The New York State comptroller, Alan Hevesi, is on the verge of pushing through a change to state law that would allow him to invest all of the New York State Common Retirement Fund – $120 billion – in hedge funds, commodities, private equity, you name it, so long as the investments meet a “prudent investor” standard. Under the current law, only 15% of the fund may be invested in such vehicles – the rest must be in stocks or bonds, or in real estate, which is limited to 5%.

Nicole Gelinas and E.J. McMahon, who broke the news of the impending change yesterday on the Web site nyfiscalwatch.com, detail many potential problems with the proposed rules. They note that it would give Mr. Hevesi alone – rather than a board – enormous discretion. They note that management fees in alternative investments are large and that valuations are sometimes vague.

We’re agnostic as to how Mr. Hevesi invests the $120 billion; the measure of his performance is the return of the fund. As Ms. Gelinas and Mr. McMahon point out, the pension fund promises a defined benefit, and if returns fall short, the taxpayers supplement the difference.

The direction that private businesses, and even the federal government, is moving in is to a defined contribution plan rather than a defined benefit plan. That way state workers could decide for themselves how to invest their retirement funds, rather than being forced to hire Mr. Hevesi to do it for them. One option for the workers could be to hire Mr. Hevesi and his hedge funds. And the workers, rather than the taxpayers, would be on the hook for their own investment performance.

As it is – typical for Albany – the money managers are lavishing campaign contributions on Mr. Hevesi, eager for those fat management fees he has to dispense by allocating that $120 billion. The taxpayers would be better served by far were the legislature to take this opportunity to move toward personal retirement accounts for state workers that are managed by the workers themselves.

Governor Schwarzenegger backed off a plan to do this in California, which would have challenged the mighty California Public Employees’ Retirement System. Were Governor Pataki in New York to lay down a marker with a veto threat on this issue, he could yet emerge as a national leader on retirement issues and show the way to Social Security reform. It’s an issue that could really resonate: Let state workers manage their own retirement money, rather than leaving it in the hands of one politician and his money-manager campaign contributors. That way, if the one politician errs, the taxpayers aren’t stuck paying.