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PENSION FUND ISSUE BRIEF NO. 1

NEW YORK STATE PENSION FUND’S COLOSSAL UNDERPERFORMANCE—THE BIGGEST SECRET IN NEW YORK

It is impossible to find an asset in New York State as large, poorly run and misunderstood as New York’s
Pension System, formally called the “Common Retirement Fund” and interchangeably referred to as “the
Fund” or “the Pension System.” With investments valued at $192.4 billion as of the most recent year for
which audited data are available1 (and approximately $206.9 billion as of March 31st, 20182), it is meant
to cover the retirement costs of 1.1 million State and local government employees. A single elected
official serves as its fiduciary. Its accounting is governed by a reporting regime so lax that it has allowed
its sole fiduciary, State Comptroller Thomas “Tom” DiNapoli, to cover up poor investment performance
over the decade it has been under his control.

The Comptroller is fond of claiming the Common Retirement Fund (“CRF”) is ranked among the best
managed and best funded pension plans in the country. If you google the following: “The Fund has
consistently been ranked as one of the best managed and best funded plans in the nation”, you will find his
assertion in over 200 places, presumably under the theory that if repeated often enough it will be believed.

It is long past due that someone calls the Comptroller on this fiction. While the funded-level of the CRF is
better than many distressed pension plans, including Illinois’ and New Jersey’s, this issue brief3 offers
definitive data—unpresented anywhere else until now—that by every objective standard show New York’s
Pension System is poorly managed. We will address the CRF’s funding level in a subsequent issue brief.

Summary of Key Findings

The CRF's actual rate of return on investments over DiNapoli’s ten years as Comptroller (2007-2017) was
5.59% gross of fees and 5.36% net of fees. Both figures are astonishingly lower than the 7.6% DiNapoli
planned for and expected. This translates into $137 billion in underperformance. (That is not a typo.)
The Fund was valued at approximately $206.9 billion as of the last quarter of the 2018 state fiscal year. It
was valued at $154.6 billion when DiNapoli took office in 2007. And the 7.6% return expectation meant
the $154.6 billion from 2007 should have more than doubled by now.

Since DiNapoli has overseen the CRF’s investments, returns have been worse than larger, comparable
public pension funds. The relevant data set to prove this has never been compiled publicly, until now. For
the first time, then, we know—empirically—that the CRF’s ten-year investment performance trailed its
peers. The median investment returns in that period for public pension funds with assets over $10 billion
was 5.65%; the median for public pension funds with assets over $25 billion was 5.72%; and the median
for public pension funds with assets over $50 billion was also 5.72%. These are precisely the right funds
with which to compare the CRF’s lower investment returns of 5.59% for the same period.

In addition, the New York State Pension Fund’s investments in individual asset classes (on the equity side)
all underperformed objective market benchmarks.

1
As of the New York State 2017 Fiscal Year (NYS FY2017), which ends on March 31, 2017.
2
The Comptroller’s preliminary announcement of the NYS CRF’s unaudited FY2018 investment results (retrieved on May 28,
2018): https://www.osc.state.ny.us/press/releases/may18/051718.htm
3
This issue brief is the first of several we will be releasing regarding various aspects of the Pension System. These issue briefs
will be compiled into a definitive white paper.

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DiNapoli’s Shortfalls

DiNapoli Underperformed His Own Expectations

Tom DiNapoli has been in charge of New York State’s Pension System for 10 years during which we have
audited data on the investment performance of the Fund (2007-2017). Over that period, the Pension Fund
earned a 5.59% annual (and compounded) return on its investments.4 But the Comptroller assumed the Fund
would earn a compounded annual rate of 7.60% in that time, a figure that accounts for him incrementally
lowering the expected growth rate from 8% when he first came to office to 7% today.

While the difference between 7.60% and 5.59% represents a huge shortfall, the latter figure doesn’t account
for investment fees. A better estimate is that under Tom DiNapoli the Pension Fund’s real compounded
annual growth rate—the only relevant data point for measuring investment performance over any time
horizon—is 5.36% net of fees.

This difference in expected performance (7.6%) vs. achieved performance (5.36%) is staggering. Yet, Tom
DiNapoli boasts the Pension System reached an estimated value of $206.9 billion at the end of New York
State fiscal year 2018. That represents an underperformance of $137 billion during DiNapoli’s stewardship.

DiNapoli's $137 billion Investment Shortfall

$350 $344
$320
$300 $297
($ in billions)

$277 $137 bn
$250 $257
$239
$222
$200 $207 $207
$192 $185 $192
$179 $177 $179
$166 $161
$150 $155 $154 $147 $151
$133
$109
$100
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Actual CRF Performance Expected CRF Performance

The next time DiNapoli boasts about the Pension System’s value, keep in mind four things:

1. When he took over the Pension System in 2007, it already had $154.6 billion in assets.
2. His 7.6% return expectation meant the $154.6 billion should have more than doubled by now.
3. He actually expected the Fund’s assets to be valued at approximately $344 billion at this point.
4. The asset value of a pension system is only meaningful relative to what it owes retirees.

DiNapoli Underperformed Relative to Other Public Pension Funds

We have seen how the CRF performed considerably worse than expectations. Now, for the first time, we
can see the Fund’s investments trailed other pension systems’. The reason this hasn’t already been plain is
due to an accounting quirk that DiNapoli takes advantage of to conceal his underperformance. At issue is
the CRF’s strange fiscal year; it ends on March 31st, which makes it hard to compare its investment results
to other funds’. Thankfully, we were able to access quarterly investment data for large public pension

4
Office of the New York State Comptroller’s Webpage (retrieved on July 27, 2018): http://www.osc.state.ny.us/pension/

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funds.5 That allowed us to calculate their annual investment performance on March 31st fiscal years so
results lined up perfectly.

Median Investment Performance of Large Public Pension

Funds vs. CRF Investment Performance During DiNapoli’s
Ten-Years in Office (Gross of Fees)
10-Year Median Public Pension Fund Investment Rate of Return (ROR)
5.85% 10-Year New York State Pension Fund Investment Rate of Return (ROR)

Median ROR Median ROR

10-Year Compounded Rate of Return (ROR)

5.72% 5.72%
Median ROR
5.65%
CRF ROR CRF ROR CRF ROR

Public Pension Funds Over $50 bn

Public Pension Funds Over $25 bn
5.59% 5.59% 5.59%
5.60%
Public Pension Funds Over $10 bn

NYS Pension Fund

NYS Pension Fund

NYS Pension Fund
5.35%

5.10%
>$10bn >$25bn >$50bn

Large Public Pension Plans vs. the New York State Pension Fund
Data source: Wilshire Trust Universe Comparison Service (TUCS)

Making the first-time apples-to-apples assessment, the above chart shows the New York State Pension
Funds’ investment performance trailed large public pension funds of over $10 billion in assets as well as
those over $25 billion and those over $50 billion, dating back to when DiNapoli first took office around
March 31st, 2007, and through March 31st, 2017. As for the largest public pension funds with assets over
$75 billion (not shown above), the CRF’s investment results fell in the bottom 75th percentile for the same
ten-year period. Empirically, this puts the lie to the DiNapoli myth that the CRF is among the best managed
in the country.
DiNapoli Underperformed Standard Benchmarks in Every Critical Asset Class

In addition to overall underperformance, it is also the case that under DiNapoli (from 2007 to 2017) the
State Pension Fund underperformed standard benchmarks in every key asset class it invested in.
Domestic Equities
The Fund currently has around $70 billion invested in domestic equities and earned 7.47% gross of fees
and 7.39% net of fees on this asset class over the ten years from 2007 to 2017. The S&P 500 returned 7.58%
over those years, which means the Fund marginally underperformed even after accounting for 8 basis points
in fees it paid on these investments—the cheapest equity class by far.

5
Wilshire Trust Universe Comparison Service (TUCS), accessed by Trichter for New York via subscription.

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Private Equity Funds

For reasons including low-interest rates and the availability of cheap debt, private equity has been a strong
performer over the last ten years, returning 9.6% overall (net of fees), according to the industry benchmark.6
DiNapoli only earned 8.94% on the Pension Fund’s private equity portfolio gross of fees and only around
8.03% net of fees.7 That translates into $3.4 billion in underperformance compared to the industry when
calculating CRF private equity returns from its allocations at the start of DiNapoli’s tenure.

CRF Private Equity Performance vs. Industry Benchmark (Net of Fees)

$35

CRF Private Equity Returns (8.03%) Cambridge US Private Equity Index (9.60)
$30
($ in billions)

$25 $25.1
$3.4 bn
$22.9
$21.7
$20.9
$20 $20.1
Initial Amount in $19.1 $18.6
Private Equity $17.4 $17.2
$15.9 $16.0
$15 $14.5 $14.8
$13.2 $13.7
$12.7
$12.1
$11.7
$11.0
$10.9
$10 $10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Hedge Funds
Depending on the benchmark, hedge funds returned somewhere between 3.3%8 and 3.9% net of fees over
the last ten years. But New York State’s Pension System earned 2.34% on hedge fund investments gross of
fees and only about 0.66% net of fees. Compared to the industry benchmark, the CRF underperformed the
market by at least around $1.7 billion, calculating returns from the CRF’s initial allocation to hedge funds
at the start of DiNapoli’s tenure. At the same time, DiNapoli’s domestic equity investments earned 7.39%.
So another way to look at this underperformance is that the Fund missed out on $4.8 billion of value—the
difference between what DiNapoli’s hedge funds earned and what his own domestic equities earned.

6
The benchmark is Cambridge Associates US Private Equity Index and is the same one the CRF uses.
7
For private equity, we did not incorporate any estimate for carried interest fees in years where the Comptroller claims profit-
sharing fees were baked into reported returns.
8
For our calculations, we used the HFRI Hedge Fund Index as our benchmark. It was the lowest one and, therefore, the most
forgiving of the CRF’s own performance.

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CRF Hedge Fund Performance vs. Industry Benchmark vs. CRF Domestic
Equities (Net of Fees)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$12

$10
($ in billions)

$9.6
$8.9
$8.3
$8
Initial Amount in $7.7
$4.8 bn
Hedge Funds $7.2
$6.7
$6.5
$6.2 $6.3
$6 $5.8 $5.9
$6.1
$5.5 $5.7
$5.4 $5.3
$5.0 $5.0 $5.2
$4.7 $4.8
$4.7 $4.7 $4.7 $4.7 $4.8 $4.8 $4.8 $4.8 $4.8 $4.8

$4
CRF Domestic Equity Returns (7.39%) Benchmark Hedge Fund Returns (3.30%) CRF Hedge Fund Returns (.66%)

Opportunistic Funds
This asset class is relatively new so there is only three-years of performance to look at. The bottom line is
the Comptroller invested almost $1.3 billion in the space in 2015.9 To date, his investments have returned
5.24% over the past three years net of fees. Over the same period, his own domestic equity returns were
10.40% net of fees. The Comptroller would have done better investing in index funds that mirror the broader
equity markets.10 By investing in opportunistic funds, he lost out on $144 million in value for retirees.

($ in millions)
Table Eight: CRF Opportunistic Fund Performance vs. CRF Domestic Equity Performance
(Net of Fees)
$1,600
$1,575

$1,500 $144 mm

$1,427 $1,431
$1,400
$1,360

$1,300 $1,292

$1,200
2015 2016 2017
CRF Opportunistic Funds CRF Domestic Equity Returns

Real Estate
The Fund had almost $6.8 billion invested in real estate11 when DiNapoli took over—assets on which he
earned 4.26% gross of fees and 3.22% net of fees over ten years.

Conclusion

9
2015 CAFR. p.36
10
The appropriate benchmark for opportunistic funds is arguable. One standard is to use whatever asset class the investment
would have been allocated to, if not an opportunistic fund. We settled on domestic equities, which is where we would have
invested instead.
11
2015 CAFR. p.36

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Over ten years under Comptroller Tom DiNapoli for which we have audited data (2007-2017), the New
York State Pension Fund underperformed every meaningful benchmark:
1) The first is expected investment returns the Pension System plans for and, when coming up short,
must charge taxpayers for to make up the difference. DiNapoli missed that 7.6% benchmark by
2.24 percentage points, a gap that over ten years amounted to $137 billion.
2) The second is how CRF investments performed relative to its peers. Here we now know the CRF’s
investment results were meaningfully lower than those of other large public pension funds.
3) The third is how CRF investments fared by asset class. What we found is that the CRF
underperformed the standard benchmark in every key asset class it was invested in under DiNapoli.

Integrity and transparency in financial reporting is critical if investors hope to fully understand the
performance of their own portfolios. That means reporting returns net of fees and with clear comparisons
to relevant benchmarks. For whatever reason, Comptroller Tom DiNapoli doesn’t believe the public
deserves the same level of disclosure when it comes to reporting the investment performance of the State’s
Pension Fund. He doesn’t report performance net of fees, nor does he compare his investment performance
to other public pension funds of similar size. And he has been misleading the public for over ten years about
his investment performance, bragging in press releases about the CRF’s top-ranked management.
It’s one thing to appoint a politician as the sole trustee of a $200 billion Pension System and expect him to
invest sensibly enough to match the results of more professionally run pension systems in the US. It’s
another thing for the same politician to lie about investment earnings in order to coverup his shortfalls.
In no way is the New York State Pension Fund among the best managed in the country—not by any
measure. And we will address why it maintains a funding level higher than other public pension funds in
subsequent white papers. Suffice to say for now, it has nothing to do with DiNapoli’s investment
performance.

Recommendations

The following two recommendations represent meaningful, necessary and long-overdue changes to how
the New York State Pension Fund reports its performance. These reforms will help promote genuine
transparency and establish a measure of integrity in the Fund’s investment reporting.
1) Reveal investment performance both gross and net of fees; and
2) Publish relative CRF investment performance each quarter by comparing it to all large public
pension plans of similar size and stature.

Over the course of my campaign, I will be releasing subsequent issue briefs and white papers on New
York’s Pension System. These reports will detail how I intend to ensure our Pension System can cover
the full retirement costs of its members, retirees and beneficiaries more equitably and without relying on
excess contributions from taxpayers.
- Jonathan Trichter, Candidate for New York State Comptroller
Additional research provided by Michael Sargent.