Comptroller Seeks Flexibility in Managing Pension Fund

The state comptroller is calling on legislators to give him more latitude in managing New York's investments in the wake of an announcement that state pension fund growth has slowed to a crawl.

Comptroller Thomas DiNapoli yesterday said the pension fund grew by 2.6%, to $154 billion, in the fiscal year ended March 31. While some in the field say that performance is reasonably strong given the condition of the economy, it is nowhere near the 12.6% return that New York enjoyed the previous year, and they say the slowing growth may put a strain on the budget. Officials plan for 8% returns when formulating budgets, so the shortfall may force the government to make unexpected payments in order to meet its obligations to retirees.

"It's a sign of trouble," the director of the Empire Center for New York State Policy, E.J. McMahon, said. "They need to be basically a lot better than 8% next year, or they'll start having a more significant effect on the pension fund contribution requirement."

In an effort to avert further pension shortfalls, Mr. DiNapoli said yesterday he wants legislators to allow him more flexibility in allocating the state's investments, a move that some have denounced as reckless. The law currently imposes a 25% limit on the amount of money he can put in "alternative investments," a category that includes real estate, commodities, private equity funds, and hedge funds.

Mr. DiNapoli noted that the pension's best performance this year came from private equity funds, which returned 24.8%, and real estate, which returned 14.8%.

"We have some new, forward-looking investment strategies that will help keep us strong in the coming years," he said in a statement. "But our growth is limited by constraints on how we can respond to market forces."

California's pension system, for example, does not have similar limitations. A spokesman for Mr. DiNapoli, Robert Whalen, said New York would have had a 4.8% overall return this year if it were allowed to allocate its investments the way California does.

The Legislature is "very wary" of raising the cap, the chief counsel for state Senator Vincent Leibell, Robert Farley, said. Mr. Leibell is a member of the committee that oversees pensions.

One cause for concern, some experts say, is that alternative investments are often riskier and more difficult to evaluate than stocks. Some worry that they increase opportunities for investment managers to make politically motivated decisions.

The alternatives class is "a place where you can make both honest and dishonest mistakes," a senior fellow at the Manhattan Institute, Nicole Gelinas, said. "Sometimes it's hard to tell whether the goal is to get the support of key constituencies, like construction workers or labor unions, or whether the goal is to maximize investment performance."

Despite this year's lower-than-usual return, New York fared better than many other states. Public funds worth more than $1 billion averaged 1.4% growth in the same period, according to the consulting group Wilshire Associates.

The precise impact of this year's shortfall on the budget will not be announced for at least a few weeks, the comptroller's office said.