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2017-01-31 11:55:10
Skip the G.M.O.s: Park Slope Food Co-op Fights Over Its Pension Fund

The Park Slope Food Co-op, bastion of high ideals and low prices, conscientiously screens the food it sells to help members avoid genetically modified ingredients.

So it came as a shock last November when the co-op’s 17,100 members learned that its pension fund was stuffed with speculative microcap stocks — like Intrexon, a company hoping to fight the Zika virus by unleashing genetically modified mosquitoes in the Florida Keys.

The pensions are not for co-op members; members must, in fact, work at no pay in exchange for access to the co-op’s much-publicized low prices. The pension plan is for the co-op’s roughly 90 paid employees, including about 20 retirees. It appears to have gone into hedge fund mode years ago, when one co-op member, also a hedge fund investor, made stock-picking his unpaid job.

The other members were unaware of this until last summer, when an auditor let fly a bolt from the blue: The fund had racked up two straight years of losses, and the co-op had to pour in more than $1 million to keep it flush.

Laid-back co-op members reacted to this news like shareholders stung by an unexplained dividend cut. Some feared a wag-the-dog effect, in which the pension fund would keep losing money and sucking more and more cash away from the co-op as more people retired. Labor costs would rise, and that would be the end of the benefit that drew them all to the co-op in the first place: food prices 20 to 40 percent below those in supermarkets.

“Does the co-op wish to continue on this rather hair-raising course?” asked Mark Kuzmack, a member who aired his views in the co-op’s newspaper, The Linewaiters Gazette, so named because members read it while waiting in line at the registers.

The members will vote on a reform proposal on Tuesday evening, at what is expected to be a stormy meeting. The proposal calls for oversight of the co-op’s two pension trustees, who have until now operated on their own. Some of the 90 paid employees suspect “oversight” is just a code word for the real agenda: getting rid of their pensions.

The co-op’s founding member and general coordinator, Joseph L. Holtz, who is also a trustee, said in an interview that a new layer of oversight was unnecessary. The stocks were recovering nicely from their swoon, he said, and in any case they were all being liquidated and replaced with safer investments.

“The members have clearly spoken, either through their letters or their statements at general meetings, that they’re not interested in investing in that much volatility,” he said.

In addition, he said, the pension trustees will stop wearing two hats, serving both as fiduciaries and stock pickers. The trustee responsible for the biotech stocks will step down, once he finishes liquidating the portfolio, a process that will take months.

“You don’t just sell $7 million of stocks overnight,” Mr. Holtz said.

The other trustee is George W. Haywood, a professional investor who worked in the past as a hedge fund manager and Lehman Brothers bond trader. He is also a Brooklyn native and a member of the co-op, though now he lives in Washington. Mr. Haywood did not respond to messages requesting comment.

“George Haywood is a high-profile Beltway insider,” said Avi Fisher, another of the many co-op members who aired their views in The Linewaiters Gazette. “I am curious why and how we have a relationship with him. It certainly isn’t because there’s a dearth of financial acumen in New York City.”

Mr. Haywood is the biggest holder of a stock in the pension fund, that of Neptune Technologies and Bioressources. Neptune makes edible oil from krill, a small, shrimplike crustacean, and promotes it as a nutrition supplement superior to fish oil.

Some co-op members see a conflict of interest in Mr. Haywood’s roles as a pension trustee, a pension stock picker and the biggest holder of one of those stocks.

In December, with controversy swirling around the pension fund, Mr. Haywood told The Linewaiters Gazette that no conflict of interest existed.

“Owning stock,” he said at the time, “doesn’t make you an insider. We’re not trading on any insider information.”

He said he had traded the shares on a public exchange and did not charge any fee for his services.

The problem some co-op members see is one of suitability. Hedge funds cater to wealthy and sophisticated people who can afford to place big bets and to bear any resulting losses. That is very different from a food co-op on a tight budget, with retirees free to take their benefit as a single big check if they want. That option, though popular, has sometimes caused liquidity crises at other pension funds.

Mr. Holtz recalled that when the pension plan was established, in 1993, there had also been worries about the risks it might pose to the co-op. He said an actuary had set up a schedule of funding and benefit accruals that would make it safe and sustainable, as long as the co-op put in 1 percent of its sales every year. Projected annual growth, of both the co-op’s sales and the pension fund’s investments, would take care of the rest.

Since then, a substantial body of academic work has appeared showing that such actuarial models are inherently biased in favor of risk: They call for investment portfolios to produce, say, 7 percent average annual gains over the long term, without adjusting for the fact that any such average will include both bear and bull markets. Such averages are deceptive, making it look as if valuable pensions can be provided by setting aside surprisingly small sums of money, then investing it aggressively — something that has brought pension funds to grief not just in Park Slope, but all across the United States.

The academic papers have won respect from specialists, but not much understanding by the public at large.

In Park Slope, however, gentrification turns out to have brought not only craft beers, man buns and deluxe baby buggies, but also a cohort of sophisticated finance professionals who still join the co-op for its cheap food.

One of them, Jonathan Hessney, went to a recent general meeting armed with his own analysis of the pension investments. He showed that the investments had zigzagged up and down since the crash of 2008 — but that in the end, the fund would have been better off just holding cash.

Mr. Hessney also showed that the co-op had not put in the actuary’s recommended 1 percent of sales every year, presumably because the trustees thought aggressive investments would make the whole plan cheaper. Many people still do.

Members at the meeting did not seem to know whom to believe, Mr. Hessney or Mr. Holtz, who is widely revered at Park Slope for devising its free-work-for-cheap-food business model.

Mr. Holtz said he predicted that his confidence in the old investment strategy would be borne out on Tuesday, when he plans to reveal the fund’s average annual return from 1993 to the present, a period that includes the biggest bull market in American history.

“It’s going to be over 9 percent,” he said.