Attorney General Andrew Cuomo handed down an indictment yesterday against former political consultant Hank Morris and former pension-fund chief investment officer David Loglisci. Both men, Cuomo alleges, were involved in a Hevesi-era state pension fund scandal.

In one way, the scandal can be viewed as alleged garden-variety Albany corruption. Scheming politicos and patronage employees allegedly took money from private interests to do bad things with the taxpayers’ money. Yawn.

But dig deeper, and there are real lessons for state pension reform.

As Cuomo notes, Morris, after helping former comptroller Alan Hevesi win election to that post in 2002, began “to exercise control over certain aspects of the [pension fund], including the alternative investment portfolio, valued then at $9.8 billion dollars.”

Since Hevesi was the sole trustee of the state’s then-$140 billion fund, this task, apparently, was easy to accomplish.

Moreover, the alleged wrongdoing that Morris & co. promptly launched posed grave risk to the taxpayer. They taxpayer ultimately guarantees the retirement benefits of the fund’s one million public-sector beneficiaries. If investments fall short, taxpayers must make up the difference.

After allegedly installing Loglisci at the pension fund to help him out in his goals, Morris used a middle-man investment firm in Connecticut to seek millions of dollars in fees plus various personal and political favors from companies seeking to manage the pension fund’s money.

As the indictment notes, the comptroller’s office set up a process through which the chief investment officer (Loglisci) was required to approve investments in “alternative” asset classes after working with an outside consultant.

Morris made himself into that consultant, taking money from investment companies eager for New York’s business in the process.

In chronicling these activities, the indictment reads as follows:

… defendant MORRIS began to exercise control over the [pension fund’s] alternative investment portfolio by recommending, approving, securing or blocking alternative investment transactions. Defendant MORRIS also influenced the [fund] to invest for the first time in hedge funds … so that MORRIS could reap fees from hedge fund transactions.

Eventually, Morris and Loglisci amassed  $4 billion in alternative investments — almost half the asset class’ total portfolio — whose managers reportedly had paid fees or made other considerations to Morris et. al. “Defendants also blocked proposed [pension fund] investments where the private equity fund or hedge fund would not pay MORRIS GROUP members or associates,” Cuomo reports.

While Cuomo doesn’t mention it, the fact that all of this happened in the pension fund’s alternative investment allocation, limited by law to a small percentage of the pension fund, is not a coincidence.

It was likely key to the alleged criminal enterprise.

What are alternative investments? They’re private equity, hedge funds, and “funds of hedge funds.”

These types of investments are dangerously opaque. They’re not publicly traded on any exchange. Their value is thus almost entirely subjective.

Such investments, then, in a public fund, are a minefield of risk for the taxpayer even when public officials are being honest.

When that’s not the case, obviously, they’re a volatile bomb.

Ironically, while all of this alleged criminal activity was going on, Hevesi, Loglisci, and others were unsuccessfully lobbying the state legislature to remove the limits that govern how much money the pension fund could invest in such alternative asset classes.

Back then, here is what we had to say:

Hedge funds, and other “alternative” investments, are opaque. Only the best hedge-fund managers can accomplish what they say they will accomplish.

How do you find out which hedge-fund managers are the best? … The comptroller must survey an array of alternative investments and determine whether to believe the financial advisers who say that this particular fund or another will diversify the portfolio. … The next risk is: How to keep track of these opaque investments?

Politicians—and taxpayers—should know the value of the entire pension fund at all times with reasonable accuracy, to determine if the fund can cover future payments to retirees. … But “alternative” investment managers don’t price their assets as often—and only they know if that pricing is accurate. … Even Wall Street’s private bankers—the bankers of the very rich—are wary of the lack of easy price information at hedge funds and private-equity investments.

Back then, this analysis naively assumed honesty (ah, the long-lost days of youth and innocence.)

The fresh allegations, though, appear to reveal a darker reality.

Morris and pals could carry out their alleged scheme only because alternative investments are so opaque. And, again, if the indictment is correct, they appear to have understood this advantage quite well.

If this stuff is true, they must have known that it would be hard for anyone with suspicions to question why they were forking over taxpayer money to managers who returned average or poor performance — because it would be harder to ferret out such performance in these types of investments.

There are still lots of good arguments why even honest managers of state pension funds shouldn’t be allowed to delve too deeply into “alternative investment classes.”

It’s hard for politicians to choose the best investment advisers. High fees for good performance simply may not be worth it, because that good performance may fall apart during the bad times.

And during those bad times, elected officials and taxpayers may not know the true liability for losses for months or years, because “alternative investments” are much harder to mark to their true value every day, unlike, say, a share in Exxon stock.

Further, in California and elsewhere this year, state pension funds have faced “cash calls” on their alternative investments. That is, under agreements signed with fund managers, they have to pony up more money to put into flailing investments just when they’re suffering big losses.

But there’s almost no better argument against allowing state pension funds to dip the taxpayer money into “alternative investment” classes than the fact that, if Cuomo’s allegations are proven in a court of law, former stewards of the state’s fund understood intuitively that “alternative investments” could serve as the perfect opaque breeding ground for corruption.

This is a good time, then, for the state to start a discussion of whether the state should switch to a strategy of passively investing the taxpayers’ money.

Longtime Yale endowment manager David Swensen, who practically invented investments in alternative asset classes, suggested such an approach few months back for pension funds and the like whose overseers can’t or won’t do their own tough analysis of the individual investment managers whom they pay to manage their money.

There’s also a lesson here for taxpayers to be wary of other opaque dealings between the government and the purported private sector, plus all of the middle men in between.

Think of the world of “public private partnerships” for infrastructure projects, for example. PPPs are meant partly to get corruption, legal and illegal, out of the world of contracting for projects, by introducing competition and private-sector price discipline.

That’s a worthy enough goal. But PPPs, like “alternative investment classes,” are also full of opaque, hard-to-assess risks and rewards. In the wrong hands, they could just create different avenues for more sophisticated corruption.