As the private equity industry digests the latest developments in the ongoing kickback scandal at the New York State Common Retirement Fund, many industry professionals have wondered why Attorney General Andrew Cuomo was only pushing for changes in the way general partners solicit business from the pension, and not how the pension evaluates its investments.
Critics have long argued that a single fiduciary system consolidates too much power over the state’s $120 billion pension assets and encourages the kind of corruption that allegedly occurred there.
“Shouldn’t there be a bigger board [at New York Common]?” asked a managing director at one New York-based buyout shop. “Is [Cuomo] addressing the core issue here? How are decisions being made?”
But Cuomo does not have the authority to implement changes at the pension, which operates as an independent trust, according to Robert Whalen, press secretary for New York State Comptroller Thomas DiNapoli, the sole trustee of the pension fund. The state would need a constitutional amendment, which would require approval by two successive legislatures and subsequent referendum vote by the public, to change the pension structure to, say, a board structure, according to Whalen. That could take at least three years, he estimated, if the legislature began acting on it now.
Alex Detrick, press secretary for Cuomo, did not respond to requests for comment.
Still, some industry professionals said Cuomo could use his position to at least push for reform at the pension.
“I would think he could use his soap box [to push for reform], but he seems to be on a different path,” said Martha Coultrap, an attorney with Sullivan & Worcester.
DiNapoli remains supportive of the single fiduciary structure, and Whalen noted that pensions with board structures—such as the New Mexico Educational Retirement Board—are also dealing with corruption allegations, suggesting the whole issue of the pension’s oversight structure is a red herring.
DiNapoli maintains the issue is campaign finance reform, according to Whalen. Employees from The Carlyle Group, for example, donated $118,000 to Alan Hevesi, DiNapoli’s predecessor during the time the alleged kickbacks were delivered, according to Bloomberg News. Hevesi has not been charged in the case.
“Take care of campaign financing first,” said Whalen, who did not work under Hevesi. “Get the money out of the mix.”
In keeping with that sentiment, the ethics code drafted by Cuomo prohibits investment firms from doing business with a public pension fund for two years after the firm, or essentially anyone associated with the firm, makes a campaign contribution to an elected or appointed official with influence over the pension fund’s investment decisions. Carlyle adopted the code of conduct drafted by Cuomo and agreed to pay $20 million to the state of New York as part of a settlement in its role in the alleged pay-to-play scandal.
DiNapoli believes the single fiduciary structure has its benefits—namely a level of independence and accountability that doesn’t exist with a board structure.
“The comptroller’s position is, if you want to have the conversation [about changing the pension’s management structure], let’s have it, but let’s be informed. Let’s not go into it thinking we’ll put a board in place and the problems will go away,” Whalen said. “That’s simplistic. That’s just not in touch with reality.”
Meanwhile, placement agents and buyout professionals are seething at what they see as an Attorney General taking a heavy-handed approach to an issue he doesn’t fully understand to gain a political victory.
“It’s just disgusting,” said one placement agent, referring to Cuomo’s comparison of placement agents to the 19th century corrupt New York politician Boss Tweed at a press conference earlier this month announcing the Carlyle settlement.
One question many buyout professionals are asking is how they’re supposed to now solicit business from the state pension fund. According to Whalen, there is no central contact prospective that GPs should deal with. They can call the general number for New York Common and ask for someone in pensions and investments, he suggested.
“It my take a number of transfers, but you’ll get there,” Whalen said.
General partners can also call Hamilton Lane, the pension’s private equity consultant, and Whalen recommended visiting the pension fund’s website as well.