June 28, 2010

Dear Comptroller Thomas P. DiNapoli:

I am writing to you about your plan, as reported in the New York Times and elsewhere, to allow
the State to borrow nearly $5 billion (and counting) to make required annual payments to New
York’s pension fund. Your plan would allow local municipalities to borrow even more. And in
a breathtaking example of Albany accounting at its most shameless, you would borrow the
money from the same pension fund to which it is owed.

Of course, the State and local municipalities would have to pay back all the money plus billions
more in interest. And the fiscal impact of the borrowing, according to your own figures, would
be to triple pension contribution rates over the next five years. Talk about kicking the can down
the road.

But I believe the real devil here is in your assumptions, because the plan’s true costs are as yet
unknown and depend heavily on the performance of the State’s pension fund. As a result, it is
imperative that you release all your assumptions, so taxpayers can evaluate the plan’s merits with
the facts in hand.

For example, according to previous reports you have not disputed, your office is—fantastically—
assuming a repeat of market conditions after the 1987 crash, including the halcyon years between
1988 and 1998 when returns averaged 14%. As I’m sure you know, if the market underperforms
that rate—or what amounts to the best ten-year span in the fund’s history—then your plan’s
reported costs could be dramatically higher.

Is this really your assumption, Mr. DiNapoli? If not, why haven’t you disputed it? If it is, have
you considered the implications?

I have. And assuming the same asset mix as the current pension fund portfolio and making fair
predictions for returns on fixed income and alternative investments, equities would have to
skyrocket. In fact, the Dow would have to hit 80,000 by 2022. Eighty thousand.

No responsible investment advisor in the world thinks that is possible, but—if this is indeed your
assumption—you are betting billions on it, with taxpayers on the hook if you lose.

Ironically, your own office assumes investment returns of 8% a year for all other purposes, and
one would be hard pressed to find a responsible investor who thinks even that’s feasible for a
large public pension fund.

As sole trustee of our pension system, you are responsible for protecting its long-term integrity.
That means looking beyond this election year at what could happen later on if wild assumptions
miss the mark.

Should the fund return anywhere less than an astounding 14% average over the next ten years
(again, your assumptions as described in previously published reports), it would mean huge
financial pressure on the State and municipalities and a mountain of new debt. Both of which
could lead to substantial underfundings. California and New Jersey underfunded their pension
systems in years past and face the real possibility that their retirement funds will run out of cash.

We cannot let New York go down that road. The injured parties would be state taxpayers, since
future pension shortfalls would be borne by these unsuspecting New Yorkers. Of course, that
would happen just after the end of the next four year term for statewide officials.

New Yorkers need the facts from their chief fiscal officer. You should disclose the assumptions
surrounding this borrowing plan as well as its costs under a range of realistic market conditions.
Only then can the public evaluate it on the merits and understand its full risk.

Sincerely,

Harry J. Wilson