Sunday, May 10, 2015

Budget Insanity at NYCERS

On March 12, 2015 the NYCERS Trustees approved the NYCERS FY-2016 administrative budget. It was Diane D'Alessandro's tenth annual adiministrative budget proposal as executive director.

The key numbers are listed in the table below. For comparison purposes I added FY-2006, my last budget as executive director, and FY-1996, NYCERS's last budget under the city's budget structure. The 1996 budget was draconian to say the least. You can see from the table that the NYCERS's budget has increased by 43% over the last ten years or 4.1%/year.

NYCERS: Admin. Budget Over the Years

FY-2016FY-2006FY-1996
FT Positions 401342155
PT Positions 35 130
PS $30.2M $20.0M***
OTPS $19.4M $14.7M***
Sub-total $49.6M $34.7M$8.0M
Fringe $8.2M $4.1M$0
Total $57.8M $38.8M$8.0M

What is extraordinary about this budget is that it is the beginning of a delusional spending spree on IT upgrades. It is being called the "Legacy Replacement Project". It proposes to spend $132M over a five year period, staring with $500,000 to be paid to Gartner, Inc. and $1.75M to other consultants to be named later. At the meeting D'Alessandro indicated that she was going to pay $310,000 to an outside firm to write a RFP for this "grand" project. Listed below is the five year spending bonanza.

  • 2016 - $ 2.25M
  • 2017 - $ 9.91M
  • 2018 - $27.86M
  • 2019 - $46.00M
  • 2020 - $46.24M

To OMB's credit they complained about the $310,000 RFP. The trustees, however, approved this budget in spite of making noise about the long term cost of the project.

You would think, considering how well funded that the NYCERS budget is, that the NYCERS staff would be able to write their own RFP. But D'Alessandro got that part right, her staff can't do the job.

Of course, without the results of the RFP where did the $132M amount come from.

In fact over the last ten years D'Alessandro should have been standardizing NYCERS applications on a current client/server platform using a relational database system. This process was underway in 2005 when she first appointed. But thankfully the old CICS/VSAM systems were so well made that they have survived long after the point when they should have been retired. Thank God for small favors.

D'Alessandro, unfortunately, was appointed to her current job in 2005 without any prior relevant experience by Martha Stark and a bunch of compromised trustees. D'Alessandro had never managed anyone. She is not a lawyer, nor an accountant, nor an actuary. She had never worked for a pension system and she had absolutely no IT experience. What she was and still is, is grossly incompetent.

To make the situation worse, the current IT director was working as the NYCERS call center manager when D'Alessandro moved her to the agency's IT division in 2007. At that point she had no IT experience either. Six months later D'Alessandro makes her the director of the IT division. It reminds of when Rudy put a key punch salesman in charge of DoITT. She is as incompetent as D'Alessandro.

D'Alessandro submitted a five page justifying her budget proposal. It is a classic example of using a lot of words to create a fog, lots of hand waving and saying nothing except give me $132M. I actually don't think D'Alessandro wrote the summary. Five pages is far too much work for D'Alessandro. It looks like a cut and paste job from some marketing crap.

This is the justification for $132M.

MAJOR PROJECTS

In a continued effort to provide greater operational efficiency, enhanced customer service and improved quality and production, NYCERS is proposing to undertake a major information technology (IT) and business system replacement project that will streamline and consolidate all applications and functions into a single data repository for common use throughout the agency.

The project which will be known as the Legacy Replacement Project (LRP) will be conducted in three stages over a minimum of five years. The LRP will require a commitment of resources to be phased in over that time.

In order to ensure the success of the LRP, NYCERS is proposing two associated projects including a communications project designed to accommodate expanded electronic interaction with clients and a change management project to address staff training, coaching, and leadership development needs.

You can always spot a IT disaster from the start. It has a long time frame and they don't tell you what they are going to do in the first week of the project, the second week of the project, third week of the project,... You get the picture. Oh yeah, it will also cost a lot of money. I will guarantee you that this project will fail.

When I left NYCERS in 2005, NYCERS had one of the best IT departments in the city. The agency had:

  1. between 60 and 65 IT professionals on staff
  2. an integrated mainframe (VSE) and a network system (Windows Server 2003)
  3. all major work operations automated running under CICS using VSAM and DB2
  4. an advanced web site which allowed members and retirees to view their own specific data.
  5. an imaging/workflow system covering all paper based applications for all members and pensioners.
  6. a dedicated document scanning division
  7. a tested computer disaster recovery plan (we were researching a full business recovery plan and site)
  8. a standardized accounting package running on the network supporting both pension and administrative operations
  9. a nightly backup process of all files including the Exchange Server
  10. a project to upgrade major applications to DB2.
  11. an advanced Avaya based call center with its own backup PBX.
  12. a modern customer service center with its own integrated queuing system
  13. an on-site fully equipped training center.
  14. a proximity card system for both time keeping and security.
  15. a separate network system for the security and a full camera subsystem.

Returning to the executive summary, it is not only short on details about the project but it also has a great deal of deceptive information. The following are a few quotes out of D'Alessandro's write-up along with some clarifying comments.

RECENT HISTORY

Over the past nine years, NYCERS has made significant infrastructure improvements.

Document Management

NYCERS continues to ensure the preservation and security of all vital records and to promote an environmentally sound approach to document management. This effort includes the incorporation of all incoming documents into the NYCEWORK system in an electronic format and the ongoing digitization of historical paper documents.

In 2014, NYCERS prepared, scanned and indexed over 200,000 incoming documents and converted over 1 million historical records into digital images. Since the inception of the document management project, over 38 million paper records have been imaged, saving approximately $600,000 in document storage fees.

From this quote you would think that document management was introduced during the last few years. In fact, it was there when D'Alessandro walked in the door. The system in place at that time used a software package called Staffware. It was working well but it was being stressed by the volume of documents that NYCERS was dealing with. It actually continued to function up until 2014 when a new software package, Filenet/NYCEWORK, was finally put into production. I wonder where the $600,000 in saved storage fees came from?

Unfortunately, while Staffware needed to be either upgraded or replaced, Filenet runs significantly slower than Staffware did. That in turn has created incremental delays at every step of every process in the agency. It has created havoc with the production levels for all major functions in the agency.

This is an example of a mismanaged project being put into production so that management doesn't have to say it made a mistake. We saw this problem with the CityTime project.

While we are talking about mistakes, there have been two major IT disasters at NYCERS in the last nine years costing millions of dollars. One was the DB2 project and the other is the infamous Long Island City disaster recovery site. At least when the DB2 project was cancelled, the bleeding stopped. The LIC-DR project is a never ending cancer.

When I left NYCERS in 2005, the IT department with the help of two consultants was slowly converting over our major VSAM files to a DB2 relational database platform. We had already had two significant systems running under DB2 but there was a long term need to shift all major files over to the relational model. Two months after I left the project was cancelled. Subsequently NYCERS entered into a contract with IBM/Blue-Phoenix to do the DB2 conversion. That project dragged on for years, cost millions, and eventually failed. NYCERS even tried to sue IBM but with very little relief.

Business Continuity

The Long Island City business recovery site enables NYCERS to restore business operations and critical applications in the event of a disaster. This ensures the sustainability of operations and reduces the potential for data loss. Business recovery time is within four hours and the data recovery point is within 30 minutes.

From this quote you would conclude LIC-DR is a success. That is not true in any sense.

The lease on the LIC-DR project was signed in 2006 and NYCERS still does not have a Certificate of Occupancy for the site. I have previously written about this mess. It is not clear what is the legal status of having employees on that site.

For the record, the rent at LIC-DR is $530,000 for FY-2016 plus another $400,000 for other ancillary lease charges. The site has serious water leakage, asbestos, and plumbing problem. The lease comes up for renewal in the spring of 2016. Let's see what the decision will be then.

And in this season of delusion, NYCERS is planning a tertiary disaster recovery site. They even started buying hardware ($250,000 in FY-2015) for this mythical site. Some people just don't get it.

Business Process Automation

NYCERS continues to streamline business processes and leverage infrastructure investments to improve service delivery. As a result, NYCERS has achieved efficiencies in areas including loans and survivor benefits. On-line loan processing time has been reduced from 10 business days to five business days.

In this quote D'Alessandro appears to claim to have automated loans and survivor benefits in the last nine years and that the turnaround time on loans has been dropped from 10 to 5 days. Actually in 2005 both loans and survivor benefits were fully automated. The loans were the first applications automated in the early 1980's and also the first application to be integrated into the imaging/workflow system in 2002. In 2005, if you filed a loan application by Tuesday, NYCERS mailed a loan check to you that Friday. You would wonder why D'Alessandro would have made the above statement.

While all this craziness was going on with the great IT upgrade, D'Alessandro also threw in a request for 12 new employees with salaries of $720,000. No explanation was given. This was on top of 6 new employees in FY-2015, again with no explanation. Since 2013 the full time staff has gone from 372 to 401 and part time staff from 12 to 35. Why are there back logs with production work? Can you imagine what A.C.S. could do with that kind personnel increase.

Wednesday, April 15, 2015

A Message to the New NYCERS Chairperson

You have a huge problem. Your designated investment manager, the NYC Comptroller, is doing a terrible job with investing NYCERS assets, this Comptroller and the last three. NYCERS has an average annual rate of return over the last 15 years of 2.89%.

The Comptroller, however, has the backing of DC-37 which is the largest city union and also a NYCERS trustee. Between the three city unions on the NYCERS Board and the Comptroller these trustees control four votes, a majority of the total seven votes on the Board.

These votes control investment decisions, disability decisions, the NYCERS administrative budget and the budget subsidies from NYCERS to the Comptroller. The three unions are bound together because of disability votes at the Board. They need to back each other up to be able to get closely contested disability cases resolved in their favor.

Without the annual investment delegation from NYCERS Board of Trustees, the Comptroller has very little political influence. With the change in the City Charter in 1990 the mayor essentially controls the Comptroller’s administrative budget. This totally compromises his operating capabilities and his political influence.

If the Chair wishes to provide some relief to the mayor from the city’s huge pension burden, he will have to take away the Comptroller’s power over investment decisions.

This is a complicated task. Since 2005, DC-37 has run NYCERS as patronage mill for its flunkies. That starts with the executive director and spreads throughout the agency. This also includes regular employees who have criminal liabilities and are more than happy to do as they are told.

As the mayor’s appointee to the Board of Trustees, the Chair will need to take on both of these political entities. This will clearly be a hard fight. The investment issue cannot be resolved without addressing the investment delegation and the internal rot at NYCERS. The Chair will have to convince DC-37 that it is in its long term interest to reduce investment costs and raise returns. He will also have to commit to totally honest and sympathetic votes on disabilities that come before the Board of Trustees.

In return DC-37 and the other unions will have to not vote for the annual investment delegation to the Comptroller in June. It will also mean, however, that DC-37 will have to accept reform within NYCERS because the Comptroller will no longer have any incentive to allow NYCERS executive staff to run wild with the agency.

In eliminating the Comptroller from investment management operations the Board will have to hire a truly independent investment consultant and hire internal NYCERS staff to track investment activity. You can see why NYCERS also needs to be reformed. Current investment consultants under contract to NYCERS have structural conflict of interest issues involving the investment community. A large part of their revenue comes from the investment community.

While the Comptroller is the statutory custodian, he has contracted out almost all of its functions. The Comptroller has even turned over the the pension payroll operations to FISA, another city agency. There really isn't much left of the old Comptroller's Office. Ed Koch really did out maneuver Jay Golden.

The Trustees should set the target for total fee expenses at 10 basis points. That would have saved $130M in FY-2014 ($184M-$54M). The Trustees could then focus on a basic Russell-3000 US stock index fund & core investment grade bond Portfolio. Maybe the bonds could be indexed also. This will make running the portfolio and hiring staff much simpler.

Note: As of June 30, 2014 NYCERS had $11.8B in US equity index funds with annual fees of $500,000 for FY-2014 with an annual rate of return of approximately 24.5% gross of fees. But at 0.4 basis points the fees don't really effect returns. Yes, that is correct. NYCERS only paid a 0.4 basis point, not even half a basis point for that return. You can see why investment managers get nervous when you talk indexing.

The Trustees can then drop all the garbage asset classes listed below. This won’t be easy because of the crazy contracts the Comptroller’s office has signed in the past. I consider these contracts illegal because of the secrecy clauses.

Asset Classes to be Dropped:

NYCERS: Unproducive Investment Classes: Values and Fees for FY-2014

Asset ClassFees PaidValue as of June 30, 2014Basis Points
Convertible bonds $2.1M $.5B 42
Bank loans $3.1M $1.0B 31
Emerging manager- US stocks $4.4M$1.0B 44
Emerging managers – Foreign stocks $.3M$.05B 60
Emerging managers – US bonds not reported $.1B***
Private equity $58.0M $4.0B (guess)145
Real estate $20.87M $2.3B (guess)90
Infrastructure not reported$.02B***
Hedge funds $15.5M $1.9B (guess)82
Emerging market/active $9.1M $2.3B 39
Developed Market equity $11.8M $5.4B 22
Junk bonds $6.9M$2.1B33
Opportunistic Fixed $16.3M $1.1B148
Foreign bonds $.4M$.3B13
Active US equity $14.2M $5.3B26
TIP bonds $1M $1.5B7
Subsidy to the Comptroller $2.3M
Foreign taxes $8.8M

Thursday, April 9, 2015

They Never Get Anything Right

The Comptroller made a big splash yesterday. He finally discovered after nine and half years that the city pension funds are paying high investment fees and getting nothing for it. Hell, it is worse than that. They are losing money.

One thing he hasn't yet discovered is that he can't add. The fees are $3.5B over the last ten years, not $2.B.

For this princely fee, the combined five city funds had an average annual rate of return of 5.68% for the ten years. A simple stock index/core bond return for the ten years was 6.59%. That difference translates into a loss of $18.8B ($163.3B - $144.5B)

So what is the Comptroller going to do about it? Not a damn thing. Of course, he could go public with all the secret investment contracts and and the cash flow histories of all the terminated alternative investments. The newspapers would have field day with that.

Where are all the brilliant trustees?

One of the absolute laws of nature is: Never trust anyone, especially with your money.

For the record, here are the fees for the last ten years:

  • 2014: $522M
  • 2013: $473M
  • 2012: $370M
  • 2011: $396M
  • 2010: $427M
  • 2009: $339M
  • 2008: $310M
  • 2007: $262M
  • 2006: $193M
  • 2005: $158M

Another point of confusion is the total value of the five city pension funds. As of June 30, 2014 is was $144.5B, not $175.4B. You don't include the $32.9B that is in the teacher's TDA fund and the police & fire VSF funds. This money does not cover any pension liabilities.

Friday, April 3, 2015

The Comptroller's Office and Simple Arithmetic

NYCERS released its FY-2014 Comprehensive Annual Financial Report (CAFR) on Jan. 1, 2105. This report is submitted to the GFOA every year and is supposed to be a standardized financial report for all state and local government entities in the US. In addition, it is supposed to provide information to the general public, especially to actual and potential lenders, about the entity’s financial health and the level of risk involved with lending to the entity.

There is a significant section in the NYCERS CAFR dealing with investment details that are prepared by the NYC Comptroller’s Office. This is the first report produced by the current Comptroller. In this section on page 114 is a chart of the rates of return for the total portfolio and the major assets classes within the portfolio covering the three years 2012, 2013, 2014. There are also 3 year, 5 year, and 10 year averages. The chart alleges that the rate of return for the NYCERS portfolio for FY-2014 was 17.04% compared to a benchmark of 16.81%. There is no supporting documentation for this number but a reasonable person would conclude that it is accurate.

The audited income statement in the CAFR (page 82), however, tells another story. Based on numbers in the income statement which were signed off by the outside CPA firm, the opening balance for the NYCERS portfolio on 7/1/2013 was $47,194.6M and the closing balance as of 6/30/2014 was $54,422.0M. The income statement also indicates that NYCERS had a positive cash flow of $691.0M in FY-2014. Based on these numbers NYCERS had a total rate of return of 13.85% in FY-2014, (($54,422.0 - $691)/ $47,194)-1).

This same pattern has been occurring, at least, as far back as 2010 as you can see from the figures below drawn from prior CAFR’s:

  • - Year: Reported vs Actual
  • - 2014: 17.04% vs 13.85%
  • - 2013: 12.24% vs 8.81%
  • - 2012: 1.32% vs -1.14%
  • - 2011: 23.12% vs 19.39%
  • - 2010: 14.09% vs 10.68%

The other figures quoted in this schedule on page 114 are much more difficult to compute and I have no confidence that the Comptroller was any more successful with the math for these numbers. In particular, he quoted 15.2% rate of return for NYCERS’s private equity contracts. I suppose he is referring to the eight contracts that terminated in FY-2014. Of course, you might easily be misled and think that he was referring to the entire class. That would wrong and he is very carefully never to report rates of return for open contracts.

But let’s get back to 15.2%. Of the eight contracts that closed in FY-2014, either by exiting or sale on the secondary market, the Comptroller is not providing any cash flow histories for these contracts. Not only do I think the 15.2% is incorrect but I think the rate of return on these closed contracts showed a loss like the Allegra contract. If I am wrong, all we need is the cash flow histories on the eight contracts to compute their correct rates of return. If I am right, you will never see their cash flow histories.

What makes this more outrageous is that over the last 15 years, members of NYCERS have contributed $5.4B out of their own paychecks into NYCERS along with $21.8B of taxpayers’ money that has also been contributed. Oh, I forgot. Members are taxpayers too.

If the Comptroller’s Office cannot perform simple arithmetic, then the NYCERS Board of Trustees has a serious problem with renewing its annual delegation of investment authority to the Comptroller.

The fact that the rates of return are consistently inflated raises the suspicion that it was done on purpose. The investment figures are not audited. NYCERS actual average annual rate of return over the last 15 years is 2.89%, a little scary.

Sunday, March 29, 2015

By the Numbers – Private Equity at NYCERS – 2011 to 2015

Since 2011 NYCERS has dropped the following number of private equity contracts:

  • 2010 – 3
  • 2011 – 4
  • 2012 – 7
  • 2013 – 0
  • 2014 – 8
It is not clear how many of these contracts were standard exits and how many were sold at a loss. NYCERS has provided no cash flow history for these dropped contracts except one. That was Allegra in 2012. That is because I requested the information. You can read about the Allegra disaster in one of my previous postings.

It is reasonable to assume that most of these dropped contracts were equally bad.

Everyone knows that the private equity industry is feeding off of the US public pension fund structure. It is a malignant cancer but no one wants to publicly admit it because that admission would make the public pension funds look like fools and would put most private equity firms out of business.

Now, for the bad news. NYCERS has continued to enter into new private equity contracts since 2010 as you can see from the numbers below:

  • 2010 – 8
  • 2011 – 5
  • 2012 – 7
  • 2013 – 7
  • 2014 – 14
  • 2015 – 3 (as of Sept. 30, 2014)
You would have thought that NYCERS would be quietly trying to get out from under these flawed investment deals but no. There is no end to this stupidity.

NYCERS’s private equity fees for FY-2014 were $44.1M for 142 contracts allegedly worth $4.0B. Don’t bet the ranch on that figure. There is an added charge for private equity organizational costs of $13.9M (page 120). No one knows who this money was paid to except that it has a private equity label.

The sum of the two costs is $58.0M. That is 145 basis points or a 1.45% annual charge. Another serious problem is that NYCERS is not reporting 33 of the 142 contracts in its fee schedule on page 135. Enough said.

Friday, February 13, 2015

Sheldon Silver, Martha Stark and Glenwood Management

2011 DOI report on Stark

On January 21, 2015 Sheldon Silver was arrested for fraud and conspiracy. In a description of the charges the name of the Glenwood Management Company surfaces in connection with a kickback scheme that Silver dreamed up to funnel fees from a legal firm to him.

NY Times

In one scheme described in court papers, he asked a pair of real estate developers to hire a small law firm, Goldberg & Iryami, which seeks reductions in New York City property taxes on behalf of its clients.

The firm was started by Jay Arthur Goldberg, who decades ago worked as a lawyer for the Assembly, according to state payroll records. Prosecutors said he was Mr. Silver’s counsel.

Mr. Silver received a slice of the legal fees paid to the firm, even though he did no work for the developers; prosecutors said he was paid about $700,000. He did not report the income on his annual financial disclosure forms submitted to the state.

One of the developers was Glenwood Management, according to people familiar with the matter. Glenwood develops luxury apartment buildings in Manhattan, has been an enormous contributor to state politicians and has a significant interest in matters before the Legislature, such as measures dealing with real estate taxation. While receiving fees from the real-estate law firm, Mr. Silver took actions that benefited the developers, prosecutors said.

Strangely enough, the Glenwood Management firm also surfaces on pages 10 to 33 of a June, 2011 NYC-DOI investigative report on allegations about Martha Stark that were pending at the time she was forced to resign in April, 2009.

Beginning in March, 2005 Stark was involved in lowering the tax assesments for Glenwood. Subsequently in January, 2007 she asked Glenwood for a apartment for her domestic partner (DOI never states which one) along with a break in the rent for the apartment. Read in light of Silver's recent arrest connected to Glenwood, the report has a much more powerful impact. Below is a quote from this section of the report.

The juxtaposition of Stark's request for assistance with an apartment for her domestic partner in a Glenwood owned building and the notice of reduction in assessed value of a Glenwood building for that tax year, and the erroneous further reduction that occurred in the following tax year raises, at a minimum, an appearance issue, and gives rise to the question of whether the reductions were some form of assistance related to the assistance given in the provision of an apartment at a modest reduction for the Finance Commissioner's domestic partner.

Attempts to answer that question were made difficult by Stark's repeated refusal to be interviewed by DOl in connection with this investigation. In addition, the explanations for the assessments were hindered by DOF's lack of oversight and recordkeeping related to the assessment process, as the investigation revealed.

Even after the arrest in 2002 of 18 tax assessors, the work of the DOI/DOF Joint Task Force and the representations by DOF that changes were made and that others would be made in the Joint Task Force Preliminary and Final Reports, there remains a lack of internal controls over assessments.

The costs to the City from this lack of oversight is unknown since no reviews were undertaken to determine if properties were undervalued, and no random audits performed and no regular reports even distributed of significant changes in assessed valuation during the period DOl examined. Finance Commissioner David Frankel reports that he has undertaken measures for reviews/audits of assessments, including assigning/hiring personnel to conduct such audits.

The spring of 2005 was also the time of the $1.74B purchase and alleged tax assessment issues in connection with with Met-Life building, NYCERS, TRS, and the Department of Finance.

It is interesting that in October, 2005 Stark, as the NYCERS Chairperson, was instrumental in hiring of Diane D'Alessandro as executive director of NYCERS. At the time D'Alessandro was a special assitant to Sheldon Silver. Prior to that D'Alessandro worked for DC-37 during the Charlie Hughes and Al Diop years.

Wednesday, January 21, 2015

Paper Tiger - the N.Y.S. Department of Financial Services - Pension Fund Audits

In July of 2013 the N.Y.S. Department of Financial Services (DFS) with a lot of fanfare announced the start of an audit of the seven state & city pension funds.

It's now January 20, 2015 and DFS has not yet produced any of the pension audits. Just a reminder, DFS has not produced an audit of NYCERS since 2002 in spite of the agency's statutory obligation to produce an audit every five years.

Of course, DFS collected $611,536 from NYCERS during FY-2014 for audit work that DFS supposedly did during that year.

When I saw the charges for 2014, I thought I'd do a little research. Here are the DFS audit charges to NYCERS since 2004:

  • 2004: $ 55,007
  • 2005: $ 64,612
  • 2006: $361,681
  • 2009: $179,542
  • 2010: $ 32,009
  • 2011: $ 29,713
  • 2014: $611,536

This is an agency adrift. They are lost.