Tuesday, March 24, 2009

No Oversight for Payment of Investment Expenses

Payment of funds from NYCERS is controlled by Section 13-137 of the NYC Administrative Code. Simply stated, the NYC Comptroller is authorized to make payments from NYCERS assets based on written authorization from the NYCERS executive director. Not only is this the law but it is sound accounting practice. It is called "two man" control, excuse the old sexist term. It is much harder to steal when there are two independent parties involved.

In 1996, the former NYC Comptroller, Alan Hevesi, convinced the NYC Law Department and the NYCERS trustees to allow him to pay NYCERS investment expenses without the inconvenience of getting written authorization from the executive director. Needless to say the executive director pointed out the violation of law to the interested parties but to no avail. The NYC Law Department has the final say on legal interpretations. The executive director could have filed an Article 78 action but he would have had a hard time paying the legal costs since he would no longer have been the executive director.

The NYC Comptroller is the official auditor for the city and specifically for NYCERS (Section 13-103.g). With this in mind, we should focus on the fact the auditor for NYCERS is free to make payments to outside vendors without an oversight from NYCERS. We have Alan Hevesi to thank for this truly ludicrous situation.

This situation has become more and more dangerous in recent years. NYCERS Investment expenses have been accelerating upwards in the last five years. The 2003 costs were $29M but the 2008 costs were $115M and 2009 will most likely be $150M. What is truly sickening about this is the billions of dollars NYCERS is currently losing with these high expenses.

DA Investigators and Grandfathered Rights

If you are DA Investigator in the 20 Year Plan and you were previously in the 25 Year Plan, you still have rights under the 25 Year Plan. That means that if you have more than 23 years of credited service, the benefit under the 25 Year Plan may be better than the 20 Year Plan. NYCERS should be comparing both benefits and giving you the better of the two. Make sure that NYCERS does the comparison. They may just do the 20 Year Plan calculation assuming it is the better benefit.

On September 13, 2006 the DAI 20 Year Plan was upgraded by law to include non-DAI service. The new calculation was carefully modeled on the 20 Year Police Pension Plan calculation. There are, however, certain cases where the old calculation may produce a better benefit than the new calculation. If you were a member of the DAI 20 Year Plan before September 13, 2006 and you have more than 23 years of DA Investigator service, the old calculation may give you a better benefit since it uses a three year average for excess DAI service rather than the over 20 year average. The more excess DAI service you have, the more the old calculation is better for you. If, however, you have non-DAI service, only the new calculation will give you credit for it.

Again, this is a situation where NYCERS should be comparing different calculations. You always should make sure that NYCERS is doing the calculation and not assuming that the new calculation is better.

Saturday, March 21, 2009

Institutional Conflicts of Interests at NYCERS

NYCERS is a trust. The trustees are obligated to pursue the best interests of the members and retirees, not the participating employers, elected officials, or the labor unions sitting on the board of trustees.

The NYC Law Department is the statutory counsel for NYCERS. Unfortunately the Law Department is primarily the mayor's lawyer. This means there is a systematic, though legal, flaw in the way NYCERS receives legal advice. The trust structure is broken by law.

In an ordinary legal setting the Law Department would be constantly recusing itself and advising NYCERS to seek outside counsel. The Law Department, of course, never recuses itself. In fact the trustees have no choice as to which staff the Law Department assigns to handle NYCERS pension issues.

If the trustees wish to acquire and pay for outside counsel, they must, by law, get approval from the NYC Law Department.

In a related matter the NYCERS trustees appoint the actuary for NYCERS. In a bizarre arrangement in 1990 the new actuary was allowed to be the head of an agency funded by the mayor. That agency has no legal basis in statute or the City Charter. The funding for this agency is dependent on decisions of the mayor.

This situation is particularly conflicted, since 1996 when the NYCERS was granted budget control over its operations by the state legislature. Instead of placing the NYCERS actuary on the NYCERS payroll and paying for the actuary's expenses, the trustees continue to allow the actuary to function outside their budgetary control. There isn't even a statutory excuse for this situation.

The main function of the NYCERS actuary is to determine every year what the city and the participating employers (i.e. the Transit Authority) must pay in pension costs to NYCERS. The actuary also determines the expected rate of return on NYCERS assets.

This rate is crucial in determining the amount of regular pension contributions that the city has to pay NYCERS every year. The higher the rate, the lower is the amount that the city has to pay. A higher rate also means that the trustees must adopt a more risky investment policy to support the higher rate.

If the market does well, everyone is happy.

If the market collapses, the city must make up the losses and the NYCERS actuary has a harder time justifying the higher expected rate of return. If the NYCERS actuary has to lower the rate, the city has to pay higher regular contributions to NYCERS, in addition to covering the losses from a down market.

Then everyone is very unhappy.

Monday, March 9, 2009

Retire at age 65 and continue to work

A NYCERS member who retires (service, not disability) at age 65, or later, can continue to work for a New York State government entity and not have his/her pension suspended. See Section 212 of the NYS RSSL. Of course the retiree doesn't earn any pension credit after he/she retires.

By the way a retirement application filed with NYCERS is not a resignation letter filed with your employer. But always be very careful with your employer, he/she has the capability to cause you a lot of problems. You don't want to be in the position of trying to force him/her to put you back on the payroll after he/she has improperly terminated you.

Currently two of the city's major commissioners (Fire and Sanitation) are doing just that. They retired after 65 and continued to work for the city.

It's good deal for the city and the retiree. The city gets quality work without paying any pension costs and only one health insurance payment. The city might even avoid paying FICA taxes. The retiree gets a full salary and a full pension. Why should the private sector get a well trained employee.

Back to retirees, once a service retiree reaches age 65, he/she can return to work in the NYS public sector without any reduction in his/her pension.

Of course before age 65 there is a $30,000/year limit on earnings in the NYS public sector. Once the retiree earns more than that, his/her pension is suspended for the rest of the year. It is reinstated the next January, if NYCERS has all its ducks in a row.

Asset Allocation Dilemma

NYCERS has an asset target of 30% for its bond investments; 25% for investment grade and 5% for junk bonds. The trustees have invested the rest of the portfolio in various classes of equity; domestic, foreign, private, and real estate.

This aggressive investment strategy was needed to support a projected 8% investment profit target.

This, in turn, allowed the city and the other employers to make lower payments to NYCERS since 2000. It, however, exposed to greater swings, up and down, in its investment returns.

In effect, NYCERS was gambling that it would make a lot of money and the city could save a lot of money. Over the last 9 years has lost that gamble. While it is easy to criticize in hind sight, you can make a good argument that this policy was never prudent in the first place, especially after the 2000-2002 collapse.

If NYCERS had followed a conservative investment strategy, 50% in investment grade bonds,the city would have had to contribute significantly more money since 2000 but it now would have a much smaller burden going forward.

Because of massive equity losses NYCERS now has 36% of its assets in bonds. This will require NYCERS to re-balance under the current asset allocation 6% into a foreign equity position. That is a scary thought.

The NYCERS trustees are faced with the dilemma of either staying with their aggressive strategy or shifting to a more conservative policy. The elected officials and union presidents on the board are highly conflicted. A conservative strategy is most likely what is best for the members and retirees of NYCERS. It definitely is not what is best for the city.

Not only would the city have to cover current losses, it would have put up more money on an ongoing basis in recognition of the fact that a 8% profit target is not prudent and probably never was. Do the trustees take care of politics or the retirees?

Strangely, NYCERS for the first time committed money to convertible bonds in the spring of 2008. They have lost 25% of the $390M invested. Convertible bonds add equity risk and reduce fixed income returns. In this market it was like throwing a match into a gas tank.

Sunday, March 8, 2009

How to deal with bad news

As of December 31, 2008 the assets of the five NYC pension funds were worth $82.5B.

After being pressed by the media the Comptroller released a statement at 4:30 PM on Friday, February 6, 2008. In a one line sentence the Comptroller let the world know that the funds had lost $12.5B in the last three months of 2008.

He then in a following sentence stated that his diversification had shielded us from crippling losses and positioned us to better weather this downturn.

He followed that up with a list of the names and titles of everyone of the 46 trustees of the five pension funds. The mayor is mentioned twice, his Finance Commissioner four times, and his Police, Fire and Education Commissioners once each. He wanted to make sure the mayor got full credit for the outstanding job.

It was John F. Kennedy who said, "Success has many fathers. Failure is an orphan." It's good to know that this was a success and not a failure.

Monday, March 2, 2009

Buying Military Service and Payroll Deductions

In 2000 NYS passed a law allowing NYCERS members to purchase wartime military service rendered before they joined NYCERS. (C.548/L.2000). The charge for this service is 3% times the years of service in the military (up to 3 years) times current salary. This amount can be paid in a lump sum or by payroll deductions. The most tax efficient way of paying this charge is by transferring the full amount from the member's Deferred Compensation 457 account, assuming the member has opened such an account. I highly recommend that every city employee opens a "457" account and puts as much money as possible into that account. One caveat, be very careful how you invest it. The investment world has radically changed since October, 2007. In 2007 NYS passed a law (C.627/L.2007) to allow payroll deductions paid to NYCERS for the payment of prior military service to be treated as tax deferred income for the purpose of federal income taxes, but only federal taxes and not state or city income taxes. While the intent of this law was to provide a tax benefit to members buying military service, members already had a more effective method available to them, the "457" transfer. Bottom line, use the "457" method to pay for this service. If you don't have enough in the "457" account, increase the contributions to the "457" plan (invest it conservatively) rather than pay it to NYCERS in payroll deductions. When there is enough money in the "457" account, then authorize the transfer to NYCERS from the "457" plan.