Gov. Cuomo has reportedly been considering the use of public-pension funds to finance the replacement of the Tappan Zee Bridge and other infrastructure investments in New York. This is a bad idea, harmful both to the state’s government employees and its taxpayers. Using public-pension monies in this fashion trades the immediate benefits of public construction for the long-term cost of underfunded public-retirement plans.
If investment in the new Tappan Zee Bridge yields risk-adjusted, market-rate returns, then private investors will step up to the plate and invest. Resorting to special financing arrangements with public pensions signals that a proposed investment doesn’t pass the test of the marketplace. Market-rate returns attract private capital; such investments don’t need to be subsidized.
Yes, there are projects that yield social benefits beyond their financial returns to investors. But in a democracy, voters (or their elected representatives) can and should be persuaded in open deliberations to finance such projects with tax dollars.
When governmental officials (however well-meaning) resort to special funding arrangements with public-pension monies, it indicates that the investment in question flunks both the discipline of the market and the legitimacy of voter approval.
Such projects also flout the venerable fiduciary standards for pension investments — namely, prudence and diversification.
An investment shunned by private investors is imprudent. When made by a state pension plan, such a below-market investment impairs the long-term interests of both the employees who depend on the plan for their retirement incomes and of the taxpayers who ultimately finance the plan.
A prudent pension investment must, at a minimum, yield a risk-adjusted, market-rate return. An investment rejected by private investors is at a below-market rate — and thus imprudent.
Moreover, an investment by New York pensions in New York infrastructure fails the test of diversification.
This test prevents a private-retirement plan from investing its resources in the stock of the employer sponsoring the plan — because the plan already depends on the economic well-being of the sponsoring employer, since the employer funds the plan. Placing the plan’s resources in the employer’s stock doubles the pension’s bet on the employer and its economic condition.
Similarly, if New York’s public pensions invest in New York projects, the pensions are doubling their bets on New York’s economy. These plans already count on New York’s economy for the tax revenues funding such plans. Concentrating their investments in the Empire State is the opposite of diversification; the financial fate of these plans is already tied to New York’s ability to fund them.
The budgetary pressures on Gov. Cuomo and other states’ chief executives today are severe. Those pressures make it tempting to turn to public pension funds to finance infrastructure when private investment can’t be obtained and voters can’t be convinced to pay taxes for such infrastructure.
It is precisely at such moments that the sage tests of prudence and diversification play their most important role — protecting the long-term interests of retirees and taxpayers by precluding pension trustees from making investments that flunk the criteria for sound fiduciary decision-making.
A new Tappan Zee Bridge is a great idea — but it should be pursued the right way, by formulating the bridge’s financing so as to attract private capital, voter approval or both. Special below-market deals for public pension plans are the wrong way to fund public infrastructure.
Edward A. Zelinsky is a law professor at the Cardozo School of Law, Yeshiva University, and author of “The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America.”