I have spent my career in the capital markets. As an investor, if you delude yourself that you know something you don’t really know, you end up making bad decisions with real consequences for the very people you seek to help.
I’ve had plenty of setbacks, but when I make a mistake, I try not to brush it off. I diagnose it and learn from it. Very often I find there was a difficult truth I chose to ignore or minimize, because it was inconvenient.
My habit of truth seeking was put to test more than once when I was chief investment advisor for New York City during Mayor Mike Bloomberg’s administration. This was back in 2010. In that role, I led the Mayor’s Office of Pensions and Investments, an office that was created in the aftermath of the global financial crisis to help the city with its $150 billion pension investments.
The governance of the city’s pension system, at the time, was complicated. There were five different pension systems and 58 trustees including administration and union appointees. The Office of Pensions and Investments was created, ostensibly, to help restructure the investment portfolio to get higher returns. But it quickly became clear that in addition to an asset management challenge, there was very poor understanding of the portfolios’ risks, and perhaps most challenging and most pressing, ballooning annual contributions required to honor promises that politicians had made in the earlier boom period to city employee unions.
Those promises constituted a core social contract. But our research showed that the city’s annual contribution to fulfill its pension obligations had grown from 1.5% of the budget when the Bloomberg administration came in to office to over 8% and was likely to rise into the double digits. The pension line item was meaningfully crowding out other budgetary items—roads, schools, safety—creating a very direct opportunity cost.
Beyond that, the city, like most peer pension systems across the country at that time, was counting on earning an annual return (the actuarial rate of return) of 8% on pension investments for the next 30 years. The higher the assumed rate, the less money from the budget has to go to funding pension liabilities. But given the economic environment, the long-term secular forecast, and the portfolios’ risk profile, that 8% number was economically unjustifiable.
Obviously, any administration wants more budget flexibility, and even though the unions were theoretically on the “other side” of the equation, they recognized that if the administration had to contribute more each year, it would create pressure to cut benefits. So perversely, both sides wanted the discount rate to stay high.
After significant research and discussion with leading academic and investment thinkers, our team proposed reducing the rate from 8% to 6%, a far more realistic and defensible target. But it would have meant as much as $4 billion more going to the pension contribution every year instead of being available for spending on everything else. We realized that this was a dramatic shift in the city’s spending, so we had carefully laid out our rationale and supported it with ample empirical and academic research.
The response was overwhelmingly negative. We expected opposition but nothing like what actually happened. The toughest of all was when, several weeks later, the city’s budget director, a key ally for creation of the Mayor’s Pension’s Office and a tremendous personal supporter, called a surprise high-level meeting to counter our research with their own research.
Our office was very quickly able to show the inadequacy of these counter arguments point by point. But I realized that rational economic facts were only part of the picture. I was a transitory private-sector advisor in a newly created position pushing powerful, entrenched public officials to go against their political interests. In retrospect, we were rather naïve. I shouldn’t have been surprised by efforts, including by colleagues within our own administration who I considered close allies, to counter, challenge, and distract rather than accept the harsh realities.
My colleagues in the pensions office and I felt blind-sided, ambushed by our own team. I was tempted to say, “I have done my bit in exposing the facts, this is now not my battle.” But that was an emotional response. I was not going to give up that easily. If I was an agent of change, there to help the beneficiaries of the pension system and the citizens of the city, I needed to learn from the maneuverings of my fellow trustees and adjust our team’s engagement strategy to account for the workings of public officials.
So, though the way our research-driven conclusions were dismissed had been shocking, we chose to be persistent and keep laying out the case. Our facts were certainly unpopular and terribly inconvenient, but for me it wasn’t a question of win or lose, it was, are we going to address the truth or not? And have I personally done everything possible, through strategy, persuasion, and communication, to make sure that critical long-term decisions are made with full debate and transparency?
As we regrouped, we realized that the city’s chief actuary is the official with the ultimate authority to make the final recommendation on the city’s actuarial rate of return. The role is somewhat like the Fed chairman, with a great deal of power and independence. We spent hours working with him, sharing our research, laying out the facts.
We still needed to persuade our own team—the administration—that the only responsible action was to cut the actuarial rate even if it meant higher pension contributions. We realized that one of the most rational actors in the entire situation was likely to be Mayor Bloomberg himself. We knew we had to talk directly to the mayor. It was impossible to get on his schedule. We worked with key remaining allies, especially Deputy Mayor Bob Steel, who was very sympathetic to our economic arguments yet sensitive to his peers’ fears about the budgetary implications. Eventually we reached the mayor.
He understood the issue almost immediately. He asked, “What do you want me to do?” Convinced he would get to the right decision if he had all the facts, we said, “Call a meeting.”
In government people do a lot of deals behind closed doors. I wanted transparency. I wanted all the key people in one place, saying what they had to say, then letting the mayor decide. The mayor was the only one who could convene the group that needed to be there.
He called the meeting. It was tense. All parties got to make their case. To cut a longer story short, it ended with the mayor saying, “We have to cut the actuarial rate. We will just have to find the money elsewhere in the budget. I am not going to do anything that is economically irrational.”
The chief actuary, the budget director, and our team spent hours figuring out how to make it work. Ultimately, the chief actuary recommended a 7% discount rate. It was clearly a compromise. But we understood that, while not going all the way, it was a giant step—7% was a lot more realistic than 8%. A lot closer to the truth.
What was the lesson learned? Showing up and speaking your truth is necessary but not sufficient. One must understand and be willing to do what can be far more difficult work to drive action and outcomes. To create needed change, one has to move beyond gathering facts, no matter how indisputable, to leveraging relationships, strategic thinking and doggedness—particularly in the public world of elected officials and entrenched power bases. And when you do that hard work, you can make your dent in the world, no matter how small.