Saturday, August 3, 2019

The FY-2020 Budget and the Legacy Replacement Project

On April 11, 2019 the NYCERS Board of Trustees adopted the agency’s new budget for FY-2020. After almost two months I was finally able to get the basic details on the FY-2020 budget. Wouldn’t be a great idea for NYCERS to store its administrative budget history on the NYCERS website? I’m afraid that will never happen. NYCERS has even dropped the two year history of its financial reports and only keeps the current CAFR online.

The total (PS & OTPS) budget increased from $77.1M to $81.1M, a 5.2% increase.

  • The full time head count increased by 5 to 433.
  • The part-timers increased by 8 to 43.
  • The number of consultants is approximately 39.
  • The PS budget is $35.3M.
  • The OTPS budget is $45.9M.
  • The fringe benefit budget is $10.7M.
This is a significantly smaller increase than what the trustees approved for FY-2019 which went from $53.5M to $77.1M. That was a 44.1% increase. The FY-2019 increase was driven primarily by the cost of the customer relationship software (CRM) contract that NYCERS granted to Salesforce. Of course there was the $2.5M cost for renovating the 23rd floor. As a point of reference the 23rd floor was totally built from scratch in FY-2000 as part of a complete office build out in brand new office building.

Based on a statement by the Chairperson, the $81.1M total is only an interim amount. The executive director will be proposing a mid-year increase to cover the cost of an expected contract that will result from a pending RFP for the Legacy Replacement Project (LRP). The closing date for this RFP is July 15, 2019. NYCERS, however, is projecting to not sign a contract for the project until April-May of 2020. So the full annual cost of the LRP will not hit the FY-2020 budget.

NYCERS staff originally presented the LRP concept to the trustees in the spring of 2015. It was supposed to be a five year project running from FY-2106 to FY-2020. The NYCERS total budget in FY-2015 was $47.3M. It is now $81.1M. Based on NYCERS own projections it will be $123.2M next year.

NYCERS finally released the RFP for this project in December, 2017. It was withdrawn because of low vendor response and reissued again in April, 2019. NYCERS has planned to take about 9 months to evaluate the RFP and negotiate a contract. With a start date in the spring of 2020 and projected five development cycle, the project should be completed in the spring of 2025, ten years after it was conceived. It is possible that the selected vendor will complete the work in less than five years but that is not likely.

My estimate of the total cost of this project from FY-2019 to FY-2025 will be at least $390M.

The actual and projected OTPS budget amounts for FY-2018 to FY-2024 as stated by NYCERS are as follows and this list does not included the planned fifth year of LRP contract, 2025.

  • 2018 - $20.9M (actual)
  • 2019 - $43.5M (actual)
  • 2020 - $45.9M (approved)
  • 2021 - $88.0M (projected)
  • 2022 - $88.9M (projected)
  • 2023 - $89.8M (projected)
  • 2024 - $90.5M (projected)

What is worth $390M? What significant benefit justifies this enormous cost?

And what about the risk that it fails? NYCERS is putting in place a huge oversight structure which is a big part of the project’s cost, but will the trustees have the nerve to pull the plug if things go bad?

Friday, July 26, 2019

Why Are the $129M Incentive Fees Not Being Reported in the NYCERS CAFR?

NYCERS issues a Comprehensive Annual Financial Report (CAFR) every December. This report is suppose to be a accurate picture of the financial information for NYCERS during the previous fiscal year (July-June). The FY-2018 report stated that total investment expenses was $241.8M and as part of that amount the private market investments expenses were $130.0M as listed in the first chart below:

In contrast to the CAFR statement prepared by the outside accounting firm, the Comptroller in September, 2018 released a FY-2018 performance report prepared by State Street. On page 27 of that report State Street lists the expenses for private market investments. You can see in the second chart below that the total fund investment fees were $346.03M and as part of that amount private market fees were $272.45M.

The $346.03M does not included foreign taxes ($26.M), payments to the Comptroller ($4.2M), and miscellaneous expenses ($2.1M) which are included in the CAFR's $241.8M expense amount.

For many years NYCERS has not defined the term "Organization Costs". The Comptroller, however, uses a different term for these costs, "Partnership Expense". I now suspect that the term means meals, travel expenses, and any other expense that the general partner can pass along to the limited partners.

But what is more disturbing is that there are incentive fees listed by the Comptroller. The total for these fees are $129.51M . These fees have never been listed in the NYCERS CAFR. This is the main reason that that the Comptroller is reporting $346M and NYCERs is only reporting $272M. There is obviously a serious flaw in NYCERS accounting. And by the way, what managers are being paid the incentive fees? Why are they being paid these fees?

NYCERS Asset Class & Fees from CAFR
Private Market Asset Class End of Year Asset Value Fees Organization Costs Total Expenses Basis Points Rate of Return
Private Equity $4,470M $50,117,502 $13,064,536 $63.18M 141.2 17.8%
Opport.& Global FI $1,851M $15,534,877 $1,820,851 $17.35M 93.5 7.0%
Real Estate & Infrastructure $3,792M $40,993,082 $9,510,109 $50.50M 133.2 12.19%
Hedge Fund $68.0M $345,733 $0.35M 50.843 8.43%
Totals - Private Markets $10,181M $131.48M
Totals - All Classes $65,206M $241.8M

--------------------------------------------------------------------------------------------------------

NYCERS Asset Class & Fees from Comptroller's September 30, 2018 Performance Report
Private Market Asset Class Avg. Asset Value (billions) Management Fees (millions) Partnership Expenses (millions) Fees&Expns-Basis Points Incentive Fees (millions) Incentive Basis Points Total Fees (millions) Total Basis Points
Hedge Fund $0.075 $0.550 $0 72.0bp $0 0.0bp $550.03 72.0bp
Private Equity $4.432 $51.02 $17.51 154.64bp $88.03 198.63bp $156.57 353.26bp
Real Estate $3.349 $33.10 $8.497 124.21bp $31.66 94.53bp $73.26 218.74bp
Infrastructure $0.328 $8.433 $3.098 128.69 $0.863 28.31bp $12.394 138.32bp
Opportunistic Fixed Income $1.763 $15.578 $10.615 148.57bp $3.482 19.75bp $29.673 168.32bp
Private Market Assets Total $9.947 $108.99 $39.72 149.19bp $124.04 124.69bp $272.45 273.88bp
All Assest Total $62.699 $176.80 $39.22 34.43bp $129.51 20.66bp $346.03 55.19bpbp

Thursday, May 9, 2019

Legal Malpractice: Final Average Salary - Tier 4 and Tier 6 Members

Introduction

In an April 15, 2015 posting, I outlined a fight between a NYCERS member and the NYCERS management over the calculation of the member’s projected pension benefit, in particular, over her final average salary (FAS). As a point of reference the management of NYCERS is engaging in this harassment over the difference between an annual benefit $5,300 versus $8,400.

In a March 20, 2019 letter the NYCERS Deputy General Counsel denied the member’s legally supported request for a proper calculation of her projected retirement benefit. The counsel’s letter failed to provide legal justification for the denial.

In response to the denial letter the member wrote to the Board of Trustees. She then received a second denial letter, dated April 22, 2019, this time from the NYCERS General Counsel, Ilyse Sisolak. This letter attempted to provide the legal support that the first denial letter lacked. This new letter, unfortunately, is either completely incorrect or purposely deceptive. I will assume that it is incorrect.

The Part-Time Law

In 1992, the governor signed Chapter 749 which was a response to NYCERS defeat in the Doctors Council part time litigation. Listed below is the first part the general counsel’s legal argument for denial of the member’s pension rights:

NYCERS First Argument

The new law added Ad. Code Section 13 -638 4 titled “Membership rights in NYCERS and BERS for part-time service credit for service, dual employment positions, membership rights of school crossing guards." The legislative history for this law establishes that the only purpose for Chapter 749 was to permit part-timers to receive service credit and a final average salary (FAS) from their part-time service. The purpose was never to change a Tier 4 member's FAS for full time service. New York Retirement and Social Security Law (RSSL) Section 608 subdivision (d) was added as part of Chapter 749 in order to account for the new calculation created for members with part-time service within Article 15 of the RSSL. Once this section was added, one could not, from the four comers of the statute, discern whether section (a)' or section (d) should be used to calculate a Tier 4 member's FAS; however, the legislative history made it clear that for full time Tier 4 members, RSSL S. 608(a) was the proper statute to use.

Using a tactic that her deputy general counsel used, Ms. Sisolak makes a statement about a section of law, Section 608(d), without quoting the actual law. Quoted below is the current wording of the statute.

Section 608(d) of the NYS RSSL

d. Subject to the provisions of subdivision c of this section, and notwithstanding the provisions of subdivision a of this section, with respect to members of the New York city employees' retirement system and the New York city board of education retirement system who are subject to the provisions of this article, a member's final average salary shall be determined pursuant to the provisions of paragraph fourteen of subdivision e of section 13-638.4 of the administrative code of the city of New York, provided, however, that the applicable provisions and limitations of the term "wages", as defined in subdivision l of section six hundred one of this article, shall apply to such determinations of final average salary.

As of 1992 when Section 608(d) was created, all NYCERS and BERS Tier 4 members became subject to this subdivision “notwithstanding the provisions of subdivision a of this section”. This language is totally clear. There is no limitation with respect to full or part-time members. There is no confusion in this language. All Tier 4 NYCERS members are covered. Therefore, there is no reason to go searching the legislative history of Chapter 749. Ms. Sisolak is searching for confusion where none exists. Ms. Sisolak’s argument is simply wrong.

As an aside, you will notice that she again provides no quotes from the legislative history to support her comments.

The Tier 6 Law

Ms. Sisolak also added a second argument referring to Chapter 18 of the Laws of 2012, the “Tier 6” law. Again she provides no quotes from Chapter 18.

NYCERS Second Argument

In 2012, the NYS Legislature passed Chapter 18 of the Laws of 2012, which created Tier 6. Enactment of the Tier 6 legislation clarified that Chapter 749 only applied to part-time service. This law further modified RSSL Section 608(a) to explicitly delineate that the first sentence within this subsection, which sets forth the FAS calculation for Tier 4 members applies to NYCERS members who joined prior to April 1, 2012. The second sentence explicitly excludes NYCERS and states that it only applies to the New York state systems. Therefore, the Ad Code provisions are only to be used for part-time service and NYCERS Tier 6 members, because they are not covered by RSSL Section 608(a). As such, Chapter 18 of the Laws of 2012 provides the statutory basis for how NYCERS calculated your pension and the assertion that there is no statutory basis is incorrect.

As a reference you can see how Chapter 18 of the Laws of 2012 amended Section 608 by clicking on the link.

Chapter 18 makes no specific reference to the part-time issue.

As background, after the passage of 749 in 1992, there were still Tier 4 members in the state retirement systems that were covered by Section 608(a).

In the first sentence of the modified Section 608(a) you can clearly see that the Chapter 18 is protecting the rights of those members who first became members before April 1, 2012. It does not explicitly include NYCERS in this sentence as Ms. Sisolak claims.

In the new added second sentence of Section 608(a), all NYSLERS and NYSTRS members who join after April 1, 2012 are made subject to the new Tier 6 five year FAS calculation. It also does not explicitly exclude NYCERS as Ms. Sisolak claims.

If according to Ms. Sisolak’s argument Section 608(a) still applied to full time NYCERS Tier 4 members, they would have escaped the new Tier 6 five year calculation. We all know they did not.

Actually Section 608(d) (see above) was already pulling Tier 4 NYCERS members into Section 13-638.4. It is true that Section 608(d) was modified by Chapter 18 but only so far as pointing specifically to subdivision e and by adding limitations to the definition of wages. All Tier 4 NYCERS members had already been routed to Section 13-638.4 via the Part-Time Law.

In turn, Chapter 18 modified Section 13-638.4.e by adding a component that applied the new 5 year calculation to new NYCERS members. You can refer to a previous post for the gory details of Section 13-638.4.e.

Conclusion

I see no logic in NYCERS arguments on this issue. It is clear to me that this member is entitled to the six consecutive year FAS in calculating her pension benefit.

NYCERS, unfortunately, has all the initial power in these situations. Unless NYCERS changes its position, the member will have to file an Article 78 which is difficult but not overwhelming. But even if she wins, NYCERS will appeal and then the cost of fighting becomes onerous.

This usually breaks the ordinary member unless you are Mr. King.

Chapter 18: Section 608 Modifications

§ 54. Subdivisions a, b, c and d of section 608 of the retirement and social security law, subdivision a as amended by chapter 379 of the laws of 1986, subdivisions b and c as amended by chapter 286 of the laws of 2010 and subdivision d as added by chapter 749 of the laws of 1992, are amended to read as follows:

a. [A] For members who first become members of a public retirement system of the state before April first, two thousand twelve, a member's final average salary shall be the average wages earned by such a member during any three consecutive years which provide the highest average wage; provided, however, if the wages earned during any year included in the period used to determine final average salary exceeds that of the average of the previous two years by more than ten percent, the amount in excess of ten percent shall be excluded from the computation of final average salary. For members who first become members of the New York state and local employees' retirement system or the New York state teachers' retirement system on or after April first, two thousand twelve, a member's final average salary shall be the average wages earned by such member during any five consecutive years which provide the highest average wage; provided, however, if the wages earned during any year included in the period used to determine final average salary exceeds that of the average of the previous four years by more than ten percent, the amount in excess of ten percent shall be excluded from the computation of final average salary. Where the period used to determine final average salary is the period which immediately precedes the date of retirement, any month or months (not in excess of twelve) which would otherwise be included in computing final average salary but during which the member was on authorized leave of absence at partial pay or without pay shall be excluded from the computation of final average salary and the month or an equal number of months immediately preceding such period shall be substituted in lieu thereof.

b. … c. …

d. Subject to the provisions of subdivision c of this section, and notwithstanding the provisions of subdivision a of this section, with respect to members of the New York city employees' retirement system and the New York city board of education retirement system who are subject to the provisions of this article, a member's final average salary shall be determined pursuant to the provisions of paragraph fourteen of > subdivision e of section 13-638.4 of the administrative code of the city of New York , provided, however, that the applicable provisions and limita- tions of the term "wages", as defined in subdivision l of section six hundred one of this article, shall apply to such determinations of final average salary.

Tuesday, April 23, 2019

The Fight Goes On: Overtime and Final Average Salary - Tier 4 and Tier 6 members

I previously posted a write up concerning the compensation base (Final Average Salary: FAS) used by NYCERS to compute Tier 4 retirement benefits. For most retirees this is the most important component in their retirement calculation.

In the posting I referred to a member I was helping with her dispute with NYCERS over the calculation of her compensation base to be used in her retirement benefit calculation. This member is currently working in a classic part-time title. This dispute was the reason I began to dig into the statutory definition for the Tier 4 FAS. The posting was the result of that research.

The dispute was caused by the fact that the member did not have five years of continuous full-time service to be used in the calculation of her FAS. This is a situation that occurs much more often for women than men because of child care responsibilities that fall on women for the most part and also the care of aging parents. The part-time law, that was passed in 1992, was aimed at fixing these types of problems (Chapter 749/Laws of 1992).

Through correspondence and in-person meetings with NYCERS the member clearly pointed out the statutory provisions she wanted applied to her case. On March 20, 2019, the NYCERS Deputy General Counsel, Maya Khodos, sent the member a final decision on the dispute and notified her of her right to file an Article 78 within four months of the letter’s date. We have the King v. NYCERS decision to thank for the clear appeal notice.

The key paragraph in the letter is listed below:

“NCERS is unable to perform a calculation of your Final Average Salary (FAS) pursuant to New York Administrative Code (Ad. Code) section 13-638.4(e)(14)(ii) using the years of 2000 through 2005 as you requested because such a calculation is contrary to the law. A six-year average calculation pursuant to Ad. Code 13-638.4(e)(14)(ii) may only be performed using part­time service. Full-time service is defined by this statute as City-service rendered in a title in which a person is regularly scheduled to work at least eighteen hundred twenty-seven hours per year. Your service, as reported by your agency, was full-time from 2000 to 2005.”
The key sentence in this paragraph is “A six-year average calculation pursuant to Ad. Code 13-638.4(e)(14)(ii) may only be performed using part­time service.”.

If that were a correct statement, I am fairly certain that Ms. Khodos would have stated the statutory language for restricting the six year calculation to only part-time service. She, however, did not state any statutory basis. That is because there is none. Based on my over 30 years of experience working at NYCERS I know this statement is clearly incorrect. Note: the “(ii)” references in the paragraph are incorrect. They should be “(i)(B)”. The “(ii)” reference covers Tier 6 members.

This member will now have to file an Article 78 in order to fight for her pension rights. My opinion is that NYCERS is stonewalling the member and wants her to just go away. NYCERS is denying a benefit without statutory authority.

This issue not only affects this member. It will affect any Tier 4 member who may have a better six year average FAS than a FAS based on a 110% limited 36 month service period.

Section 13-638.4(e)(14) (NYC Admin Code) is the primary definition of the FAS for all Tier 4 members. It was enacted in 1992 in response to the Doctors Council court decision. Prior to that Section 608 (NYS RSSL) was the controlling statute in 1992 it was amended to refer to the new Section 13-638.4. I have included the text of this section at the end. You can read it for yourself and see that there is no part-time service limitation placed on the six year calculation.

NYC Admin Code Section 13-638.4.e.(14)

(For Tier 4 Members)

(i) Subject to the provisions of subdivision f of this section and the provisions of subdivision c of section six hundred eight of the RSSL, where those provisions are applicable, and notwithstanding the provisions of subdivision a of section six hundred eight of the RSSL,

for a tier IV member of NYCERS

who is not a New York city revised plan member (as defined in subdivision m of section six hundred one of the RSSL) or

for a tier IV member of BERS

who is not a New York city revised plan member,

the term "final average salary", as used in article fifteen of the RSSL,

shall be equal to the greater of:

(A) one-third of the highest total wages earned by such member during any continuous period of employment for which the member was credited with three years of service credit;

provided that if the wages earned during any year of credited service included in the period used to determine final average salary exceeds the average of the wages of the previous two years of credited service by more than ten percent,

the amount in excess of ten percent shall be excluded from the computation of final average salary; or

(B) the total wages earned during any six consecutive years from service for which the member received service credit divided by the amount of such service credit earned during that six-year period,

(added as of April 1, 2012 and if limiting benefits, is not applicable to Tier 4 members)
provided, however, that "wages", as used in this paragraph, shall mean the applicable provisions and limitations of the term "wages", as defined in subdivision 1 of section six hundred one of the RSSL.

(For Tier 6 Mmebers)

  (ii) Subject to the provisions of subdivision f of this section where those provisions are applicable, and notwithstanding the provisions of subdivisions a and c of section six hundred eight of the RSSL,

for a tier IV member of NYCERS

who is a New York city revised plan member as defined in subdivision m of section six hundred one of the RSSL) or

a tier IV member of BERS

who is a New York city revised plan member,

the term "final average salary", as used in article fifteen of the RSSL,

shall be equal to

one-fifth of the highest total wages earned by such member during any continuous period of employment for which the member was credited with five years of service credit;

provided that if the wages earned during any year of credited service included in the period used to determine final average salary exceeds the average of the wages of the previous four years of credited service by more than ten percent,

the amount in excess of ten percent shall be excluded from the computation of final average salary,

provided further that "wages", as used in this paragraph, shall mean the applicable provisions and limitations of the term "wages", as defined in subdivision l of section six hundred one of the RSSL.

Wednesday, February 20, 2019

How to Piss Away $242M

Now that I have your attention, let me bore you with the numbers.

In FY-2018, the NYCERS portfolio opened at $61.3B and closed at $65.2B. With interest and dividends, NYCERS had a rate of return of 8.56%. For that return NYCERS spent $241.8B on investment expenses. That was almost a quarter of a billion dollars and represents 39.5 basis points based on the opening balance. At the same time Jane Doe earned 14.34% on her standard S&P 500 index fund for basically no cost.

NYCERS is well aware of the low cost/high return index strategy. During FY-2018, the system consolidated its five existing stock index funds (four large cap and one mid cap) into one fund.

The new fund, Blackrock Russell-1000 Core Index had a closing value of $14.828B on June 30, 2018. The fee for the last quarter of the year was $83,775. (NYCERS FY-2018 CAFR page 144). The Comptroller quoted a 3 month rate of return of 3.84%. The five retired funds cost $424,000 for the first nine months of FY-2018.

Projected for a whole year, NYCERS would have earned 15.36% on $14B for a cost of only $347,100.

Costs for the Five City Funds

On a larger scale what is even more shocking is that the five NYC pension funds spent $999.4M on investment expenses. That's right, just shy of one billion dollars in one year. The opening balance for the five funds was $201.0B and closed with $217.0B. That is 50 basis points based on the opening balance.

There is never any quantitative justification for this level of cost.

It is my opinion, however, that large pension systems as a general rule should be able expense their investment operations for 10 basis points or less. To support this opinion consider the following disussion.

NYCERS Details

The following table is a listing of NYCERS fees by asset class and style as reported by the FY-2018 NYCERS CAFR starting on page 144. It is an eye opening read.

In the table three items are highlighted. They represent limited partnership contracts (approx. 200) that the Comptroller has signed and the trustees have never seen. Their EOY asset values and rates of return are highly questionable in so far as the numbers are provided by the general partner and can not be publicly confirmed. I would use a 20% discount rate on these three asset classes. They are the highest cost asset classes and i would also be skeptical of their expense numbers.

On an ethical basis the limited partnerships very often and in a hidden manner engage in actions designed to extract the greatest amount of money with greatest damage to society.

In addition, these contracts can not be terminated. The general partner is in total control of the term of the contract and the demand for new funds from the limited partners during the life of the contract.

One bright spot is that NYCERS has reduced its exposure to the hedge fund class.

See the last column in the table for what I think is the proper diversification of the NYCERS portfolio after discarding the risky high cost asset classes. It looks like you would be able to get away with a $30M cost for the year.

What would the return for this portfolio? The current NYCERS asset allocation is 67% stocks and 33% bonds. Bonds did terrible in FY-2018. Structured and high yield returned -.03% but the R-1000 core index fund returned 15.36%. So you wind up with a total 10.27% total return for the year. Not bad for a $30.0M cost

By the way what did NYCERS get for the $2.1M under miscellaneous expenses? I've given up trying to find out what organization ("Org") costs are.

NYCERS Asset Class & Fees
Asset ClassFeesEOY Asset ValueBasis PointsRate of ReturnProper Allocation
Fixed Income
Structured$5,318,152$14,057M 3.3 -0.34% $22.0B
High Yield$7,391,750$2,602M 28.4 1.65% 4.0B
All Other$6,096,651$1,257M 48.5 $0.0B
US Equity
Passive $476,096$14,359M 0.3 15.3% $37.0B
Active $7,053,690$3,102M 22.7 13.34% $0.0B
US SC Equity Passive fees: $15,649$334M 0.5 20.83% $0.5B
Private Equity $50,117,502 $4,470M 141.2 17.8% $0.0B
(plus Org costs) $13,064,536
PE-Opport.& Global FI $15,534,877 $1,851M 93.5 7.0% $0.0B
(plus Org costs) $1,820,851)
Real Estate & Infrastructure $40,993,082 $3,792M 133.2 12.19% $0.0B
(plus Org costs) $9,510,109
Foreign Equity $41,508,658$8,226M 82.711.4% $0.0B
(plus Taxes =) $26,456,516
Hedge Fund $345,733$68.0M 50.843 8.43% $0.0B
Target-Mortgage $1,515,348$819M 18.5 -0.69% $1.0B
TIPS $496,907$2,585M 2.0 2.18% $2.0B
Bank Loan $3,661,246$1,139M 32.2 4.73% $0.0B
Consultant Fees: $3,769,671
Legal Fees: $405,499
Subsidy to Comptroller: $4,203,498
Misc. Expenses: $2,061,778
Total $241.8M

NYCERS Income Flow during FY-2018

Note: During FY-2018 NYCERS received:

  1. $ 523.5M - contributions from members
  2. $ 3,377.0M - contributions from employers
  3. $ 878.6M - interest income
  4. $ 897.9M - dividend income
  5. $ 27.1M - securities lending income
  6. $ 3.4M - other income

During FY-2018 NYCERS paid out:

  1. $ 4,882.6M - benefits and withdrawals
  2. $ 9.1M - transfers to other retirement systems
  3. $ 10.9M - payments to VSF (Transit&Housing Police)
  4. $ 205.0M - payments to VSF - Correction Force
  5. $ 241.8M - investment expenses
  6. $ 59.7M - NYCERS operating expenses