Alan’s angels

Part
one of a two-part series. Read Part two here.

Alan
Hevesi holds a deceptively low-key position in state government.

            As New York’s comptroller, he
oversees the pension fund for state and local government employees. His office
also serves as the state’s auditor and bookkeeper, and as such, it analyzes the
budgets of municipalities, state agencies, and the state itself, issuing
reports and finding ways governments can operate more efficiently.

            Exciting stuff, eh? It’s no wonder
most people have no idea who he is or what he does.

            When Hevesi — a Democrat from
Queens and former New York City comptroller who served for over two decades in
the State Assembly — ran for the office last year, his campaign ads
acknowledged his relative anonymity. “Alan who?” the ads’ narrator asked
rhetorically several times.

            “Alan Hevesi.”

            (Hevesi edged out former Republican
Assembly Minority Leader John Faso by just over 162,000 votes. Faso took Monroe
County, thanks to a strong showing on the Independence and Conservative Party
lines.)

            Folks, don’t be fooled. Hevesi is
one of the most influential people in New York State. And compared to every
other state comptroller in the country, he is the most powerful, which, by
extension, makes him a major player in national issues, as well.

            Lucky for us, he’s on our side. That
is, unless you’re a corrupt or inept businessperson or public official, a
bigot, a homophobe, or a polluter. If you are, you’d better watch your back.
Because Hevesi and his staff will nail you sooner or later, one way or the
other.

The breadth of
Hevesi’s responsibilities — and, as a result, his power — is astounding.

            Consider one of his aforementioned
roles: auditing local government operations. The City of Buffalo is in dire
financial straits. Due to structural imbalances in its budget, the city has
been running huge deficits (the combined gap for 2000-01 and 2001-02 was $23.8
million), which it has filled using temporary sources of revenue. (Sound
familiar?) If its budget for 2003-04 were enacted as is, the city would be
$18.5 million in the hole.

            At the request of Assembly Speaker
Sheldon Silver, Hevesi dispatched a team of 25 budget experts and auditors to
analyze the city’s books and, as Hevesi says, “tell the complete truth about
their financial problems.” Based on their findings, Hevesi proposed the
creation of the Buffalo Oversight and Recovery Board, which would have the
ultimate say over the city’s fiscal decisions for several years to come.

            Recently approved by the Legislature
and governor, the board is now ready “to effectively take over the governance
of the City of Buffalo,” Hevesi says.

            If you think a guy occupied with the
takeover of a major city’s government functions doesn’t have the time to catch
a small town crook, think again. Also last month, Hevesi’s people nailed Ruth
Milks, former court clerk in the sleepy village of Perry.

            During a routine review of the Perry
Village Court’s accounting procedures, one of Hevesi’s auditors noticed a
discrepancy between the parking fine she’d paid and the amount recorded for the
fine in the clerk’s books.

            It turns out that Milks was adding
an unauthorized $35 surcharge to $100 parking tickets, pocketing the extra
cash, and covering her tracks with duplicate or incomplete records. Over time,
it’s estimated that Milks bilked as much as $250,000 in bogus surcharges from
nearly 1,500 people. (Perry is a common stop for Rochesterians on their way to
and from Letchworth State Park; refund checks will be in the mail to many
locals following Milks’ July 1 sentencing.)

            But that was just the beginning. The
auditors also found that Milks’ direct supervisor, the village justice, failed
to catch the crime because he was not monitoring her work. His name: Emmett
Milks, her husband. (Both resigned shortly after the investigation began). In
addition, the Village Board of Trustees was found to be at fault for poor
oversight practices.

            Like a new sheriff in the Old West,
Hevesi and his crew have cleaned up the whole dang place.

Now six months
into the job, Hevesi’s picking up speed and picking on the powerful with
greater frequency and effectiveness. Hevesi’s reach extends from the lowliest
backwater bureaucrat to the fattest fat cats in Corporate America.

            For example, Hevesi is the lead
plaintiff in class-action lawsuits against telecommunications giant WorldCom
(now MCI) and related defendants in the high-profile securities fraud case.

            Why Hevesi? The comptroller is the
sole trustee of the nearly $100 billion New York State Common Retirement Fund.
It’s estimated that the fund lost over $300 million as a result of the alleged
wrongdoing at WorldCom.

            The Common Retirement Fund is the
second-largest state pension fund in the country (behind California’s). There
are 945,000 people in New York’s pension fund system, and woe to the CEO who
puts their benefits in jeopardy by mismanaging a company the fund is invested
in.

            Corporate fraud is an obvious target
for Hevesi’s ire, but discriminatory labor practices and environmental
destruction also provoke his wrath. From a purely financial standpoint, those
things are bad for business, as the resultant fines and lawsuits hurt a
company’s stock value and, ultimately, the return on the pension fund’s
investment.

            Hevesi threw his support behind a
shareholder resolution requesting that Kodak develop a plan to drastically
reduce the amount of dioxins and other “bioaccumulative pollutants” at its
Rochester headquarters. “Over the long term, responsible environmental
practices are more cost-efficient and improve corporate sustainability,” Hevesi
said in an April 22 (Earth Day) press release. He noted that Kodak has “already
incurred tens of millions of dollars in fines and hundreds of millions of
dollars of clean-up expenses at Kodak Park.”

            (The resolution, which Kodak’s board
opposed, failed at the company’s May 7 annual meeting in Hollywood. However,
Hevesi says he’ll be in town to have a little chat about the matter with top
Kodak officials later this summer.)

            Hevesi is clearly personally
offended by bigotry and hate-mongering in all its forms. Last winter, the state
finally passed the Sexual Orientation Non-Discrimination Act, which protects
gay men and lesbians from discrimination in areas such as housing, employment,
and credit. However, SONDA does not specifically protect transgendered
individuals, an omission which has been a point of contention in the gay
community.

            Hevesi, a married father of three,
took the extra step of signing an executive order last April that specifically
protects any transgendered person employed by his office. “I believe that it is
important to state clearly in our policy that ‘sex’ includes gender identity or
expression, thereby ensuring protection,” he said at the time. “I want to send
a message to our staff and to all New Yorkers that I will not tolerate
discrimination or harassment.”

In this, part
one of an edited transcript of a phone interview with the comptroller, Hevesi
describes his job and how he restructured the way the pension fund is funded,
saving the state and local governments a cool $1.6 billion this year.

City:How do you describe your job, in layman’s
terms?

            Hevesi: Well, effectively, the comptroller’s the chief financial officer for New York
State. It’s maybe the largest [such office] among the states in America,
combining, for example, the responsibilities that are divided in California
between the comptroller, the treasurer, and pension-fund managers. We combine
them all in one.

            We have 2,300 employees, all
professionals: management experts, budget experts, lawyers, pension-fund
advisers, pension-fund managers, accountants, and auditors.

            Major responsibilities: One is
managing the pension fund, the second largest in America.
Nine-hundred-forty-five-thousand people are in the system right now, of whom a
third are retired, and the other two-thirds work for state and local government
— almost equally. Our job is to invest the money in the fund, grow the fund,
manage it, and make sure that every one of those people and their families —
we’re talking 2.5 million people — are secure in their retirements.

            Two, we are the state’s accountants
and bookkeepers and auditors. The auditing function is enormous. It means we go
to the 1,600 local governments, and state agencies, and review their books and
records and programs to make sure they’re managed effectively, that money isn’t
wasted, and that it isn’t stolen. We occasionally have to deal with malfeasance
and criminality — people ripping off the system. So we have subpoena power
and we work with prosecutors. We’re the watchdogs.

            But we’re also management
specialists. So we will go into a local government at their request or as
needed, and help them reorganize a service, set up a sewage system in a
different way, or recommend ways of saving money.

            We review their budgets to make sure
that their projections are correct, that the revenues match the expenditures,
that money isn’t wasted. And, of course, we do that for the state. That’s a job
we’ve taken on, even though there’s no law that requires us to do that,
interestingly.

            Yesterday, we issued a budget report
on the state budget [see www.osc.state.ny.us for a copy, but be prepared for
some very bad news]. It’s interesting, because it’s in the context of this very
controversial budget fight between the governor and the Legislature.

            It’s sort of an inherent role, not
defined, but we’re increasingly called in as sort of the outside experts to
solve problems…. Some of it’s mundane, and it makes you smile a little bit, but
it’s serious business.

            There’s a Long Island Power
Authority that was created when they closed the nuclear power plant on Long
Island — called LIPA. They did a poll a year ago. It asked their consumers:
‘How much gas do you use?’ ‘How much oil do you use?’ ‘Do you turn off your air
conditioners?’ All legitimate questions.

            And then they asked, ‘Are you voting
for Carl McCall or George Pataki?’ We were called in to take a look at the
appropriateness of that, which will build into an audit of the agency.

            So, we’re troubleshooters, and
non-partisan, expert, professional. Our strength is our professionalism and our
non-partisanship.

            I’m not naïve about this. I was a
very partisan member of the New York Assembly. I was a Democratic floor leader.
My job was to beat up Republicans, and their deal was to beat me up. This is a
different role.

City:Could I, as a citizen, request that you take
a look at, say, Monroe County’s finances?

            Hevesi: If you did it as an individual citizen and were pointing out a particular
problem — maybe you’re a whistleblower — and say, ‘I know, of my knowledge,
that money is being wasted with such-and-such,’ we’d send a team in right away.

            To have an individual citizen ask us
to look at the entire books and records of Monroe County, it probably would
require you to impress a team of either county legislators or state legislators
to call us in. Because if you did it, in every city and town and village
somebody would ask us to do the same. We have to husband resources, as well.
But if you pointed out something, a legitimate problem, we’d come in.

            We’ve known of schools where there
were real problems with the budgets, and they were citizens [who told us about
it]. They were real, so we went in anyway. We didn’t need the formality [of a
legislative request]. In deciding how we use our resources, we have hundreds of
auditors, but it’s still 1,600 local governments.

City:What happened with the pension fund this
year?

            Hevesi: I’ll avoid getting technical, but I have to make a point. Those who are in the
system — the 945,000 people, plus families — must know that this is a
solvent system. We are 93-percent fully funded.

            Now, what does that mean? It means
that we have enough money right now to pay the pensions on 93 percent of those
in the system — that includes not only those retired, but the 600,000 people
who haven’t even retired yet. And when we adjust this contribution issue, we’ll
be well over 100-percent fully funded. That’s our obligation.

            Here’s the deal. The pension funds
are financed from two sources. One is contributions into the system by
government employers, state and local; and [the other is] our investments. Over
time, the typical, average contribution by a government is a percentage of its
total payroll: about 15, 16 percent.

            During the Clinton boom — the six
great years of the greatest boom in American history — the stock market was
terrific and we were all geniuses. The return on investment, which was
predicted to be 8 ½, 8 ¾ percent, was 16, 18, 22, 24 percent. So that flood of
money grew the funds dramatically, and the beneficiaries were the state and
local governments.

            Their contribution levels steeply
dropped. And they dropped so low that last year, the State of New York dropped
from the typical 15 percent down to 1 percent, and the local governments the
same. There were some local governments, under the complex formulas, that
dropped to zero. There’s some mayors of local villages and towns that never
paid a dime into the pension system, which was terrific, for that period of
time.

            This is a priority obligation of
government — you’ve got to pay pensions, as you’ve got to pay debt and
salaries and health plans and hire cops and teachers.

            What happens is, now the market went
sour, for a variety of reasons. And therefore, the pension contributions are
going back up to the norm. The jump was dramatic. I got sworn in on January 1,
and on February 1 was telling everybody: ‘You’re going up to 11 percent from
1-percent average.’

            This is an example: Last year, at 1
percent, the state contributed $138 million into the pension system for state
employees. The governor knew it’s not going to be 1 percent [this year], it’s
going up, and he put an extra $200 million into the budget, on top of the $138
million, for a total of $338 million for this current budget, even though we
had a huge deficit.

            I had the high honor to tell him it
won’t be $338 million, it’ll be $1.1 billion.

            Monroe County, for its employees’
retirement system, they were at 1 percent, so it was about $2 million their
prior fiscal year; but at 11 percent, they were looking at $23 million. It’s a
huge jump, and that happening after they had prepared their budgets and dealt
with huge deficits during these bad times.

            So, what happened? The governor
called on me, as the comptroller, to give relief to the state and local
governments. And the reason he called on me was I’m the only one authorized to
do so. I can change those formulas.

            My legal problem was, I can change
those formulas, but not to help local government. I can only change the
formulas to enhance the performance of the pension fund or bring it stability,
because I’m a fiduciary. I represent the 945,000 people, not the state and
local governments.

            So we figured out — this was an
elaborate, long process — that if we find a formula to stabilize the funds,
to enhance their performance, that would allow me to delay these payments. We
did it by establishing that, no matter what your contribution is in a given
year, you will pay a minimum of 4 ½ percent of payroll. So, in a year where you
have to pay 11, you pay 11. If you have to pay 8, you pay 8; if it’s 6, it’s 6.

            If it’s 2, you pay 4 ½. If it’s 1,
you pay 4 ½. If it’s zero, you pay 4 ½. It means over time, we build a cushion,
so the volatility is reduced.

            Having done that allowed me to do
the second piece, which is to delay, for one year, the jump from 1 percent to
11 percent, and give relief to the local governments. But we didn’t keep them
at 1 percent. We have a 4 ½-percent minimum. So what the local governments are
doing is, they went from 1 percent to jumping to 4 ½ percent.

            Next year, it is 11 percent. It’s
actually mandated they go to 7, and they can go to 11 — which will be the
average — but there’s some stuff in the legislation that allows them to stall
and delay that a little bit, too.

            So we provided about, for this year,
$1.1 billion in relief for all local governments in the state, and about
$600-to-$700 million in relief to the state itself.

            What did it mean to Monroe County?
Instead of $23.2 million, which is 11 percent, they have to pay $9.6 million.
So they’re saving $13.6 million.

City:So next year, Monroe County could only pay
seven percent of its payroll into the system?

            Hevesi: Yeah, and there’s a way to borrow the difference. As the comptroller, I don’t
recommend that, but it gives them some options.

            City:And this is assuming that the market will
turn around?

            Hevesi: Well, at least the localities have time to plan for this, set their priorities.
[Last year’s increase] came after the fact for a lot of localities.

            I’ll give you one example. One
village, before they got the notice from me that they had to go to 11 percent,
this small village had 12 cops, and because of other budget problems, [they
decided] ‘We’re gonna have to fire two of the cops.’ They get a letter from us
saying you have to go to 11 percent, they fire four cops immediately, even
though it’s many months before they have to pay the money. So that’s how bad it
was. It was sort of symptomatic.

            The other interesting part of our
process was not only the legal problem, meeting the requirements of law to do
this plan, but to get it passed in the middle of a blood feud between the
governor and all these legislators.

            Also, whenever anybody tried to
change pension formulas, the unions representing the retirees and the retiree
organizations always opposed it, said this is a raid on the pension funds, and
went to court. So we worked with them very carefully, got them all on board our
program. There were nine editorials around the state, all supporting us, and
the bill passed both houses of the Legislature unanimously and was signed by
the governor — the only bill during the budget that the governor didn’t veto
and that had to be overridden.

            It was quite an enterprise. I think
the reason we did it was that we have a very professional staff, but I come to
Albany knowing Albany. This is one of the advantages of having been an insider.

            I was a member of the Assembly for
22 years. So the people I’m dealing with are my friends, and yet I’ve been out
of their way politically, so none of them were my enemies. [Republican Senate
Majority Leader] Joe Bruno’s my friend, [Democratic Assembly Speaker] Shelly
Silver’s my friend, and they trusted me and we worked with them very carefully.
It was a successful effort and it brought a lot of relief to the localities.

            If you were to call the Mayor of
Rochester, the county executive, both of whom we met on the road — I went
over to talk to them about it — I think they’re grateful we did this.
Ultimately, they’ve got to pay, but we smoothed it out for them.

Next week:
Hevesi comments on shareholder activism, Monroe County Executive Jack Doyle’s
use of tobacco settlement funds to balance our county’s budget, and the folly
of President Bush’s tax cuts.

This article appears in Jul 2-8, 2003.