Bloomberg and Liu’s losing investment

No one likes budget cuts — least of all the mayor and comptroller making them. Yet Mayor Michael Bloomberg and Comptroller John Liu fumbled a chance to cut down on the billions the city shovels into pension funds — money that could have helped pay for programs under the axe this year, and many more.

The city plans to spend $8.1 billion to cover retirement costs for its workers in Bloomberg’s proposed budget, up fivefold since the mayor took office in 2002.

The relentless rise in the pension bill — now more than 11 percent of the entire budget — prompted Bloomberg and Liu to try to rein in New York City’s sprawling and costly pension system. Or, more accurately, systems: five separate funds that pay for the retirement of teachers, firefighters, policemen, and other city employees.

Liu beamed as he announced the plan in October 2011 in an unusual joint press conference with the mayor. “This is a game-changer,” he pronounced. “A solid win for taxpayers and city workers alike.”

New York City’s five separately run pension funds would consolidate their investment efforts, with an independent staff guided by a single, restructured board of trustees. The five funds would continue to administer their own benefits.

Firefighters union chief Steve Cassidy, left, joins Mayor Michael Bloomberg and Comptroller John Liu to announce historic changes to the management of the city’s pension systems, now on hold. Photo: Edward Reed

Civil service unions — usually at odds with City Hall — voiced enthusiastic approval. At the news conference, United Federation of Teachers president Michael Mulgrew stood behind Bloomberg, then stepped to the microphone and offered him rare praise.

“If somebody has an idea that says, ‘You know what, we can do even better, and it not only helps your fund but it helps the community and the city which we live in,’ why wouldn’t we do it?” Mulgrew said.

Bloomberg and Liu expected to cut down on the hundreds of millions of dollars the system spends on fees for the outsourced money managers who place the funds’ investments, in everything from stocks and bonds to real estate and private equity. Their plan would have allowed key investment staff to serve for longer periods than a comptroller’s four- or eight-year term, promoting stability. And it would have streamlined painstaking approval processes, which were making it harder for the pension system to act quickly in the marketplace and secure good deals.

“Right now, if we want to make an investment, it’s like turning the Queen Mary around in the Hudson River,” Steve Cassidy, the president of one of the city’s firefighters’ unions, said at the news conference. “By the time you do it, you may be going in the wrong direction.”

A year and a half later — with Bloomberg about to leave his office and Liu seeking to claim it — their groundbreaking reform deal is dead. Liu, the plan’s architect and most vehement backer, has given up, the victim of his office’s own political oversights in pitching the plan, and his damaged credibility in the wake of a federal investigation into his campaign fundraising.

Liu and Bloomberg portrayed the deal as a slam-dunk, in which the city could reduce its pension costs without having to extract any painful concessions from labor unions.

The comptroller pledged to help draft legislation to send to Albany, which had to sign off on the changes. City officials had already been laying the groundwork there, and a spokesman for Governor Andrew Cuomo said he was looking forward to reviewing a proposal.

After the news conference, Deputy Mayor Robert Steel emailed Eric Eve, the deputy comptroller who had designed the reform package. Steel seemed to think the deal was sealed.

“Congrats to you for getting this in motion and to this point,” he wrote. “Look forward to congratulating you in person next week and working with you over the next couple of months to get all buttoned up.”


Slow decisions, middling returns

Three months before the triumphant announcement, Bloomberg dispatched Steel to a breakfast at the Princeton Club in Midtown. There Steel, a former Wachovia CEO and undersecretary for the U.S. Department of the Treasury, made his case for reform at a Citizens Budget Commission breakfast.

Bloomberg, Steel said, was adamant about paring back the benefits enjoyed by city workers — the biggest factor driving up costs. But the mayor’s office also wanted to reform the way that the pension system made investments, an idea that arose from simple arithmetic: that an extra one percent in returns from the funds’ $120 billion in holdings would generate more than a billion dollars.

The existing system for investing the city’s pension money, Steel argued, was outdated and inefficient. A tortuous board approval process required each group of trustees to hold separate votes, any time the comptroller’s office wanted to pick a money manager to invest a combined chunk of the portfolio. That soaked up staff time, and put the funds at a competitive disadvantage to other investors that didn’t have to go through such a laborious route.

“We’re spread across five funds, with five sets of decision-makers, and five sets of meetings, and five sets of processes,” Steel said.

Steel also wanted the city to hire more of its own investment staff — cutting down on the exorbitant cost of outsourcing to private asset managers  — and make that staff more independent of the comptroller.

Academic research backs up Steel’s notions, according to Gordon Clark, a professor at the University of Oxford and a founding governor of the UK Pension Policy Institute, who has researched practices of pension funds worldwide.

“The conventional model of a public-sector pension plan is basically broken,” Clark said. The reforms Steel was floating, Clark added, “are entirely appropriate.”

Across the street from Steel’s City Hall office, in the Municipal Building, Larry Schloss had been thinking along similar lines. As chief investment officer under Comptroller John Liu, Schloss was charged with managing that $120 billion in city pension fund money.

Schloss, previously a founder and CEO of a $2 billion private equity firm, started in Liu’s office shortly after the comptroller’s election in 2009. Schloss discovered that he’d inherited a Rube Goldberg contraption, with an array of strict procurement policy rules to be followed, consultants to be queried, and approvals to be sought from each board of trustees before making investments.

He also found that the city pension system didn’t manage any of its own money directly, which led to overspending on fees for outside managers, which totaled $400 million a year. One of the top public pension funds in the world, the $117 billion Ontario Teachers’ Pension Plan, spent 25 percent less running its funds than New York City. But the New York system’s average return over the last 10 years was 6.7 percent — in the middle range for a large U.S. pension fund — while the Ontario’s performance was 8 percent in roughly the same period.

Liu charged his staff with drafting a proposal to fix the pension funds. And despite some initial discord, Bloomberg’s office ultimately came on board.

Liu and Eve, his top deputy, projected that an improved investment process could pull in as much as an extra 1 to 2 percent in returns, annually — $1.2 to $2.4 billion in direly needed money.

That prediction was realistic, according to Clark.

“There is a premium on good governance,” he said. “Those numbers are quite plausible.”


Advance Work

The math added up. Now Liu and Bloomberg had to make sure the politics worked.

Liu’s staff had been briefing civil service labor unions ahead of the public announcement, according to multiple sources, with Eve leading an effort to get the groups on board with the proposal. Emails reveal the mayor’s office advised Eve’s efforts to sell the plan to unions, and did some of its own outreach. The mayor’s office did not respond to multiple requests from the World in an interview with Steel or to questions from the World.

Liu’s office would not address questions about the comptroller’s outreach efforts. But some union officials complained that they had been given few details before being asked to appear at the October news conference with the mayor and comptroller, on short notice.

Michael Palladino, president of the city’s police detectives union, said he had had initial discussions with officials from the comptroller’s office — and a lot of questions still to be answered — when he learned secondhand that the comptroller and mayor were about to announce the plan.

“I heard about the press conference a half hour before it happened,” said Palladino, who ultimately made brief remarks expressing tentative support. “I got called by a colleague from another union.”

Leaders of two unions with seats on the New York City Employees Retirement System (NYCERS) — the Teamsters and Transport Workers Union — said they hadn’t been consulted at all. The TWU did not respond to repeated requests for comment, and a Teamsters spokesman would not elaborate. But Teamsters President Gregory Floyd — representing public housing and hospital workers — made his displeasure clear at the time in a blistering letter to Liu’s office.

“We cannot understand why our views were not sought,” Floyd wrote. “We expect, if not demand, that all Trustees work together to determine if, and in what form, the proposal should move forward.”

Each of the two unions carry a vote on NYCERS, as does District Council 37, which represents a wide swath of public employees from librarians to zookeepers. The comptroller, mayor and public advocate also have a single vote each, while the five borough presidents have one more vote divided up between them. The boards of the other funds have a similar split between city officials and labor.

Liu was proposing to take the five boards, each with its own slate of trustees, and combine them into a single, streamlined super-board overseeing pension investments.

The idea was to speed up the process. But some of the labor leaders took a look at the numbers — a slate of 58 pension trustees being sliced down to more like a dozen — and saw a move by the city to take away their votes, instead. When the proposal didn’t specify how the super-board would be selected, alarm bells started going off for the union members who thought they’d lose their seats.

At the time, Eve assured critics that no new trustees had been chosen, and that the proposal lacked specifics because he wanted to allow the existing boards to decide on a new, representative format for themselves. “There is no secret list,” he said at a pension board meeting. “There is no magical board.”

It’s an assertion Eve reiterated in an interview with The New York World. But still, several sources say they believed that the city had planned to cut the Teamsters, the Transport Workers Union, and some smaller fire and police groups out of their voting roles on the pension boards — while preserving votes for the more politically powerful District Council 37 and the teachers union, both of which openly supported the plan.

“The proposal was to make them one pension fund, in a nutshell, and have a reduced number of trustees,” said Roy Richter, the president of the police captains’ union. “We’re not in favor of voices being silenced, be they union trustees or be they elected trustees.”

The leaders of the smaller labor groups worried that, had they let the plan go through, it would have opened themselves to criticism, or even an ouster.

“Those are very, very difficult things to sell to our members,” Palladino said.


Blood in the water

The complaints by the Teamsters, the TWU and the others may not have been enough to sink the proposal had they been the only problems. With the backing of District Council 37 and the United Federation of Teachers, and with the support of Bloomberg and Liu, the plan might still have pushed through Albany.

But on November 16, less than three weeks after the joint news conference, a Liu fundraiser was arrested and indicted as part of a federal investigation into the comptroller’s campaign finances.

The arrest provided all the fuel Floyd needed for a scorched-earth campaign against the comptroller. A combative, colorful union boss with political aspirations of his own, Floyd condemned the “surprise attack” in a Huffington Post column and commissioned a hyperbolic radio ad.

“You’ve probably heard an awful lot about New York City Comptroller John Liu and his affairs,” listeners of 1010 WINS and WCBS heard. “The scandal. The indictment of his fundraiser. The federal investigation of his campaign. Now, we learn that John Liu has a plan to deliver your tax dollars, with limited oversight, to Wall Street bankers….John Liu. He’s all wrong.”

Liu’s reform agenda was further undercut by the wave of anti-corporatism sweeping the city and country. Early in the morning of November 15, 2011, the day before Liu’s fundraiser was arrested, the NYPD swept into the Occupy Wall Street encampment in Zuccotti Park and evicted its protestors. Transport workers had been an early and supportive presence in the movement.

Later that same day, Eve, a former senior vice president at Citigroup, went in front of the NYCERS board. He was there to explain why Liu and Bloomberg, a billionaire, were pressing the unions to allow the city pension system to hire new investment experts — who would need private sector–sized paychecks — and consent to giving up at least some measure of control. That did not sit well with the labor representatives in the room.

Making matters worse, the reform proposal specified qualifications for trustees on the new board that some members feared would freeze out blue-collar workers.

“I don’t have anybody in my union right now, that I know, that will meet those qualifications that we call public servants — that won’t have ties to Wall Street,” Floyd said at the meeting. “The perception, and sometimes perception is reality, [is] that they will have this connection to Wall Street. And we know how that played out with AIG, with Lehman Brothers, with Bear Stearns.”

The mayor and comptroller had started with an uphill battle, after the outcry from the Teamsters and Transport Workers Union. Now, with Occupy Wall Street and the federal investigation into the comptroller’s campaign as the backdrop, they were fighting headwinds, too.

The Teamsters were also working behind closed doors, pressing not only city officials but, lobbyist filings reveal, the legislators in Albany who ultimately would have to approve the overhaul.

“We were very vocal about our feelings on the project, and we shared those feelings in private meetings with appropriate parties,” said spokesperson Andrew Moesel in an interview.

Liu’s credibility worsened in February, with the arrest of his campaign treasurer, and in the middle of the month Eve left for a job in the private sector. There’s been no legislative progress since then, even though Liu’s office — which wouldn’t respond to detailed questions — says it is still pushing the reform package.

“A broad coalition came together to propose this plan, which will ensure a best in class pension system and save billions of dollars for city taxpayers,” said spokesman Mike Loughran in an emailed statement. “We have every hope that these reforms can be implemented. Our taxpayers and pensioners deserve nothing less.”

Eric Eve maintains that the comptroller’s office hadn’t made any missteps. Given another opportunity, he said, “We would have done exactly the same thing.

“You could have had public hearings; you could have gone through a much more extensive process,” Eve said. “But at the end of the day, there was a sense of urgency. There still continues to be a sense of urgency, given the burden that the pension obligations place on the city’s budget, its taxpayers, and its working families. Something’s got to be done.”


“The homework wasn’t done”

Dissenting union officials say they are still open to reform ideas — and, moreover, that it is their duty as trustees to consider them.

“Anyone who says they can save the city money, and ultimately save the taxpayers money, at the same time they’re going to increase performance — well, to be a responsible fiduciary, of course I’m going to listen,” said Palladino, the detectives union president.

A coalition of police and firefighter unions, including Palladino’s, has suggested that all five boards gather for a single, common investment meeting — preserving the votes of all the participants, while cutting down on the time needed to get approval for investments. The idea has gone nowhere.

What has endured is bad blood. Labor trustees and borough presidents have since stymied even minor reform efforts pushed by the mayor, with Liu now siding with the unions. In October 2012, both Liu and the labor representatives on the NYCERS board voted to reject a Bloomberg proposal to have the pension fund participate in a $350,000 efficiency study, paid for by the mayor’s office.

“With the current players in place, I don’t really think I have a comfort level exploring this any further,” said Palladino.

With the city’s pension bill projected to stay at an excruciatingly high level over the next few years, the issue isn’t going away. Management of the funds is the most likely area for progress, now that the governor already made a deal to reduce benefits paid to future employees.

Schloss in the meantime has made some incremental progress in areas that don’t need Albany approval. He has promoted a fast-track hiring process that cuts down the time it takes to bring on an investment manager to five months, from 17. He has beefed up his own staff by half, and made the pension system’s first foray into direct investment, bypassing the outsourced managers — aiming to save about 85 percent in fees.

But Kathyrn Wylde, who heads the business group Partnership for New York City, said  more substantial reforms are still needed — and that they’re possible, despite Liu’s failures and union obstinacy. It’s a matter of making the right pitch.

“You have people that have represented the unions, in particular, for many years, and take their position very seriously. It’s a significant amount of power for the 30-odd people around the table that have been part of the decision-making process that have to give up their vote,” Wylde said. “The question is how to make them comfortable that there’s still some accountability, and I think that would have been very possible to do. But the homework wasn’t done.”

Data Tools


Our work has appeared in…

About TNYW

The New York World focuses on producing data-driven investigative projects.