deal. Follow this space for developments.