Latest / Masters in Business / BONUS: NY Comptroller Candidate Drew Warshaw on Changing the NY State Pension Funds

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BONUS: NY Comptroller Candidate Drew Warshaw on Changing the NY State Pension Funds · Masters in Business

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Masters in
0:11
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
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Speaker 2: This week on the podcast a special bonus episode. Drew
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Speaker 2: warshow is candidate for New York State Controller. The Democratic
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Speaker 2: primary is June. That really is the whole shooting match.
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Speaker 2: Fascinating person. Helped rebuild the World Trade Center, background in
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Speaker 2: solar and alternative energy, affordable housing, worked for the Port Authority.
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Speaker 2: I thought this conversation about the New York State pension
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Speaker 2: and the role of the Controller was fascinating, and I
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Speaker 2: think you will also with no further ado, my conversation
0:50
Speaker 2: with New York State Controller candidate Drew Warshaw. I'm really
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Speaker 2: excited to talk to you because of not just your background,
1:00
Speaker 2: but some of your ideas about the New York State
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Speaker 2: pension plan. Nearly three hundred billion dollars. It's one of
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Speaker 2: the biggest in the countries. We'll get to that in
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Speaker 2: a bit. I have to start out asking you a
1:12
Speaker 2: little bit about your background. You get a bachelor's in
1:15
Speaker 2: history and government from Cornell, your MBA from Columbia Business School.
1:21
Speaker 2: What was the original career plan?
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Speaker 3: The original path was public service, so that's I started
1:27
Speaker 3: my career in government. I worked for a governor many
1:29
Speaker 3: governors ago, and then moved up to Albany and worked
1:35
Speaker 3: for that governor. And then when that governor resigned, his
1:38
Speaker 3: name was Elliott Spitzer, which you may have remembered. This
1:44
Speaker 3: was two thousand and eight. This was the same week
1:46
Speaker 3: Bear Stearns went down, which I'm sure you remember. And
1:50
Speaker 3: I had to get back to New York City where
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Speaker 3: I'm from, and the Port Authority was rebuilding the World
1:56
Speaker 3: Trade Center at the time, and the World Trade Center
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Speaker 3: was still sixteen acre hole in the ground.
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Speaker 2: I remember. There was a whole lot of dysfunction and
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Speaker 2: arguing with the person who had originally owned the property.
2:09
Speaker 2: I'm forgetting the name of Larry Silverstein. That's right, Silverstein.
2:12
Speaker 2: I mean this went nowhere. It felt like, Oh, they're
2:15
Speaker 2: never going to rebuild this. This is going to be
2:16
Speaker 2: a horrific thing for New York City. Tell us a
2:20
Speaker 2: little bit about your involvement in going from a dysfunctional
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Speaker 2: government entity to something a little more resilient.
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Speaker 3: Sure. So, I was blessed to become the chief of
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Speaker 3: staff to the head of the Port Authority in New
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Speaker 3: York and New Jersey, And this was seven years after
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Speaker 3: the attacks, and it was still a sixteen acre hole
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Speaker 3: in the ground. And to your point, it was peak
2:38
Speaker 3: government dysfunction. Everyone was worrying with everyone. There was a
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Speaker 3: private developer, there were insurance companies, there was unfortunately, the
2:46
Speaker 3: families of nearly three thousand victims, and there was one
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Speaker 3: of the most complicated engineering and construction projects in the
2:53
Speaker 3: most congested area of New York City, while two mass
2:57
Speaker 3: transit systems had to continue operating, the one train that
3:00
Speaker 3: bisects the site and the path system that comes in
3:03
Speaker 3: from the Hudson River. And we got there in two
3:05
Speaker 3: thousand and eight, and it was basically a hole in
3:07
Speaker 3: the ground at that point, and they called it the
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Speaker 3: pit if you remember, down at ground zero. And over
3:13
Speaker 3: the next four years we got it built and we
3:15
Speaker 3: opened the memorial. By the ten year anniversary, we secured
3:19
Speaker 3: Conde Nast as an anchor tenant for one World Trade Center.
3:23
Speaker 3: We ended up renegotiating the original real estate deal with
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Speaker 3: Silverstein Properties and rationalized the commercial development and the financing
3:31
Speaker 3: of that project to phase it in over time, given
3:34
Speaker 3: where we were in the market at the time. So
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Speaker 3: just the experience of a lifetime, especially for a lifelong
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Speaker 3: New Yorker, to have an opportunity to rebuild my hometown.
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Speaker 3: There's really nothing like it.
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Speaker 2: And what's fascinating and really relevant for today's circumstance is
3:49
Speaker 2: how Lower Manhattan, which was never much of a residential area,
3:54
Speaker 2: very much transformed into not quite Brooklyn Heights, but a
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Speaker 2: very residential friendly a whole lot more apartments and condos
4:04
Speaker 2: and co ops. I wonder if that's a little bit
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Speaker 2: of a template for moving forward now that we seem
4:11
Speaker 2: to have sixty seventy percent rates of return to office.
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Speaker 3: Yeah, and much much more mixed use. To your point,
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Speaker 3: I mean, no one would recognize Lower Manhattan today where
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Speaker 3: it was, you know, in two thousand or in the nineties.
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Speaker 3: And I live in Lower Manhattan with my two boys
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Speaker 3: and my wife, not far from the World Trade Center.
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Speaker 3: Just given the importance that it has in my life,
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Speaker 3: and it's an incredible area. I think it's you know,
4:34
Speaker 3: the connectivity, the mass transit. You know, you're close to Brooklyn,
4:38
Speaker 3: you can get uptown anytime you want or out of
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Speaker 3: the city. It's extraordinary.
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Speaker 2: So not only have you worked in government at the
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Speaker 2: Port Authority, but you've worked for a fortune two fifty
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Speaker 2: energy company. You've worked on affordable housing in the US.
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Speaker 2: Tell us a little bit about your business experience.
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Speaker 3: Yeah, so I was blessed to one get to help
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Speaker 3: rebuild the World Trade Center and work in one of
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Speaker 3: the most extraord ordinary government agencies that exist, and got
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Speaker 3: to do it at a very young age. And so
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Speaker 3: I had this extraordinary experience where I had the opportunity
5:09
Speaker 3: to either keep going vertical and keep going up within
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Speaker 3: government or build out. And you know, I bet that
5:16
Speaker 3: life is long. If it's not, we're sort of in
5:19
Speaker 3: trouble anyway. And so you know, for my part, when
5:23
Speaker 3: I do things, I want them to be meaningful and transformational.
5:27
Speaker 3: To do that, I think you need experience and you
5:30
Speaker 3: need to broaden your foundation and not just build on
5:32
Speaker 3: high So I pivoted out of government. I went to
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Speaker 3: business school, as you mentioned, and then joined a fortune
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Speaker 3: two fifty power company that was trying to build a
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Speaker 3: renewable energy investment platform and development platform, and fortunately was
5:47
Speaker 3: led by a very visionary CEO at the time who
5:49
Speaker 3: saw the green revolution coming wanted to make sure that
5:52
Speaker 3: the power company was positioned for that, and brought in
5:55
Speaker 3: a bunch of different people, some with power and finance experience,
5:59
Speaker 3: some with engine experience, and then you know others like
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Speaker 3: me who just were good at solving complicated problems. And
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Speaker 3: together we built a really strong renewable energy business.
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Speaker 2: And let's look a little bit about housing. We in
6:13
Speaker 2: the United States have a shortage of single family homes,
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Speaker 2: of starter homes, and then just generally affordable homes. How
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Speaker 2: bad is the housing problem in New York City and
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Speaker 2: in the entire country.
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Speaker 3: It's as bad as it gets. But I think importantly
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Speaker 3: in your last point is spot on. This is not
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Speaker 3: just a New York City problem. It is not just
6:36
Speaker 3: a city problem. It is an everywhere problem. And when
6:39
Speaker 3: I left the renewable energy industry, and just to give
6:43
Speaker 3: you a sense, this is late twenty nineteen, I was
6:46
Speaker 3: at my unpteen ribbon cutting for however many solar farms
6:50
Speaker 3: that we had built. And it's an extraordinary thing to
6:54
Speaker 3: be at a solar farm to see the sun shining
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Speaker 3: on basically three pieces of equipment, clean electrons going into
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Speaker 3: the grid, and you're sort of like, this is a miracle.
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Speaker 3: We figured this out. We just need a battery, we
7:05
Speaker 3: need an extension court, and we've got this but what
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Speaker 3: you don't have in that farm and a field somewhere
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Speaker 3: is people. And I'm a New Yorker and I'm a
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Speaker 3: state and local guy at heart, and the affordability crisis
7:18
Speaker 3: was mushrooming around me, and I just felt like I
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Speaker 3: needed to do something that impacted a person's day to
7:26
Speaker 3: day life as opposed to trying to save the species,
7:28
Speaker 3: which we need to do. And climate change is real.
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Speaker 3: But for my part, the home is the centerpiece of
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Speaker 3: a good life. And if you have a good one
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Speaker 3: that provides safety and security and value, everything else opens up.
7:42
Speaker 3: And if you have a home that is the opposite
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Speaker 3: of those things, or if you don't have a home,
7:47
Speaker 3: then things close down on you. And so we have
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Speaker 3: I think the most serious domestic policy crisis in this
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Speaker 3: country is the fact that people cannot afford their own home.
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Speaker 3: My kids. My kids go to public school downtown in
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Speaker 3: Lower Manhattan. One out of every single, one out of
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Speaker 3: every seven public school students in New York City, they
8:09
Speaker 3: don't go home at night because they don't have one.
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Speaker 2: That's unbelievable.
8:13
Speaker 3: They are homeless. And when I'm sitting there, co CEO
8:18
Speaker 3: of the most extraordinary Affordable Housing nonprofit in the country,
8:23
Speaker 3: eleven hundred dedicated professionals who were there to address the
8:26
Speaker 3: affordable housing crisis. And it occurs to me, Barry, that
8:30
Speaker 3: we were losing. We were getting smoked. It wasn't even close.
8:34
Speaker 3: And I look over to a government that we are
8:37
Speaker 3: trying to make faster, better, cheaper, and more efficient, and
8:41
Speaker 3: they have all this power and they have all this money,
8:44
Speaker 3: and we could use those things to address this raging
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Speaker 3: affordability crisis. And that's sort of what turned me on
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Speaker 3: to doing you know what we'll talk about. I'm sure
8:55
Speaker 3: because I was not someone who grew up, you know,
8:57
Speaker 3: wanting to run for office. I was sort of the operator,
9:00
Speaker 3: the heads down person behind the person. But I got
9:03
Speaker 3: to the point where I realized that the cavalry is
9:06
Speaker 3: not coming. The cavalry is us.
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Speaker 2: So let's stay with housing for a bit. We're going
9:11
Speaker 2: to talk a lot about the controller position and really
9:15
Speaker 2: what the main focus of that is. But I'm just
9:18
Speaker 2: fascinated by the housing circumstance, starting with really, since the
9:23
Speaker 2: financial crisis, we've underbuilt single family homes, to say nothing
9:27
Speaker 2: of affordable homes. So just in terms of demographics, depending
9:33
Speaker 2: on whether you believe the realtors, the economists, or the builders.
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Speaker 2: We're two three four million homes short. That's right, relative
9:41
Speaker 2: to three hundred and thirty something million Americans. That is
9:45
Speaker 2: very likely over the next twenty five years to be
9:48
Speaker 2: three point fifty three sixty three seventy. So given that,
9:52
Speaker 2: and given you have federal rules, you have state rules,
9:56
Speaker 2: you have private sector rules, you have local city and
10:00
Speaker 2: and county and town rules. What can we do to
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Speaker 2: improve the housing situation? What should we be doing at
10:07
Speaker 2: each of those levels.
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Speaker 3: Yeah, so we have a massive undersupply problem, a supply
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Speaker 3: demand imbalance. And you know, whether it's two million, whether
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Speaker 3: it's seven million, it's too many million home short and
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Speaker 3: people feel that every day, whether it's in their rent
10:23
Speaker 3: or in home prices. And what we saw at Enterprise
10:27
Speaker 3: Community Partners, which is the affordable housing nonprofit that I
10:31
Speaker 3: worked for, as to your point, at every single level,
10:34
Speaker 3: it is virtually impossible to build a home that people
10:37
Speaker 3: can afford. And I thought citing a solar farm was difficult.
10:40
Speaker 3: Then you get pushed back, try citing an affordable property.
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Speaker 3: And there's so many layers of bureaucracy, and whether it's
10:47
Speaker 3: from the financing side, the capital structures of these affordable properties,
10:53
Speaker 3: you needed to code a ring to figure them out.
10:54
Speaker 3: They're so complex the building code, and you know that,
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Speaker 3: I think is the silent killer of affordable housing in
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Speaker 3: this country. We talk a lot about zoning, and that
11:04
Speaker 3: is also an issue, but what gets talked about much
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Speaker 3: less is even if a piece of land is perfectly zoned,
11:12
Speaker 3: it is still hard to get the mathwork because the
11:14
Speaker 3: minute you hit dirt, particularly in New York, with the
11:16
Speaker 3: complexities of the building code and the gold plated nature
11:19
Speaker 3: and the outdated and so on and so forth, it
11:23
Speaker 3: is a fortune to build. So, whether it's the cost
11:25
Speaker 3: of construction or the cost of capital and the cost
11:29
Speaker 3: of land, you have so many different things working against you.
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Speaker 3: And those are some of the roadblocks that we need
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Speaker 3: to start clearing.
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Speaker 2: How significant is the nimby not in my backyard issue
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Speaker 2: that once people are established and they have a home, Hey,
11:45
Speaker 2: we don't want affordable housing, we don't want Section eight
11:50
Speaker 2: housing in our area going to send property values down.
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Speaker 2: How legitimate are those concerns and how can they be addressed?
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Speaker 3: Yeah, you have this credible dynamic in this country where
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Speaker 3: the incumbents of home ownership are actually economically incentive in
12:10
Speaker 3: theory to not allow greater supply, because just if we're
12:14
Speaker 3: in a supply demand world, if the supply goes up
12:18
Speaker 3: and demand stays constant, the value of their underlying property
12:22
Speaker 3: either will sort of rest in a neutral position or
12:25
Speaker 3: potentially go down. And so there is just this literal
12:28
Speaker 3: economic self interest to not want to allow more homes
12:32
Speaker 3: into your neighborhood. And then there's cultural things, and there's
12:35
Speaker 3: all sorts of other cross currents. It is a big problem.
12:41
Speaker 3: And unfortunately, what we've seen is if you actually study
12:44
Speaker 3: this and you look at what happens when you introduce
12:47
Speaker 3: new supply of homes, what you don't see is home
12:51
Speaker 3: values plunging. You don't see wild traffic jams or the
12:56
Speaker 3: schools getting filled up. You see a balance. Because things
13:00
Speaker 3: can't come online all once anyway, they are phased in
13:03
Speaker 3: over over time, and a place will naturally adjust to
13:07
Speaker 3: the inflow of new homes and new people. And I
13:10
Speaker 3: think much too much is made from a very small
13:15
Speaker 3: but very loud group of people who, to your point, say,
13:19
Speaker 3: not in my backyard.
13:20
Speaker 2: So let's talk a little bit about the controller position.
13:25
Speaker 2: Most people don't really know what this role is We're
13:28
Speaker 2: going to go into a lot of details, but essentially,
13:32
Speaker 2: this is one of the most significant financial roles in
13:35
Speaker 2: the state. Their regular audits and oversight of all sorts
13:40
Speaker 2: of tax and spending revenue, as well as overseeing the
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Speaker 2: New York State Pension Fund, which is almost three hundred
13:50
Speaker 2: billion dollars. I think it's the third largest in the country.
13:52
Speaker 2: Is that right? That's right, So tell us a little
13:55
Speaker 2: bit about this role.
13:56
Speaker 3: Yeah. You know, everyone's heard of the governor, everyone's heard
13:59
Speaker 3: of the General. There's a third statewide position in New
14:03
Speaker 3: York and it's the New York State Controller. And you know,
14:06
Speaker 3: put simply, the State Controller is the state's chief financial officer,
14:12
Speaker 3: chief auditor, and chief investment officer of the third largest
14:16
Speaker 3: fund in the United States of America, all rolled up
14:18
Speaker 3: into one job. One person has all three of those responsibilities.
14:22
Speaker 3: So it's an extraordinarily powerful position. Unfortunately, too few New
14:27
Speaker 3: Yorkers have ever heard of it, and the ones who
14:29
Speaker 3: have can barely pronounce the titles. So we need to
14:32
Speaker 3: do a lot more to educate the public on the
14:36
Speaker 3: awesome responsibility and authority of this one office. And part
14:40
Speaker 3: of the challenge has been it's been occupied by the
14:43
Speaker 3: same person in the same seat for eighteen years, who
14:46
Speaker 3: has stayed well below the radar, and unfortunately, I think
14:49
Speaker 3: is sort of treating the position like a lifetime appointment.
14:52
Speaker 3: And we have, as I mentioned, you know, being you know,
14:56
Speaker 3: focusing on the affordable housing crisis. We have a position
14:59
Speaker 3: that is sitting on all this power and all this
15:02
Speaker 3: money and is not being flexed for the people without it.
15:06
Speaker 3: And I think if we could get in there with
15:07
Speaker 3: energy and surround ourselves with talent, we have all the
15:11
Speaker 3: levers we need to address so many of the crises
15:14
Speaker 3: that we face.
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Speaker 2: So I'm fascinated, and I bet a lot of our
15:19
Speaker 2: audience is fascinated by We don't really think about New
15:23
Speaker 2: York State pension. My wife is a teacher. I have
15:27
Speaker 2: friends who are police and fire people, state hospital doctors
15:33
Speaker 2: and emergency room nurses. There are just a whole run
15:37
Speaker 2: of people that benefit from the New York State pension.
15:42
Speaker 2: Tell us a little bit about what's going on on
15:44
Speaker 2: that pension. Three hundred billion dollars. Is that's real money?
15:48
Speaker 3: Yeah, So let's be clear, every New Yorker is impacted
15:52
Speaker 3: by this pension fund. So one, to your point, they're
15:55
Speaker 3: nearly one point twenty five million beneficiaries. These are public
15:58
Speaker 3: school teachers, these are firefighters, these are cops, he's are
16:00
Speaker 3: frontline government workers. So they are directly impacted. But who
16:04
Speaker 3: funds the public pension fund?
16:06
Speaker 2: Don't say kick in taxpayers.
16:08
Speaker 3: They do kick in a portion, but taxpayers pay the
16:12
Speaker 3: overwhelming amount of the contributions into the pension fund. So
16:16
Speaker 3: your property taxes and your state income taxes, they are taxed,
16:20
Speaker 3: and all eleven million New York tax filers pay into
16:23
Speaker 3: our public pension fund. So everyone is impacted. And what's
16:26
Speaker 3: so extraordinary is this is not only the third largest
16:30
Speaker 3: public pension fund in the United States, but it's run
16:33
Speaker 3: by one person. He is the sole trustee of this fund.
16:36
Speaker 2: Meaning he's not an investment committee and a lot of
16:38
Speaker 2: he does not report to a board of trustees.
16:41
Speaker 3: The New York City Controller reports to five different fiduciary boards.
16:46
Speaker 2: Right, He.
16:48
Speaker 3: Those five boards, and it's currently there's the teachers, there's
16:51
Speaker 3: the firefighters and cops, there's the public employees, and so
16:55
Speaker 3: on and so forth. The state Controller reports to himself.
17:00
Speaker 3: He is the board. He is literally the chief investment officer.
17:04
Speaker 3: He is the fiduciary. He runs this money.
17:07
Speaker 2: So should there be a board of trustees the controller,
17:10
Speaker 2: as head of the pension fund reports to How do
17:13
Speaker 2: you propose changing that structure?
17:16
Speaker 3: Yeah, I think so. Just to be clear, only one
17:18
Speaker 3: other controller nationally has that level of sole trusteeship that authority.
17:23
Speaker 3: That's Connecticut, which is a much smaller fund. And I
17:27
Speaker 3: think corporate governance is so critical here. I think a
17:30
Speaker 3: board structure makes so much sense. But we have to
17:33
Speaker 3: get that board structure right. And one of the challenges,
17:37
Speaker 3: and this is, you know, I've looked at sort of
17:39
Speaker 3: best practices across the country. One of the challenges of
17:42
Speaker 3: these public pension funds is their boards are political appointees,
17:46
Speaker 3: and so you get into a situation where you know,
17:50
Speaker 3: the governor gets an appointment, and the state Senate majority leader,
17:53
Speaker 3: and the Assembly and so on and so forth, and
17:55
Speaker 3: so now you have this board that you hope is accountable,
17:59
Speaker 3: but in many ways you've actually diffused accountability away from
18:02
Speaker 3: a person who's publicly elected at least they have a
18:05
Speaker 3: job interview every four years and have to come up
18:08
Speaker 3: to a sort of anonymous, unknown board that sort of
18:12
Speaker 3: operates wherever they operate, and are politically appointed. So I
18:16
Speaker 3: think you know. Moving to a board structure, to me,
18:19
Speaker 3: on its face, makes perfect sense. There is way too
18:22
Speaker 3: much concentrated power in one human. But if it becomes
18:25
Speaker 3: a politicized board, I think we have a problem. So
18:28
Speaker 3: I think we have to move in that direction, but
18:31
Speaker 3: we have to do that thoughtfully and carefully.
18:34
Speaker 2: Really interesting coming up, we continue our conversation with Drew Warshaw,
18:39
Speaker 2: candidate for New York State Controller, talking about what most
18:43
Speaker 2: New Yorkers don't understand about the position. I'm Barry Richlse.
18:48
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
19:04
Speaker 2: Barry Redlts. You're listening to Masters and Business on Bloomberg Radio.
19:08
Speaker 2: My extra special guest today is Drew Warshaw. He is
19:11
Speaker 2: a candidate for New York State Controller.
19:15
Speaker 3: In New York.
19:16
Speaker 2: Really the primary is the whole whole thing, and that
19:20
Speaker 2: will be held in June of twenty twenty six. Let's
19:25
Speaker 2: talk a little bit about this role that so many
19:29
Speaker 2: New Yorkers either don't understand or don't even think about.
19:33
Speaker 2: You mentioned Attorney General and governor. Everybody knows those titles.
19:37
Speaker 2: Tell us a little bit about the important powers of
19:40
Speaker 2: the New York State Controller.
19:42
Speaker 3: Yeah, I think what is extraordinary and unfortunate is we
19:47
Speaker 3: have a position in government that is sitting on all
19:50
Speaker 3: this power and all this money, and it is not
19:53
Speaker 3: being used for people without it. And what do I mean?
19:57
Speaker 3: New Yorkers cannot afford to live in New York right now.
20:00
Speaker 3: We have a massive affordability problem, not just housing anything,
20:04
Speaker 3: electricity bills, insurance, and so on and so forth. And
20:07
Speaker 3: there is a person up in Albany whose job it
20:10
Speaker 3: is is to address things like that, although unfortunately I
20:13
Speaker 3: don't think he understands that or knows that. And so
20:17
Speaker 3: I want to take this position, and I want to
20:19
Speaker 3: use the massive levers of power and massive levers of
20:22
Speaker 3: money and help address the raging cost crisis and affordability
20:26
Speaker 3: crisis of New Yorkers. And I think we can do that,
20:28
Speaker 3: whether it is managing the public pension fund in a
20:31
Speaker 3: very different way, and I'm sure we'll talk about that.
20:33
Speaker 2: Absolutely.
20:34
Speaker 3: The incredible audit powers, the fact that this person could
20:37
Speaker 3: audit anything that touches a state tax dollar. A quarter
20:40
Speaker 3: of a trillion dollars gets spent every single year in
20:43
Speaker 3: New York and he has an all access pass to
20:46
Speaker 3: being able to audit any of that spending, which is
20:48
Speaker 3: basically the ability to audit anything. And then what is
20:53
Speaker 3: not well known is that the New York State Controller
20:56
Speaker 3: also oversees this thing called the New York State Unclaimed Fund,
20:59
Speaker 3: which is all which is where all of our money
21:01
Speaker 3: or uncast checks are, you know, health insurance benefits that
21:05
Speaker 3: don't somehow find their way to our mailbox, get gets
21:09
Speaker 3: you know, goes out.
21:09
Speaker 2: That's a pretty decent chunk of money, isn't it.
21:11
Speaker 3: It turns out it is. It should be zero because
21:13
Speaker 3: it's New Yorker's money and it is the State Controller's
21:15
Speaker 3: job to give it back to New Yorkers. But it
21:18
Speaker 3: is twenty billion dollars. There's twenty billion dollars in the
21:21
Speaker 3: New York State Done Claim Fund. When the Controller was
21:24
Speaker 3: appointed eighteen years ago, that number was only seven billion.
21:27
Speaker 3: And by the way, that's still too high. And so
21:29
Speaker 3: that is a rare thing to be able to quantify
21:31
Speaker 3: the performance of an elected official sort of how do
21:33
Speaker 3: you do that, especially with like a senator or an assemblymen?
21:36
Speaker 3: Or is it how many bills that they sponsor? But
21:39
Speaker 3: what if the bills are bad bills, or what if
21:40
Speaker 3: they're in the minority and they don't get passed. This
21:43
Speaker 3: is something in the job remit in the description that
21:46
Speaker 3: a fund that is supposed to go down has nearly
21:49
Speaker 3: tripled in size, and it's New Yorker's money in the
21:51
Speaker 3: middle of an affordability crisis. This guy is sitting on
21:54
Speaker 3: twenty billion dollars of our money.
21:56
Speaker 2: So let me let me defend the sitting New York
22:00
Speaker 2: gentleman named Tom DiNapoli. He's been in the job for
22:04
Speaker 2: almost two decades. His reputation is he's a steady technocrat.
22:09
Speaker 2: He's done some audits, he's found some waste and savings.
22:13
Speaker 2: It's not like he's, you know, doing nothing. What do
22:18
Speaker 2: you credit him doing right? And where do you think
22:22
Speaker 2: the biggest area is he's fallen short?
22:24
Speaker 3: Sure, well, look I think and this is not nothing.
22:28
Speaker 3: And he he leads with this. Now, my problem is
22:34
Speaker 3: this is a problem if this is your reason for running.
22:36
Speaker 3: And what he says is he has never been indicted
22:40
Speaker 3: and he's never been in a sex scandal.
22:42
Speaker 2: Now, in New York, that's a pretty big thing. Elliott
22:44
Speaker 2: Spitzer stepped down. Lots of other public officials in New
22:48
Speaker 2: York have had a step down. And this predates me
22:51
Speaker 2: too by a long time.
22:52
Speaker 3: Yeah. For my part, though the bar has to be
22:54
Speaker 3: a bit higher than that.
22:56
Speaker 2: So no sex scandals is not just the miniment.
22:59
Speaker 3: I don't think that could be the definition of success
23:02
Speaker 3: in a position of this consequence, and unfortunately that is
23:05
Speaker 3: what we have heard. So look, I think he is
23:09
Speaker 3: not corrupt. I don't know of any sex scandal, but
23:13
Speaker 3: we have to be doing more, and you ask some
23:16
Speaker 3: of the things that he could be doing more of.
23:18
Speaker 3: I think the way he has managed the three hundred
23:21
Speaker 3: billion dollar public pension fund has amounted to malpractice. I
23:25
Speaker 3: think it has cost New Yorkers, and you know, we'll
23:27
Speaker 3: talk about this, nearly sixty billion dollars of extra taxes
23:31
Speaker 3: that have come out of our pocket and literally just
23:34
Speaker 3: been vaporized. So I think whether it's the public pension fund,
23:37
Speaker 3: the fact that he hasn't been able to get twenty
23:39
Speaker 3: billion dollars of New Yorkers back into their pockets in
23:42
Speaker 3: the middle of an affordability crisis, or the way he
23:46
Speaker 3: focuses the audit authority, not going after the things that
23:49
Speaker 3: matter most to New Yorkers and instead spreading his staff
23:53
Speaker 3: and diluting his staff over thousands and thousands of audits.
23:56
Speaker 3: And if you audited two thousand things every single year,
23:59
Speaker 3: is very difficult to get to the root cause of
24:01
Speaker 3: any one of them. And so I think just even
24:03
Speaker 3: the level of focus, and we could talk about some
24:05
Speaker 3: of the ideas and some of the areas that I
24:07
Speaker 3: would audit just need to be fundamentally more focused than
24:11
Speaker 3: when you run large organizations or large businesses or even
24:15
Speaker 3: large government agencies. Resources are finite at the end of
24:18
Speaker 3: the day, and you need to understand that, and you
24:20
Speaker 3: need to concentrate those finite resources on the things that
24:24
Speaker 3: matter most.
24:25
Speaker 2: So let's talk about the New York State Pension Fund
24:27
Speaker 2: nearly three hundred billion dollars. You've taken to standing by
24:33
Speaker 2: the Wall Street charging bull with a giant check for
24:36
Speaker 2: twenty one million dollars. That you say is how much
24:40
Speaker 2: the fund is wasting every week. So that's one point
24:45
Speaker 2: one billion dollars a year in fees. We'll dive into that.
24:50
Speaker 2: I'm just curious what sort of reaction do you get
24:52
Speaker 2: from people down by the bull on Wall Street.
24:56
Speaker 3: Yeah, so I think, true friend, why is what you're
24:59
Speaker 3: talking about in terms of.
25:00
Speaker 2: And by the ways lower Broadway near walls.
25:02
Speaker 3: Right, So if you go to Drew fran Y on
25:05
Speaker 3: Instagram or x or whatever social channel, you will see
25:09
Speaker 3: what Barry is talking about. But every single Friday, which
25:12
Speaker 3: is Payday, which is why New Yorkers get paid, I
25:14
Speaker 3: go down to the Wall Street Bowl and I call
25:18
Speaker 3: I don't know what we can say on this podcast,
25:20
Speaker 3: Say whatever you want, okay. I called bull on the
25:23
Speaker 3: fact that our New York State Controller for the last
25:26
Speaker 3: eighteen years has given eleven point three billion dollars in
25:30
Speaker 3: fees to hundreds of Wall Street bankers who fundamentally didn't
25:34
Speaker 3: do their job, who did not beat the market net
25:36
Speaker 3: of their fees, They did not even come close. In fact,
25:39
Speaker 3: they underperformed his own market benchmarks by thirty nine percent
25:43
Speaker 3: and got eleven point three billion dollars in fees. And
25:46
Speaker 3: we got this all off of the controllers.
25:48
Speaker 2: And is that how you got to fifty plus billion dollars?
25:51
Speaker 2: Was the underperformance?
25:52
Speaker 3: The underperformance would have had to be made up by
25:56
Speaker 3: tax payers. Now the state controller walks around and he goes,
25:59
Speaker 3: you know, I've done a really good job. Why because
26:02
Speaker 3: the public pension Fund of New York is one of
26:04
Speaker 3: the best funded in the nation. And he's right, it is.
26:07
Speaker 3: But he doesn't tell.
26:08
Speaker 2: You why it's funded through tax It's.
26:10
Speaker 3: Funded because eleven million New York taxpayers over the last
26:14
Speaker 3: eighteen years paid fifty nine point one billion dollars and
26:17
Speaker 3: extra property taxes and extra state income taxes to make
26:21
Speaker 3: certain it was fully funded. It was the taxpayers that
26:24
Speaker 3: ensured that, not the stewardship and the investment fund, because
26:27
Speaker 3: it is New York state law for the public pension
26:29
Speaker 3: fund to be fully funded. Mickey Mouse could be the
26:32
Speaker 3: state controller and it must be. The question is how
26:35
Speaker 3: how is it funded? Is it through the investment income
26:38
Speaker 3: and the returns if you're doing your job, or is
26:40
Speaker 3: it through taxpayers subsidizing the underperformance? And that's what we found, Barry.
26:44
Speaker 3: We found that fifty nine point one billion dollars of
26:47
Speaker 3: additional taxes, what we call the dnapoly tax, has had
26:50
Speaker 3: to subsidize that thirty nine percent underperformance over the last
26:54
Speaker 3: eighteen years.
26:55
Speaker 2: So I live in Nasall County, which I think is
26:57
Speaker 2: like the third or fourth highest property tax in the country.
27:02
Speaker 2: Are you telling me that my taxes are higher because
27:07
Speaker 2: the New York State Pension Fund is not even getting
27:10
Speaker 2: market beta? Is that when I'm to understand.
27:12
Speaker 3: That is exactly the case. You understand this perfectly. And
27:15
Speaker 3: that is the direct connection between this job and people.
27:19
Speaker 3: And that's just one of the direct connection between this
27:21
Speaker 3: job and everyday New Yorker's lives on Long Island. Last year,
27:26
Speaker 3: ten of the thirteen towns on Long Island blew through
27:28
Speaker 3: their property tax cap. The reason they blew through it
27:31
Speaker 3: is because Toms and Appley did not do his job.
27:34
Speaker 3: It's because he underperformed the market. And we are sending
27:37
Speaker 3: billions of dollars of property taxes one point one billion
27:40
Speaker 3: dollars last year alone, or twenty million dollars every single week,
27:43
Speaker 3: every single payday alone in fees to a bunch of
27:47
Speaker 3: bankers who fundamentally did not do their job. And if
27:49
Speaker 3: you and I didn't do our job for eighteen street years,
27:52
Speaker 3: what would happen to us? We'd be fired. And these
27:55
Speaker 3: guys continue to get paid and paid and paid.
27:58
Speaker 2: So let's talk a little bit about what that pension
28:01
Speaker 2: fund should look like. And full disclosure, I've testified at
28:06
Speaker 2: various state pension funds. I've made the argument, actually it
28:12
Speaker 2: was about a dozen years ago to the Connecticut pension
28:15
Speaker 2: funds that they should move away from high priced alts
28:19
Speaker 2: and just simplify, what do you think we should do
28:23
Speaker 2: with this three hundred billion dollar pension fund? How should
28:26
Speaker 2: it be positioned?
28:27
Speaker 3: So the state controller right now pays six hundred and
28:30
Speaker 3: sixty four different investment managers to actively invest the fund,
28:34
Speaker 3: and their promise is we will beat the market out
28:37
Speaker 3: of our fees, and as we've established, they have not
28:39
Speaker 3: even come close. And what I would do is I
28:41
Speaker 3: would replace those six hundred and sixty four investment managers
28:45
Speaker 3: with a diversified set of low cost index funds. To
28:49
Speaker 3: your point, let's not pay all these fees for something
28:52
Speaker 3: that they have been unable to do over the last
28:54
Speaker 3: eighteen years, and let's take the market return. Let's focus
28:57
Speaker 3: on asset allocation. To be very clear, that matters. You know,
29:01
Speaker 3: whether it's between eighty nine or ninety three point four
29:04
Speaker 3: percent of a portfolio's return will be driven by your
29:07
Speaker 3: asset allocation. So let's spend our time and resources on
29:11
Speaker 3: getting that right and making sure that asset allocation matches
29:14
Speaker 3: the job description of the fund.
29:16
Speaker 2: Right.
29:16
Speaker 3: Assd allocation can look very different depending on what that
29:19
Speaker 3: fund needs to do, the liquidity needs and so on
29:22
Speaker 3: and so forth, So let's focus on that. Once we
29:25
Speaker 3: do that, the picking and choosing of the underlying securities
29:29
Speaker 3: and so on and so forth. To me, I think
29:31
Speaker 3: that's a loser's game, as one person famously said it,
29:34
Speaker 3: And I think we should save taxpayers their money in
29:37
Speaker 3: the form of these fees, and we'd earn a better
29:39
Speaker 3: rate of return for the pension and we'd be able
29:42
Speaker 3: to lower property taxes in the process.
29:44
Speaker 2: The data on active managers beating their benchmark, and to
29:47
Speaker 2: be fair, a big chunk do every year, but it's
29:52
Speaker 2: just about half, usually a little less each year. Over time,
29:56
Speaker 2: that drops to about twenty percent over five years, ten
29:58
Speaker 2: percent over ten years, and over twenty years, it's virtually nobody.
30:03
Speaker 2: You know, the handful of names, Warren Buffett, Peter Lynch, etc.
30:07
Speaker 2: But the vast majority, vast, vast majority don't. What sort
30:12
Speaker 2: of response do you think you would get from Wall
30:15
Speaker 2: Street who is very happy to collect big fees on
30:20
Speaker 2: underperforming funds. And again, to be fair, there is a
30:25
Speaker 2: substantial chunk of fund managers that do greade each year.
30:28
Speaker 2: It's just really hard to pick them consistently over time.
30:31
Speaker 3: And that's the thing. So one the response that I've
30:35
Speaker 3: gotten from people who understand finance and investments. No one
30:38
Speaker 3: could possibly understand how someone could hire six hundred and
30:42
Speaker 3: sixty four different investment managers. Effectively, he's bought the most
30:45
Speaker 3: expensive index fund in the world with the worst tracking error,
30:48
Speaker 3: and that's basically what he has done, right, and with
30:51
Speaker 3: a lower sharp ratio than the market, So you're getting
30:55
Speaker 3: a worse risk adjusted rate of return and you were
30:58
Speaker 3: underperforming the market by thirty nine percent. So it's like,
31:00
Speaker 3: on every possible level, this thing is not performing. And
31:04
Speaker 3: I'm not here to say, you know, we can debate
31:07
Speaker 3: active management versus passive management. What I am here to
31:10
Speaker 3: say is, for purposes of a two hundred and ninety
31:13
Speaker 3: one billion dollar fund that is managed by a bunch
31:16
Speaker 3: of folks in Albany, I do not believe that fund
31:20
Speaker 3: should or needs to try to pick the pickers and
31:24
Speaker 3: to somehow be the ones who, frankly, I think would
31:28
Speaker 3: be arrogant enough to think that they know how to
31:31
Speaker 3: choose these folks, and they have six hundred and sixty
31:33
Speaker 3: four of them. So I don't know how selective you
31:35
Speaker 3: could be by basically hiring everyone.
31:37
Speaker 2: Anyway, Hey, someone has to be pretty good in that group.
31:40
Speaker 3: Right exactly, But how do I know which one. And
31:43
Speaker 3: I'm not arrogant enough to think I do.
31:45
Speaker 2: So here's the pushback, and I have this discussion on
31:50
Speaker 2: the regular. But the pushback is, well, we could be
31:53
Speaker 2: concentrated in anyone index or any group of indexes, but
31:58
Speaker 2: we want none correlated returns and we want the potential
32:02
Speaker 2: to outperform the market. So when we go to venture
32:06
Speaker 2: capital or private equity, or private credit or real estate investments,
32:14
Speaker 2: it allows us to withstand whatever the market or the
32:18
Speaker 2: economy throws at us because these are so non correlated
32:22
Speaker 2: and they give us the chance to outperform the market.
32:25
Speaker 2: When you buy an index, all you're going to get
32:28
Speaker 2: is the market.
32:29
Speaker 3: Yeah. Sure, So I guess a couple of things on
32:31
Speaker 3: that one. I think, I think, you know, diversification matters,
32:36
Speaker 3: So you know, that's back to asset allocation. Absolutely, we
32:40
Speaker 3: need to be thoughtful about diversifying. We need to be
32:42
Speaker 3: thoughtful about you know, idiosyncrasies and trying to find those
32:47
Speaker 3: non correlative asset classes. But to me, the idea that
32:53
Speaker 3: we should put our money in a bunch of private
32:55
Speaker 3: asset classes to basically, you know, perform an exercise in
32:59
Speaker 3: volatility just because they may not have to mark to
33:02
Speaker 3: market their valuations the way you know, every split second
33:06
Speaker 3: in the public markets, we know exactly what an asset
33:09
Speaker 3: is worth in terms of that value discovery and price discovery.
33:12
Speaker 3: To me, that is not that. That can't be the
33:15
Speaker 3: reason we are putting our money in private asset classes.
33:18
Speaker 3: We can deal with volatility in the mechanics of the
33:22
Speaker 3: contribution rates and you know, look back periods and smoothing
33:26
Speaker 3: mechanisms and things like that, but let's not that. Let's
33:29
Speaker 3: not have that be the reason we put our money
33:32
Speaker 3: in private asset classes. If there are idiosyncratic opportunities, if
33:37
Speaker 3: there are ways to diversify within the context of a
33:40
Speaker 3: private market, I am open to that. But what I
33:42
Speaker 3: am not open to is the idea that just because
33:46
Speaker 3: it's somehow in private equity, the laws of physics and
33:49
Speaker 3: gravity of the economy are not impacting the underlying assets
33:54
Speaker 3: simply because the ownership model looks different, right, I mean,
33:57
Speaker 3: to me, that doesn't mean that we've diversified. It just
34:00
Speaker 3: means we've changed the ownership structure, not And if we
34:04
Speaker 3: can diversify, I would love to have that conversation and
34:08
Speaker 3: we could get the benefits of those idiosyncrasies. Then great like,
34:13
Speaker 3: I truly am open to that conversation. But to me,
34:15
Speaker 3: it can't simply be because we're going to wash away
34:18
Speaker 3: the volatility, because that is a terrible reason to make investments.
34:23
Speaker 2: The volatility washing. You're channeling Cliff Asnesz of AQR. He's
34:28
Speaker 2: the one who's champion that phrased more than anybody else,
34:31
Speaker 2: and he's a quant and an active manager, and he says,
34:37
Speaker 2: if you're putting things into privates just so you don't
34:41
Speaker 2: have to do quarterly reporting, you're probably paying too much
34:45
Speaker 2: in fees and you're probably giving up too much in
34:48
Speaker 2: terms of future returns.
34:50
Speaker 3: Yeah, that's a bad reason. And again, in the context
34:53
Speaker 3: of a pension fund, we could deal with volatility. I
34:57
Speaker 3: appreciate and am sensitive to the liquidity needs to sure
35:00
Speaker 3: benefit payouts. But we can do those things outside the
35:03
Speaker 3: context of our investment choices. We could do that in
35:07
Speaker 3: the context of the mechanics of how the pension fund
35:09
Speaker 3: is funded and smoothing mechanisms and averaging and so on
35:13
Speaker 3: and so forth. We don't have to do it in
35:15
Speaker 3: the in the actual job of investments.
35:18
Speaker 2: So let's stay with that, because it's really a fascinating
35:23
Speaker 2: way to think about whenever I talk about perpetual funds
35:27
Speaker 2: like a pension or a foundation, they have certain obligations.
35:32
Speaker 2: There's a substantial payout every year. If you're a tax
35:37
Speaker 2: exam foundation, it's five percent at a minimum. I think
35:41
Speaker 2: the pension fund pays out a whole lot more than that.
35:43
Speaker 3: That's right, right, that's right, Well, fifteen or sixteen billion
35:46
Speaker 3: dollars a year.
35:47
Speaker 2: So that's not an insubstantial chunk of money. How do
35:51
Speaker 2: you think about and how should whoever's running the New
35:55
Speaker 2: York State Pension Fund think about the future liabilities that
36:00
Speaker 2: fund has for forever and what it means for asset allocation?
36:05
Speaker 2: Does this mean we steer away from a liquid assets?
36:10
Speaker 2: Does this mean we steer towards fixed income? How do
36:14
Speaker 2: you think about that asset allocation?
36:15
Speaker 3: I think it's it just needs to be balanced and
36:18
Speaker 3: it needs to align and reflect to the job description
36:21
Speaker 3: of the fund. And you know, I was talking to
36:23
Speaker 3: a chief investment of a former chief investment officer one
36:26
Speaker 3: of the largest public pension funds the United States, and
36:29
Speaker 3: he was the one, you know, who reminded me, you know, Drew,
36:31
Speaker 3: what what is the job description of the New York
36:33
Speaker 3: State Public pension fund. What does it need to do,
36:36
Speaker 3: what are what is the benefit stream that it needs
36:38
Speaker 3: to pay out, What is the income stream that is
36:41
Speaker 3: coming in, whether it's from the investment income or you know,
36:46
Speaker 3: public taxpayers and you know employers, the three thousand municipalities
36:49
Speaker 3: that are paying into the public pension fund that are
36:51
Speaker 3: funded by those property taxes. So to me, that is
36:55
Speaker 3: first principles. And for my part, you know, I think
36:58
Speaker 3: we absolutely can be in areas that are less liquid.
37:03
Speaker 3: We just need to have balance liquidity. We just need
37:06
Speaker 3: to ensure that. On the other hand, we have pockets
37:09
Speaker 3: of the portfolio that we know can perform or we
37:12
Speaker 3: know can pay out, and we know are highly liquid.
37:14
Speaker 3: And fortunately in the capital markets there are plenty of
37:18
Speaker 3: asset classes that can provide that liquidity. While some of
37:23
Speaker 3: our assets may be tied up and you can either
37:26
Speaker 3: get whether it's some illiquidity premium or some other cashflow
37:30
Speaker 3: characteristic that is useful again for that broader job description
37:34
Speaker 3: of the fund that has to pay out now, but
37:37
Speaker 3: also to your point is the ultimate long term investor.
37:41
Speaker 3: The State of New York is not going away anytime soon.
37:44
Speaker 3: They are a forever open fund, and we need to
37:48
Speaker 3: have that focus of and that balance of what are
37:52
Speaker 3: our liquidity needs today and over the foreseeable future. But
37:55
Speaker 3: how are we investing to ensure that the public employees
37:59
Speaker 3: and the public school teachers who just centered the workforce,
38:01
Speaker 3: who are teaching my two sons are are going to
38:05
Speaker 3: have the benefits paid out, you know, thirty thirty, five,
38:08
Speaker 3: forty years from now.
38:09
Speaker 2: And for sure, ninety percent of the assets don't need
38:13
Speaker 2: to be liquid each year, even if most of them
38:16
Speaker 2: will be, it's less than ten percent annually that has
38:19
Speaker 2: to be paid out. What you're proposing sounds radical, but
38:26
Speaker 2: I could look at elsewhere around the country. I know
38:30
Speaker 2: Kalpers made a shift a few years ago, ten years
38:33
Speaker 2: ago where they took a lot of money away from
38:37
Speaker 2: not just underperforming hedge funds but even fairly well performing
38:41
Speaker 2: hedge funds that were kind of pricey and rolled them
38:45
Speaker 2: into index funds. And then, very famously, the Wall Street
38:48
Speaker 2: Journal did this somewhat hilarious article about the head of
38:54
Speaker 2: a Nevada pension fund, and it's one person who is
38:58
Speaker 2: fully indexed, and really he goes in, answers some email,
39:02
Speaker 2: answers his own phone, has lunch, and goes home This
39:07
Speaker 2: isn't really radical what you're proposing. This is Black Rock.
39:11
Speaker 2: Half of their twelve trillion dollars is passive, or i
39:15
Speaker 2: should say indexed. Even more of Vanguard's eleven trillion is indexed.
39:22
Speaker 2: This is fairly state of the art.
39:24
Speaker 3: Think if you want to use radical, it is radical
39:27
Speaker 3: common sense. It is the first day of business school,
39:30
Speaker 3: you know, they gather you around and they say, come close,
39:33
Speaker 3: We're we're gonna tell you a secret. It turns out
39:36
Speaker 3: it's really really hard to beat the market net of fees.
39:39
Speaker 3: It's really hard to do that over a long period
39:41
Speaker 3: of time. It's especially hard to do that with a
39:43
Speaker 3: fun size as big as three hundred billion dollars. That
39:46
Speaker 3: just wants to regress to the mean, and so focus
39:49
Speaker 3: on assd allocation, think about diversification, think about that job description.
39:53
Speaker 3: But once you do, don't worry about the last six
39:58
Speaker 3: percent or whatever it is with which a lot of
40:00
Speaker 3: people argue, you know, may not be skilled, could be luck,
40:03
Speaker 3: could be a lot of other factors. I don't need
40:05
Speaker 3: to have that debate right now. For purposes of the
40:07
Speaker 3: third largest public pension fund in the United States of America,
40:10
Speaker 3: we should not be trying to beat the market and
40:13
Speaker 3: doing something that we can't possibly do, because it turns out,
40:15
Speaker 3: over the last eighteen years, it is crush taxpayers in
40:18
Speaker 3: the process in the middle of an affordability crisis. And
40:21
Speaker 3: what we've seen, Barry, and what this basically amounts to,
40:24
Speaker 3: is our state control over the last eighteen years has
40:27
Speaker 3: overseen one of the largest wealth transfers that no one
40:29
Speaker 3: knows anything about from ordinary taxpayers fifty nine point one
40:33
Speaker 3: billion dollars to hundreds of Wall Street bankers who didn't
40:38
Speaker 3: do their job. And if they were to do their job,
40:40
Speaker 3: if they were to beat the market net of fees, great,
40:43
Speaker 3: then it's a win win. Then everyone wins. Then we
40:45
Speaker 3: are living in a world in which we can have
40:48
Speaker 3: our cake and we can eat it too. But I
40:51
Speaker 3: live in the real world. Nineteen million New Yorkers live
40:54
Speaker 3: in the real world. It hasn't happened over the last
40:56
Speaker 3: eighteen years, and that's why I think we need a
40:58
Speaker 3: fundamental change.
40:59
Speaker 2: Coming up, we continue our conversation with Drew Warshaw, candidate
41:03
Speaker 2: for New York State Controller, talking about what most New
41:07
Speaker 2: Yorkers don't understand about the position. I'm Barry, results you're
41:13
Speaker 2: listening to masters in Business on Bloomberg Radio. I'm Burry Redults.
41:29
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
41:32
Speaker 2: extra special guest today is Drew Warshaw. He is a
41:36
Speaker 2: candidate for New York State Controller in New York. Really
41:40
Speaker 2: the primary is the whole whole thing, and that will
41:45
Speaker 2: be held in June of twenty twenty six. So we've
41:49
Speaker 2: talked a bit about the pension. Let's talk about some
41:52
Speaker 2: of the other roles within the New York State Controller's Office.
41:57
Speaker 2: You mentioned the office does two thousand audits a year.
42:02
Speaker 2: What areas are they orderling, What's the purpose of it,
42:06
Speaker 2: and how do you want to change that? What areas
42:09
Speaker 2: do you think they should be ordering but are not sure?
42:12
Speaker 3: So their remit. Their job jar is they are allowed
42:15
Speaker 3: to audit anything that touches a state tax dollar, which,
42:19
Speaker 3: if anyone understands public finance is basically everything because our
42:22
Speaker 3: taxes go up to Albany and then they get redistributed
42:25
Speaker 3: all across the state. So he, in theory, is able
42:28
Speaker 3: to audit anything he wants. These are audits, I think
42:32
Speaker 3: importantly to understand these are not only financial statement audits,
42:36
Speaker 3: which they are. They do do those, but these are
42:40
Speaker 3: auditing the efficacy of how our tax dollars are spent.
42:44
Speaker 3: Are they spent well? Are they getting the results that
42:46
Speaker 3: the legislature and these laws intended. If not, how should
42:50
Speaker 3: we improve them? So this is also not just chief auditor,
42:54
Speaker 3: but sort of chief efficiency officer of the State of
42:57
Speaker 3: New York. And one of the things that you know,
43:00
Speaker 3: and they're nearly three thousand employees who work for the
43:03
Speaker 3: State Controller, which you know I hear, and that's that
43:06
Speaker 3: seems like a lot. That seems like an extraordinary resource
43:09
Speaker 3: to be able to deploy over a quarter of a
43:11
Speaker 3: trillion dollars of spending. But when you dilute those resources
43:15
Speaker 3: over thousands of different audits, and you don't focus your
43:18
Speaker 3: finite resources I think on the things that matter most,
43:22
Speaker 3: then you don't get to the root cause, such as
43:24
Speaker 3: so many the challenges. Give us a few examples, So
43:26
Speaker 3: let me give you three. Let me just give you
43:28
Speaker 3: three examples, and everyone you know would start with the MTA,
43:31
Speaker 3: And of course we're going to audit the MTA.
43:33
Speaker 2: But was the first thing I was thinking of, is
43:35
Speaker 2: why is it so expensive to build subway or roads
43:39
Speaker 2: and tolls and books?
43:40
Speaker 3: But one of the things that I want to get
43:41
Speaker 3: to some of the other things, because the State Controller
43:44
Speaker 3: actually does audit the MTA, And one of the things
43:46
Speaker 3: that I would want to do is, because there have
43:48
Speaker 3: been so many audits of the MTA, I would first
43:50
Speaker 3: initially just do an audit of the audits. I would
43:53
Speaker 3: want to truly understand what have been the findings, make
43:57
Speaker 3: sure that those findings make sense, and then just simply
44:00
Speaker 3: ross reference to what have they implemented and what are
44:03
Speaker 3: still outstanding, and like literally just simplify it from that point,
44:06
Speaker 3: and then we can get into the weeds once you've
44:08
Speaker 3: gotten smarter on that. But for my part, before we
44:11
Speaker 3: launch into some new MTA audit, there have been so
44:14
Speaker 3: many MTA audits, let's just understand what of the findings
44:18
Speaker 3: have actually been addressed and what remain outstanding. But I
44:21
Speaker 3: want to talk about three audits, three things that I
44:24
Speaker 3: think we should concentrate this authority on. One is I
44:28
Speaker 3: think we should audit the Department of Financial Services. What
44:31
Speaker 3: is the Department of Financial Services? It turns out the
44:34
Speaker 3: State Department of Financial Services is the largest regulator of
44:37
Speaker 3: insurance companies in the country. Insurance companies are not regulated
44:42
Speaker 3: by the federal government. They are regulated on a state
44:44
Speaker 3: by state basis, and the Department of Financial Services in
44:47
Speaker 3: the State of New York happens to be the largest
44:50
Speaker 3: among them. How are they doing We have no idea
44:53
Speaker 3: because we have never done a top to bottom audit
44:56
Speaker 3: on the way in which they regulate this massive sector
44:59
Speaker 3: of of our economy, whose business model these days seems
45:03
Speaker 3: to be to take our money and make it really
45:05
Speaker 3: really hard to get it back, whether it's on the
45:07
Speaker 3: health side and the health insurance you know gauntlet that
45:11
Speaker 3: you have to run, or in my old world, in
45:15
Speaker 3: the housing world, with property insurance premium skyrocketing, with deductibles
45:19
Speaker 3: going up to the point where you basically are self
45:22
Speaker 3: insuring anyway, So you need to start asking, you know,
45:24
Speaker 3: questions like that, we are going to get to the
45:28
Speaker 3: bottom of this insurance industry, and we can from this
45:32
Speaker 3: position of state controller. A second area, the New York
45:35
Speaker 3: State Public Service Commission and the Department of Public Service
45:38
Speaker 3: another sort of mouthful of bureaucratics sounding things. Well, it
45:43
Speaker 3: turns out this bureaucratic sounding thing is the largest regulator
45:47
Speaker 3: of our electric and gas utility monopolies. This is the
45:50
Speaker 3: one thing that ensures that these monopolies actually serve the
45:55
Speaker 3: public interest. And I was in the electricity business for
45:58
Speaker 3: eight years, building renewable enters G power infrastructure all across
46:01
Speaker 3: the country, and I had to deal with these utility monopolies.
46:05
Speaker 3: And these utility monopolies are broken and their regulator is
46:09
Speaker 3: not doing anything about it. And what I would do
46:13
Speaker 3: is go in and we would audit the regulator. The
46:16
Speaker 3: one thing that's standing in between the public interest and
46:18
Speaker 3: these monopolies. Why aren't we laser focused on that? When
46:22
Speaker 3: electricity rates are going up by double digits. I was
46:25
Speaker 3: up in Rochester, New York, and Rochester Gas and Electric,
46:29
Speaker 3: one of those utility monopolies, proposed a one year thirty
46:32
Speaker 3: six percent increase to your electricity rates. That is an
46:36
Speaker 3: admission of failure. That is literally an admission that the
46:39
Speaker 3: company in charge does not know what it is doing
46:42
Speaker 3: and is not up to the task. We need to
46:44
Speaker 3: fundamentally change the utility business model. I think we can.
46:49
Speaker 3: I think they're a financial incentive structure that was built
46:52
Speaker 3: for one hundred years ago, not for today and for
46:54
Speaker 3: the next hundred years. And I think that that would
46:57
Speaker 3: ultimately be good for ratepayers, good for consumers, and fundamentally
47:02
Speaker 3: good for the investors and the developers of these power
47:05
Speaker 3: infrastructures in the first place. And the third thing that
47:08
Speaker 3: I would audit is I would audit the New York
47:10
Speaker 3: City and New York State building Code. And people say, well,
47:13
Speaker 3: wait a minute. You can audit agencies, you can't audit
47:16
Speaker 3: something like the building code. But my authority extends to
47:20
Speaker 3: anything that touches a state tax sellar. And if you
47:22
Speaker 3: had energy imagination and urgency, you would recognize that the
47:27
Speaker 3: silent killer of not just housing, but of anything in
47:31
Speaker 3: this town or all across New York State is the
47:34
Speaker 3: building code. This thing kills projects before they start, and
47:38
Speaker 3: it is gold plated, and it is outdated. And what
47:41
Speaker 3: I would do is propose a model building code that
47:44
Speaker 3: we estimate will strip fifteen percent of the cost to
47:47
Speaker 3: construct anything, not just housing, which obviously I care a
47:50
Speaker 3: lot about and New Yorkers need more of, but anything.
47:53
Speaker 3: And I would literally do the Audit would be a
47:55
Speaker 3: track change version from the model building code to the
47:58
Speaker 3: existing two codes that government construction New York, and we
48:01
Speaker 3: would show precisely what would need to be changed to
48:04
Speaker 3: get to that lighter, simpler, easier, and more cost effective,
48:09
Speaker 3: effectively to build building code. We would do the work
48:12
Speaker 3: for them, and then we would go to the mayor
48:14
Speaker 3: and we would go to the city council, and they
48:16
Speaker 3: have talked a lot about affordability, and we would say,
48:19
Speaker 3: if you were serious about this, go adopt this code.
48:21
Speaker 3: And we would go to the governor and the legislature,
48:23
Speaker 3: and they talk a lot about affordability, as they should,
48:26
Speaker 3: and we would give them a concrete way to be
48:28
Speaker 3: able to deliver that. And that is how I think
48:31
Speaker 3: we need to be thinking of leveraging the power of
48:34
Speaker 3: this audit.
48:34
Speaker 2: So is the code passed by a city or state
48:37
Speaker 2: legislature or is it administratively that's rest.
48:41
Speaker 3: No, it's adopted by the City of New York and
48:44
Speaker 3: then the basically rest of state the state adopts a
48:48
Speaker 3: building code. Different municipalities can add on. But that's one
48:51
Speaker 3: of the challenges, Barry, is we always add we never
48:54
Speaker 3: subtract to these things, right, And no one has done
48:58
Speaker 3: a top to bottom audit of the thousands of pages
49:02
Speaker 3: of code that drives up the costs to build anything.
49:06
Speaker 3: And that's the type of creativity and energy and experience
49:11
Speaker 3: driven audits that I think we need to bring.
49:13
Speaker 2: So you're talking to a large degree about making this
49:19
Speaker 2: position much more public, much more visible, much louder than
49:25
Speaker 2: it's been what's been going on with the incumbent. I
49:31
Speaker 2: don't think most people and in fact, the data point
49:34
Speaker 2: that you've shared before, sixty two percent of Democrats don't
49:39
Speaker 2: know who he is. Twenty percent of them view him favorably.
49:43
Speaker 2: This has kind of been a stealth position. You're really proposing,
49:49
Speaker 2: if not elevating this well, certainly making it much more
49:53
Speaker 2: visible and public. To tell us about that and your
49:57
Speaker 2: thoughts in that.
49:58
Speaker 3: Space, Yeah, I mean, look, the job can be keeping
50:00
Speaker 3: the job. That's not what this job is. And we
50:03
Speaker 3: are in a moment where if you were sitting on
50:07
Speaker 3: money and you were sitting on power and you were
50:10
Speaker 3: not using that really really well, you have got to
50:13
Speaker 3: step aside. When one out of every seven New York
50:16
Speaker 3: City public school students do not go home at night
50:19
Speaker 3: because they don't have one, and you were sitting on
50:22
Speaker 3: the third largest pool of public capital in the United
50:25
Speaker 3: States of America, and none of that money is invested
50:27
Speaker 3: in homes that people can afford, by the way, while
50:30
Speaker 3: earning a reasonable risk adjusted rate of return, which is
50:32
Speaker 3: what we did for a living. Then that is a
50:35
Speaker 3: massive problem. And so for my part, the fact that
50:39
Speaker 3: no one has ever heard of this office is a
50:43
Speaker 3: problem that is not an asset of the last eighteen years.
50:46
Speaker 3: That is a massive liability. That is red blinking lights
50:49
Speaker 3: that the fiscal watchdog of the State of New York
50:53
Speaker 3: no one has ever heard of them. And if you
50:54
Speaker 3: were to ask, if you were to make up a
50:56
Speaker 3: name and you were to pull it, you know, it
50:58
Speaker 3: is human behavior for least one out of every three
51:01
Speaker 3: people to say, yeah, yeah, sure, I've heard of that person.
51:03
Speaker 3: And so the fact that sixty two percent of New
51:06
Speaker 3: Yorkers and New York Democrats have never heard of this guy,
51:09
Speaker 3: to me is an indictment of the performance of this job,
51:14
Speaker 3: and in terms of definitions of success, we need to
51:17
Speaker 3: address this cost crisis. But after four years, you better
51:21
Speaker 3: have heard of the New York State Controller, right, because
51:24
Speaker 3: that means we are actually using this power and this
51:27
Speaker 3: money for the people who don't have it.
51:29
Speaker 2: So let's talk about some things that I think have
51:32
Speaker 2: worked out pretty well, and they tend not to just
51:36
Speaker 2: to be New York City or New York State programs,
51:39
Speaker 2: but poort authority and bigger programs. Also, as a lifelong
51:44
Speaker 2: New Yorker and a long time I've lived in the
51:48
Speaker 2: city for a long time, I've been really impressed with
51:53
Speaker 2: I think LaGuardia could be the best airport in the country. Now,
51:57
Speaker 2: I don't know is that six or eight billion dollars later.
52:00
Speaker 2: They should have done it twenty years ago. Adding moving
52:05
Speaker 2: part of Penn Station to Grand Central as well as
52:09
Speaker 2: the new facility, a huge when the extension of the
52:13
Speaker 2: Second Avenue subway, and then as I drive around New
52:17
Speaker 2: York State, we seem to be repaving everything. I know,
52:21
Speaker 2: a big infrastructure bill passed a couple of years ago,
52:25
Speaker 2: and the Long Island Expressway and the Interstate ninety five,
52:32
Speaker 2: the New York State Thruway, and it seems everywhere I look,
52:35
Speaker 2: new roads, new bridges, new tunnels are being laid. Are
52:40
Speaker 2: these Are we getting the best bang for our buck
52:43
Speaker 2: with these projects? And what other projects? There's talk about
52:48
Speaker 2: a very expensive project to protect southern Manhattan from climate
52:54
Speaker 2: change and rising sea levels. And I recall after Sandy
52:59
Speaker 2: that was just every red superstorm standy. There was a
53:02
Speaker 2: brief discussion about, gee, look at the towns that had
53:06
Speaker 2: buried power lines. They didn't lose electricity as opposed to
53:11
Speaker 2: half the state lost electricity for two weeks or longer.
53:14
Speaker 2: How do we look at all these projects, how do
53:16
Speaker 2: we manage the expenses of them? Are we getting a
53:19
Speaker 2: bang for our buck on any of these tell us
53:22
Speaker 2: about these big public works projects. What do you see
53:25
Speaker 2: the next five or ten years looking like?
53:27
Speaker 3: Sure? So the short answers, no, we are not getting
53:30
Speaker 3: the best bang for the taxpayer buck in these projects.
53:35
Speaker 3: And there are any number of reasons why I talked
53:37
Speaker 3: about the building code as one of those reasons. Another reason,
53:42
Speaker 3: and you know, I think listeners will appreciate this, is
53:45
Speaker 3: you look at the Department of Buildings and where are
53:49
Speaker 3: their service level standards? Right? Where are their turntimes? Where
53:53
Speaker 3: are the things that they need to be doing to
53:56
Speaker 3: ensure that the people out in the world who are
53:59
Speaker 3: investing the capital and putting that capital to use, and
54:02
Speaker 3: all the workers who are trying to build these projects
54:04
Speaker 3: and build these infrastructures, these pieces of infrastructure, where are
54:10
Speaker 3: those service level standards? You know, in the world that
54:13
Speaker 3: I used to occupy, we would have service level agreements
54:15
Speaker 3: right our counterparty would have to perform based on a
54:19
Speaker 3: number of different metrics. And this is you know, goes
54:21
Speaker 3: back to that audit authority. These are the things that
54:24
Speaker 3: the state controller can do both by proposing those service
54:28
Speaker 3: level standards and making sure that they are adopted. And
54:31
Speaker 3: if they aren't adopted, that's okay. We can we can
54:34
Speaker 3: still measure them anyway, and we can come back every
54:36
Speaker 3: single year and see how they're doing. So the Department
54:39
Speaker 3: of Buildings is one of those places where again sort
54:43
Speaker 3: of projects go to die, and I think there there
54:47
Speaker 3: just is a lack of discipline and focus around metrics
54:51
Speaker 3: to just make sure that they are doing their legally
54:55
Speaker 3: required job. You should not have to hire an expedi
54:58
Speaker 3: or to have an expedite project. That seems to be
55:01
Speaker 3: that's a layer of cost, right, that is a layer
55:04
Speaker 3: of costs and a layer of friction that basically admits
55:08
Speaker 3: that the status quo makes no sense. And so we're
55:10
Speaker 3: going to have this off ramp for people who can
55:13
Speaker 3: afford it, and only those people who can afford it,
55:15
Speaker 3: and they will somehow get special treatment. And to me,
55:18
Speaker 3: that is like the exact wrong thing and the wrong direction.
55:22
Speaker 3: And we have to show that the regular thruway works,
55:26
Speaker 3: that you don't need the Lexus lane that only certain
55:29
Speaker 3: people can afford. And that's where we have to kind
55:32
Speaker 3: of pull government back in that mindset that they should
55:35
Speaker 3: just be able to do their core job.
55:36
Speaker 2: So let's zoom out and ask you to imagine four
55:40
Speaker 2: years or eight years into the job. What does success
55:43
Speaker 2: look like? How do you define being able to look
55:47
Speaker 2: back after a term or two when saying this is
55:51
Speaker 2: where we succeeded, this is how it should be run.
55:54
Speaker 3: Yeah, great questions. So a few very concrete examples. One,
56:00
Speaker 3: hopefully property tax payers and state income taxpayers aren't bleeding
56:05
Speaker 3: because they're paying a bunch of fees to a bunch
56:08
Speaker 3: of bankers who just are not doing their job. So one,
56:10
Speaker 3: we have pivoted the investment strategy away from that sort
56:14
Speaker 3: of beat the market idea that has failed utterly over
56:19
Speaker 3: the last eighteen years. And we are moving away from that,
56:22
Speaker 3: and we are taking pressure off of taxpayers. That is
56:25
Speaker 3: part of the cost crisis that we are facing in
56:28
Speaker 3: New York and why New Yorkers cannot afford to live here.
56:31
Speaker 3: So that's one thing, the cost of housing. I think
56:35
Speaker 3: the state Controller has an ability, both on the capital
56:37
Speaker 3: side and on the audit side to address it. We
56:40
Speaker 3: talked about the audit side in terms of addressing this
56:44
Speaker 3: building code issue, and I hope that that can lower
56:48
Speaker 3: or at least keep neutral the cost of construction. And
56:52
Speaker 3: on the financing side, I think we could bend the
56:54
Speaker 3: cost curve of the cost structure, the capital structure, and
56:58
Speaker 3: the cost of capital or affordable housing by making available
57:03
Speaker 3: and I've proposed the largest housing fund in the United
57:05
Speaker 3: States of America, a ten billion dollar housing fund to
57:08
Speaker 3: invest in homes that New Yorkers can afford. Definition of
57:11
Speaker 3: success that is deployed in what we estimate to be
57:14
Speaker 3: one hundred thousand homes that New Yorkers can actually afford,
57:18
Speaker 3: that is something that is absolutely concrete. And then this
57:22
Speaker 3: twenty billion dollar fund of a New Yorker's own money
57:25
Speaker 3: in the New York State Unclaim Fund, that we actually
57:28
Speaker 3: start getting that money back. And you have to go
57:31
Speaker 3: to some dopey website right now that is complicated and
57:34
Speaker 3: hard to use, and if you have money, they don't
57:36
Speaker 3: even tell you how much because they don't even really
57:38
Speaker 3: want you to get it back, right it sounds like
57:40
Speaker 3: you're trying to issue into a health insurance claim or
57:43
Speaker 3: something like that. We are going to get rid of
57:45
Speaker 3: this website. We're going to decommission it. We won't have
57:47
Speaker 3: a website because we won't need it, because we're automatically
57:50
Speaker 3: going to send New Yorkers their money back, because it's
57:53
Speaker 3: their money. It is not Tom Dinapolis, it is not
57:56
Speaker 3: the State of New York's. It is New Yorkers. We
57:58
Speaker 3: have your name, we have how much you're owed, we
58:00
Speaker 3: have your last sony trust, We have access to all
58:02
Speaker 3: the data in the world, and we are in twenty
58:05
Speaker 3: twenty six. My phone knows more about my personality than
58:09
Speaker 3: I do. My phone knows where I live. Why can't
58:11
Speaker 3: we figure out how to get you your money back automatically?
58:15
Speaker 3: We can, and we will.
58:16
Speaker 2: Drew, really interesting, Thank you so much for coming. And
58:20
Speaker 2: I'm going to extend an invitation to Tom DiNapoli if
58:23
Speaker 2: you want to come to Bloomberg and talk to us
58:25
Speaker 2: about what you've been doing as Controller and what your
58:29
Speaker 2: plans are for the future, We would love to have you.
58:31
Speaker 2: I'm going to have my producer reach out. Really really
58:35
Speaker 2: interesting stuff. Thank you for a thought provoking conversation. We
58:40
Speaker 2: have been speaking to Drew Warshaw. He is a candidate
58:44
Speaker 2: for New York State Controller and the Democratic primary in
58:47
Speaker 2: June twenty twenty six. If you enjoyed this conversation, well
58:52
Speaker 2: check out any of the six hundred we've done over
58:54
Speaker 2: the previous twelve years. You can find those at iTunes, Spotify, YouTube, Bloomberg,
59:00
Speaker 2: wherever you get your favorite podcasts. I would be remiss
59:04
Speaker 2: if I not thank our crack staff who helps me
59:06
Speaker 2: put these conversations together each week. Alexis Noriega is my
59:12
Speaker 2: video producer. Sean Russo is my researcher. Anna Luke is
59:16
Speaker 2: my podcast producer. I'm Barry Ritolts. You've been listening to
59:20
Speaker 2: Masters in Business on Bloomberg Radio