Even More Pension Money Is Headed to Wall Street

New York’s Democrat-controlled legislature passed a bill this week to funnel an additional $54 billion in public pension funds to high-risk private equity investments. It's most likely an unwise financial strategy — and only Wall Street will benefit.

Legislation now headed to Democratic governor Kathy Hochul’s desk — would allow officials to invest up to 35 percent of New York’s $545 billion state and local pension funds in hedge funds, private equity, real estate, and other so-called “alternative investments.” (Wally Gobetz / Flickr)

New York’s Democratic-controlled legislature this week passed a bill to funnel as much as $54 billion more in retiree savings into high-risk Wall Street investments, amid a flood of campaign cash from the financial industry.

New York’s largest teachers’ union backed the legislation, even though the move came after federal regulators — and the union’s own national leaders — issued loud warnings about the risk of such investments.

The legislation — now headed to Democratic governor Kathy Hochul’s desk — would allow officials to invest up to 35 percent of New York’s $545 billion state and local pension funds in hedge funds, private equity, real estate, and other so-called “alternative investments.” The state currently caps pension funds’ outlays in alternative investments at 25 percent.

Over the past thirty years, public pension funds have moved $1.4 trillion of retiree savings into such risky and costly alternative investments, creating megafirms that aggressively extract profits from businesses and load them up with debt while delivering middling returns to pension fund investors.

While New York’s alternative investment bill was hailed by proponents as a way to maximize public pension funds’ returns, the effort could ultimately cost state and local public pension systems billions, because private equity investments charge high fees but often fail to deliver market-beating returns.

Either way, private equity firms could rake in more than $1 billion annually in additional fees thanks to the legislation.

New York Union Officials Defy National Labor Leaders’ Warnings

Ludovic Phalippou, a professor at Oxford University’s business school, has published a series of papers demonstrating that the outsize returns promised by private equity firms do not match up with reality. Indeed, private equity firms on average do not beat the S&P 500 index of large companies’ stocks, while charging enormous fees that eat up part of their returns.

Phalippou’s research was buttressed last year by Securities and Exchange Commission (SEC) chairman Gary Gensler warning investors about the industry’s high fees and lack of transparency. The SEC also issued a risk alert cautioning that some alternative investment advisers may be inaccurately representing funds’ performance, charging excessive fees, and misleading investors about their track records.

In February, the SEC proposed a broad range of reforms related to transparency by private equity firms, eliciting strong criticism from the industry. The rulemaking process is ongoing, with the public comment period ending on June 17.

Despite those warnings, the New York State United Teachers (NYSUT) — which represents more than 600,000 members — recently sent a memo to Albany lawmakers backing the legislation to allow state and local pension funds to funnel significantly more money into alternative investments.

“Increasing the public pension systems’ ability to diversify their investments will result in increased flexibility and allow fund managers to better respond to changing market conditions,” wrote NYSUT officials. “This proposed change imposes no costs to the affected retirement systems and could, depending on future market fluctuations, allow for greater investment returns, thus greatly benefiting public pension funds in years to come.”

However, the American Federation of Teachers (AFT) — which is one of the two NYSUT umbrella unions — recently issued a report warning against such investments.

AFT president Randi Weingarten said that “private equity is all too often a detour into uncertainty,” adding that the “industry has failed to match its rhetoric with reality and has instead introduced countless investment risks we should be trying to eliminate.”

NYSUT’s decision to endorse the legislation likely gave Democratic lawmakers, particularly progressives, cover to vote for a bill that will transfer billions of dollars worth of retirees’ savings to private equity moguls. The legislation subsequently passed by wide margins, with little debate. The state senate approved the bill by a count of fifty-six to five. The vote count in the state assembly has not yet been released.

The votes come as the finance, insurance, and real estate industry has pumped more than $8 million into New York State politics over the past two years, according to data from the National Institute for Money in Politics.

Comptroller Championed Bill After Running as a Wall Street Critic

We recently reported that pouring retirees’ money into alternative investments has already cost New York City’s largest pension fund, the $84 billion New York City Employees Retirement System, at least $1 billion in lost assets over the past decade.

Nonetheless, the new legislation was championed by New York City comptroller Brad Lander (D), an erstwhile private equity critic endorsed last year by progressives like Senator Elizabeth Warren (D-MA) and Representative Alexandria ​​Ocasio-Cortez (D-NY).

Lander, who received more than $115,000 in campaign donations from the financial sector for his 2021 comptroller bid, pledged during the campaign that he would review the city pension “funds’ positions with risky and speculative assets including hedge funds, private equity, and private real estate funds.”

However, shortly after he took office, Lander called on the legislature to pass the alternative investment bill and increase the state’s cap on such high-risk investments, saying that it would “allow public pension funds in New York State to prudently diversify their portfolios based on current market conditions and obtain potentially greater returns while maintaining a consistent, prudent level of risk.”