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.

1 comment:

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