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

Monday, November 17, 2014

Investment Fees for NYC Pension Funds since 2000 - Good Work If You Can Get It

The Comptroller just came out with the city's financial statement on Halloween. One of the interesting items in the report is the amount paid in investment fees for the five city pension funds. FY-2015 continued the insane upward trend as you can see from the list below. The grand total for the last 15 years is $4.0B. Yes, that is billion. All for 3.6% rate of return, maybe.

  1. 2014 - $530.2M
  2. 2013 - $472.5M
  3. 2012 - $370.3M
  4. 2011 - $395.7M
  5. 2010 - $426.8M
  6. 2009 - $339.3M
  7. 2008 - $310.2M
  8. 2007 - $262.0M
  9. 2006 - $192.7M
  10. 2005 - $158.2M
  11. 2004 - $131.6M
  12. 2003 - $ 96.7M
  13. 2002 - $101.9M
  14. 2001 - $100.0M
  15. 2000 - $100.0M

Friday, October 3, 2014

NYC Law Department

I have previously written about the inherent conflict of interest in the NYC Law Department. You would think that the lawyers at the Law Department represent the citizens of New York City and their best interests. You would also think that full disclosure is in the best interest of the citizens on New York City.

On September 21, 2014 NY Times published an article about a scandal at the NYC Department of Corrections concerning a falsification of official records in 2011. In 2012, when the fraud was discovered by DOC investigators, the Corrections Commissioner chose to radically alter the investigatos' report by erasing all damaging information relating to the roles of the two senior DOC managers involved. She had previously promoted those managers.

The following is a quote from that article:

The audit’s authors said that the testimony of both Mr. Clemons and Mr. Gumusdere pointed to a “complete abdication” of their obligations as managers, recommending that both be demoted “based on their admitted lack of attention to critical duties and responsibilities of jail management.”

Then Ms. Schriro intervened. After consulting with the department’s legal counsel, and being told she had the authority to alter the report, she ordered the reference to demotion removed, Ms. Schriro said. She also directed the investigative division to remove large portions of the most critical material involving Mr. Clemons and Mr. Gumusdere, including the statement that “it defies logic to think that they could have concluded that the number of fights RNDC reported during these months was accurate.”

...

In February 2013, as part of their civil rights investigation, the federal authorities made a detailed request to the city for documents related to the use of force by guards on teenage inmates and violence between the adolescents. The request included “all” documents related to audits and reviews to assess the accuracy and integrity of reporting on such incidents, including, but not limited to, “working papers and any other documents reflecting findings or recommendations,” according to one person who was told of the request.

A city Law Department official said on Friday that the first version of the report was not produced in response to the original federal requests because it was treated as a draft and seen as privileged. Last week, the United States attorney’s office specifically requested it from the city, and the current corporation counsel, Zachary W. Carter, decided that it should be turned over — and it was, the official said.

It is clear that the Law Department under the Bloomberg administration withheld significant evidence from federal authorities who were investigating serious allegations about activities at the NYC Department of Corrections during the Bloomberg administration. The reason given, that the original audit with specific supporting details was a draft and privileged, is what you might expect from a lawyer in private practice. The citizens of New York City, however, are entitled to have their attorneys represent their best interests and not the Commissioner of Corrections or city hall.

The current Corporation Counsel, a former US Attorney in the Eastern District, has now turned over the "privileged" report to the federal authorities.

As a general principal the public has a right to see everything that our government does as outlined in our freedom of information laws. The attorney at the Department of Corrections who signed off on the altered report and the lawyers at the Law Department who labeled the report as privileged should be fired for incorrect legal decisions. And we all know that what they did should be considered illegal.

Friday, September 12, 2014

Recycled Garbage

In June of this year the executive director of NYCERS, Diane D’Alessandro, appointed Diane Bratcher as deputy director of communications for the agency. The position had become vacant when the former director had left to work in the mayor’s office. His annual salary was $150K. I strongly suspect there was no posting for this position.

At the time of this appointment, Bratcher had been working for eleven months as an associate staff analyst at HRA. The hiring salary for new ASA’s is $59,536.

As background, Bratcher graduated from college in 1974. For the next eight years she seems to have been unemployed. In 1982 Bratcher started working for the Interfaith Center for Corporate Responsibility. She worked there until May, 2002. A month later she was hired by the NYC Finance Commissioner, Martha Stack, as an assistant with a salary of $95K.

Three months later in September, Stark was appointed by Mayor Bloomberg as as the chair of the NYCERS Board of Trustees. At that point Stark made Bratcher the director of the pension unit at Finance, replacing another woman who was a veteran city attorney who had worked for many years at both the Finance pension unit and the NYC Law Department.

For the next seven years Bratcher functioned as a submissive assistant to Stark. I make this comment based on my observations of their interactions at NYCERS board meetings from 2002 to 2005.

It has been established by the NYC Department of Investigation that Stark was slicing through numerous female employees during her seven years as the Finance Commissioner among other transgressions. According to several Finance employees Stark’s escapades were common knowledge within the agency. It is reasonable to conclude that Bratcher was also aware of this sexual activity by her boss, Stark.

In March 2005, Stark as chair of the NYCERS Board of Trustees fired me as the NYCERS executive director because I was involved with a woman on the NYCERS staff. We have since been married. My wife, fortunately or unfortunately, still works at NYCERS.

In October 2005, Stark and the other trustees appointed D’Alessandro as the new NYCERS executive director. Bratcher was actively involved with this appointment.

In April 2009, Bloomberg accepted Stark’s resignation and ordered an investigation into her activity at Finance including her predatory actions with respect to female employees.

All three women, D’Alessandro, Stark, and Bratcher, are long time politically active gay women.

In January 2011, Bratcher left Finance. Her salary at that time was $125,847. Assuming she had joined NYCERS, she was eligible for an annual pension of approximately $18,200 but not health insurance.

In May 2012, Bratcher started working at the UN Principles for Responsible Investment. She lasted there until April 2013. She started working at HRA in July 2013. I strongly suspect that she rejoined NYCERS because of opportunity to significantly increase her pension and gain health insurance coverage in retirement.

Assuming that D’Alessandro gave Bratcher the salary of the former deputy director of $150,000, a significant increase over the ASA salary, Bratcher will be able to increase her future pension by at least an additional $2,100 for every year she works at NYCERS. She will also be eligible for retirement health insurance by the end of this year.

In 2006 I observed Bratcher being deposed during a libel suit I filed against Stark and the NYCERS Board of Trustees. It is common practice for people to lie when testifying during a deposition. They conclude that there is no evidence to contradict what they say. Usually they are correct. But it is truly punishing when evidence is produced during the testimony that proves that the person being deposed has just lied.

The following is a portion of Bratcher’s December 13, 2006 deposition:

Q. Your testimony is Murphy tells the trustees that the DOI report is inaccurate. He had the relationship with Browne, but the DOI report is inaccurate, right?

A. Right.

Q. He wants an opportunity to correct the DOI report. You're saying he says nonetheless, he is going to retire?

A. Yes.

Q. Unconditionally?

A. Unconditionally.

Q. He is just going to retire?

A. Yes.

MS. CARROLL: Mark this document as Bratcher Exhibit 5. It is numbered N 0040. (Bratcher Exhibit 5, N 0040, marked for identification, as of this date.)

Q. After Murphy made his statement to the board, he left the room and then there was executive session again?

A. Yes.

Q. It is a fact, is it not, that because Murphy had not agreed to retire, that the board voted that Murphy had to go; isn't that what happened?

A. No .

Q. Would you look at N 00040. Do you see the second paragraph?

A. Yes.

Q. This is from you to Llembellis. Who is Llembellis?

A. Llembellis at that time was counsel to The Bronx borough president and his representative to the NYCERS board of trustees.

Q. You prepared this E-mail and sent it to Llembellis telling her what occurred at the NYCERS meeting?

A. Yes.

Q. The second sentence of the second paragraph, everybody else voted that John had to go and empowered Martha to negotiate that with him. You wrote that?

A. Yes.

Q. You wrote it on March 11, 2005, the day after the meeting?

A. Yes.

Q. It was accurate when you wrote it, wasn't it?

A. Not accurate.

Q. Are you in the habit of writing inaccurate memos, Ms. Bratcher?

MR. MARKS: Objection to the form.

A. I am not in the habit of –

Q. No, you're not. In fact, you're a very capable assistant, aren't you?

A. I think so.

Q. When you do things, they are very carefully crafted, like your analytical summary, aren't they?

MR. MARKS: Objection to the form.

A. Sometimes, usually.

Q. One could think this document, Stark 2, was done by a lawyer it is so direct and on the money as to the issues, right?

MR. MARKS: Are you trying to pay her a nice compliment or ask her a question?

Q. This statement when you wrote it was true and accurate because you don't write inaccurate and untrue statements, do you, Ms. Bratcher?

A. It was inaccurate. No vote was taken.

Q. Is there any reason why you would mis-inform Ms. Llembellis as to what occurred at the trustee meeting?

MR. MARKS: Objection to the form.

A. I didn't mis-inform her.

Q. I am asking you, is there any reason why you would mis-inform Ms. Llembellis and tell her that everybody else voted that John had to go and empowered Martha to negotiate that with him; is there any reason why?

A. No reason.

Q. The Earl who abstains on the decision, who is that?

A. Earl Brown, E A R L.

Q. By abstaining, that means he didn't vote?

A. What happened -- you want me to answer what happened?

Q. It says here, Earl ended up abstaining on the decision. My question to you is, Earl was a trustee at the meeting?

A. Yes.

Q. That is what you're intending to advise Llembellis about?

A. Right.

.

Tuesday, May 13, 2014

Emerging Manger Circus and the NYC Pension Funds

Three weeks ago Scott Stringer issued a press release saying that he was going to recommend that the NYC pensions funds dump another $1B into the emerging managers circus.

For the record in FY-2013 NYCERS had $818.25M invested in US equities run by emerging managers. NYCERS paid them $4.41M in FY-2013. That is 50 basis points (50 BP's).

During the same year NYCERS had $4.39B invested in a Russell 3000 index fund run by Blackrock. NYCERS paid them $161,565 in FY-2013. That is .4 basis points (.4 BP's).

The emerging managers had the following returns:

  1. one year: 22.63%
  2. three years: 18.34%
  3. five years : 6.84%

Blackrock had the following returns:

  1. one year: 21.37%
  2. three years: 18.58%
  3. five years : 7.24%

I don't think I have to say more except that the trustees in their infinite wisdom terminated Blackrock in FY-2014. You can't make this stuff up.

Thursday, February 20, 2014

Requesting Info for 10 Year Cutoff for Tier 4 Members

One of my original postings in 2009 was about the cutoff of Tier 4 members 3% required contributions after earning ten years of credited service. This benefit was granted by Chapter 110 of the Laws of 2000.

Operationally, this statutory change required NYCERS to monitor the accumulation of service of Tier 4 members who join NYCERS after 2000. Because of Tier 6, members who join after April 1, 2012 are no longer entitled to the 10 year cutoff. New members, who transfer or restore prior memberships with start dates before the April 1, 2012 date, still qualify.

To support this service tracking requirement, I had the IT division develop a Tier 4 required contribution system to augment the service history system that was already in place. You can see the service history file on the NYCERS web site when you sign on to your account.

The required contribution system was developed after the web site was implemented in 2003. Unfortunately, I was not able to migrate it to the web site before I was terminated in March of 2005. Nine years later and it is still not on the web site.

In light of this, I recommend that all Tier 4 members request a copy of their required contribution workup so that they aware of any shortages in their account. It is especially relevant to members who have not reached their 10 year cutoff and are 1) purchasing military or prior service or 2) transferring or restoring other memberships. The workup will allow them to see whether they have crossed the 10 year threshold or how close they are to it. They will then be able to know when the 3% contributions should stop.

In addition to the required contribution workup, all members should request a copy of their annuity account history. This is another valuable file that should be on the NYCERS web site but has never made it there. It outlines by year the deposits, withdrawals, interest earned, and closing balances for each member's contribution account.

Monday, January 27, 2014

How Asset Allocation Can Have a Huge Impact on Returns

I recently posted a chart detailing the investment performance at NYCERS over the last 14 years. I contrasted NYCER's actual returns with the market returns for a simple index(stocks)/core(bonds) portfolio. In both cases the asset allocation was an "aggressive" 70% for stocks and a 30% for bonds.

The comparision showed a large shortfall between actual and market strategies. NYCERS actual asset value as of 6/30/2013 was $47.2B. The market value was $58.2B.

Since then I have done some further analysis using different asset allocations. The results were truly startling. Higher stock allocations are assumed to be riskier but offer higher potential returns. Stated another way an 50%(stock)/50%(bond) allocation should have produced lower returns but less volatility. The numbers tell another story all together.

In a snap shot, the list below shows the 6/30/2013 closing balances for the market index/core strategy over the last 14 years using different asset allocations:

  • 80%/20% : $53.2B
  • 70%/30% : $58.2B
  • 60%/40% : $62.9B
  • 50%/50% : $67.6B
  • 40%/60% : $72.3B
  • 30%/70% : $76.9B
  • 20%/80% : $81.5B

This experience is definitely tied into the last 14 years. Experts might question whether my simulations are refined enough. It is, however, clear to me that traditional thinking about calculating the efficient frontier curve is seriously flawed.

Over time NYCERS has scaled up its stock allocation. In 1985 it was at 30%. By 1990 it was at 50%. By 1995, NYCERS had shifted up to a 70%/30% position trying to catch the updraft of 1990's stock market. Since then NYCERS has never changed from this general allocation.

Not only have the trustees made very bad specific investment decisions over the last 14 years, they seriously misjudged the overall market.

No trustee could have been expected to push for 30%/70% asset allocation in 2002 but a 50%/50% position was well within the accepted range of prudent behavior. It would also have been much more successful. I light of the national pension crisis, we need to be more focused on the part that pension trustees have directly played in that crisis.

Blaming the benefit structure alone will miss the full extent of the disease. There are some who want the patient to die but we, as a society and a successful economy, will be far worse off without a healthy pension system in the United States.

This is a more detailed chart of NYCERS's actual June 30 closing balances and the simulated closing balances for the 70%/30% vs 50%/50% allocations over the last 14 years.

NYCERS - Actual Returns and Index/Core Returns (70%/30% vs. 50%/50%) from 2000 to 2013

Fiscal Year Actual Close Balance Actual Rate of Return Index/Core Return (70%/30%) Index/Core Return (50%/50%) Index/Core Close Balance (70%/30%) Index/Core Close Balance (50%/50%)
1999 $41.9B % % % $ $
2000 $42.8B 3.14% 5.52% 5.22% $43.8B $43.7B
2001 $38.1B -11.86% -7.58% -2.09% $40.0B $42.2B
2002 $32.8B -11.44% -10.82% -5.25% $34.8B $39.1B
2003 $31.5B 0.62% 2.36% 4.96% $34.0B $39.4B
2004 $34.2B 12.71% 12.08% 8.75% $36.8B $41.6B
2005 $35.5B 6.30% 5.56% 6.31% $38.1B $43.4B
2006 $37.3B 7.10% 4.23% 2.63% $39.0B $43.8B
2007 $42.5B 13.03% 14.75% 12.34% $45.2B $49.7B
2008 $39.7B -7.32% -8.10% -3.59% $41.9B $48.3B
2009 $31.9B -20.46% -17.50% -10.39% $35.0B $43.7B
2010 $35.4B 10.68% 11.63% 11.30% $39.3B $48.9B
2011 $42,4B 19.39% 20.94% 16.14% $47.8B $57.0B
2012 $42.7B -1.14% 5.01% 6.25% $51.0B $61.4B
2013 $47.2B 8.81% 12.26% 8.49% $58.2B $67.6B