Saturday, November 19, 2016

Structure of the CO-VSF

The CO-VSF Board has five trustees, the NYCERS chair(one vote), the Comptroller (one vote), the Finance Commissioner (one vote), the head of COBA (one & half votes) and the head of the Correction Captains union (half vote). By statute the NYCERS actuary is the actuary for the Co-VSF. I am not sure when the CO-VSF Board last met. This board along with the actuary should be publicly informing the CO-VSF retirees what is happening with the 2016 payments and providing them with supporting documentation. With modern technology this is an easy lift.

CO-VSF is required to publish a financial statement every year in the City Record

7. The variable supplements board shall publish annually in the City Record a report for the preceding year showing the assets of the correction officers' variable supplements fund and a statement as to the accumulated cash and securities of such fund as certified by the comptroller, and shall set forth in such report such other facts, recommendations and data as the board may deem pertinent.
NYS DFS has issued only one audit of the CO-VSF system.

The following text is from that audit:

A. History

Chapter 657 of the Laws of 1999 established the Correction Officers Variable Supplements Fund (“COVSF” or the “Fund”) and the Correction Captains’ and Above Variable Supplements Fund (“CCAVSF”). Chapter 255 of the Laws of 2000 (“Chapter 255/00”) combined the COVSF and the CCAVSF into one amended fund (Correction Officers Variable Supplements Fund) effective December 29, 1999.

The Fund operates pursuant to the provisions of Title 13, Chapter 1 of the Administrative Code of the City of New York (“ACNY”). It provides supplemental benefits to members of the Uniformed Correction Force (“UCF”) that retire on or after July 1, 1999, with 20/25 or more years of service from the New York City Employees’ Retirement System (“NYCERS”).

Under current law, the Fund is not to be construed as constituting a pension or retirement system. Instead, it provides supplemental payments, other than pension or retirement system allowances, in accordance with applicable statutory provisions. The New York State Legislature has reserved to itself and the State of New York the right and power to amend, modify, or repeal the Fund and the payment it provides.

Thursday, November 17, 2016

NYCERS, Is This Really a Ponzi Scheme?

In the NYCERS FY-2015 CAFR on page 189 you will find the updated Solvency Test issued by the NYCERS actuary.

The last year listed on the chart is 2013. The actuary has always been slow in doing his/her work. On the last line there are several amounts:

  1. $7.6B = the total contributions made by active workers plus the 5% interest they have earned on their money.
  2. $36.2B = the pension liability for all current retirees (7% assumed interest rate)
  3. $30.6B = the employer financed pension liability for all active workers (7% assumed interest rate)
  4. $47.3B = the actuarial value of NYCERS assets

What the City/Employers Actually Pay for Active Workers

Workers are currently contributing approximately 3.6% of payroll into NYCERS. In FY-2015, workers contributed $457.1M to NYCERS and the covered payroll was $12.7B.

For argument sake let us assume the city and the other employers are contributing $3 for each $1 that the workers are contibuting. That would be 10.8% of payroll. Lets assume that the $3 earn the same conservative 5% that worker's $1 earns. That would mean that there should be at least $22.8B along with the $7.6B set aside for the active workers. That would be $22.8B to cover a $30.6B liability. Wrong!

Faking It

If you go back to the last line in the chart, you will see that the actuary is claiming that both the liability for all current retirees, $36.2B, and the workers contributions, $7.6B, are 100% funded. She is also valuing NYCERS's assets at $47.3B.

So when you start with $47.3B and you subtract $36.2B and $7.6B, you are left with only $3.5B. That is $3.5B to cover a $30.6B liability for active workers. This is a truly frightening conclusion.

The Other City Pension Funds

The story only gets worse. The Police Pension Fund is in the same shape as NYCERS with only $2.3B to cover a $17.9B liability for working police officers (page 151 of the FY-2015 NYPPF CAFR).

Teachers and the Fire Funds are in totally worse shape. The Fire Pension Fund has NO money to cover a $5.2B liability for working firefighters and only $8.0B to cover a $10.5B liability for current retired firefighters (page 151 of the FDNYPF FY-2015 CAFR).

Teachers with over a 100,000 working teachers has NO assets to cover their $18.6B pension liability and only $31.9B to cover the $37.5B pension liability for retired teachers (page 120 of the NYC-TRS FY-2015 CADR).

This grim picture is based on the unrealistic 7% assumed interest rate assumption. You don't want to do the arithmetic for a lower interest rate assumption. Just going from 7% to 6% at NYCERS increases the unfunded liability from $20.2B to $28.0B (page 114 of NYCERS FY-2016 CAFR)

What is Really Going On

Of course, there is one major flaw. The current retirees benefits are not fully funded. Most of the pension contributions the city and the other employers are making each year are catch up payments covering pensions being paid to current retirees.

The city and other employers paid $3.4B to NYCERS in FY-2016. The workers paid $485.5M. Three times what the workers paid is $1.5B. Under our 3 for 1 scenario it is reasonable to conclude that $1.9B went to cover retirees benefits not current workers. This is actually a Ponzi scheme and not an actuarially funded pension plan. It is a lot like the Social Security benefit system.

What is actually going on is that the city and other employers are trying to pay two different pension bills each year. One for active workers and the other for former workers who are now collecting pensions from NYCERS. You can just imagine the political nightmare this is. Part of the ongoing pension funding issue is not just about pensions for current workers. It is the huge mass of current retirees whose benefits the city did not properly secure when the workers retired.

How did this happen?

When a worker retires, the actuary can very accurately compute the cost of the benefit. She, however, can be very prudent or a total screw up. You know where this going. A 62 year old retiree is going to get a pension of $40,000 a year for the rest of his/her life. The actuary can say that $400,000 will cover this benefit or she can say that $520,000 will cover the cost.

Now if the fund hasn't even put aside the $400,000, you can imagine how they feel about the $520,000 cost figure. In either case there is going to be catch up, even if the fund is hitting its interest targets. Needless to say pension funds are not known for hitting their interest targets

One thing that NYCERS active workers should immediately demand is that their annual statement be expanded to include how much the city or their employer have contributed on their behalf during the year for their future pension benefit. The statement should also include an opening balance of employer contributions and how those assets performed during the year. And don't let anyone tell you it can't be done.

Monday, November 14, 2016

Correction Officer VSF (COVSF) Payment for 2016

The NYCERS Board had their November Regular Meeting last Thursday. In the last 5 minutes of a two hour long meeting the actuary's representative dropped a bomb on the retired Correction Officers. They were not going to get their VSF payment this year.

Last Saturday my blog got inundated with hits, almost a thousand inquiries on my most recent posting on NYCERS's poor investment performance in FY-2016. Guess who gets hammered when NYCERS trustees screw up? Not the trustees but the retired Correction Officers.

Also something funny happened in FY-2016. NYCERS clawed back $52.724M from the COVSF. You can see in my previous posting the regular "skim" to the COVSF for the last six years.

COVSF History 2013-2016
Year Open Balance Interest Eraned "Skim" Payments Close Balance
FY-2013: $35.925M $0.038M $0.000M $0.000M $35.963M
FY-2014: $35.963M $0.020M $190.000M $38.014M $187.969M
FY-2015: $187.969M $0.010M $30.012M $78.285M $139.706M
FY-2016 $139.706M $0.184M -$52.7240M $82.149M $5.017M

Tuesday, November 8, 2016

How Do You Lose $174M in a Rising Market?

On October 31, 2016 the Comptroller's Office released the city's Comprehensive Annual Financial Report (CAFR) for FY-2016. This report, in particular, contains the basic financial information for the city's five pension funds.

Based on this report, NYCERS lost $174.2M in asset value during FY-2016 and had a closing balance of $55.59B. Even worse,during the same period the five city pension funds plus the TDA & VSF funds, in total, lost $1.323B in assets.

At a September NYCERS investment board meeting the Comptroller's representative, Scott Evans, presented a performance report to trustees that stated that the fund had earned a return of 1.76% for the year.

What he did not say was that NYCERS had lost $174.2M of assets during the year and obviously he did not explain how that had happened. In a year that the index/core rate of return was 3.9%, NYCERS assets fell by -0.32%.

This is absolutely unacceptable. In three of the last six years NYCERS lost assets. All six years were up markets. See the table below.

The Index/Core Performance for FY-2016

During FY-2016 the S&P500 Index increased in value from 2063.11 to 2098.86, a 1.7% increase for the year. Not good but above water.

The NYCERS bond core target was 7.16% for FY-2016. According to the September performance report NYCERS managed a 6.64% return in this asset class. That was C+ grade but not a loss of capital.

With a 60/40 stock asset allocation the fund should have produced a 3.904% increase in assets with a closing balance of $57.85B.

So how did NYCERS lose $174.2M in capital, a -0.32% loss?

Over the last 17 years NYCERS has managed to leave over $25B on the table because of investment decisions made by Comptrollers and trustees. There is no personal penalty for trustees if they fail to do their job. Hell, they don't even get fired. They just go to work for investment mangers.

NYCERS Investment Fees for FY-2016

NYCERS paid $212.9M in investment fees during FY-2016. That is 38 basis points on the closing balance of $55.59B. NYCERS should never pay more than 10 basis points in fees, even for beating the index/core strategy. 10 basis points is $55.6M, a savings of $157M.

Of course beating the index/core strategy is not possible for a pension fund over a long period of time. Investment returns over a long period of time always reverts to the mean, if you are lucky. Trying to beat the mean will cause a pension fund to fall short of average market returns over extended periods of time.

Six Year Review

Look at the last two rows in the table below. In only one year did NYCERS outperform the Index/Core rate of return. Just adding up the shortages for the six years listed below adds up to $4.2B. If you compounded the shortages for the six years, the loss is over $10B. When you compound the shortages over the last 17 years, the calculation produces a $25B loss.

Why do the trustees always make these bad decisions? Follow the money. Who is getting the extra $157M in fees. Who is making and receiving campaign contributions?

The following table is a recap of NYCERS income statements from FY-2011 to FY-2016:

Income Statement History
Year FY-2016 FY-2015 FY-2014 FY-2013 FY-2012 FY-2011
Employee contributions $485.5M $467.1M $447.7M $437.8M $403.6M $413.7M
Employer contributions $3.366B $3.160B $3.114B $3.047B $3.017B $2.387B
Interest income(bonds) $692.8M $635.8M $658.7M $624.7M $528.0M $492.2M
Dividends(stocks) $836.5M $795.3M $739.7M $696.7M $637.1M $619.9M
Securities Lending $29.7M $26.5M $8.8M $27.8M $25.0M $23.4M
Income-In $5.413B$5.089B$4.974B$4.884B $3.941B$4.616B
Benefits/refunds $4.403B $4.236B $3.990B $3.851B $3.689B $3.569B
Transfers to the other pension funds $7.4M $7.1M $7.2M $5.3M $5.0M $4.4M
Skim to VSF's -$41.2M $41.9M $202.1M $12.3M $12.4M $12.4M
Investment Expenses $213.0M $231.8M $184.6M $183.3M $129.5M $145.1M
Administrative expenses $56.7M $54.6M $50.4M$48.7M $51.4M$46.4M
Income-Out $4.638B$4.571B$4.283B$4.101B$3.888B$3.770B
Net Income $774.4M $518.1M $691.0M $783.0M $728.0M $164.1M
Actual Cl. Bal.$55.489B$54.889B$54.442B$47.195B$42.655B$42.409B
Index/Core Cl.Bal.$57.806B$57.107B$55.171B$47.863B$45.523B$42.107B
Shortage $2.317B $2.217B $0.749B $0.668B $2.868B -$0.302B
Actual RR -0.317% -0.093% 13.850% 8.806% -1.136% 19.391%
Index/Core RR 3.904% 3.981% 15.437% 10.373% 5.626% 18.537%

Sunday, October 23, 2016

Rejection of Index Investing at the Common Investment Meeting - This is Fraud.

So, the Comptroller has convinced the five city pension boards to attend a combined investment meeting, “Common Investment Meeting - CIM”, every month. Interestingly, the Teachers Retirement System continues to hold additional separate investment meetings every month.

The CIM is similar to a lecture hall class with 200 students as opposed to an ordinary class with 15 students. There is a certain circus quality to the meeting. You can judge for yourself. The videos are on this link.

I recently watched the September 26, 2016 meeting run by Scott Evans. He is the head of the Comptroller’s Bureau of Asset Management (BAM) and is paid $350,000 per year. The five pension funds actually pay his salary through a non-governmental grant scheme to the Comptroller’s revenue budget but the pension funds have no control over his hiring.

Comments on Index Investing

At about one hour into the show Mr. Evans started to comment on a possible simple index stock/bond investment strategy for the city's pension funds as opposed to the “sophisticated” strategy that the funds have adopted and he supports.

While he was not clear about what he precisely meant by the index stock/bond strategy, I am assuming that he was referring to the index stock-R-3000/core+5 bond strategy that NYCERS was using to a large extent circa 2000.

As of June 30, 2000, NYCERS had assets worth $43B of which $21B was in a Russell-3000 stock index and $10B was in a core+5 (Treasuries, investment grade corporate bonds and agency/mortgage backed bonds bond strategy, all with terms 5 years or greater) strategy. Together the two components were 75% of the total portfolio.

Specifically Mr. Evans stated that the index strategy would produce acceptable results, simplify the investment process for the pension funds, allow the pension funds to shrink the staff at BAM and have shorter investment meetings. He, however, claimed that it would be more risky than the “sophisticated” strategy and he made some vague reference to possible draw downs problems but nothing else.

That is basically the end of his discussion on this topic. He provided no quantitative support for his position. He felt his comment was sufficient to dismiss the index concept. No trustee asked any questions in spite of the importance and value of index investing.

What he failed to mention, however, was the actual historical rates of return for the two strategies. He did not list the radical differences in external fees, internal costs and taxes between the two strategies. He made no mention of the liquidity, volatility, currency, political, and credit risks inherent in the “sophisticated” strategy. He also failed to mention the potential of the “sophisticated” strategy for improper political influence and corruption which has occurred in the state pension fund in Albany and other public pension funds around the country.

Some Actual Numbers

In an effort to provide some specifics let me give you some historical numbers. Over the last 20 years (1996-2016) NYCERS assets have increased at annual rate of 3.4% per year, from $27.98B to $54.55B. See below.

From 1996 to 2000, as I mentioned above, NYCERS followed an investment strategy that was roughly 75% in a index/core+5 strategy with the other 25% in more dubious assets. The annual rate of increase in the assets for those four years was 11.3%. As of June 30, 2000 there were almost no private equity investments (non-publicly traded assets) in the NYCERS portfolio.

Since 2000, the annual rate of increase in NYCERS assets, using the quarterly numbers, has been 1.51%. Since 2007, that rate has been 2.88%. Needless to say, 2000 was the advent of the “sophisticated” investment strategy. By 2008 NYCERS was hip deep in shit with only 56% in the index/core+5 strategy. You can see that the trustees are not totally crazy.

Since 2009, NYCERS assets have increased at a 9.5% annual rate but the S&P 500 stock index has increased at an even higher 12.5% annual rate. As of June 30, 2106 NYCERS had assets of $54.6B. That number, however, includes a $3.2B positive cash inflow from 2009 to 2015 and $9.9B in non-publicly traded assets. The quoted values of non-publicly traded assets are basically guesses of what they are worth and you know the real number is less than $9.9B.

Based on the NYCERS official financial statements, which are different from the Comptroller's quarterly reports, the opening balance on July 1, 1999 was $41.9B and the closing balance on June 30, 2016 was $55.49B. That is an average annual increase of 2.53% for the seventeen years. The rate of increase for the S&P500 index/core+5 bond strategy with a 60/40 stock/bond allocation over the same 16 years is 4.648%. That translates into a $81.0B closing balance for June 30, 2016. That is a $25.5B higher than what NYCERS actually had. The sum of each year's difference individually is over $16.2B but compounded over the 16 years it is $25.5B. This is a big step towards full funding for NYCERS but we should be very aware that even indexing does not hit the 7% assumed interest rate that actuaries dream about.

Bottom line, NYCERS almost certainly would be in far better shape over any span of time with the “unsophisticated” index/core investment strategy. Of course, Scott Evans would be working somewhere else.

Listed below are the June 30 NYCERS asset values since 1985 as reported by the Comptroller in the quarterly performance reports along with closing balances from the CAFR's and estimates of index returns from FY-2000 forward.

  • Year - Quartely - CAFR CB - Indexing CB
  • 1985 - $10.178B
  • 1986 - $12.534B
  • 1987 - $13.866B
  • 1988 - $14.349B
  • 1989 - $16.499B
  • 1990 - $17.904B
  • 1991 - $18.852B
  • 1992 - $20.670B
  • 1993 - $22.939B
  • 1994 - $22.432B
  • 1995 - $25.455B
  • 1996 - $27.983B
  • 1997 - $32.439B
  • 1998 - $37.711B
  • 1999 - $41.024B
  • 2000 - $42.997B - $42.824B - $43.746B
  • 2001 - $37.519B - $37.251B - $40.222B
  • 2002 - $32.212B - $32.842B - $34.106B
  • 2003 - $30.841B - $31.524B - $32.477B
  • 2004 - $33,526B - $34.178B - $33.480B
  • 2005 - $34.703B - $35.526B - $35.406B
  • 2006 - $36.650B - $37.288B - $36.008B
  • 2007 - $42.237B - $42.514B - $42.707B
  • 2008 - $38.862B - $39.716B - $40.342B
  • 2009 - $30.929B - $31.903B - $34.490B
  • 2010 - $34.618B - $35.383B - $35.633B
  • 2011 - $41.623B - $42.409B - $42.107B
  • 2012 - $41,620B - $42.655B - $45.523B
  • 2013 - $46.623B - $47.194B - $47.862B
  • 2014 - $53.549B - $54.422B - $55.171B
  • 2015 - $54.289B - $54.889B - $57.106B
  • 2016 - $54.553B - $55.490B - $57.806B

Saturday, October 8, 2016

A Word of Caution About Selecting the New NYCERS Executive Director

Just in case anyone is entertaining the thought of appointing Karen Mazza as the new executive director of NYCERS, including Mazza herself, let me refresh your memory about her illustrious career.

In 1990 I was appointed executive director at NYCERS after 17 years with the agency. In that position I had steady contact with the NYCERS Chair and other NYCERS trustees. At that time it was common for the Mayor to appoint the Finance Commissioner as the Chair of NYCERS.

In 1993 Mazza went to work for the Mayor's Pension Unit at the Finance Department. That unit supported the Commissioner with his/her duties as NYCERS Chair. In that position she worked for an attorney named Norm Rosner who was the Commissioner's alternate at the NYCERS Board. Rosner made it clear to me that Mazza was not an effective employee but gave no details. At the time I did not appreciate his insight into this woman. In hindsight, it is quite clear why he held her in such low esteem. She left Finance in 1994 and went to work at the Comptroller's Office.

In 1991 Leo Vallee and I began writing procedural descriptions for all newly passed pension legislation that impacted NYCERS. These write ups are still being used today. At that time NYCERS had an old time permanent staff lawyer who thought he was a brilliant legal writer. Unfortunately he was not. He was, however, honest.

In 1997, I hired Mazza as an administrative staff analyst. I was hoping we would get help with the analysis of the pension legislation along with other in-house legal issues. Because of the 1996 legislation giving NYCERS budgetary independence, I was legally prohibited from hiring lawyers in legal titles unless I had approval from the Law Department. The Law department was not about to give NYCERS that approval.

Unfortunately, Vallee and I had to continue writing the legislative descriptions because Mazza was also not able get the job done. This was a warning sign that Mazza was not an astute analytical attorney.

Falsifying Time Sheets

In 2000, Mazza gave birth to her second child. Also in 2000 we moved into the new office site in Brooklyn. She returned from maternity leave in late 2000. She returned to 8:00-3:45 work schedule. I worked a 9-5 schedule. Her new office had an open glass front as did all managers' offices and was twenty feet down the hall from my office. Whenever I passed her office I would be able to know whether she was in her office or she was on the phone. For the record she was on the phone almost every time I walked by.

In 2001, I began to notice that when I would arrive to work she was not in her office. I would eventually find her after 9:30 or later. She was one of the top three managers in the agency. Managers have a certain leeway with their schedules in that a manager can be make up time at the end of the day if he/she comes in late in the morning. She, however, was meticulous about dashing out the door at 3:45 hoping I would not see her.

One of my duties was to sign off on the time sheets of all of my direct reports which Mazza was. When I became aware of her absences at the beginning of the day, I started to closely cross check her time sheets with the days when I knew she was late and found that she was falsely recording her starting time as 8:00 when she very often was not arriving until 9:30 or later.

To double check what I had found, I examined the security system which records when all employees enter the working area of the office. Sure enough as another sign of her dishonesty, on the days that she was late she would make sure she did not swipe her security access card. She instead would tell the security guard on the front desk that she had forgotten her card and ask him to buzz her in through the security door. This meant that there was no trace in the security system of when she actually arrived.

I should have fired her at this point.

In retrospect, it was the worst mistake I made while running NYCERS. Foolishly I gave her a second chance. I spoke to her about what I had discovered. She tried to deny it. I told her it had to stop and that I would be closely monitoring her time sheets. From then on she knew I was watching her like a hawk. This was not a good situation.

In addition, in a regular weekly managers' meeting I made it very clear to the all managers that they had to swipe through security every day and if they forgot their card that they had to sign in with Security and mark their time. I got a few funny looks but Mazza knew I was talking about her.

Perjury and Fraud

Subsequently in early 2004 during the hiring process for a new HR director Mazza enabled Felita Baksh to falsify her writing sample which was crucial in my decision to appoint Baksh as the NYCERS HR director. This was in addition to the help that she gave Baksh with her resume.

As everyone at NYCERS has come to know, it is a law of nature that Baksh/Ramsami/DiLorenzo can not write a grammatically correct sentence never mind a two page essay. As a cruel twist of fate, the one HR staff member who unknowingly observed Mazza and Baksh rig the writing sample was eventually fired by Mazza and Baksh. This was after Conflict of Interest Board had fined Baksh for using this employee's credit card to buy furniture.

Later in 2004 Mazza conspired with the DOI investigator, Carol DeFreitas, who was investigating Baksh's appointment. DeFreitas was Martha Stark's "man" on staff at DOI. DeFreitas was literally her employee on assignment at DOI. I need not say anything more about Stark. Together Mazza and DeFreitas were able to supress any mention of Baksh's lying under oath or the false writing sample.

While one trustee forwarded the perjury charge to DOI, there was never any follow up.

Retaliation Against My Wife

After I was fired in March of 2005 Mazza was involved with creating trumped up charges against my wife which lead to her being demoted. Over the next ten years Mazza was a driving force behind placing my wife in position where she had no work assignments and ensuring that any attempt to give her work was blocked. In 2015 my wife had to resign because of health reasons. Over the ten years she had developed sever colitis and had a major heart attacked which almost killed her.

Just a Bad Lawyer

I previously mentioned that Mazza is a incompetent lawyer. In 2008 she was so unable to handle pension issues that she had NYCERS issue a $100K per year no-bid contract to a former law Department staffer to do her work. This went on for 4 or 5 years.

In 2008 Mazza lawyer began harassing the Tier 4 accident disability EMT retirees over the alleged gainful employment issue and forced then to enact legislation to override her incorrect interpretation of the disability statute. She also managed to deny a disabled EMT worker her rightful disability benefit.

When the Workers' Compensation Offset issue arose in 2012, she was in the fore front of crucifying Tier 3 retirees who were receiving disability benefits. Who can forget her words when she was cutting disabled pensioners' checks to $10 a month "we're trying to leave them with something in their pocket at the end of the month".

In 2006 NYCERS signed a lease for a disaster recovery site in Long Island City. Mazza handled the lease and all the the contracts for this fiasco. Ten years later the site still does not have a Certificate of Occupancy.

Closing Thought

D'Alessandro, the executive director, has been a nasty empty suit for eleven years at NYCERS. Now, in July, she appoints Mazza as Deputy Executive Director to fill the spot that opened up with the retirement of the person who held the position for ten years. Then two months later in September D'Alessandro announces her own retirement. What do you think is going on?

Friday, October 7, 2016

Finally Someone Noticed the Skim at TRS

This month the Citizens Budget Commission discovered a city funded subsidy for the teachers TDA fund at the NYC Teachers Retirement Fund (TRS), better late than never.

In 2013 I stumbled on the fact that TRS had a persistent negative cash flow.

Then in 2014 someone reminded me of something I sort of knew but never understood the full impact.

I can not understand how the city allows this massive benefit to exist. It puts the entire TRS retirement structure at risk. The teachers have a very respectable pension benefit. This subsidy to the TDA program is irresponsible in that it pulls assets, $1.2B in FY-2015, out of the pension fund every year. I can see how the teachers love this benefit but if all the other city workers find out about this, there will be hell to pay.

Note: the skim for FY-2016 is $1.354B.