A Message to the New Trustees in 2014

On January 1, 2014 all of the elected officials on the five city pension funds will be new people. Actually the NYCERS trustees will be doing a little musical chairs. The union reps will generally remain unchanged.

The Bill de Blasio will, I assume, will be appointing a new chairperson for the NYCERS Board of Trustees. This can be any person the mayor chooses. It is an unpaid position. It would be intriguing if he choose a former executive director. At least it wouldn't cost the city any money.

In spite of public perception the new Comptroller will only be one of the eleven trustees at NYCERS and acts only as investment agent for the full board. (See Note below)

All of the new trustees, not only the Comptroller, should focus on their prime responsibility as trustees, protecting and building the assets of the system. It is clear to me that the departing trustees failed in that duty.

The following is a list of the money spent by NYCERS for investment services since 1997. It totals $1.4B over 16 years. This covers only one of the five city pension funds. The five system total is in the $3.0B range

1. $17,3M (1997)
2. $26.1M (1998)
3. $27.4M (1999)
4. $32.5M (2000)
5. $41.3M (2001)
6. $37.6M (2002)
7. $29.3M (2003)
8. $35.1M (2004)
9. $53.9M (2005)
10. $69.4M (2006)
11. $98.1M (2007)
12. $115.3M (2008)
13. $138.2M (2009)
14. $175.3M (2010)
15. $145.1M (2011)
16. $129.5M (2012)
17. $183.3M (2013)

1997 was the year that NYCERS began paying all of its investments expenses from the assets of the fund.

1997 was also the year that Alan Hevesi hijacked the contacting and payment process for investment managers. The trustees, including the mayor's representative, were truly stupid in letting him do this, as future events have shown. At the time I objected to this statutory violation but the Law Department said it was ok.

As background, 1987 was the first year that NYCERS started paying any investment expenses. At that time Ed Koch and Jay Goldin got into a pissing contest at the old Board of Estimate over approving contracts for equity managers for the pension funds. So Jay Goldin went to the trustees to get the contracts paid from the assets of the funds. Prior to 1987 these expenses were paid directly out of the city budget. For some reason the bond managers continued to be paid directly from the city budget until 1997.

I have never before put this complete list together. The patterns are fascinating. For the fiscal years from 1997 to 2002 the fees under Hevesi climbed from $17M to $37M. From 2003 to 2010 under Thompson the fees jumped from $29M to $175M. From 2011 to 2012 under Liu the fees dropped from $145M to $129M. The drop is encouraging but the fees are still way out of control. 2013 saw a reverse in this drop with a jump to $183M.

As a point of reference in FY-1999 NYCERS assets grew from $37.5B to $41.0B with fees of $27M. In FY-2009 NYCERS assets dropped from $38.9B to $30.9B with fees of $138M. It appears that there is most probably no benefit gained from higher investment fees and in fact quite the opposite.

How does this crap keep going on for years and years?

Note:
Comment from the last (2002) NYS Insurance Department Report of Examination:

The highest governing body at NYCERS is its board of trustees. The trustees are fiduciaries for NYCERS, its members and its retirees. The trustees delegate NYCERS investment functions to the New York City Comptroller, pursuant to Section 13-702 of the New York City Administrative Code. The investment powers transferred to the Comptroller are subject to written delegations which may not exceed one year. Although this authority is renewed annually, the System is not required to use the Comptroller for investment services. The investment services provided to NYCERS by the Comptroller are provided through the Bureau of Asset Management (BAM), a division of the Comptroller’s office. The delegated powers authorize the Comptroller of the City of New York to make any investment which NYCERS trustees are authorized to make. Also, the Comptroller is authorized to hold, sell, assign, transfer, or dispose of any of the properties, securities or investments in which any of the funds of the System have been invested.

Section 136.2 of Department Regulation No. 85 states in part: (b) “Administrative head shall mean,…the board of trustees of a retirement system, in their individual and collective capacities”

Section 136.6 of Department Regulation No. 85 states in part:
“(a) The administrative heads are fiduciaries and as such shall act solely in the interests of the members and beneficiaries of the systems they administer. They shall perform their responsibilities in a manner consistent with those of a reasonably prudent person exercising care, skill and caution.
(b) The assets of a system shall at all times be under the control of the administrative head.
(c) No investment or loan transaction shall be made by a system unless the same has been approved by the administrative head. The administrative head may delegate its powers of investment to a committee or agent of the administrative head within well-defined established guidelines. Such committee or agent shall render timely written reports of its activities to the administrative head under a schedule to be established by the administrative head and shall render special reports whenever requested by the administrative head.
(d) In respect to the delegation of investment powers, the administrative head shall periodically review: (1) the present holdings in the investment account; (2) any marked changes in the account during the preceding period; (3) the reasons for such changes and the results achieved thereby; (4) the investment activity in the account including the rate of turnover; and (5) any other factors the administrative head considers pertinent to an analysis of the financial performance and planning, consistent with its obligation as a fiduciary.”

As outlined in Department Regulation No. 85, the trustees are the fiduciaries of the System and as such must act solely in the interests of its members and beneficiaries. No board collectively, no trustee individually, nor any administrative head, can delegate their fiduciary obligations to others. They must perform their responsibilities in a manner consistent with those of a reasonably prudent person exercising care, skill and caution. The Regulation requires that the assets, at all times, be under the control of the trustees and that investments and loan transactions be approved by the trustees. Department Regulation No. 85 allows the trustees to delegate its investment powers within well–defined established guidelines and with the rendering of timely written reports of its activities to the trustees under a schedule established by the trustees. At a minimum, the Department believes that appropriate implementation of such guidelines requires a comprehensive Investment Policy Statement.