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December 21, 2011

“Bad idea” alert

E.J. McMahon

Using public pension funds to help finance infrastructure projects like the Tappan Zee Bridge would be “a bad idea, harmful both to the state’s government employees and its taxpayers,” Professor Edward Zelinsky of Cardozo Law School writes in a provocative op-ed in today’s New York Post.

Governor Andrew Cuomo wants to create a public-private infrastructure fund including investments by pension plans.  It is unclear whether he would seek money from taxpayer-supported public funds as well as union-controlled private pension funds, but the governor hasn’t ruled it out.

Zelinsky’s critique:

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.
Investing public pension funds in New York infrastructure also “fails the diversification test,” Zelinsky says.
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.

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