DFS and the Elusive Pension Audits

It is June 26, 2017, a sunny June day. It is also two years ago that the NYS Department of Financial Services announced a major audit of the seven major NYS retirement systems.

There are still no audits reports from DFS.

For the record, DFS is scared to death to publish any reports on the seven retirement systems. DFS knows how bad the situation is. They can either report the facts and create sheer terror, or they can fake it and be on record for hiding the facts.

Just stop billing the retirement systems for your bullshit audits and save the taxpayers some money.

Budget History at NYCERS

On April 23, 2017 the NYCERS Trustees adopted the FY-2018 Administrative Budget for the agency. It increased the payroll by $645,000 from $31.06M to $31.70 and the OTPS budget by $900,000 from $20.92m to $21.83M. The F/T head count was increased from 401 to 411. The P/T head count stayed at 35.

Interestingly, the Chair, John Adler, voted against the budget primarily because of the increase in the F/T head count. With the Comptroller's vote the increased head count was adopted. It is a hard budget rule that head count drives costs.

The table below charts out the history of the NYCERS admin budget back to 1986. That was before the 1996 passage of the “corpus funded” budget law.

The 1989 NYCERS budget was the high mark for the NYCERS budget while it was still part of the total city budget. As of July 1, 1996 NYCERS’s budget began to be funded through the assets of the system under the control of the trustees and it was no longer an item in the city's budget. The mayor and the comptroller each have a super vote on the budget resolution in so far as at least one of them needs to vote for the budget for it to be adopted.

In 1996, the non-loan agency head count was 154 F/T employees and 30 college aides. The total budget, both PS and OTPS, was $8.77M. The agency was on life support and the Mayor's Executive Budget had set the NYCERS head count at 146 for 1997.

From 1997 to 2005 with the help of "corpus funding" the agency's F/T staff increased from 154 to 342 along with the original 30 college aide positions. That was a radical increase of 186 positions. In addition in 2000, NYCERS moved into modern office space (133,000 sq. ft.) in downtown Brooklyn.

The NYCERS budget in 2006 had a F/T head count of 342 and a total budget of $34.94M, not including fringe benefit costs. FY-2006 was the last budget I prepared. At that point NYCERS was the best staffed agency in the city and the best funded. If necessary, NYCERS could have performed at a top level indefinitely without any increase in head count.

As of July 1, 2017 NYCERS will have a head count of 411. That is an increase of 69 people over the last 11 years. You would think NYCERS must be functioning flawlessly. It is not.

In 2015, I wrote a critical review of a IT upgrade that NYCERS was planning for the five year 2016-2020 budget cycle. The project is two years through the five year cycle with nothing much done. The only good thing is that the trustees have not let NYCERS spend the full $132M that the staff had requested.

Last year the previous executive director resigned. Adler and the trustees are now in the process of appointing/hiring a new executive director. Let us hope that they find an honest competent person for the position.

History of NYCERS Admin Budget 1987-2018

Fiscal Year	F/T Count	P/T Count	College Aides / Hourly	PS Budget	OTPS Budget	Total	% Increase
1986	205	0	30	$5,916,793	$1,423,743	$7,340,536
1987	203	0	30	$6,621,803	$1,881,300	$8,167,220	11.2%
1988	223	0	30	$6,621,803	$1,881,300	$8,503,103	4.11%
1989	243	0	30	$7,849,731	$1,932,351	$9,782,082	15.4%
1990	238	0	30	$8,284,883	$2,578,693	$10,863,576	11.06%
1991	229	0	30	$6,826,473	$2,475,205	$9,301,678	-14.38%
1992	225	0	30	$6,646,549	$2,216,262	$8,862,811	-4.72
1993	223	0	30	$6,858,991	$2,198,882	$9,057,873	2.20%
1994	194	0	30	$6,778,541	$2,183,101	$8,961,642	-1.06%
1995	167	0	30	$6,202,062	$2,080,504	$8,282,566	-7.58%
1996	154	0	30	$6,199,709	$2,573,715	$8,773,424	5.93%
1997	200	0	30
1998	230	0	30
1999	270	0	30
2000	290	0	30
2001	320	13	30
2002	320	13	30
2003	334	13	30
2004	334	13	30
2005	342	13	30	$19,737,687	$14851355	$34,589,042	288.6%
2006	342	13	30	$20,255,911	$14,683,855	$34,939,766	1.01%
2007	364	13	0	$22,616,783	$14,258,471	$36,875,254	5.54%
2008	371	13	0	$23,597,857	$17,259,313	$40,857,170	10.80%
2009	371	13	0	$25,189,842	18,208,861	$43,398,703	6.22%
2010	372	12	0	$26,046,827	$17,777,228	$43,824,055	0.98%
2011	372	12	0	$26,046,827	$18,492,228	$44,539,055	1.63%
2012	372	12	20	$25,756,827	$18,781,428	$44,538,255	0.00%
2013	380	5	30	$26,623,635	$17,951,822	$44,575,457	0.08%
2014	383	5	30	$26,813,635	$18,761,240	$45,574,875	2.24%
2015	342	5	30	$29,131,972	$18,154,572	$47,286,544	3.76%
2016	342	5	30	$30,233,989	$19,407,619	$49,641,608	4.98%
2017	401	5	30	$31,056,080	$20,916,796	$51,972,876	4.70%
2018	411	5	30	$31,701,410	$21,832,718	$53,534,128	3.00%

NYC Pension Costs for FY-2018

The total costs for the five actuarial pension funds for the NYC FY-2018 Budget is $10.009B up from $9.663B in FY-2017.

Teachers Retirement System	$3.744B	110,000 working teachers	$34,000 per teacher.
Board of Education Retirement System	$.295B	20,000 active employees	$14,700 per employee.
NYC Employees Retirement System	$1.825B	100,000 active city employees	$18,200 per employee.
Police Pension Fund	$2.393B	35,000 police officers	$68.400 per police officer.
Fire Pension Fund	$1.200B	11,000 firefighters	$109,100 per firefighter.

There is also a $.552B cost in the budget that is unassigned to any of the five funds but clearly stated in the budget for FY-2018.

Deficits at Retirement

In 2000, the NYS Legislature passed a law which changed the contribution requirement for Tier 4 members of all public retirement systems in New York State.

Starting in 2000 any Tier 4 pension member who had earned 10 or more years of credited service no longer had to contribute the standard 3% payroll pension deduction. By 2012, just before the Tier 6 modification of Tier 4 removed the 10 year cutoff of the 3% contribution requirement, there were approximately 135,000 NYCERS Tier 4 members who were entitled to this 10 year cutoff.

This 10 cutoff obliged NYCERS to confirm exactly when a Tier 4 member had earned 10 years of service. This was not just the member’s 10 year anniversary of joining NYCERS.

Specifically this meant that NYCERS had to determine exactly when a member earned and paid for 10 years of service. In addition, NYCERS had to blend into this calculation any of the member’s prior service buyback applications. Buyback payments could be fully completed before the 10 year cut over occurred or they could overlay the 10 year boundary. In which case, the 10 year boundary was a moving target, since buyback service counted towards the 10 year service requirement after two years of membership service earned after joining NYCERS.

Needless to say this inspired a huge increase in early service buybacks. Four years of buyback purchased after the second year of membership could provide relief from paying four years of regular 3% contribution. Buying the service after completing the ten years of membership, however, would provide no added relief.

To automate this process I directed the IT staff to develop a required amount system that computed the required 3% contributions that each member needed to have on account at NYCERS. This included all service that the member had worked as a member, transferred from another NYS system, or that the member had applied to purchase under the buyback law. The system also displays what the member has actually contributed at that point.

At the start of every year, driven by the service history system, a list of Tier 4 members were marked for review during the year as candidates for earning 10 years of service. As part of the review, staff would use the required contribution system to check whether the member had the needed contributions plus interest earned for the 10 year cutoff date. The system allowed for a request for any date. This enabled staff to hone in on the specific date that the 10 years was achieved.

This means that every Tier 4 member should have been checked for required contributions in or around his/her 10 year service date.

So why is NYCERS sending deficit letters to Tier 4 members after they have applied for retirement? We all know NYCERS must correct its errors. The question is why is NYCERS making the errors in the first place? Also why is it taking six to eight months as opposed to two or three months to produce option letters for new retirees? Forget about updating the legacy IT systems. Thank god those systems are still working.

It is clear to me that the information from this and many other in-house systems should have been made available on the NYCERS website over the last 12 years.

Closing note: NYCERS will need an extremely bright experienced honest manager to fill the position of Executive Director. There are massive problems that have built up over the last 12 years that this person will have to correct.

Divorce, Pensions, and DRO's

Quick Note for NYCERS Members:

If you are getting divorced and your pension is being divided up, be very careful about how your DRO is worded.

For example,

• you have 15 years of service at the point you are getting divorced,
• you have a three year average income of $50,000
• you are age 45, and
• you plan to work until you are 62

At age 62, if you stay in city service, you will have 32 years of service and your three year average income may very well be $100,000.

Your vested benefit at age 45 is 1.67% * 15 * $50,000 = $12,300.

Your retirement benefit at age 62 is [((2% * 30) + (1.5% * 2)) * $100,000] = $63,000

If your DRO only specifies that your former spouse is to receive 25% of your pension when you retire, then your former spouse will receive 25% of $63,000, and not $12,300.

In contrast, if you had left city service on the day you were divorced, your former spouse would receive only 25% of $12,300.

You should be aware of how this will play out if you continue to stay in city service.

If your DRO only specifies an open ended percentage, your former spouse will be gaining increasing benefit from your employment after the divorce.

Tier 6 - The New 3/4 Accident Disability Benefits - What Will Members Pay?

On June 6, 2016 the mayor announced an agreement with the unions representing the Uniform Forces of Fire, Sanitation, and Corrections granting their Tier 6 members a ¾ accident disability benefits under Tier 6.

The Uniform Fire Force

The benefit for the Uniform Fire Force needed subsequent state legislation, Chapter 298 of the Laws of 2016. It will cost eligible firefighters 2% of payroll every year to start. As of 9/18/2019 the actuary will review the cost of the program and I am quite certain the cost will rise to 5%. Luckily for firefighters the cost is capped at 5%.

Chapter 298 also created a new agency to administer the Fire pension fund staffed with personnel from the internal pension division within the Fire Department.

When members are paying 5% per year for the benefit, I guarantee you that the number of accident disability awards at the FDNY will greatly increase from the current level of 57% of retirees (9,842 out of 17,261 as of FY-2015). God help the funding level at the FDNY-PF.

The Uniform Sanitation and Correction Forces

In contrast to Fire, the benefits for the Uniform Sanitation and Correction Forces utilized Article 25 of Tier 6 to authorize the new benefit. See the recap below. In this structure there is no cap on the costs that the eligible members will have to pay for the new accident disability benefit.

In 2012, as part of the Tier 6 legislation, the legislature added three new parts to the RSSL, Articles 23, 24, and 25. Articles 23 & 24 apply to the NYSLERS. Article 25 applies to NYCERS, NYCTRS, and BERS.

The idea behind these new articles is to provide the state and the city with the right to grant pension benefits to bargaining units with the provision that the members getting the new benefits would pay for the full cost of the granted benefits.

At first look this might seem like a reasonable idea. It has, however, several potential problems.

Initially, the definition of the new pension benefit is not contained in state statute. I would assume the mayor will issue an executive order legally describing the benefit and giving public notice since there will inevitably be litigation arising from these benefits. As of today there are no publicly available executive orders granting the new benefits.

Secondly it appears that only the state legislation can terminate these benefits. Without legislation the parties are locked into these benefit/funding arrangements, no matter how onerous.

Thirdly, the retirement system involved, in this case NYCERS, will have to set a contribution rate and a control system to insure that the members are paying for the cost of the benefit. This is something very easy to say but very hard to do.

To properly do this, NYCERS will have to carefully track each one of these new accident disability awards correctly determining the extra cost for each benefit and offsetting the reserve that has been built to cover this cost. The actuary will have to be very careful to correctly cost these benefits because the city can not pay for any of this added cost. The interest rate assumption and mortality tables will be crucial. You know there will be shortfalls all the time.

The Added Cost of the New Benefit

Let me give you an idea how much this benefit will cost. A current Tier 6 Sanitation member is eligible for a 50% accident disability benefit equal to 50% of his/her five year average earnings (FAS) reduced by 50% of his Social Security disability benefit. This is a rough description. The SS offset can get very convoluted. For the sake of simplicity and being conservative, let us assume that the final benefit after the offset would be 45% of the member’s FAS.

The new benefit will be 75% with no SS offset. That is a 30% increase in the lifetime benefit. For example, a member with a $70,000 FAS who is disabled at age 38 will see an annual increase of $21,000 in his accident disability benefit. The IRS 4% annuity factor at 38 is 19.1665. Together they create present value of $402,496. For this example let us assume 25 accident disability awards per year. This gives you an annual cost for the new benefit of $10,062,400.

There are approximately 7,000 Sanitation workers of which about 1,750 are in Tier 6 right now. That number grows by 350 per year. NYCERS must give the existing 1,750 members the option to elect this benefit. All new Tier 6 members will be forced to pay for the benefit. The cost divided into 2,100 workers is $4,830 per year. That is 6.9% of a $70,000 salary.

I suspect you already can see the tidal wave coming.

What NYCERS Is Charging

NYCERS has costed this benefit out at 1.3% of payroll for Sanitation and .8% for Corrections and stated that they will review the rate on 6/30/2019. It would be interesting to see the calculations that support these percentages. But I guess that would be too much information for the public to handle. Yeah, right.

The Sanitation rate will fund a benefit with an annual value of $1,911,000 (2,100*.013*$70,000) or 4.75 accident disability pensions per year. What does NYCERS do if they have 10 accident disability pensions a year? What will NYCERS do on 6/30/2019 if they 15 or 20 unfunded accident disabilities? That could be a $8M deficit.

I suspect that there are approximately 350 Sanitation workers retiring each year. If they are a Tier 6 members, they now have an intense motivation to file for an accident disability pension. The moral hazard is very large.

I spent 20 years sitting at NYCERS Board meetings for disability benefits. The idea that there will only be 2.3 accident disability awards per year per 1,000 Tier 6 Sanitation workers is naïve.

If 7,000 Sanitation workers find themselves paying a substantial percentage of payroll for a ¾ accident disability benefit, they are going to file for it.

I won’t be 57% but NYCERS should be ready for at least 33%. They will work until they are injured. Members know how to maximize their pensions.

When a member pays for a benefit, he or she is going to get it, hell or high water. This will get very ugly. You can imagine if they have to pay 15% every year for this benefit.

Everyone should read about the Dallas Police and Fire Pension Fund to see how bad things can get when people are irresponsible about running a pension fund.

Recap of Article 25 of the NYS RSSL.

- The city of New York may elect to provide its employees benefit enhancements

- Such election may be made at the sole discretion of the mayor of the city of New York to the retirement systems upon receipt of a request from the collective bargaining organization,recognized or certified to represent such eligible employees, for such benefits.

- Upon election by the city of New York, the retirement system shall require additional member contributions to be paid by all eligible employees.

- The additional member contributions to be paid by eligible employees shall be of a level so that no additional contributions shall be paid by the city of New York to cover the cost of such additional benefits.

Tier 4 Sanitation Workers Being Forced into Tier 6 - also Correction Officers and DA Investigators

Two months ago in the being of November, NYCERS started sending letters to a group of Tier 4 Sanitation Workers. The letters stated that NYCERS had incorrectly put them in the Tier 4 Sanitation 20 Year Plan.

This group of Sanitation Workers had NYCERS membership dates prior to April 1, 2012 but had stared working as Sanitation Workers after April 1, 2012, the date that Tier 6 became effective. Originally, NYCERS had correctly placed these members in the Tier 4 Sanitation Plan.

Now NYCERS, ignoring their pre April 1, 2012 membership dates, was stating that since they started working as Sanitation Workers after April 1, 2012, NYCERS was stripping them of their Tier 4 rights and putting them in Tier 6. This was a serious reduction in their benefits. This problem will continue to occur whenever a Tier 4 member becomes a Sanitation Worker, Correction Officer, or DA Investigator.

In New York State the pension rights of state and local government employees are protected from being reduced by the N.Y.S. Constitution, Article V, Section 7. (Klienfeldt v NYCERS, 36 NY.2d 95 (1975) and CSEA v Regan, 71 NY2d 653 (1988))

In addition to violating members' contractual rights guaranteed under the N.Y.S. Constitution, NYCERS provided

1. no legal analysis supporting this change in procedure,
2. no pre-deprivation hearing to the members to allow them to challenge this negative decision,
3. no notice to these members that they have 120 days to file an Article 78 in N.Y.S. Courts to fight this arbitrary and capricious decision.

And finally in classic NYCERS fashion, these letters were not signed.

To rub salt in the wound, NYCERS told these members that all of their Tier 4 Sanitation contributions plus interest would be refunded to them along with the resulting tax liability that would adhere to that refund. Of course, they will have to repay this money with interest in the Tier 6 plan.

I now know that there are comparable groups of Correction Officers and DA Investigators who have been illegally forced in Tier 6. I'm not sure whether they were all given notice.

The NYCERS operating budget is fully funded by the assets of the members and retirees of NYCERS. Why is NYCERS so hostile to the membership? This atrocious legal decision by both D'Alessandro and Mazza is another sign of the total chaos occurring at NYCERS.

Listed below is the new wording added in 2012 which created the Tier 6 Sanitation/Correction membership. A member becomes subject to an article of the Retirement and Social Security Law as of their membership date not their employment date.

25. "New York city uniformed correction/sanitation revised plan member" shall mean a member who becomes subject to the provisions of this article on or after April first, two thousand twelve, and who is a member of either the uniformed force of the New York city department of correction or the uniformed force of the New York city department of sanitation. (Section 501.25 of the NYS-RSSL)