Rejection of Index Investing at the Common Investment Meeting - This is Fraud.

So, the Comptroller has convinced the five city pension boards to attend a combined investment meeting, “Common Investment Meeting - CIM”, every month. Interestingly, the Teachers Retirement System continues to hold additional separate investment meetings every month.

The CIM is similar to a lecture hall class with 200 students as opposed to an ordinary class with 15 students. There is a certain circus quality to the meeting. You can judge for yourself. The videos are on this link.

I recently watched the September 26, 2016 meeting run by Scott Evans. He is the head of the Comptroller’s Bureau of Asset Management (BAM) and is paid $350,000 per year. The five pension funds actually pay his salary through a non-governmental grant scheme to the Comptroller’s revenue budget but the pension funds have no control over his hiring.

Comments on Index Investing

At about one hour into the show Mr. Evans started to comment on a possible simple index stock/bond investment strategy for the city's pension funds as opposed to the “sophisticated” strategy that the funds have adopted and he supports.

While he was not clear about what he precisely meant by the index stock/bond strategy, I am assuming that he was referring to the index stock-R-3000/core+5 bond strategy that NYCERS was using to a large extent circa 2000.

As of June 30, 2000, NYCERS had assets worth $43B of which $21B was in a Russell-3000 stock index and $10B was in a core+5 (Treasuries, investment grade corporate bonds and agency/mortgage backed bonds bond strategy, all with terms 5 years or greater) strategy. Together the two components were 75% of the total portfolio.

Specifically Mr. Evans stated that the index strategy would produce acceptable results, simplify the investment process for the pension funds, allow the pension funds to shrink the staff at BAM and have shorter investment meetings. He, however, claimed that it would be more risky than the “sophisticated” strategy and he made some vague reference to possible draw downs problems but nothing else.

That is basically the end of his discussion on this topic. He provided no quantitative support for his position. He felt his comment was sufficient to dismiss the index concept. No trustee asked any questions in spite of the importance and value of index investing.

What he failed to mention, however, was the actual historical rates of return for the two strategies. He did not list the radical differences in external fees, internal costs and taxes between the two strategies. He made no mention of the liquidity, volatility, currency, political, and credit risks inherent in the “sophisticated” strategy. He also failed to mention the potential of the “sophisticated” strategy for improper political influence and corruption which has occurred in the state pension fund in Albany and other public pension funds around the country.

Some Actual Numbers

In an effort to provide some specifics let me give you some historical numbers. Over the last 20 years (1996-2016) NYCERS assets have increased at annual rate of 3.4% per year, from $27.98B to $54.55B. See below.

From 1996 to 2000, as I mentioned above, NYCERS followed an investment strategy that was roughly 75% in a index/core+5 strategy with the other 25% in more dubious assets. The annual rate of increase in the assets for those four years was 11.3%. As of June 30, 2000 there were almost no private equity investments (non-publicly traded assets) in the NYCERS portfolio.

Since 2000, the annual rate of increase in NYCERS assets, using the quarterly numbers, has been 1.51%. Since 2007, that rate has been 2.88%. Needless to say, 2000 was the advent of the “sophisticated” investment strategy. By 2008 NYCERS was hip deep in shit with only 56% in the index/core+5 strategy. You can see that the trustees are not totally crazy.

Since 2009, NYCERS assets have increased at a 9.5% annual rate but the S&P 500 stock index has increased at an even higher 12.5% annual rate. As of June 30, 2106 NYCERS had assets of $54.6B. That number, however, includes a $3.2B positive cash inflow from 2009 to 2015 and $9.9B in non-publicly traded assets. The quoted values of non-publicly traded assets are basically guesses of what they are worth and you know the real number is less than $9.9B.

Based on the NYCERS official financial statements, which are different from the Comptroller's quarterly reports, the opening balance on July 1, 1999 was $41.9B and the closing balance on June 30, 2016 was $55.49B. That is an average annual increase of 2.53% for the seventeen years. The rate of increase for the S&P500 index/core+5 bond strategy with a 60/40 stock/bond allocation over the same 16 years is 4.648%. That translates into a $81.0B closing balance for June 30, 2016. That is a $25.5B higher than what NYCERS actually had. The sum of each year's difference individually is over $16.2B but compounded over the 16 years it is $25.5B. This is a big step towards full funding for NYCERS but we should be very aware that even indexing does not hit the 7% assumed interest rate that actuaries dream about.

Bottom line, NYCERS almost certainly would be in far better shape over any span of time with the “unsophisticated” index/core investment strategy. Of course, Scott Evans would be working somewhere else.

Listed below are the June 30 NYCERS asset values since 1985 as reported by the Comptroller in the quarterly performance reports along with closing balances from the CAFR's and estimates of index returns from FY-2000 forward.

• Year - Quartely - CAFR CB - Indexing CB
• 1985 - $10.178B
• 1986 - $12.534B
• 1987 - $13.866B
• 1988 - $14.349B
• 1989 - $16.499B
• 1990 - $17.904B
• 1991 - $18.852B
• 1992 - $20.670B
• 1993 - $22.939B
• 1994 - $22.432B
• 1995 - $25.455B
• 1996 - $27.983B
• 1997 - $32.439B
• 1998 - $37.711B
• 1999 - $41.024B
• 2000 - $42.997B - $42.824B - $43.746B
• 2001 - $37.519B - $37.251B - $40.222B
• 2002 - $32.212B - $32.842B - $34.106B
• 2003 - $30.841B - $31.524B - $32.477B
• 2004 - $33,526B - $34.178B - $33.480B
• 2005 - $34.703B - $35.526B - $35.406B
• 2006 - $36.650B - $37.288B - $36.008B
• 2007 - $42.237B - $42.514B - $42.707B
• 2008 - $38.862B - $39.716B - $40.342B
• 2009 - $30.929B - $31.903B - $34.490B
• 2010 - $34.618B - $35.383B - $35.633B
• 2011 - $41.623B - $42.409B - $42.107B
• 2012 - $41,620B - $42.655B - $45.523B
• 2013 - $46.623B - $47.194B - $47.862B
• 2014 - $53.549B - $54.422B - $55.171B
• 2015 - $54.289B - $54.889B - $57.106B
• 2016 - $54.553B - $55.490B - $57.806B

A Word of Caution About Selecting the New NYCERS Executive Director

Just in case anyone is entertaining the thought of appointing Karen Mazza as the new executive director of NYCERS, including Mazza herself, let me refresh your memory about her illustrious career.

In 1990 I was appointed executive director at NYCERS after 17 years with the agency. In that position I had steady contact with the NYCERS Chair and other NYCERS trustees. At that time it was common for the Mayor to appoint the Finance Commissioner as the Chair of NYCERS.

In 1993 Mazza went to work for the Mayor's Pension Unit at the Finance Department. That unit supported the Commissioner with his/her duties as NYCERS Chair. In that position she worked for an attorney named Norm Rosner who was the Commissioner's alternate at the NYCERS Board. Rosner made it clear to me that Mazza was not an effective employee but gave no details. At the time I did not appreciate his insight into this woman. In hindsight, it is quite clear why he held her in such low esteem. She left Finance in 1994 and went to work at the Comptroller's Office.

In 1991 Leo Vallee and I began writing procedural descriptions for all newly passed pension legislation that impacted NYCERS. These write ups are still being used today. At that time NYCERS had an old time permanent staff lawyer who thought he was a brilliant legal writer. Unfortunately he was not. He was, however, honest.

In 1997, I hired Mazza as an administrative staff analyst. I was hoping we would get help with the analysis of the pension legislation along with other in-house legal issues. Because of the 1996 legislation giving NYCERS budgetary independence, I was legally prohibited from hiring lawyers in legal titles unless I had approval from the Law Department. The Law department was not about to give NYCERS that approval.

Unfortunately, Vallee and I had to continue writing the legislative descriptions because Mazza was also not able get the job done. This was a warning sign that Mazza was not an astute analytical attorney.

Falsifying Time Sheets

In 2000, Mazza gave birth to her second child. Also in 2000 we moved into the new office site in Brooklyn. She returned from maternity leave in late 2000. She returned to 8:00-3:45 work schedule. I worked a 9-5 schedule. Her new office had an open glass front as did all managers' offices and was twenty feet down the hall from my office. Whenever I passed her office I would be able to know whether she was in her office or she was on the phone. For the record she was on the phone almost every time I walked by.

In 2001, I began to notice that when I would arrive to work she was not in her office. I would eventually find her after 9:30 or later. She was one of the top three managers in the agency. Managers have a certain leeway with their schedules in that a manager can be make up time at the end of the day if he/she comes in late in the morning. She, however, was meticulous about dashing out the door at 3:45 hoping I would not see her.

One of my duties was to sign off on the time sheets of all of my direct reports which Mazza was. When I became aware of her absences at the beginning of the day, I started to closely cross check her time sheets with the days when I knew she was late and found that she was falsely recording her starting time as 8:00 when she very often was not arriving until 9:30 or later.

To double check what I had found, I examined the security system which records when all employees enter the working area of the office. Sure enough as another sign of her dishonesty, on the days that she was late she would make sure she did not swipe her security access card. She instead would tell the security guard on the front desk that she had forgotten her card and ask him to buzz her in through the security door. This meant that there was no trace in the security system of when she actually arrived.

I should have fired her at this point.

In retrospect, it was the worst mistake I made while running NYCERS. Foolishly I gave her a second chance. I spoke to her about what I had discovered. She tried to deny it. I told her it had to stop and that I would be closely monitoring her time sheets. From then on she knew I was watching her like a hawk. This was not a good situation.

In addition, in a regular weekly managers' meeting I made it very clear to the all managers that they had to swipe through security every day and if they forgot their card that they had to sign in with Security and mark their time. I got a few funny looks but Mazza knew I was talking about her.

Perjury and Fraud

Subsequently in early 2004 during the hiring process for a new HR director Mazza enabled Felita Baksh to falsify her writing sample which was crucial in my decision to appoint Baksh as the NYCERS HR director. This was in addition to the help that she gave Baksh with her resume.

As everyone at NYCERS has come to know, it is a law of nature that Baksh/Ramsami/DiLorenzo can not write a grammatically correct sentence never mind a two page essay. As a cruel twist of fate, the one HR staff member who unknowingly observed Mazza and Baksh rig the writing sample was eventually fired by Mazza and Baksh. This was after Conflict of Interest Board had fined Baksh for using this employee's credit card to buy furniture.

Later in 2004 Mazza conspired with the DOI investigator, Carol DeFreitas, who was investigating Baksh's appointment. DeFreitas was Martha Stark's "man" on staff at DOI. DeFreitas was literally her employee on assignment at DOI. I need not say anything more about Stark. Together Mazza and DeFreitas were able to supress any mention of Baksh's lying under oath or the false writing sample.

While one trustee forwarded the perjury charge to DOI, there was never any follow up.

Retaliation Against My Wife

After I was fired in March of 2005 Mazza was involved with creating trumped up charges against my wife which lead to her being demoted. Over the next ten years Mazza was a driving force behind placing my wife in position where she had no work assignments and ensuring that any attempt to give her work was blocked. In 2015 my wife had to resign because of health reasons. Over the ten years she had developed sever colitis and had a major heart attacked which almost killed her.

Just a Bad Lawyer

I previously mentioned that Mazza is a incompetent lawyer. In 2008 she was so unable to handle pension issues that she had NYCERS issue a $100K per year no-bid contract to a former law Department staffer to do her work. This went on for 4 or 5 years.

In 2008 Mazza lawyer began harassing the Tier 4 accident disability EMT retirees over the alleged gainful employment issue and forced then to enact legislation to override her incorrect interpretation of the disability statute. She also managed to deny a disabled EMT worker her rightful disability benefit.

When the Workers' Compensation Offset issue arose in 2012, she was in the fore front of crucifying Tier 3 retirees who were receiving disability benefits. Who can forget her words when she was cutting disabled pensioners' checks to $10 a month "we're trying to leave them with something in their pocket at the end of the month".

In 2006 NYCERS signed a lease for a disaster recovery site in Long Island City. Mazza handled the lease and all the the contracts for this fiasco. Ten years later the site still does not have a Certificate of Occupancy.

Closing Thought

D'Alessandro, the executive director, has been a nasty empty suit for eleven years at NYCERS. Now, in July, she appoints Mazza as Deputy Executive Director to fill the spot that opened up with the retirement of the person who held the position for ten years. Then two months later in September D'Alessandro announces her own retirement. What do you think is going on?

Finally Someone Noticed the Skim at TRS

This month the Citizens Budget Commission discovered a city funded subsidy for the teachers TDA fund at the NYC Teachers Retirement Fund (TRS), better late than never.

In 2013 I stumbled on the fact that TRS had a persistent negative cash flow.

Then in 2014 someone reminded me of something I sort of knew but never understood the full impact.

I can not understand how the city allows this massive benefit to exist. It puts the entire TRS retirement structure at risk. The teachers have a very respectable pension benefit. This subsidy to the TDA program is irresponsible in that it pulls assets, $1.2B in FY-2015, out of the pension fund every year. I can see how the teachers love this benefit but if all the other city workers find out about this, there will be hell to pay.

Note: the skim for FY-2016 is $1.354B.