Tuesday, November 8, 2016

How Do You Lose $174M in a Rising Market?

On October 31, 2016 the Comptroller's Office released the city's Comprehensive Annual Financial Report (CAFR) for FY-2016. This report, in particular, contains the basic financial information for the city's five pension funds.

Based on this report, NYCERS lost $174.2M in asset value during FY-2016 and had a closing balance of $55.59B. Even worse,during the same period the five city pension funds plus the TDA & VSF funds, in total, lost $1.323B in assets.

At a September NYCERS investment board meeting the Comptroller's representative, Scott Evans, presented a performance report to trustees that stated that the fund had earned a return of 1.76% for the year.

What he did not say was that NYCERS had lost $174.2M of assets during the year and obviously he did not explain how that had happened. In a year that the index/core rate of return was 3.9%, NYCERS assets fell by -0.32%.

This is absolutely unacceptable. In three of the last six years NYCERS lost assets. All six years were up markets. See the table below.

The Index/Core Performance for FY-2016

During FY-2016 the S&P500 Index increased in value from 2063.11 to 2098.86, a 1.7% increase for the year. Not good but above water.

The NYCERS bond core target was 7.16% for FY-2016. According to the September performance report NYCERS managed a 6.64% return in this asset class. That was C+ grade but not a loss of capital.

With a 60/40 stock asset allocation the fund should have produced a 3.904% increase in assets with a closing balance of $57.85B.

So how did NYCERS lose $174.2M in capital, a -0.32% loss?

Over the last 17 years NYCERS has managed to leave over $25B on the table because of investment decisions made by Comptrollers and trustees. There is no personal penalty for trustees if they fail to do their job. Hell, they don't even get fired. They just go to work for investment mangers.

NYCERS Investment Fees for FY-2016

NYCERS paid $212.9M in investment fees during FY-2016. That is 38 basis points on the closing balance of $55.59B. NYCERS should never pay more than 10 basis points in fees, even for beating the index/core strategy. 10 basis points is $55.6M, a savings of $157M.

Of course beating the index/core strategy is not possible for a pension fund over a long period of time. Investment returns over a long period of time always reverts to the mean, if you are lucky. Trying to beat the mean will cause a pension fund to fall short of average market returns over extended periods of time.

Six Year Review

Look at the last two rows in the table below. In only one year did NYCERS outperform the Index/Core rate of return. Just adding up the shortages for the six years listed below adds up to $4.2B. If you compounded the shortages for the six years, the loss is over $10B. When you compound the shortages over the last 17 years, the calculation produces a $25B loss.

Why do the trustees always make these bad decisions? Follow the money. Who is getting the extra $157M in fees. Who is making and receiving campaign contributions?

The following table is a recap of NYCERS income statements from FY-2011 to FY-2016:

Income Statement History
Year FY-2016 FY-2015 FY-2014 FY-2013 FY-2012 FY-2011
Employee contributions $485.5M $467.1M $447.7M $437.8M $403.6M $413.7M
Employer contributions $3.366B $3.160B $3.114B $3.047B $3.017B $2.387B
Interest income(bonds) $692.8M $635.8M $658.7M $624.7M $528.0M $492.2M
Dividends(stocks) $836.5M $795.3M $739.7M $696.7M $637.1M $619.9M
Securities Lending $29.7M $26.5M $8.8M $27.8M $25.0M $23.4M
Income-In $5.413B$5.089B$4.974B$4.884B $3.941B$4.616B
Benefits/refunds $4.403B $4.236B $3.990B $3.851B $3.689B $3.569B
Transfers to the other pension funds $7.4M $7.1M $7.2M $5.3M $5.0M $4.4M
Skim to VSF's -$41.2M $41.9M $202.1M $12.3M $12.4M $12.4M
Investment Expenses $213.0M $231.8M $184.6M $183.3M $129.5M $145.1M
Administrative expenses $56.7M $54.6M $50.4M$48.7M $51.4M$46.4M
Income-Out $4.638B$4.571B$4.283B$4.101B$3.888B$3.770B
Net Income $774.4M $518.1M $691.0M $783.0M $728.0M $164.1M
Actual Cl. Bal.$55.489B$54.889B$54.442B$47.195B$42.655B$42.409B
Index/Core Cl.Bal.$57.806B$57.107B$55.171B$47.863B$45.523B$42.107B
Shortage $2.317B $2.217B $0.749B $0.668B $2.868B -$0.302B
Actual RR -0.317% -0.093% 13.850% 8.806% -1.136% 19.391%
Index/Core RR 3.904% 3.981% 15.437% 10.373% 5.626% 18.537%

9 comments:

Patricia Bell said...

Welcome to post-Trump America, First Responders! NYC Boldest, Bravest, Finest! You get what you voted for. See you in 2019👿

Vicky said...
This comment has been removed by the author.
Vicky said...

What are you (dumbbell) talking about, post Trump America, he just got elected!! The answer is that nycers should not be giving our monies to no campaigns to buy influence & when they did it was given to the crooked ass democrats!! Read the article again dumbbell & stop spewing your dumb idealogy because your girl lost!!!

BJSGARDA317 said...

Last time I check the Comptroller Stringer is a Democrat.

Remember what happen to Hevsi who became the State Comptroller after serving as the City Comptroller. The fees did him in.

Patricia you need to educate yourself.

debra burrows said...

Sounds like an upcoming episode of American Greed.

Dave L said...

Completely uninformed comment...

Dave L said...

Mr Murphy, what can we, retired Correction Officers, do something to assist our 2016 VSF After NYCERS UNSKIMMED our skim?

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