The New Chair of the NYCERS Board of Trustees

Mayor de Blasio will soon be appointing a new commissioner for the Department of Finance. The position, unfortunately, has a tradition of being filled with political operatives as opposed to public finance/taxation professionals.

The commissioner is, ex officio, a trustee of both the city police and fire pension funds.

The mayor will also be appointing his representative on both the NYCERS and TRS Boards of Trustees. The Mayor can appoint anyone to these two unpaid positions. On the NYCERS board the mayor's representative is the statutory chair. At TRS the chair is elected by the trustees.

Because of the mayor's enormous political and budgetary power, the mayor's representative is the most important member of the NYCERS Board of Trustees.

Prior to 1990, the power structure of the NYCERS Board of Trustees, to a large extent, mirrored the Board of Estimate which was the original governing body of NYCERS up until 1968. With the destruction of the Board of Estimate in 1990 the mayor's power within the city increased radically. That was alos true at NYCERS.

While the mayor's representative has only one vote, it is the most important vote. Even a dissenting vote from the chair on an investment decision is a warning signal to the other trustees.

Mayor Bloomberg's appointees to the NYCERS and the TRS Boards have been a disaster. The mayor has constantly complained about the rising costs of pensions during his three terms but his representatives have failed to control investment costs or institute a sound investment strategy that earns a market rate of return.

Mayor de Blasio's appointee will have the challenge of bringing the annual investment costs for the five pension funds down from the $472.5M (FY-2013) to a rational annual amount of $100M (FY-2002) along with pushing to adopt an index/core strategy which has the potential to earn on average an additional $1.5B a year in asset value for the five city pension funds.

With respect to NYCERS here are some operational recommendations that I hope the mayor's new representative considers:

1. Hire a totally independent investment consultant with no revenue connections to the investment management community.
2. Make all investment contracts public record and provide every trustee with a copy of each contract. It is most likely that the trustees have never seen any of these contracts.
3. Make the Board's investment meetings totally open for all items unless the Law Department gives written direction that a specific item must be dealt with in executive session.
4. Put in place a tight accounting control of the invoice/payment process for all investment expenses and publicly report all payments to the trustees at each meeting and once a year provide the trustees with a copy of the final annual reconciliation of investment expenses for the year.
5. Utilize the NYCERS web site to provide public disclosure of investment data and decisions. The Comptroller's attempt in this area has failed to deliver on the information it promised to provide.
6. Make available to the trustees the full cash flow history of each private equity, real estate, and hedge fund contract on a real time basis. (NYCERS web site)
7. Explore the feasbilty of dropping of all asset classes that do not fit within a index/core strategy.
8. Set 10 basis points as the general limit on fees for all investment contracts. I suspect that this will be a very effective screen for unproductive investments.
9. Almost certainly drop all emerging manager contracts unless their fees are brought under the 10 basis point limit.
10. Review the quality of NYCERS's senior administrative management. This staff was put in place while Martha Stark was chair.
11. On an annual basis provide the trustees with a copy of a complete reconciliation of administrative expenses, This report was dropped in FY-2010. (NYCERS web site)
12. Radically upgrade the agency's monthly production report to include open and closing transaction balances along with incoming work, work completed during the month, and aging information on the outstanding work. (NYCERS web site)

FY-2013 Investment Returns: NYCERS Fails to Match the S&P 500 Index, Again.

The Comptroller has just released the NYC FY-2013 CAFR (Comprehensive Annual Financial Report) : the city's annual financial statement. Pension investment expenses have increased significantly from FY-2012, $472.5M up from $370.3M. This is a reversal from the previous two years.

Specifically, NYCERS expenses jumped from $129.5M to $183.3M (see original expense history).

As of June 30, 2013, the NYCERS closing balance increased from $42.7B to $47.2B but given the 17.9% increase in the S&P 500 index that number should have been $48.6B (Bond Core = -.95% with a 70/30 allocation). With a waste of $150M in investment expenses NYCERS is short $1.55B for FY-2103 that a prudent investment policy would have provided. For the record NYCERS missed the Index/Core threshold by $2.6B in FY-2012.

The truly scary thought is that if NYCERS had followed a simple prudent investment strategy over the last last 14 years, the June 30, 2013 closing balance would be $58B. In this year's CAFR the actuary estimated the NYCERS current pension liability at $65.3B. A sane investment policy can go a long way in solving pension problems.

Stop the Bleeding - Public Pension Funds Under Attack - Report and NY Times article

I have been hammering the NYCERS trustees for several years about about their investment decisions, in particular, allocations to private equity, real estate partnerships, and hedge funds.

Now there is a growing record of how misplaced these investments are for public pension funds.

Read the October 20, 2013 NY Times article by Gretchen Morgenson, Ted Seidle's recap article in Forbes on the investigation to the assault on the Employee Retirement System of Rhode Island, and the broad sweeping expose in Rolling Stone magazine.

Here is the link to the full investigative report.

Maybe the new mayor could find the money for his pre-K program by stopping the bleeding of the pension funds by Wall Street.

What Happened to the Perjury Investigation at NYCERS - Thompson & de Blasio

In 2009, four years ago, the Public Adovcate and the Comptroller, both NYCERS trsutees, requested D.O.I. to investigate a charge of perjury and official misconduct by senior management at NYCERS. As of today there has been no resolution of those charges. The trustees made this request in response to specific evidence that I had given to the trustees of the perjury by NYCERS senior staff.

In 2009, Bill Thompson was a NYCERS trustee and the Public Advocate's office made the actual request for the investigation. In 2010, de Blasio became the Public Advocate and a NYCERS trustee.

Thompson and de Blasio are now running for mayor of New York City. Shouldn't they clear up this unfinished business before they take on the responsibilities of mayor? Scott Stringer was also a NYCERS trustee in 2009 and has equal responsibility for cleaning up this mess.

A Plea to Bill De Blasio, John Liu, and Scott Stringer.

I know this posting is probably a waste but I have to try one last time. I spent over thirty years trying to help the members and retirees of NYCERS and it drives me crazy when I see the current management trashing them.

In a June 30, 2013 posting I wrote about how NYCERS and in particular, Karen Mazza, was crushing a disablity retiree.

I am making a direct appeal to Bill De Blasio, John Liu, and Scott Stringer, and the other members of the NYCERS Board of Trustees to correct Mazza's mistake. If this was March 1, 2005 when I was executive director, NYCERS would have given this retiree his legal due process. I am asking you now as the head of the agency to do the same.

Two days ago I received a copy of a new letter from Mazza concerning this case. This letter is dated July 30, 2013 and is in response to a July 9, 2013 letter from the original lawyer asking the trustees to correct a NYCERS error. The error occurred in 1990 when NYCERS did not process the retiree's application for accident disability under S.507.

In a June 18, 2013 letter, Mazza had denied an initial April 19, 2013 request from the lawyer. Mazza had stated that the Medical Board had determined that the incident was not an accident and therefore there was no need to process the member's S.507 application.

In the July 30, 2013 letter Mazza was forced to apologize for the false statement she made in her first letter. She now claims:

What I should have written was: "Since the Medical Board had already determined that the on-duty event did not aggravate the condition he claimed to be disabling, he was not eligible to be considered under S.507 of the RSSL for accident disability."

As an aside, this woman is a licensed attorney getting paid a lot of money. To any competent lawyer this correspondence above is a hard reflection on Mazza's competence as lawyer. It reminds me of a clip from a deposition from years ago. You can read it below.

We also can see Mazza's dubious footwork in the following sentence trying to shift responsibility for her words to the outside lawyer:

I apologize for this error. Nevertheless, on the basis of our prior correspondence about this case, you should have been aware that the Medical Board's determination was related to the causation issue rather than the accident/incident issue.

While Mazza's original statement was false, her new statement about causation is both false and absurd. If the Medical Board finds a member not disabled under S.605, it is not possible for the Board to determine whether the incident caused a nonexistent disability. The Board is not authorized to make hypothetical determinations.

In addition, the final determinations on causation and accident are made by the Board of Trustees. Since the member, under S.605, was not disabled, the Trustees never addressed the causation and/or accident issues for this member nor made a final determination on these issues. The member had no opportunity at that time to argue these two issues before the Board of Trustees.

Since causation was not dealt with in the S.605 process, it is absolutely clear the S.507 application should have been processed in 1990 but it was not. No notice of denial was given to the member in 1990. Since NYCERS must correct all errors, it must process the original S.507 application.

The Medical Board must review the Social Security Administration disability decision and the documentation that supported that decision. They must accept the disability determination made by the Social Security Administration in spite of the fact that it is contrary to their own medical determination. They then must in good faith make recommendations on causation and accident relative to the disability and the claimed incident.

The Medical Board's recommendations must then be submitted to the Board of Trustees to make the decision about whether the incident caused the disabilty and whether the incident was an accident. The retiree has the right to argue his case before the trustees.

In closing, I am asking Bill De Blasio, John Liu, Scott Stringer, and the other trustees to do the right thing.

From an old Mazza deposition, "What I Wrote is Not What I Meant."

          16          Q.    I will direct your attention to the

          17     upper part of the memo.

          18                What do you mean you're uncomfortable

          19     if anybody in-house asks to see your deleted

          20     E-mails; uncomfortable about what?

          21          A.    I wanted to know if anybody else was

          22     asking to look at those deleted E-mails.

          23          Q.    That wasn't my question.  I understand

          24     that.  That is what it says.  My question to you

          25     is, why were you uncomfortable about this
 

                                                                  61

           1                            Mazza

           2     information being recoverable, the deleted

           3     E-mails?

           4                MR. MARKS:  Objection to the form.

           5          A.    I wasn't uncomfortable with it being

           6     recoverable.  I was uncomfortable with other

           7     people asking to see it.

           8          Q.    I am reading what you wrote.  "I am

           9     somewhat uncomfortable with this info being

          10     recoverable."  That is not my words.  That is what

          11     it says here.

          12                My question is, when you wrote this,

          13     why did you say that?  What were you uncomfortable

          14     with about having this information, that is the

          15     deleted E-mails, being recoverable?

          16                MR. MARKS:  Objection to the form.

          17          A.    That is not -- what I wrote is not what

          18     I meant.  When I say recoverable, I meant being

          19     seen by somebody else.

          20          Q.    Well, you couldn't see it if it wasn't

          21     recovered.

          22          A.    Right.

          23          Q.    Why were you uncomfortable that the

          24     E-mails that you had deleted would be seen by

          25     somebody else "in-house"?  Why?
 

                                                                  62

           1                            Mazza

           2          A.    My purpose in writing that paragraph

           3     was, we were in the middle of a DOI investigation

           4     and I wanted to know if anybody else was asking

           5     Kin to show them my deleted E-mails.

           6          Q.    You're not answering my question.

           7                I asked you, using your own words, why

           8     were you uncomfortable with this information being

           9     recoverable.  I am asking you why.

          10          A.    I answered you and said that --

          11          Q.    No, you haven't answered me.  Why were

          12     you uncomfortable; because it would show that you

          13     doctored a resume?

          14          A.    No.

          15          Q.    Why were you uncomfortable; because you

          16     deleted E-mails and it related to a subject that

          17     you were sitting on a panel?

          18          A.    What I said to you in my answer

          19     previously was that what I wrote is not what I

          20     meant.

          21          Q.    You're a lawyer, Ms. Mazza.  The trade

          22     of a lawyer is the usage of words.  I want to

          23     know, what did you mean when you used the words, I

          24     am somewhat uncomfortable with this information

          25     being recoverable?  At that time, what did you
 

                                                                  63

           1                            Mazza

           2     mean?

           3                MR. MARKS:  Objection to the form.

           4          Q.    What did you mean?

           5          A.    What I meant was, I want to know if

           6     Mr. Murphy was asking to see my deleted E-mails.

           7     That is what I meant.

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.