New York City Comptroller Scott Stringer Loosening City Pension Private Equity Rules Will Help Him, Hurt Pensioners

What a remarkable coincidence that New York City Comptroller Scott Stringer is looking to loosen strict rules that govern private-equity firms managing the city’s pensions when the Democrat is running for mayor in this year’s election. Presumably, private equity firms who may earn hundreds of millions in fees if the pension restrictions are lifted will let him know just how grateful they are.

Stringer is hardly the first politician to use pensions set aside to provide retirement security for government workers to further his ambitions. When former Rhode Island Democratic Governor Gina Raimondo (President Biden’s pick for Commerce Secretary) was General Treasurer of the state, she raised unprecedented amounts of out-of-state donations for her gubernatorial run after allocating pension assets to high-risk, high-cost hedge funds. Not surprising, this wild gamble of retirement savings ended disastrously, costing taxpayers and government workers nearly $1 billion. Newly-elected General Treasurer Seth Magaziner who succeeded her, very swiftly and publicly abandoned Raimondo’s Wall Street wager, instituting what he refers to as a “back to basics” approach. In North Carolina, Democratic State Treasurer Janet Cowell led the $80 billion state pension to gorge on private equity resulting in skyrocketing fees paid to Wall Street and equally disappointing results.

Private equity funds lack all of the hallmarks of prudent pension investments. While Wall Street is eager to feast on the lavish fees public pensions willingly pay, private equity firms have consistently refused to be fully transparent, eviscerating state access to public records laws. PE firms want public money, they just don’t want to play by the rules that govern public funds.

Private equity funds charge excessive, as well as undisclosed and potentially illegal fees (says the SEC) which are also inconsistent with prudent investing. Operating in secrecy, most private equity funds engage in self-dealing practices which may be harmful to their investors. Whether these abuses amount to violations of law, the public will never know since they are kept secret. Finally, the performance of private equity funds is questionable, at best. Not only have these funds underperformed the public markets based upon self-reported returns, such returns are highly suspect given that the private equity managers are permitted to value the portfolios of their funds—an obvious conflict of interest since they are compensated through asset-based fees.

Loosening private equity rules may be good for Stringer’s immediate political ambitions but will cost the city’s underfunded pensions for decades to come, given that these deals have lock-ups that can last as long as 50 years.