Monday, November 9, 2015

Changing Stories about the 2015 Pension Investment Fee Explosion

On Nov. 3, 2015 I pointed out the investment fee explosion for the five NYC pension funds and the Comptroller's lame comments about the fees and the miserable performance of the pension funds. I also made the comment that I suspected "the Comptroller's Office was in shambles when it comes to accurate records of the payment of investment fees."

On Nov. 4, 2015 the Comptroller was quoted in P&I with a new story about why the fees are so high. It's no longer that the assets have increased or that they are being more comprehensive. The following is the the new excuse.

“Since we started the hard work of reforming the investment environment 22 months ago, we've uncovered layer after layer of Wall Street fees,” city Comptroller Scott Stringer said Wednesday in an e-mail. Mr. Stringer is the fiduciary for the five pension funds that make up the $162.9 billion retirement system.

“In our review of this year's financial report we've found even more charges — millions of dollars in 'incentive fees' — that had gone largely unreported in previous reports,” Mr. Stringer added.

“While we believe we've captured the bulk of the fee data, we will continue to refine our reporting and transparency processes until we have a complete picture of all fees and expenses paid,” said Eric Sumberg, a spokesman for Mr. Stringer, in an e-mail. “The comptroller has made transparency and fee disclosure priority issues for his administration.”

It has been clear for years that the investment fee problem is out of control. $522M is an obscene amount to pay for investing the assets of the five city pension funds. In the past I have been clear that 10 basis points should be the target level for fees.

Now this year we learn that the situation is worse ($705M) and not totally nailed down.

The obvious questions are:

  • Now that the Comptroller has uncovered all these layers of fee, why hasn't he reported all the details?
  • How did the fees go unreported in the first place?
  • How were the unreported fees paid?
  • how would you describe the unreported fees?
  • Who received the unreported fees?
  • What are the dollar amounts of the fees and the recipients?
  • How do you know that you have found all the fees?
  • Are the fees necessary given the miserable performance of the managers?
  • How accurate is the 2014 CAFR which the Comptroller released last year?
  • In general how reliable are any of the figures that the Comptroller has reported? Maybe this why the NYS DFS can never get the pension audits done. The black hole is too deep.

The final and most crucial question is, will the Comptroller release all the pension investment contracts to the public or will he continue to keep them secret and hidden from the public in spite of the fact that they are paid with taxpayer and employee money? When a contract has a clause that is prohibited by law, the contract is void. Of course, one of the parties must take action to void the contract.

Note: For the record the five funds do not have $162.9B in assets. They have $145.7B as of June 30, 2015. The TRS & BERS TDA's have $28.9B and the Police, Fire, and Correction Force VSFs' have $3.8B. The TDA and VSF funds are not available for covering the pension liabilities of the five funds. The Comptroller's Office always likes to quote the combined amounts but it is not accurate.

Note: Comptroller Stringer has been a trustee of NYCERS since 2006. Of course, the he is not the only trustee.

Tuesday, November 3, 2015

Bad Year for the NYC Pension Funds - FY-2015 - Investment Fees and Performance

The Comptroller released the NYC FY-2015 Comprehensive Annual Financial Report (CAFR) on Friday, October 30, 2015. The following are some points from the press release:

The City pension systems earned $4.746 billion in net investment income in FY15 and paid benefits totaling $13.4 billion during FY15. Employer and employee contributions to the City pension systems were $10.0 billion and $1.8 billion, respectively;

The City pension systems paid investment expenses totaling $708.9 million in FY15, an increase over FY14 that primarily reflects increased assets under management and more comprehensive fee disclosure and reporting;

These numbers are accurate but they are presented in a deceptive way.

The five funds received $1.94B in interest payments and $2.66B in dividends during 2015. They also earned $73M in securities lending income. That adds up to $4.67B. It does not take much skill to collect interest and dividend payments. It definitely does not take $708.9M in fees, a $183.0M increase from last year.

Listed below are the fees (pension funds only) for the last 14 years. You can see from the numbers that the "increased assets under management" comment is not valid. Of course previous reported fees may be inaccurate but that's not what "more comprehensive" means. I have a strong feeling that the Comptroller's office is in shambles when it comes to accurate records of the payment of investment fees.

  • Year: -- Fees ---- Assets
  • 2015: $705.0M ($145.7B)
  • 2014: $522.0M ($144.5B)
  • 2013: $472.5M ($124.8B)
  • 2012: $370.3M ($111.3B)
  • 2011: $395.7M ($111.0B)
  • 2010: $426.8M ($90.0B)
  • 2009: $339.3M ($79.5B)
  • 2008: $310.2M ($101.9B)
  • 2007: $262.0M ($110.9B)
  • 2006: $192.7M ($96.0B)
  • 2005: $158.2M ($90.6B)
  • 2004: $131.6M ($86.5B)
  • 2003: $ 96.7M ($78.1B)
  • 2002: $101.9M ($80.7B)

On July 30, 2015, P&I reported that the Comptroller estimated that the city pension funds had a 3.3% rate of return for FY-2015. Of that amount 3.1% is due to interest and dividends paid to the pension funds.

Based on the details in the CAFR, the total pension assets for the five funds increased only 0.198% in FY-2015. In addition, this miserable number is based on unreliable asset values for private equity, real estate, and hedge fund classes. Note that two of the funds have avoided getting sucked into the hedge fund swamp.

The opening balance for the city pension funds (no TDA and no VSF) was $144.5B. The closing balance was $145.7B. With a $0.9B positive cash flow you get a 0.198% increase in asset value.

The other bruising fact in the city's CAFR, along with the $183M increase in fees, is the $1.294B that was skimmed off from the TRS & BERS pension funds to the TRS & BERS TDA funds and the $672M that was skimmed off to the VSF funds.

In FY-2015, the S&P 500 index rose 5.2% (from 1960.23 to 2063.11). NYCERS reported a 1.88% net of fee return on its structured fixed income class (Treasures, Corporates, & Mortgage Backed Securities) with a benchmark of 2.08%. With the 70%/30% asset allocation that the funds are currently using, the projected increase in asset value for FY-2015 could easily have been 4.24%, not 0.198%. That would have been a $150.95B closing balance instead of $145.67B.

That is $5B in one year. This why investment decisions are so important. The state implements Tier 6 and the trustees blow it all on bad investments.

All five of the pension funds had a decease in their funding status in FY-2015. The levels weren't great to start with. Here is the bad news.

  • NYCERS went from 75.32% to 73.13%.
  • TRS went from 71.79% to 68.04%.
  • BERS went from 78.60% to 75.33%.
  • Police went from 74.44% to 73.85%.
  • Fire went from 63.78% to 62.79%.

Here are the accounting numbers for the five city pension funds:

Money Coming In for FY-2015

(in millions)Five FundsNYCERS TRS BERS Police Fire
employee contributions $1,015.0 $467.1 $158.6 $39.6 $241.1 $108.6
employer contributions $9,986.8 $3,160.3 $3,270.0 $258.1 $2,309.6 $988.8
other contributions$55.5 $55.5
interest $1,939.5 $635.7 $758.5 $36.9 $392.8 $115.6
dividends $2,661.8 $795.3 $889.2 $46.2 $703.7 $227.4
SL income $72.5 $26.5 $20.3 $2.7 $18.0 $5.0
other ($64.9) $4.1 $0.3 ($115.1) $4.6 $41.2
Cash-in $15,666.2 $5,089.0 $5,152.4 $268.4 $3,669.8 $1,486.6

Money Going Out for FY-2015

(in millions)Five FundsNYCERS TRS BERS Police Fire
Benefits $11,994.1 $4,235.6 $4,024.3 $223.2 $2,360.5 $1,150.5
Transfers from TRS & BERS to TDA$1,294.0 $0.0 $1,249.0 $45.0 $0.0 $0.0
Payments to VSF * $12.2 $11.9 $0.0 $0.0 $0.3 $0.0
Transfers (Pension to VSF) * $660.0 $30.0 $0.0 $0.0 $590.0 $40.0
Investment expenses * $705.0 $231.8 $203.0 $10.1 $192.1 $68.0
Admin expenses * $141.9 $54.6 $58.4 $11.0 $17.9 $0.0
other $7.1 $7.1 $0.0 $0.0$0.0 $0.0
Cash-out * $14,814.3 $4,571.5 $5,534.7 $289.3 $3,160.8 $1,258.5
Net Cash * $851.9 $517.5 ($382.3) ($20.9) $509.0 $228.1

Closing Balances & Asset Increases for FY-2015

(in millions)Five FundsNYCERS TRS BERS Police Fire
Open Bal: $144,538.0 $54,422.0 $44,490.0 $3,279.3 $31,750.9 $10,595.8
Close Bal $145,674.8 $54,889.3 $44,254.7 $3,359.8 $32,356.0 $10,815.0
Net Change $1,136.80 $467.30 ($235.30) $80.50 $605.10 $219.20
Cash Flow: $851.9 $517.5 ($382.3) ($20.9) $509.0 $228.1
Open Bal Adj:$144,538.0 $54,422.0 $44,107.7 $3,258.4 $31,750.9 $10,595.8
Close Bal Adj:$144,823.4 $54,371.8 $44,254.7 $3,359.8 $31,847.0 $10,586.9
Net Change Adj:$285.4 ($50.2) $147.0 $101.4 $96.1 ($8.9)
Rate of Asset Increase: 0.197% -0.092% 0.333% 3.112% 0.303% -0.084%

Tuesday, October 27, 2015

Again, DFS and the Pension Audits.

Today the temporary head and the press officer of the NYS DFS suddenly resigned. This is after Lawsky left in June.

What happened to the audits of the seven state and city pension funds?

DFS is an agency in free fall.

Monday, October 19, 2015

My Wife Resigned from NYCERS in May of this Year

In May of this year my wife resigned from NYCERS about two years shy of the date she would have been able to retire. She started working at NYCERS in the fall of 1998. In December of 2003, she was promoted to Deputy Director of Administration by Milt Aron, the Deputy Executive Director.

Prior to that, starting in 1980, she worked at the Mayor’s Office, the Sheriff’s Office, and the Department of Homeless Services.

In June, 2005 she was demoted by Aron with the explicit approval of Martha Stark, Chair of the NYCERS Board of Trustees and the Finance Commissioner. She was demoted because of her relationship with me. She was forced back to her permanent civil service position and her salary was reduced by $14,000, the amount that she had been given when she was promoted.

From June of 2005 to May of 2015 my wife was given no work. She was told many times that there were strict orders from the executive staff that she was not to be given any work. Many times over the ten years she explicitly asked for work.

On a few rare occasions she was given some significant work but the minute the executive staff became aware of it, the work was stopped. Kin Mak could always be counted on to pass the word along to Karen Mazza about the work assignment.

In 2013 my wife was hospitalized for 12 days with acute ulcerative colitis.

In 2014, while driving to church on Palm Sunday, she had a major heart attack. She almost died on the side of the road. It was incredibly fortunate that she was at a stop sign and that her 16 year old daughter was with her in the car. The EMT’s were there in minutes and were able revive her with a defibrillator. She spent 18 days in the hospital. She was on reduced body temperature protocol for possible brain damage. She had double bypass surgery and another procedure for a defibrillator implant.

Both of these illnesses were directly caused by stress.

After both of these hospital events she returned to work. Both times she asked for work and both times NYCERS executive staff refused to assign her any work.

In the spring of 2015 the stress of being totally marginalized at NYCERS finally became too much of a threat to her health. She reluctantly resigned. At that point her salary was $104,000.

For many years now, I have been writing about the wretched way that NYCERS, and I mean D'Allesandro, Mazza, and Baksh/Ramsami, have treated members, retirees and NYCERS employees. I speak from personal experience.

You can understand why people lie, cheat, and steal for their own personal gain but to be just plain nasty for no good reason is despicable. The only thing I can come up with is that they are so incompetent they think they have to kick every one under them to hide their own failures. Maybe City Hall and the new NYCERS Chair will get tired of them like the previous mayor did with Martha Stark.

Monday, September 28, 2015

Parting Gift from the Old NYCERS Actuary

Last year I wrote short note on the history of the investment fees paid by the five pension fund sponsored by New York City.

On January 30, 2013 the Governor signed Chapter 3 of the Laws of 2013 changing the assumed interest rate for the five pension funds from 8% gross of fees to 7% net of fees. the legislation was drafted the NYCERS actuary, Robert North. It did a lot of other things but that was the big item. One of those minor things, however, deals with how city repays to the five pension funds the investment expenses incurred by the pension funds in the previous fiscal year (see below: S.13-705, NYC Admin Code). These expenses include the subsidy that the pension funds pay to the Comptroller for his regular operating budget that is part of the total city budget adopted by the City Council.

Beginning in FY-1999 the original legislation required the city to pay in FY-2000 with 8% interest all investment expenses incurred in FY- 199. This meant that these expenses were treated as operating expenses and not long term capital expenses. This is a very sound accounting practice. This legislation was also drafted by the NYCERS actuary.

You can further see that that starting with FY-2005 the law was changed to allow the city to repay expenses two years later rather than one year, so that FY-2005 was paid back in FY-2007 rather that in FY-2006. Again with 8% interest. This amending legislation was also drafted by the actuary.

You can also see that the law was again changed starting with FY-2010. And again it was drafted by the actuary. This change allows the city to treat the repayment of investment expenses as a long term capital expense rather than an operating expense. The new change also dropped the interest rate charge, in effect making this a interest free loan. Needless to say this is not a sound accounting practice. It gave the current city administration a payment holiday now and dropped the costs on a future city administration. This is how a pension crisis is born.

The new statute is listed below. It is the last item at the end of thirty two sections amending the NYC Admin Code. The new language is underlined as is standard.

§ 32. Subdivision d of section 13-705 of the administrative code of the city of New York, as amended by chapter 152 of the laws of 2006, is amended to read as follows:

d. In each city fiscal year, beginning with investment expenses paid during the nineteen hundred ninety-eight--nineteen hundred ninety-nine fiscal year, whenever the income, interest or dividends derived from deposits or investments of the funds of a retirement system are used pursuant to subdivision b of this section to pay the expenses incurred by such retirement system in acquiring, managing or protecting invest- ments of its funds, the monies so paid shall be made a charge to be paid by each participating employer otherwise required to make contributions to such retirement system no later than the end of the fiscal year next succeeding the fiscal year during which such monies were drawn upon, provided,

however, that where such charge is for such investment expenses paid during fiscal year two thousand four--two thousand five or during any subsequent fiscal year, such charge shall be paid by each such participating employer no later than the end of the second fiscal year succeeding the fiscal year during which such monies were drawn upon

, provided further that the provisions of this subdivision shall not apply to investment expenses paid during the two thousand nine--two thousand ten fiscal year or during any subsequent fiscal year.

In the event that such retirement system has more than one participating employer, the actuary shall calculate and allocate to each such partic- ipating employer its share of such charge.

All charges to be paid pursu- ant to this subdivision shall be paid at the regular rate of interest utilized by the actuary in determining employer contributions to the retirement system pursuant to the provisions of paragraph two of subdi- vision b of section 13-638.2 of this title.

Saturday, September 26, 2015

The New NYCERS Actuary

I just came across the announcement of the new NYCERS actuary (see quote below). It is from the NYC web site dated back in May. I had been looking for it for awhile but I only found it when a friend sent me a link to the city web site. The reason I had not seen it before was that the announcement does not actually say that NYCERS had appointed a new actuary. The former NYCERS actuary, Bob North, resigned in the Fall of 2014.

May 29, 2015 NEW YORK—Mayor Bill de Blasio today announced Sherry Chan as the City’s new Chief Actuary. In this role, Chan will serve the City’s retirement funds and oversee actuarial calculations for post-employments benefits for City employees.

Legally the City does not have a Chief Actuary. NYCERS and TRS have actuaries (see quote below from NYC Admin Code). The two retirement funds usually appoint the same person as their actuary. That appears to be a very practical policy but in reality it is not financially sound. They are two very different pension funds with different liabilities. As background, by statute the NYCERS actuary is also the actuary for the Police and Fire pension funds and the TRS actuary is also the actuary for BERS (Board of Ed. Retirement System).

Ms. Chan is a ASA of the Society of Actuaries, not a FSA. I guess that is not a big deal unless it was because NYCERS could not attract a full Fellow of the Society of Actuaries. Once upon a time actuaries needed to be highly skilled mathematical technicians. Now they need to fearless messengers of painfully news.

The assumed interest rate is the key component of the annual pension costs that the city and the other participating employers must pay to the pension funds each year. It will be interesting to see where Ms. Chan stands on the 7% net of fees rate. She will be required to make a recommendation this winter for a new five year rate effective July, 1, 2016 and Albany will have to enact enabling legislation by June 30, 2016.

I suspect she will punt and ask for a one year extension of the old rate. North did this all the time. It is a bad fiscal policy and contributes to the under-funding of the pension funds.

Her most recent job was the actuary for the Ohio State PERS which began in January, 2014 and ran through May, 2015. It was interesting to watch the NYCERS chair introduce Ms. Chan to the Board of Trustees at the June Board of Trustees meeting. I guess they had never met her before that.

§ 13-121 Retirement system; adoption of tables and certification of rates.

The actuary appointed by the board shall be the technical advisor on all matters regarding the operation of the funds provided for by this chapter and shall perform such other duties as are required of him or her.

The actuary shall keep in convenient form such data as shall be necessary for the actuarial valuation of such funds.

Every five years, he or she shall make an actuarial investigation into the mortality, service and compensation experience of the members and beneficiaries as defined by this chapter and he or she shall make a valuation, as of June thirtieth of each year, of the assets and liabilities of the various funds provided for by this chapter.

Upon the basis of such investigation such board shall: 1. Adopt for the retirement system such mortality, service and other tables as shall be deemed necessary; and 2. Certify the rates of deduction from compensation computed to be necessary to pay the annuities authorized under the provisions of this chapter.

As part of the May 29th announcement, the mayor's office described Ms. Chan's work load as follows:
As Chief Actuary, Chan will work for the five major actuarially-funded New York City Retirement Systems, including the New York City Employees’ Retirement System (NYCERS), the Teachers’ Retirement System (TRS), the Board of Education Retirement System (BERS), the New York City Police Pension Fund, and the New York Fire Department Pension Fund.

The Chief Actuary also serves as the legally-designated technical advisor to the Board of Trustees of the New York City Retirement Systems (NYCRS).

The Office of the Actuary is responsible for determining employer contributions and funded status for NYCRS, preparing employer contributions for use in the development of budget and financial plans, certifying benefits for retiring employees, and preparing financial reports and accounting information on the New York City Health Benefits Program.

Friday, September 25, 2015

When You Buy a Ferrari and You Really Need a Pickup Truck

What happens when you buy a Ferrari, when you need a pickup truck?

You pay 10 times too much for what you need, you don't get what you need, and you pay a lot for mechanics. What you do get is a fast car.

It's too bad that the NYCERs doesn't even get a fast car when they make the wrong investment decisions.

Here's the the bill for the mechanics. And once again NYCERS is not even getting Ferrari mechanics.

As of August 2, 2015 the Comptroller increased the salaries of his investment staff. The story is that the five city pension funds were convinced to pay for the increases through their mindless subsidy to the Comptroller's budget. Of course, that is an illusion. It is the NYC taxpayers and the NYC employees who are paying for these increases. In fact, the employees pay twice, once as a taxpayer and a second time through their pension payroll deductions.

All the lucky people listed below are provisional employees. I wonder how permanent civil servants feel about that?

This is in addition to the five investment consultants that NYCERS paid $3.2M in FY-2014. Consultants are not the managers who do the actual investing but "experts" who advise the trustees on how oversee the managers.

Salary Increases at the Comptroller's Office

Count Name Civil Service Title Assignment % Increase New Salary Old salary New Hire
1Scott EvansPension Investment AdvisorCIO 56%$350,000$224,359
2 Michael Garland Admin Staff Analyst Corporate Governance 56%$265,000$169,872
3John MerseburgAdmin Staff Analyst Public Equities93% $250,000$129,650yes
4Niel MessingAdmin ManagerHedge Funds 67%$250,000$149,701
5Alexis DoneAdmin Staff AnalystPrivate Equity 75% $280,000$160,000
6Martin GantzAdmin Staff AnalystFixed Income 62%$280,000$172,840
7Yvonne NelsonAdmin Staff AnalystReal Estate 69%$265,000$156,805
8Petya NikolovaAdmin Staff Analyst Infrastructure 59%$250,000$157,233
9 Miles Draycott Admin Staff Analyst$265,000
10Evan NahnsenAdmin Manager$180,000
11Noraina ParesAdmin Staff Analyst$130,000
12 Tatiana Pohotsky Admin Manager $160,000
13 Wesley Pulisic Admin Manager $180,000
14 Steven Veloric Admin Accountant $160,000
15 Scott Zdrazil Admin Manager $170,000
16 Marc Gross Admin Staff Analyst $110,000 $70,833 yes
17 Vistoria Hui Admin Staff Analyst $120,000 $85,000 yes
18 Janet Londond-Valle Admin Staff Analyst $130,000
19 Karen Barclay Admin Manager $160,000
20 Shachi Bhatt Admin Staff Analyst $160,000
21 Yi Feng Admin Manager $180,000
22 Millicen Budhai-Robinson Admin Staff Analyst $110,000
23 Eneasz Kadziela Admin Manager $130,000
24 Lakhir Kaur Admin Manager $110,000 $70,000 yes
25 Louis Lent Admin Accountant $110,000
26 Barbara Nersten Admin Accountant $120,000 $70,789 yes
Total = $4,875,000