N.Y. Comptroller Thomas DiNapoli says the nation's fifth-largest retirement plan takes a conservative approach. It's paying off.

As sole trustee of the New York State Common Retirement Fund, state Comptroller Thomas P. DiNapoli presides over the fifth-largest retirement fund in the U.S., according to Pensions & Investments' annual survey of the largest plans.

The pension fund, with assets of $267.7 billion, covers 1.24 million active members, retirees and beneficiaries.

In the first of two parts in P&I's latest Face to Face interview, DiNapoli discussed how the pension fund plots a course through volatile domestic, foreign and statewide economies to produce a 93.2% funded ratio, one of the highest among public plans.

He described how the pension fund invests in alternatives, the possible impact of Federal Reserve interest rate cuts and why the pension fund adheres to one of the lowest assumed rates of return among all state pension programs.

Statewide issues present special challenges because more money is leaving the fund than coming in through contributions due to demographics. “I guess the good news is our New York retirees are living into their 90s, so we're happy about that,” he said. “But it means we have to anticipate paying out a lot more.”

Appointed state comptroller in 2007 by the Legislature, DiNapoli, who served as a state assemblyman for 20 years, has been elected to four consecutive four-year terms since 2010.

Questions and answers have been edited for context, conciseness and clarity.

Q: What are the external forces that affect the Common Retirement Fund’s planning for the future?

A: The big challenge for us in recent years has been the volatility of the markets. Obviously, that's very much influenced by macroeconomic trends, global economic trends. Clearly, the instability in many regions of the world as well has an impact on the environment. And here at home, the political environment is a fair amount of unpredictability and instability.

That being said, because we are a large institutional investor, what we tend to do is spend a lot of time on developing our asset allocation and then sticking with it. So, to a certain extent, we don't really react to anything that may be happening globally or in the U.S. because we're just so big.

We monitor what's happening because you have to. And I think there certainly are tactical decisions we can make now and then that does have an impact as far as where we're putting money. We pay close attention to what's happening, but at the end of the day, we kind of stick to whatever our plan is; I think that has served us well.

Q: Are there instability issues that are so severe that you decided to divest or to stop investing?

A: I think they're probably few and far between. When Russia invaded Ukraine, is an example. Not that we had very much invested in Russia anyway, but we said we're freezing, and we're going to try to get out of all those (investments).

In terms of domestic issues that we felt compelled us to change strategy, when the Sandy Hook shootings happened in Connecticut. ... We looked at our portfolio, we saw we did have some investments in gun manufacturers, and we took the view that — always looking at it from the perspective of fiduciary and impact on returns — that long term as an investment choice to have money in gun manufacturers is problematic and risky.

And I think the added layer of understanding that many of our system members work in schools. It just seemed not to be a place we wanted to be.

So that was an example of where, within our public equity portfolio, we made the decision to divest what we had and put a freeze on doing new purchases.

In both those cases, you're not talking about huge percentages of our portfolio. Doing that did not, from our perspective, have any great investment risk. But we felt those are smart decisions from an investment perspective, and certainly ones that I could easily defend.

Q: What is the impact of the Fed’s recent interest-rate cut on your investment management?

A: It probably doesn't change it a whole lot. Obviously, it will have an impact. We just adopted the asset allocation formally earlier this year. There was some assumption that the rates were going to start to moderate, but I wouldn't say that had a huge impact on asset allocation.

Q: New York enacted a law in 2023 that allows the Common Retirement Fund and other state pension funds to expand their use of alternatives. What have you done?

A: We have put more in private equity and real estate and reduced public equity. I think it would be fair to say much of that was a consequence of where we were at anyway. We were pleased to have the enhanced flexibility.

Q: Real estate, relatively recently, has not been so good.

A: I actually think the assets there are going to perform well over time, but just because valuations going down, I don't think the investments went bad, just that their values went down. We’re sticking to our commitment … Even though real estate was the only part of our portfolio that had negative (returns) at the end of this fiscal year (March 31), we're going to take the long view that we want to continue to invest there. We do think it's going to come back, and we don't want to miss out on opportunities that are there now won't be realized for five or seven years. But sitting still is not a smart strategy.

Q: Real estate isn't a monolith. What are the areas that you find to be the most attractive now and in the future?

A: I'd say we're doing more in areas that we hadn't been as much in logistics (and) warehouses. We are starting to do some investing in data centers and real estate related to data centers. Residential has challenges, but we think there are opportunities, especially affordable housing (because) there's a big need for it.

Q: What about crypto?

A: We stay away from it. Clearly, there's not the transparency, the regulation or oversight. So we're not we're not comfortable going there.

Q: When you make an allocation revision, please describe the process.

A: The staff does an analysis, and they work with our advisers, so if there needs to be a rebalancing, if it looks like we're getting out of whack with where we want to be, they will make an evaluation. It usually would transpire over a period of weeks, and then it will come to me for a final sign off. The monitoring is continuous, though, so if it gets to the point where they wanted, they feel the need to do a rebalancing, it's pretty much been baked into the analysis.

Q: The Common Retirement Fund’s annual assumed rate of return is 5.9%, one of the lowest among state pension plans and lower than many that are less well-funded. Why?

A: We have been ramping down the assumed return over a period of time … I wouldn't call it a pessimistic viewpoint, but certainly a conservative viewpoint, that over the long term for us, positioning us with a more conservative number would make sense. We're a mature plan. Our contributions are less than our payouts, and I believe it was the right decision. I think I think we're positioned appropriately, so I'm not anticipating a change there. I think it was smart to be a bit more conservative because there's no 100% guarantee we make the 5.9% every year.

Q: Are there issues in New York that make pension management different than your peers?

A: We have more money going out than we have contributions coming in. I think that would be typical of any mature system. I guess the good news is our New York retirees are living into their 90s, so we're happy about that. But it means we have to anticipate paying out a lot more. Obviously, what sets New York apart from the other plans, except for Connecticut and North Carolina, is that we have a self-fiduciary model.

That structure enables us, in some cases, to move a little more quickly, perhaps, than some of the other structures. It doesn't mean what people sometimes think, which is that I sit there, and I read The Wall Street Journal or P&I and I say buy this, sell that.
We have a very elaborate process, very professional staff, consultants, advisers and partners. We have a lot of checks and balances before decisions are made. But I do think that structure has benefited us in terms of the speed with which we could sometimes act. We act deliberately. It's given us a strength to protect the fund.

Keep in mind one of the things that people don't fully appreciate about my role is that they tend to focus on the investment side. The real power actually is the ability to set the contribution rates, which for other funds are done legislatively or not done independently of the broader government. That's been another source of strength to keep our funded status, our funded ratio, so strong.

Q: Do the legislators or governors try to impose their will on issues related to investment strategy?

A: It doesn't happen a lot. It's usually not successful. It's not like we're unconstrained. And I think the other piece sometimes folks don't realize is that we are audited by the Department of Financial Services. There is some level of regulatory oversight. Every five years, they do a deep dive audit.

Q: How much influence does the Legislature have on pension fund management? For example, legislators passed, and the governor signed, a law basing a retirees’ pension calculations on the average of their three highest consecutive annual earnings instead of the five highest. This covers more than half of the state employees, known as Tier VI employees, who were hired since April 2012.

A: It creates more pressure on us to have the money to pay for benefit enhancements. We don't set the benefit level. We have to come up with the money to pay for what the benefits are. So, there was certainly more pressure. Newer employees are looking at what older employees have and are saying, 'Wait a minute.' And there have been issues of recruitment and retention that enhancing the benefits hopefully will address.

We said very clearly, fine, if you want to do it, but there is a cost. We did raise the contribution rates that we announced (in September) for the payments due in February of 2026 to give them time to prepare.

But there is a slight increase … and a significant part of that, but not all of it related to the benefit enhancement for Tier VI. It would be fair to say there will be, as we as we head to the next legislative session, continued pressure for even more benefit enhancement.

Q: What are other pressures?

You also have the pressure from the retiree groups that have said you've done something for the active employees. New York has a COLA (cost-of-living adjustment) that has certain caps and limitations. Given how significant inflation has been in recent years, the retiree groups are saying that COLA needs to be revisited. So, I think there's going to be continued pressure. And obviously the Legislature wants to be responsive to their constituents.

My only concern is, and my cautionary word to them — and to the governor — is (it's) all well and good to try to keep everybody happy. But be mindful, there's a price tag attached to it … I want to keep the plan as closely funded to 100% as possible. We're certainly doing the goal of our hard work to get the investment return to exceed our long-term goal as consistently as possible. But if benefits keep getting enhanced, if the only option to keep the plan well-funded is to raise contribution rates, I'm going to do it … I'm on the receiving end of whatever they do. We just always want people to know what the cost is.

Q: What other factors affect pension fund management?

A: The pace of retirement. One of the consequences of COVID is more people retiring, and I think that's still the pattern, more than we had anticipated. The challenge there, when you have a spike in retirements, the more recent retirees, obviously, their pensions are higher because they've been at a higher salary. And what we're also seeing at the state level and the local level is that as part of contract negotiations (there) have been significant salary increases.

What I've had to explain to the employers is that their billing is reflective of what their payrolls are. They may, at times point to us: "Why are you raising the rates as well?" Part of it is your bill is higher because you've given some generous contracts out in some cases. You've spent a lot of money on overtime, which also has an impact on final average salary in many cases. These are factors that we don't control.