Accounting Problems with Investment Fees at NYCERS

In May, 2010, in response to a FOIL request I received a copy of NYCERS internal accounting charts of investment expenses for FY-2008 and FY-2009.

This year NYCERS has chosen to deny my FOIL requests for the accounting charts for FY-2009, FY-2010, and FY-2011.

Each year, on December 31st, NYCERS files a Comprehensive Annual Financial Report (CAFR) for the previous fiscal year ending on June 30th. This report includes a detailed listing of all investment vendors under contract to NYCERS and the fees paid to the vendors. This reporting is on an accrual basis. In plain English, that means if you don’t have the billing data when you are closing the books, you make a best guess at the amount, enter that amount, and make offsetting entries in the next year report when the data comes in. You don’t leave the entry blank.

As I have mentioned in the past NYCERS does not control the payment process for the investment vendors. The Comptroller does. NYCERS is dependent on the Comptroller for the billing and payment data needed for the accounting function. It is very clear why you normally don’t run a business like this. You have no way of vouching for the correctness of your accounting statements.

In this defective arrangement, when NYCERS receives billing and payment notices from the Comptroller’s Office, it records that information in its internal spreadsheets. This should be the basis of what appears in the CAFR statement. That is not what is happening. While the CAFR amounts are incomplete, the internal charts at NYCERS are even more incomplete.

Here is what is happening at NYCERS.

NYCERS currently has 92 managers of registered securities, 141 private equity managers, and 39 real estate managers. On its face, having this many managers is a red flag of a system out of control.

The FY-2009 CAFR statement quoted investment expenses at $138.1M. The corresponding internal NYCERS accounting chart amount is $97.4M, a $40M shortage.

The FY-2010 CAFR amount was $175.2M. NYCERS is now refusing to disclose what amount is recorded in its internal accounting chart.

The FY-2009 CAFR listing was missing entries for

• 2 managers of registered securities
• 27 private equity partnerships
• 8 real estate partnerships.

The FY-2009 internal chart was missing

• 8 managers of registered securities
• 28 private equity partnerships
• 7 real estate partnerships.

The FY-2010 CAFR listing was missing entries for

• 2 managers of registered securities
• 31 private equity partnerships
• 6 real estate partnerships.

Again NYCERS will not disclose the internal accounting chart for FY-2010 and therefore we don’t know the number of missing managers for FY-2010 in this chart.

The bottom line is that NYCERS accounting for investment fees is out of control as seen from defects in both the CAFR and the internal accounting reports. Aggravating this lack of control is the enormous amounts of money at play in these fees. The fees for FY-2011 are on track to reach $220M.

The following is another sign of a system adrift. In a September 7, 2011 Bloomberg article, the Comptroller refused to disclose the recipients of $32M in fees that NYCERS paid in FY-2010 under the cover of organization fees for private equity and real estate partnerships.

The Comptroller claimed an exemption from the state Freedom of Information Law. The actual response was that the payments “are derived from information from the private equity companies and real estate partnerships which if disclosed would cause substantial injury to the competitive position” of the firms. This is the same reason NYCERS gave me for refusing my FOIL request this year for NYCERS internal accounting charts for Investment fees.

I can not imagine how disclosing what NYCERS paid a vendor would hurt the vendor’s competitive position. Independent of the state FOIL law, all NYCERS distributions are public record since they have to be approved by a resolution of the Board of Trustees. Such resolutions must be voted on in public session of a board meeting. This is all designed to protect against fraud and corruption.

As a point of reference, the NYC Teachers Retirement System does not report paying any organization fees.

All of this is a clear sign of an unacceptable risk to the integrity of the assets of the system.

The NYS Insurance Department just finished its multi-year examination of NYCERS. I will be curious if they comment on this glaring failure of financial control. The last report, unfortunately, covered only FY-2000 to FY-2002 and was only released in June, 2009.