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.
(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.