The Real Scandal

MEDIA attention on the comptroller's race has focused more on incumbent Alan Hevesi's use of a state worker to drive his ailing wife around the city than on a far bigger issue: the urgent need to reform New York state's massive pension fund.

But the attention on the Hevesi scandal may not be too much of a distraction - for it illustrates that the pension fund concentrates far too much power in one place.

As comptroller, Hevesi is sole trustee of New York's $145 billion in pension assets, which he invests in the financial markets to fund retirement benefits for nearly 1 million state and municipal workers and retirees. State law governs how Hevesi invests the funds, and he gets plenty of advice from financial firms - but he's the only one who's actually responsible.

Hevesi's woes should remind New Yorkers that it's a bad idea to put so much power and responsibility in the hands of a single man. The state's Ethics Commission has found that there's cause to believe that the comptroller "knowingly and intentionally" broke the law when he directed a state worker to spend much of his time over the last three years driving his wife. (Hevesi justified this by claiming threats against his wife but never substantiated them - and the man who serves as the state's "green eyeshades" kept such poor records about the affair that any claim that he ever planned to pay the state back, the commission found, just isn't credible.)

Yesterday, Hevesi lost his most important supporter, Eliot Spitzer, who withdrew his endorsement of his fellow Democrat, calling the allegations "deeply troubling."

All this shows that the comptroller is always going to be a fallible human being - indeed, an even more fallible New York state employee. And even though his alleged misuse of state resources had nothing to do with the pension fund, Hevesi's predecessor, H. Carl McCall, did use his control of the pension fund to advance his personal interests.

vAs The Post reported in 2002, then-Comptroller McCall wrote on state stationery to a Verizon official, "successfully [seeking] a job for his daughter . . . while reminding [the exec] . . . that the state pension fund owned millions of the firm's shares."

This behavior is dangerous: New Yorkers must be confident that the state invests their funds in a particular stock only because that investment is expected to yield a competitive return - not because someone's relative needs a job.

And it's not only state workers who should worry about whose hands their pension investments are in - it's all taxpayers. Why? It's the taxpayers who would suffer if the pension fund were to stumble.

That's how the system is designed. State and municipal employees have a guaranteed pension when they retire, no matter how the state's investments perform. If the pension fund does badly, taxpayers have no choice but to make up the difference.

This is in contrast to most private-sector employees today. They must invest their own money (often matched by their employers) in personal 401(k) accounts so that by the time they retire, they've saved enough to complement their Social Security income.

Worse, state taxpayers bear a risk besides the chance that the financial markets will sink: They get stuck with the bill if the officials who run the funds severely mismanage the funds, either through fraud or by making just plain mistakes.

One example: Trustees of San Diego's pension fund allegedly played tricks to make the fund seem healthier than it was for political reasons - and threw the city into a fiscal crisis that's still raging two years later.

Of course, the public sector certainly has no monopoly on fraud (or mistakes): Just look at Enron or WorldCom.

But the key is to distribute risk to make the effects of fraud less severe. E.g., if Enron workers' pensions weren't so concentrated in Enron stock, the investments would've been safe. Yet New York state's pension fund, ultimately in the hands of one elected official, is the very definition of a type of concentrated risk.

Ironically, Hevesi - a walking example of the risks in today's system - spent part of Wednesday's debate attacking his opponent for even talking about reform that would reduce the risk.

Yet it's an idea endorsed by all manner of independent budget watchers. New York should reform its pensions so that most new workers get what workers do in the private sector: private 401(k) accounts, optimally invested across varied financial instruments with different people ultimately in charge of each.

No one person should be in charge of $145 billion.

This piece originally appeared in New York Post

This piece originally appeared in New York Post