The Risks of "Alternative Investments"

Harvard has been very successful with "alternative" investments, as its endowment more than quadrupled in value during the 15 years it was managed by Jack R. Meyer, a former Deputy NYC Comptroller.

But the downside of alternative investments was the Orange County fiasco, when County Treasurer Bob Citron borrowed $13 billion to invest in derivatives, betting that interest rates would go down as the Fed decided to move interest rates the other direction. Orange County declared bankruptcy on December 6, 1994.

The San Diego County Employees Retirement Association lost more than $100 million in a hedge fund in NYC's back yard, Amaranth Advisors.

Orange County is again in the news. New Century Financial was a part of the story on February 27 when the Dow dropped by more than 400 points, although China was mostly blamed then. But in yesterday's Dow-drop of 240 points, New Century Financial is at the heart of the story. Bear Stearns led the decline partly because it had just invested in New Century Financial, the second-largest U.S. subprime lender, now on the brink of bankruptcy.

So where is New Century Financial based? In Irvine, California, right in the middle of Orange County.

And what government-supervised pension fund owns a 3.6 percent stake in New Century Financial? The New York State Teachers Retirement System.

Performance by U.S. Counties and Cities

The mission of the Council on Municipal Performance in 1973-1988 was to try to figure out why some cities and counties provide better services than others. What makes the difference?  

In 1988 its activities were absorbed by the National Civic League. They were also picked up by, among others, the Maxwell School Government Performance Project. The Maxwell School in 2002 rated 40 counties in the United States in five management areas. Five of the counties were in New York State. 

At the top end, the Project overall rated Erie and Westchester Counties C+, which is a failing grade in graduate school. At the low end, Nassau County rated the lowest, at D-, which is the next grade up from failure even for undergraduates. Since the data were collected in 2001 and Nassau has undergone some reforms, an update might carry Nassau County out of the cellar.

Two years before, the Project rated 35 cities, included two cities in NY State – New York City and Buffalo. The city ratings were published in 2000, based on data collected in 1999, when Rudy Giuliani was New York City's mayor.

Combining the New York State county and city numbers together in a single table - not something we asked the Project permission to do - New York City outperformed all of the NY counties in every area with only three exceptions. Westchester excelled in capital management, with a grade of A-, exceeding New York City’s B+. Also, Westchester equaled New York City in financial management, while Buffalo equaled New York City in information technology.

The counties and cities in New York State were given six grades - an overall average grade based on their rating and five ratings in specific areas, namely Financial Management, Human Resources Management, InformationTechnology, Capital Management and Managing for Results.

Erie County's grades were C+ B- C- B C+ C
Monroe County: C C C- D B C
Nassau County: D- F D D+ D- F
Suffolk County: C- B- C- C B- F
Westchester County: C+ B D+ B- A- D+
City of Buffalo: C- C D C C- D+
New York City: B B B- B B+ B

The Project rated counties thoughout the United States, so it was possible to scale the performance of New York counties and cities to a national norm.

FINANCIAL MANAGEMENT: U.S. County Average B-
The Project rates U.S. counties rated highly on financial reporting. All but one county received the Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting. Most of the county budgets are viewed as having a good structural balance (i.e., avoiding deficits on a year-to-year basis) and as having strong rainy day funds. Only 15 percent of the counties have a legally required rainy day fund. Nassau County, NY received the only F in the nation.

HUMAN RESOURCES: U.S. County Average C+
Many counties lack of a unified county personnel system, meaning that departments may bid against one another for potential employees. The tight job market of the 1990s forced many counties to improve their salaries and merit pay policies.

INFORMATION TECHNOLOGY: U.S. County Average C+
The decentralized nature of county government has hampered introduction of technological efficiency. Different county offices may use different IT systems. Counties are improving their web sites for two-way transactions. The only A’s received in any management area were the IT grades of Fairfax (Va.) and Maricopa (Az.) Counties. Allegheny and Monroe, N.Y. Counties tied for the lowest information technology grade, with a D.

CAPITAL MANAGEMENT: U.S. County Average B-
New standards from the Governmental Accounting Standards Board Statement 34 (GASB 34) requie counties to add information on assets and their maintenance needs. Almost all counties have long-term capital improvement plans and solicit citizen input. Baltimore, Fairfax, San Diego, and Westchester, NY Counties tied for the high score of A-. Nassau County’s D- grade was the lowest of the 40 counties studied nationwide.

MANAGING FOR RESULTS: U.S. County Average C+ Only one-fourth of the counties evaluated have formal overall strategic plans, although more counties have departmental strategic planning. Budgets tend to be the main way that counties convey their goals and measure results. Fairfax, Maricopa, and San Diego Counties received the highest grade of A-, while Nassau and Suffolk, NY Counties received the lowest grade of F.

Overall, this record suggests room for improvement in New York State. Some counties have improved their records since 2002 - Nassau is an example. But in the absence of crisis, the incentives and pressures for improvement are not necessarily present.

Workers' Comp Costs - NY State 27% Above U.S. Average

An association of businesses, the Business Council of New York State, has undertaken reform of Workers' Compensation laws, with a program called Comp Watch. New York State’s cost per Workers' Comp case is 72 percent above the national average. In September 2006 Attorney General Eliot Spitzer endorsed the idea of reforming Workers' Comp in New York State. Crain's Magazine on October 23, 2006 (p. 10) editorialized that such reform would be a step in the direction of removing "one of the most significant drags on the New York economy."

To get some perspective on this issue, CityEconomist interviewed Peter Rousmaniere, a columnist for a leading insurance magazine, Risk & Insurance. Peter talks with many people throughout the country on Workers' Comp and consults within the field, where he has worked for 20 years. He has an MBA from Harvard.

Do you think Workers' Comp should – and can – be reformed in New York State?
PFR: Yes and yes. The Workers' Comp system everywhere in the United States needs a comprehensive assessment. This could well start in a major state like New York. After all, the whole Workers' Comp system was in part the result of increased interest in labor conditions after the famous, tragic Triangle Shirtwaist Factory fire in 1911, one block from Washington Square. New York State’s first Labor Commissioner was Frances Perkins, who cut her teeth on the Triangle Fire. As you know, she went on to become the first Secretary of FDR’s newly created Labor Department, and the first woman to be a member of the Cabinet.

What do you think is the biggest issue with Workers' Comp? Crain’s picks out the issue of permanent partial disability.
PFR: This is one of a number of symptoms of a basic problem, which is that Workers' Comp has hardly changed since the days of Frances Perkins. It is failing badly in cases of industrial diseases. A case in point is the way that illnesses from the WTC cleanup were mishandled from the perspective both of prevention and compensation. People outside the field don’t realize that many WTC cleanup workers felt they had to misrepresent their conditions to get through the workers comp maze. The next few occupational disasters will not be traditional ones like the Triangle fire but will be in some cases very frightening diseases, as in the WTC cleanup.

Are Workers' Comp costs too high?PFR: The best answer to this often-posed question is that the system is obsolete, which has made it unresponsive, with far too much overhead costs, and universally disliked. The design of the system today is extremely close to where it was in its birth, 1910-1925. Work has changed, exposure to injury and illness has changed. The science of detecting occupational risks has moved ahead greatly. Injured worker options have changed – career-change options are far greater than in the 1920s. Medicine has changed. The whole disability system, enormous compared to 1920, is cumbersome, overused, and an invitation to moral-hazard problems.

Will the Federal Government come in to make needed changes?
PFR: It is clear to people in the field that creeping federalization will occur, with Washington paying for an increasing amount of work-injury costs. But no one really knows how much and who should be accountable to manage this shift – or indeed whether such a shift is good for workers and employers. The Federal oversight body for Wall Street, the SEC, fell down on the job while your Attorney General picked up the slack. Federal doesn’t mean better.

What is the solution, then, do you think?
PFR: The main solution is that the WC system needs to be better integrated into health plans and into other disability programs. This is not going to be an easy task. We saw what happened when the Clinton Administration tried to reform health care. But it is arguably easier for a governor to take on a task like this than a President. At least the Federal-State issues are not as thorny. A group of governors might also undertake reforms. It might start with an in-depth assessment. The last time such an investigation happened was in the 1970s. This study spurred states to make much-delayed reforms, generally favoring workers who had been under-protected.

Thank you. This was an exploratory interview. Can we get back to you if we have more questions?PFR: Absolutely. New York State seems to be on the verge of a lot of good reforms. I would be glad to help any way I can.

© Copyright 2006 by CityEconomist.