by Alex Powell
The rent is too damn high! Without possessing an increasingly endangered rent stabilized apartment, what New Yorker can’t get behind that slogan? Who wouldn’t support a mayoral contender who campaigns on building 200,000 units of affordable housing over the next decade? The housing crisis in New York City is arguably the most pressing issue facing the City today with over half of NYC residents paying over 30% of their income to housing. In the face of such an imminent threat to the overall quality of life in NYC, is there a mean that isn’t justified through the end of producing more affordable housing?
One of the many proposals Mayor de Blasio has suggested to achieve his ambitious affordable housing goal is the use of pension funds to finance the rehabilitation and development of affordable housing. New York City’s five pension funds collectively have over $150 billion worth of assets from contributions by 700,000 current and future beneficiaries of these funds including teachers, police officers, firefighters, and city employees. The mayor sits on the board of trustees for each of the funds and appoints various trustees to positions on these boards as well. From a political framework, the mayor only consists or appoints a minority of all the boards, with the exception of the Board of Education Retirement System, which is by far the smallest fund by assets and would do little towards achieving his housing goal.
The New York City Comptroller’s Office calls these investments in affordable housing Economically Targeted Investments (ETI), a program in which the funds have been participating since 1981, providing funding to three local investment partners who select affordable housing projects to support with financing based on their expertise of which will generate the desired rate of return for their investors.
The largest impediment towards diverting pension investments for funding affordable housing is twofold; first, transcending the legal restriction of fiduciary duty, and, second, convincing the board of trustees and the custodian of the fund, Comptroller Scott Stringer, to back this investment strategy. The former will likely boil down to a dialectic debate while the latter would depend largely on a rhetorical battle.
The most pressing concern for the trustees of these pension funds is composing an investment strategy that aligns with their fiduciary obligation. While each fund defines their own investment strategy and philosophy, generally fiduciary obligations imply that it is the responsibility of the Board to diversify investments that will produce the greatest risk adjust return on their investment. Affordable housing finance by the government implies a reduced rate of return, only redeemed for investment through its diversification and risk-adjusted characteristics. The empirical evidence indicates that the ETI program has generated an after fee return of 6.31% over the past ten years, exceeding expectations compared with industry indexes.
Currently the five pension funds invest fewer than two percent of their assets in ETI, or around $3 billion, which are not solely devoted to affordable housing. The proposal by the new Mayor is to increase this funding by $1 billion or to 3% of total assets. Many investment consultants encourage pension funds to invest 5-15% of their assets in real estate because of the nature of this assets class and the needs of the funds.
While public outcry of legality has ensued since the Mayor’s announcement of this proposal, these investments are within the legal capabilities of the Board of Trustees. The Mayor will still need to present the facts to indicate the legality of expanding financing for affordable housing, which will inevitably be part of the affordable housing strategy to be released on May 5th. The rhetorical battle the Mayor must win is a political one. Convincing the public of a plan to divert funds towards a personal political cause (affordable housing) by placing the risk of the investment on the beneficiaries (moral hazard) is an uphill battle.
The Comptroller of NYC has a large voice on the Boards of Trustees and with a staff behind him can create convincing arguments to expand or contract the pensions’ holding in ETI. The Mayor’s largest hurdle will be to convince Scott Stringer of the benefit of this program to the City and the beneficiaries of the funds. This may be difficult considering he is attempting to convince a politician who undoubtedly has the aspirations of becoming Mayor someday and could use a similar technique of tapping the pension funds for his own political agenda.
While this proposal may appear benign, it could open the floodgate to a new form of political corruption, not for personal embezzlement, but for financing an agenda under the auspice of public service.