Andrew Cuomo is one of the most admired recently-elected state governors – primarily for his efforts to get the budget under control and bring taxes down. Two years ago, when he was New York State’s attorney general, he launched a national war against corruption and abuses in US public pension funds. That campaign helped to get him elected governor of the same state last November, and now he is enforcing new pension rules that are stricter than the ones adopted by other states or recommended by the Securities and Exchange Commission (SEC). But he still struggles with the broader problem of curbing pension costs.

The $140.6bn (€107.7bn) New York State Common Retirement Fund (CRF), the nation’s third-biggest, is one of the best-funded public pension systems in the nation, according to the last report by the Pew Center on the States. It is 101% funded, and is also more conservative than the national average: it has lowered its long-term assumed rate of return on investments from 8% to 7.5% last year. However, its results are well below that target, even though it is chasing bigger returns with alternative investments, while the high fees paid for this strategy are coming under scrutiny – not to mention the fact that some of those alternative investments were at the centre of the scandal pursued by Cuomo.

The scandal involved former state comptroller Alan Hevesi, who is in now in jail after pleading guilty last October to approving $250m in pension-fund investments with private equity firm Markstone Capital Partners, in exchange for almost $1m in gifts. The comptroller is the sole trustee of CRF. Last April he was sentenced to one to four years. 10 days after that sentence, Cuomo issued new rules to prevent future similar abuses: a permanent ban of placement agents, lobbyists and elected officials from any pension-fund business; and the end of ‘revolving door’ employment of former pension fund officials at firms that do business with the retirement plan.

Placement agents are paid by private equity and hedge funds to find investors. Their business has boomed in recent years, because public pension funds have increased asset allocation to alternative investments to boost returns. From 2005 to 2010 CRF’s private equity investments rose from 6.3% to 9.7% of total assets: its five-year annualised rate of return was high at 12.82%, but not enough to lift the whole fund’s results, which were 4.16%. Meanwhile, the state pension fund expenses rose from $277m to 433m. Over the next five years, lower returns and higher expenses than expected will double taxpayer contributions to the state retirement system to more than $8bn, according to the Empire Center for New York State Policy, a conservative fiscal group.

Cuomo is working towards two goals: one is to quietly negotiate labour concessions - such as freezing wages and getting employees to pay a greater share of insurance premiums - to achieve savings, as much as $450m in this year’s budget; the second is to avoid CRF’s investments being chosen against the interests of its 1m members and follow instead ‘play-to-play’ schemes, where government contractors pay politically connected middlemen or make campaign contributions in exchange for winning business. Hence the decision to shut out placement agents, even though the SEC has not adopted a similar ban and has placed only some restrictions on the way investment advisers use them.

Will that be enough to avoid a future fiscal crisis? Sceptics observe that until state pension funds are politically driven, their performance will disappoint. The New York State pension fund’s situation is made worse by having a sole trustee, currently Thomas DiNapoli. One year ago Cuomo proposed a pension reform bill – Taxpayers’ Reform for Upholding Security and Transparency (TRUST) – that would have replaced the sole trustee with a board of trustees, but the new state legislature has not yet adopted that idea.

DiNapoli was picked by fellow Democrats in the state legislature to replace Hevesi in December 2006. He had little experience or knowledge of finance, as the New York Times noticed in endorsing his opponent, Harry Wilson, at the 2010 elections for state comptroller.

Wilson is an expert in private equity, having worked for the Blackstone Group. He warned that when a pension fund like CRF invests $12bn in private equity funds, it does not have the luxury of picking the best performers and is likely not to get good results but will still pay high fees.