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.

Friday, December 5, 2014

TRS - Permanent Handicap - TDA Transfer

Last year I wrote about a persistent negative cash flow at the NYC Teachers Retirement System (TRS).

Just recently someone pointed out to me the impact of something I vaguely knew about but not really. Every year TRS pulls money out of the pension fund and transfers it to the TDA plan that it runs separately from the pension plan. The TDA plan is a defined contribution plan, a 403(b) plan in IRS speak. Information about this transfer is buried in the TRS annual CAFR. The city, however, has never identified the transfer in its annual CAFR. That is until FY-2014.

This is why TRS has had a negative cash flow for the last 15 years. In the last eight years (2007-2014) TRS has paid $33.3B in benefits but $6.8B went to the TDA plan and not pension benefits. The employers' contributions for the 2007-2014 period were only $19.2B. This is a big problem. It is never discussed publicly. I have no idea how Bob North, the TRS actuary, values this liability for the TRS pension fund. This is a huge leak in the funding pipeline for the TRS pension plan.

If you look at the table below it appears that North is reporting a funding level for TRS based only on the liability based on the pension benefits paid and ignores the TDA transfer.

Funding Status for TRS and NYCERS for FY-2013

System Actuarial Assets Actuarial Liabilities Funding Level MembersPensionersPension Benefits Paid TDA Transfer
NYCERS $42.4B $65.3B 65.0%212,347137,987$3.9B $0.0B
TRS $33.6B $57.7B 58.2% 132,01776,539$3.6B $1.1B

TRS Benefit Payout Since 2007

Fiscal YearEmployer ContributiondsAll Benefits PaidPensions PaidTDA SkimOther Benefits PaidPension Paid % TDA Skim %Other Benefits %
2005$1.23B $3.13B ******
2006$1.32B $3.34B ******
2007$1.60B $3.58B$2.89B$0.55B$0.14B80.7%15.4%4.0%
2008$1.92B $3.78B$3.02B$0.65B$0.11B79.9%17.2%3.0%
2009$2.22B $3.78B$2.92B$0.77B$0.10B77.2%20.4%2.6%
2010$2.48B $4.12B$3.20B$0.82B$0.10B77.7%19.9%2.4%
2011$2.47B $4.33B$3.38B$0.85B$0.10B78.1%19.6%2.2%
2012$2.67B $4.49B$3.44B$0.95B$0.10B76.6%21.2%2.3%
2013$2.86B $4.67B$3.54B$1.05B$0.08B75.8%22.5%1.7%
2014$3.00B $4.58B$3.82B$1.15Bnr76.9%23.1%*
2007-2014$19.22B $33.72B$26.21B$6.78B$0.73B***