Friday, August 19, 2011

The Vanishing Act on Investment Fee Reporting

The Problem

In FY-1997, NYCERS paid $17.3M in investment fees for a portfolio worth $31.7B.

In FY-2010, NYCERS paid over $175M in investment fees for a portfolio worth $35.4B.

Yes, that is a 1,000% increase in 14 years.

On its face, this is gross negligence on the part of the NYCERS trustees. Why would anyone pay 10 times more for an inferior product? These numbers are not a mistake. It really is as bad as it appears.

History

Prior to 1987, all NYCERS investment managers were paid directly by the NYC Comptroller from the city budget. In 1987, the trustees approved the direct payment of its equity (stock) investment managers from the assets of the pension fund. This change of payment method was due to a deadlock between the then Mayor, Ed Koch, and the Comptroller, Harrison J. Golden, over the approval of the equity manager contracts at the old Board of Estimate. Before its elimination by Koch’s charter commission in 1989, the Board of Estimate was required to approve all significant city contracts.

From FY-1987 to FY-1996, the NYCERS trustees approved the equity manager’s contracts. The annual cost started at $2M in 1987 and reached $4.6M in 1996. The executive director signed both the contracts and the associated payment vouchers for these managers(S.13-137 of the NYC Admin Code). During this period, the bond managers continued to be paid directly from the city budget.

Out of Control

In FY-1997, the NYCERS trustees surrendered control of all of their investment manager contracts and the associated payment process to Alan Hevesi, the then NYC Comptroller and now convicted felon.

In return, as part of an annual renewal resolution, the trustees required the Comptroller to provide an estimate of the total annual fees for the upcoming year along with a detailed listing of each manager and the fee estimate for that manager. The Comptroller was also required to provide, contemporaneously, the amount of the payments made and copies of the supporting audited invoices to the executive director for his/her review.

In a real Catch-22 situation, the Comptroller is also the statutory auditor of all payments made by NYCERS (S.13-103.g of the NYC Admin Code).

At that time, I directed the agency’s accounting division to start maintaining investment expense charts for each year. The chart was designed to record fee expenses by quarter for services incurred during the quarter. The fee amounts entered in the charts were based on the information provided by the comptroller to me as the executive director.

The charts do not close on June 30 each year. The accounting division continuously updates them as data comes in from the comptroller’s office, very often many months after June 30. Strictly speaking, these are not formal accounting documents since they don’t have a closing date but are an historical record of what was paid for services rendered during any given quarter.

Unfortunately, the submitted billing data has never been complete or timely. The estimates of the managers' fees, however, were provided each June with the adoption of the renewal resolution. That is until June of 2010.

As of June, 2010, however, the Comptroller stopped providing the NYCERS trustees with budgeted estimates of the investment fees for the upcoming year. This was the beginning of an effort to cut off information on this fiasco.

My best guess for FY-2011 is $200M and for FY-2012, $225M.

Cover Up

On December 17, 2010, I made a Freedom of Information Law (FOIL) request to NYCERS for a copy of the current investment manager expense charts for FY-2009, FY-2010, and FY-2011. On August 10, 2011, after seven follow up requests, NYCERS refused my request using the following excuse:

Your request is being denied pursuant to §87 2(d) “are trade secrets or are submitted to an agency by a commercial enterprise or derived from information obtained from a commercial enterprise and which if disclosed would cause substantial injury to the competitive position of the subject enterprise”.

I’m not sure which of these excuses NYCERS is using. I’m sure there can be no legal basis for a government agency not reporting the amount of money being paid to a vendor. For background read the 2005 opinion from the NYS Commission on Open Government.

This denial is a sharp change in policy by NYCERS. The agency had previously honored my FOIL requests for these documents. Specifically, on May 28, 2010, NYCERS gave me current copies of the FY-2009 and FY-2008 expense charts.

In addition, NYCERS allegedly published accurate investment fees for each individual manager for FY-2010 in the NYCERS 2010 Comprehensive Annual Financial Report (CAFR). This would support the fact that the data in the FY-2010 investment expense chart is already in the public domain.

Last year, however, I pointed out to NYCES how much the data in the expense charts deviated from the amounts reported in the FY-2008 and the FY-2009 CAFR reports. I expect that NYCERS realized that the agency’s tracking process was seriously broken. In addition, the agency had no way of fixing it since the comptroller office does not have an effective control of the payment process for the investment managers either.

This in turn raises serious questions about the quality of the accounting that is the basis of the formal CAFR reporting of these investment fees.

When a government agency denies the public access to basic information, it usually is because of a desire to hide incompetence but sometimes it is corruption. We need only look at the pattern we saw with City Time to realize that you can never overestimate the incompetence of government agencies.

This fee problem is not restricted to NYCERS alone. The five city pension funds paid a total of $426.9M in investment fees in 2010. This cost item dwarfs almost any other city contract and it is growing at annual rate of 27% since 2005.

In closing, not only does the public not know what the fees are, but neither do the trustees. Well, at least, they've got plausible deniability.

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