Loss of Transparency on Investment Fees

In FY-1997 Alan Hevesi, the then Comptroller, made a power grab for full contract and payment authority of the investment managers of NYCERS. In spite of statutory requirement of two person accounting control of the payment process and no statutory authority to delegate contracting authority to a single trustee, the Law Department rolled over for the Comptroller and gave him control.

At the time, I objected to the violation of the statutory requirement that NYCERS approve all payments before the Comptroller paid them. I was amazed that the Law Department ignored the statutory language. Of course, the Comptroller would have had to give NYCERS a copy of each of the investment contracts and that would have exposed the terms of the contracts.

Since FY-1997 until FY-2010, Comptroller Thompson’s last year in office, the trustees have adopted an annual resolution granting this “authority” to the Comptroller. The resolution has always had the clause stating an estimated total cost for the coming year. For example see the clause for FY-2010, R-41 (6/11/09), listed below. In addition, the Comptroller also provided a detailed schedule of individual managers and estimated fees for the coming year.

“Resolved, that the estimated fees allocated to the System for Fiscal Year 2010 shall be approximately $159,941,361.34 and be it further “

But for FY-2011 and FY-2012, Comptroller Liu has submitted resolutions dropping the above resolve clause. See R-1 (6/22/2010) & R-35 (6/9/2011). And, of course, he submitted no detailed schedules of individual fees. The trustees now have no idea what the total amount might be or the estimated amount each manager is going to be paid.

While the Comptroller is supposed to report all payments contemporaneous to NYCERS, the reporting process has always been slipshod. The Comptroller’s office has never given NYCERS a full accounting of what fees he/she has paid in any given year. With the rising costs, however, this weakness is becoming more dangerous. The potential for fraud is huge. The fact that the Comptroller is a statutory auditor of all NYCERS payments is ironic.

The mayor could change this process by having the Law Department issue an opinion stating that the payment process must adhere to S.13-137 of the NYC Admin code and that the trustees do not have the statutory authority to delegate their contracting responsibility to one trustee.

§ 13-137 Payments from funds. All payments from such funds shall be made by such comptroller upon a voucher signed by the executive director of the retirement system.

Since 2003, these fees have accelerated out of control. For the record, the actual investment fees for FY-2010 were $175.2M, $16M more than estimated. In contrast, the fees for FY-2003 were $29.3M.

Considering the current budget constraints, these fees are obscene. On top of this, there is a clear attempt to obscure the scale of these fees.