How to Do Investment Fees the Right Way - TRS and Its TDA Fund

TRS is one one the five NYC pension funds, the one that covers NYC teachers. Actually TRS is two funds, a defined benefit fund (DB) and a defined contribution fund (DC). TRS calls its DC fund the TDA Program. The TDA program is funded by payroll deductions (approximately $1.0B/year) from the teachers. This fund is teachers' money, not tax payers' money. Well not really. The DB fund guareantees a 8.25% and 7% rate of return on fixed income assests in the TDA fund. But that is another story for another day.

The following list is the closing balances of the two funds as of June 30th of following years:

• Year - DB Fund - TDA Fund
• 2020 -- $59.3B -- $37.0B
• 2021 -- $78.3B -- $43.0B
• 2022 -- $64.0B -- $42.2B
• 2023 -- $67.9B -- $45.4B

You can see from the numbers that the TDA fund runs a tighter ship than the DB fund. The TDA fund grew by 22.7% over the three years while the DB fund only grew by 14.5%. Eeven though the TDA rate of return is is impressive compared to the DC fund, what rally is superhuman is the investment fees that the TDA fund pays versus the DC fund. See the fees for the two funds over the four years listed below:

• Years - DB Fund - TDA Fund
• 2020 -- $290.8M -- $0.6M
• 2021 -- $405.7M -- $13.7M
• 2022 -- $535.3M -- $24.2M
• 2023 -- $518.9M -- $11.2M

How does the TDA spend so little on fees and does so much better that the DB fund???

NYCERS, Is This Really a Ponzi Scheme?

In the NYCERS FY-2015 CAFR on page 189 you will find the updated Solvency Test issued by the NYCERS actuary.

The last year listed on the chart is 2013. The actuary has always been slow in doing his/her work. On the last line there are several amounts:

1. $7.6B = the total contributions made by active workers plus the 5% interest they have earned on their money.
2. $36.2B = the pension liability for all current retirees (7% assumed interest rate)
3. $30.6B = the employer financed pension liability for all active workers (7% assumed interest rate)
4. $47.3B = the actuarial value of NYCERS assets

What the City/Employers Actually Pay for Active Workers

Workers are currently contributing approximately 3.6% of payroll into NYCERS. In FY-2015, workers contributed $457.1M to NYCERS and the covered payroll was $12.7B.

For argument sake let us assume the city and the other employers are contributing $3 for each $1 that the workers are contibuting. That would be 10.8% of payroll. Lets assume that the $3 earn the same conservative 5% that worker's $1 earns. That would mean that there should be at least $22.8B along with the $7.6B set aside for the active workers. That would be $22.8B to cover a $30.6B liability. Wrong!

Faking It

If you go back to the last line in the chart, you will see that the actuary is claiming that both the liability for all current retirees, $36.2B, and the workers contributions, $7.6B, are 100% funded. She is also valuing NYCERS's assets at $47.3B.

So when you start with $47.3B and you subtract $36.2B and $7.6B, you are left with only $3.5B. That is $3.5B to cover a $30.6B liability for active workers. This is a truly frightening conclusion.

The Other City Pension Funds

The story only gets worse. The Police Pension Fund is in the same shape as NYCERS with only $2.3B to cover a $17.9B liability for working police officers (page 151 of the FY-2015 NYPPF CAFR).

Teachers and the Fire Funds are in totally worse shape. The Fire Pension Fund has NO money to cover a $5.2B liability for working firefighters and only $8.0B to cover a $10.5B liability for current retired firefighters (page 151 of the FDNYPF FY-2015 CAFR).

Teachers with over a 100,000 working teachers has NO assets to cover their $18.6B pension liability and only $31.9B to cover the $37.5B pension liability for retired teachers (page 120 of the NYC-TRS FY-2015 CADR).

This grim picture is based on the unrealistic 7% assumed interest rate assumption. You don't want to do the arithmetic for a lower interest rate assumption. Just going from 7% to 6% at NYCERS increases the unfunded liability from $20.2B to $28.0B (page 114 of NYCERS FY-2016 CAFR)

What is Really Going On

Of course, there is one major flaw. The current retirees benefits are not fully funded. Most of the pension contributions the city and the other employers are making each year are catch up payments covering pensions being paid to current retirees.

The city and other employers paid $3.4B to NYCERS in FY-2016. The workers paid $485.5M. Three times what the workers paid is $1.5B. Under our 3 for 1 scenario it is reasonable to conclude that $1.9B went to cover retirees benefits not current workers. This is actually a Ponzi scheme and not an actuarially funded pension plan. It is a lot like the Social Security benefit system.

What is actually going on is that the city and other employers are trying to pay two different pension bills each year. One for active workers and the other for former workers who are now collecting pensions from NYCERS. You can just imagine the political nightmare this is. Part of the ongoing pension funding issue is not just about pensions for current workers. It is the huge mass of current retirees whose benefits the city did not properly secure when the workers retired.

How did this happen?

When a worker retires, the actuary can very accurately compute the cost of the benefit. She, however, can be very prudent or a total screw up. You know where this going. A 62 year old retiree is going to get a pension of $40,000 a year for the rest of his/her life. The actuary can say that $400,000 will cover this benefit or she can say that $520,000 will cover the cost.

Now if the fund hasn't even put aside the $400,000, you can imagine how they feel about the $520,000 cost figure. In either case there is going to be catch up, even if the fund is hitting its interest targets. Needless to say pension funds are not known for hitting their interest targets

One thing that NYCERS active workers should immediately demand is that their annual statement be expanded to include how much the city or their employer have contributed on their behalf during the year for their future pension benefit. The statement should also include an opening balance of employer contributions and how those assets performed during the year. And don't let anyone tell you it can't be done.

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.

Bad Year for the NYC Pension Funds - FY-2015 - Investment Fees and Performance

The Comptroller released the NYC FY-2015 Comprehensive Annual Financial Report (CAFR) on Friday, October 30, 2015. The following are some points from the press release:

The City pension systems earned $4.746 billion in net investment income in FY15 and paid benefits totaling $13.4 billion during FY15. Employer and employee contributions to the City pension systems were $10.0 billion and $1.8 billion, respectively;

The City pension systems paid investment expenses totaling $708.9 million in FY15, an increase over FY14 that primarily reflects increased assets under management and more comprehensive fee disclosure and reporting;

These numbers are accurate but they are presented in a deceptive way.

The five funds received $1.94B in interest payments and $2.66B in dividends during 2015. They also earned $73M in securities lending income. That adds up to $4.67B. It does not take much skill to collect interest and dividend payments. It definitely does not take $708.9M in fees, a $183.0M increase from last year.

Listed below are the fees (pension funds only) for the last 14 years. You can see from the numbers that the "increased assets under management" comment is not valid. Of course previous reported fees may be inaccurate but that's not what "more comprehensive" means. I have a strong feeling that the Comptroller's office is in shambles when it comes to accurate records of the payment of investment fees.

• Year: -- Fees ---- Assets
• 2015: $705.0M ($145.7B)
• 2014: $522.0M ($144.5B)
• 2013: $472.5M ($124.8B)
• 2012: $370.3M ($111.3B)
• 2011: $395.7M ($111.0B)
• 2010: $426.8M ($90.0B)
• 2009: $339.3M ($79.5B)
• 2008: $310.2M ($101.9B)
• 2007: $262.0M ($110.9B)
• 2006: $192.7M ($96.0B)
• 2005: $158.2M ($90.6B)
• 2004: $131.6M ($86.5B)
• 2003: $ 96.7M ($78.1B)
• 2002: $101.9M ($80.7B)

On July 30, 2015, P&I reported that the Comptroller estimated that the city pension funds had a 3.3% rate of return for FY-2015. Of that amount 3.1% is due to interest and dividends paid to the pension funds.

Based on the details in the CAFR, the total pension assets for the five funds increased only 0.198% in FY-2015. In addition, this miserable number is based on unreliable asset values for private equity, real estate, and hedge fund classes. Note that two of the funds have avoided getting sucked into the hedge fund swamp.

The opening balance for the city pension funds (no TDA and no VSF) was $144.5B. The closing balance was $145.7B. With a $0.9B positive cash flow you get a 0.198% increase in asset value.

The other bruising fact in the city's CAFR, along with the $183M increase in fees, is the $1.294B that was skimmed off from the TRS & BERS pension funds to the TRS & BERS TDA funds and the $672M that was skimmed off to the VSF funds.

In FY-2015, the S&P 500 index rose 5.2% (from 1960.23 to 2063.11). NYCERS reported a 1.88% net of fee return on its structured fixed income class (Treasures, Corporates, & Mortgage Backed Securities) with a benchmark of 2.08%. With the 70%/30% asset allocation that the funds are currently using, the projected increase in asset value for FY-2015 could easily have been 4.24%, not 0.198%. That would have been a $150.95B closing balance instead of $145.67B.

That is $5B in one year. This why investment decisions are so important. The state implements Tier 6 and the trustees blow it all on bad investments.

All five of the pension funds had a decease in their funding status in FY-2015. The levels weren't great to start with. Here is the bad news.

• NYCERS went from 75.32% to 73.13%.
• TRS went from 71.79% to 68.04%.
• BERS went from 78.60% to 75.33%.
• Police went from 74.44% to 73.85%.
• Fire went from 63.78% to 62.79%.

Here are the accounting numbers for the five city pension funds:

Money Coming In for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
employee contributions	$1,015.0	$467.1	$158.6	$39.6	$241.1	$108.6
employer contributions	$9,986.8	$3,160.3	$3,270.0	$258.1	$2,309.6	$988.8
other contributions	$55.5		$55.5
interest	$1,939.5	$635.7	$758.5	$36.9	$392.8	$115.6
dividends	$2,661.8	$795.3	$889.2	$46.2	$703.7	$227.4
SL income	$72.5	$26.5	$20.3	$2.7	$18.0	$5.0
other	($64.9)	$4.1	$0.3	($115.1)	$4.6	$41.2
Cash-in	$15,666.2	$5,089.0	$5,152.4	$268.4	$3,669.8	$1,486.6

Money Going Out for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
Benefits	$11,994.1	$4,235.6	$4,024.3	$223.2	$2,360.5	$1,150.5
Transfers from TRS & BERS to TDA	$1,294.0	$0.0	$1,249.0	$45.0	$0.0	$0.0
Payments to VSF *	$12.2	$11.9	$0.0	$0.0	$0.3	$0.0
Transfers (Pension to VSF) *	$660.0	$30.0	$0.0	$0.0	$590.0	$40.0
Investment expenses *	$705.0	$231.8	$203.0	$10.1	$192.1	$68.0
Admin expenses *	$141.9	$54.6	$58.4	$11.0	$17.9	$0.0
other	$7.1	$7.1	$0.0	$0.0	$0.0	$0.0
Cash-out *	$14,814.3	$4,571.5	$5,534.7	$289.3	$3,160.8	$1,258.5
*
Net Cash *	$851.9	$517.5	($382.3)	($20.9)	$509.0	$228.1

Closing Balances & Asset Increases for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
Open Bal:	$144,538.0	$54,422.0	$44,490.0	$3,279.3	$31,750.9	$10,595.8
Close Bal	$145,674.8	$54,889.3	$44,254.7	$3,359.8	$32,356.0	$10,815.0
Net Change	$1,136.80	$467.30	($235.30)	$80.50	$605.10	$219.20
Cash Flow:	$851.9	$517.5	($382.3)	($20.9)	$509.0	$228.1
Open Bal Adj:	$144,538.0	$54,422.0	$44,107.7 $3	,258.4	$31,750.9	$10,595.8
Close Bal Adj:	$144,823.4	$54,371.8	$44,254.7	$3,359.8	$31,847.0	$10,586.9
Net Change Adj:	$285.4	($50.2)	$147.0	$101.4	$96.1	($8.9)
Rate of Asset Increase:	0.197%	-0.092%	0.333%	3.112%	0.303%	-0.084%

TRS - Permanent Handicap - TDA Transfer

Last year I wrote about a persistent negative cash flow at the NYC Teachers Retirement System (TRS).

Just recently someone pointed out to me the impact of something I vaguely knew about but not really. Every year TRS pulls money out of the pension fund and transfers it to the TDA plan that it runs separately from the pension plan. The TDA plan is a defined contribution plan, a 403(b) plan in IRS speak. Information about this transfer is buried in the TRS annual CAFR. The city, however, has never identified the transfer in its annual CAFR. That is until FY-2014.

This is why TRS has had a negative cash flow for the last 15 years. In the last eight years (2007-2014) TRS has paid $33.3B in benefits but $6.8B went to the TDA plan and not pension benefits. The employers' contributions for the 2007-2014 period were only $19.2B. This is a big problem. It is never discussed publicly. I have no idea how Bob North, the TRS actuary, values this liability for the TRS pension fund. This is a huge leak in the funding pipeline for the TRS pension plan.

If you look at the table below it appears that North is reporting a funding level for TRS based only on the liability based on the pension benefits paid and ignores the TDA transfer.

Funding Status for TRS and NYCERS for FY-2013

System	Actuarial Assets	Actuarial Liabilities	Funding Level	Members	Pensioners	Pension Benefits Paid	TDA Transfer
NYCERS	$42.4B	$65.3B	65.0%	212,347	137,987	$3.9B	$0.0B
TRS	$33.6B	$57.7B	58.2%	132,017	76,539	$3.6B	$1.1B

TRS Benefit Payout Since 2007

Fiscal Year	Employer Contributionds	All Benefits Paid	Pensions Paid	TDA Skim	Other Benefits Paid	Pension Paid %	TDA Skim %	Other Benefits %
2005	$1.23B	$3.13B	*	*	*	*	*	*
2006	$1.32B	$3.34B	*	*	*	*	*	*
2007	$1.60B	$3.58B	$2.89B	$0.55B	$0.14B	80.7%	15.4%	4.0%
2008	$1.92B	$3.78B	$3.02B	$0.65B	$0.11B	79.9%	17.2%	3.0%
2009	$2.22B	$3.78B	$2.92B	$0.77B	$0.10B	77.2%	20.4%	2.6%
2010	$2.48B	$4.12B	$3.20B	$0.82B	$0.10B	77.7%	19.9%	2.4%
2011	$2.47B	$4.33B	$3.38B	$0.85B	$0.10B	78.1%	19.6%	2.2%
2012	$2.67B	$4.49B	$3.44B	$0.95B	$0.10B	76.6%	21.2%	2.3%
2013	$2.86B	$4.67B	$3.54B	$1.05B	$0.08B	75.8%	22.5%	1.7%
2014	$3.00B	$4.58B	$3.82B	$1.15B	nr	76.9%	23.1%	*
2007-2014	$19.22B	$33.72B	$26.21B	$6.78B	$0.73B	*	*	*

FYI: New York City Labor Costs in FY-2014

Disclaimer: All of the figures listed below come from the NYC OMB web site and the NYS Financial Control Board.

Sometimes the actual hard numbers tell their own story. New York City has budgeted $38.367M ($38+B) for personnel costs in FY-2014. The city will employee 273,120 people during the year.

The fringe costs total $16,021M which leaves $22,346M for actual paychecks. The fringe costs are detailed below:

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NYC Personnel Costs for FY-2014

Category	General	Dept. of Education	Retirees – DOE	CUNY	Cultural Affairs	Totals
Social Security Taxes	$ 945,377,286	$ 774,704,532	na	$25,186,254		$1,745,268,072
Health Insurance Premiums	$2,385,907,769	$1,675,842,974	$ 370,353,278	$40,943,606	$1,503,728	$4,474,551,355
Supplemental Welfare Funds	$ 549,405,510	$ 380,688,742	$ 133,715,336	$15,805,711		$1,079,615,299
Workers Compensation	$ 205,196,474	$ 40,142,415		$1,843,985		$247,182,874
Unemployment Insurance	$ 28,256,171	$ 37,760,989		$539,682		$66,556,842
Workers Comp - Other	$56,200,000					$56,200,000
Disability Insurance		$611,303				$611,303
Annuity Fund Payment		$33,812,860				$33,812,860
Non-city Pensions	$78,415,014					$78,415,014
City Non Actuarial Pensions	$57,667,273					$57,667,273
City Actuarial Pensions	$8,180,622,400					$8,180,622,400

Note: Health insurance premiums cover active workers, retiree under age 65, and retirees over age 65. The union welfare funds, administered by the unions, provide added fringe benefits to members of the participating unions. Both of these items need detailed analysis. I think that the city is not getting its money's worth in these areas. In response to the Emblem Health take over of HIP/GHI in 2008, the city produced a very rational argument against the takeover and the city seems to be aware that there is a fundamental problem with the system. There are very entrenched special interests connected with health insurance and welfare funds. (Note: The city runs the welfare fund for city managers.)

City Actuarial Pension Systems

• $2,917.0M (TRS)
• $1,728.1M (NYCERS)
• $ 205.9M (BERS)
• $2,320.9M (Police)
• $ 960.7M (Fire)

Note: Of the $8,132.6M amount, $357.2M is needed to replace investment fees paid in FY-2012 and $106.8M is needed to replace administrative expenses incurred in FY-2012. The city only incurs 55% of NYCERS investment and administrative costs. NYCERS covers other participating employers, like the Transit Authority.

When Will the City Wake Up?

About a month ago I wrote about NYCERS's miserable investment performance over the last 13 years in contrast to a simple index(stocks)/core(bonds) strategy. It was so bad that I wondered how the other city pension funds did. So I did a comparable analysis of the performance of TRS and the Police Pension Fund, the two other large systems. You can check the detailed spreadsheets for NYCERS , TRS , and Police with the highligthed links.

TRS and Police did almost as bad as NYCERS as seen in the first table below. The analysis, however, did surface an issue when looking at the three systems together. They had significantly different income flows over the 13 year period. NYCERS & TRS had negative income flows, while Police had a positive income flow.

This positive flow hides the poor investment performance for Police. In contrast, TRS's large negative flow makes its investment performance look worse than it really is.

The last column in the first table shows the new 7% pension liability amount computed by the NYCERS/TRS actuary.

If the investment strategy and the funding (see table 2) were better, NYCERS and TRS would be in great shape, even without the benefit of the new Tier 6 benefit limits. Police has a much deeper problem but upgrading the investment strategy would be a big step forward in getting the problem under control.

NYCERS - TRS - Police Pension Fund Investment Performance: 2000 - 2012

System	Closing Balance	Closing Balance	Income Flow	Closing Balance	Actuarial Liability
****	Actual	Index/Core	2000-2012	Zero Income Flow	2012
				Index/Core	(7%)
NYCERS	$42.8B	$55.5B	-$4.4B	$63.2B	$62.9B
TRS	$32.8B	$41.0B	-$8.8B	$53.5B	$55.1B
Police	$25.5B	$31.2B	$4.5B	$26.1B	$38.1B

NYCERS - TRS - Police Pension Fund Benefits & Contributions: 2000 - 2012

System	Benefits paid	Employer Contributions
NYCERS	$38.9B	$15.6B
TRS	$41.6B	$18.6B
Police	$20.2B	$16.5B

NYCERS - TRS - Police Pension Fund Retiree & Members: 2011

System	Retirees	Vested Members	Inactive Members	Active Members
****	2011	2011	2011	2011
NYCERS	135,468	8,914	18,969	182,021
TRS	74,064	8,932	10,938	109,636
Police	45,755	780	1,643	33,705

Note: Since July 1, 2009 Police and Fire pension benefits for new employees have been reduced to Tier 3 levels.

Note: Since April 1, 2012 all NYS pension benefits for new employees have been reduced by Chapter 18 of the Laws of 2012 (Tier 6).

Teachers Retirement System - Why is it $4.4B short

I recently became aware that the NYC Teachers Retirement System (TRS) has had a regular and significant negative cash flow as far back as 2000 and maybe further. The total negative cash flow for the 13 years is $8.8B . In plain English a negative cash flow for a city pension fund means that the employee and employer contributions, interest payments, and dividends are less than expenses and pension payments. That leads to liquidating assets to cover the shortfall and creates a permanent handicap when it comes to investment returns.

This raises a question about the actuary's funding strategy for TRS.

None of the other four city pension funds have had consistent negative cash flows over the same time period. As of June, 2012 these four funds have reached or surpassed their pre-crash 2007 values. From the table below you can see that TRS is $4.4B short of its 2007 asset value.

TRS has a serious investment problem. Of course, in FY-2012 the other four funds didn't do so well with their positive cash flows. The five funds managed to turn $1.45B into $306.5M in a market that was was up 3.4% for the year.

The New York State Department of Financial Services (DFS) has not done a statutory examination report on any of the five city pension funds since at least 2003. This is in spite of the fact that the pension funds have paid DFS for the associated audits.

Asset Values and Cash Flows for the Five City Pension Funds: (2007 - 2012)

Pension Fund	2007	2009	2012	2012	2012
	Closing Balance	Closing Balance	Closing Blanace	Asset Change	Net Cash Flow
NYCERS	$42,514.3M	$31,903.4M	$42,655.3M	$246.3M	$728.0M
TRS	$37,142.8M	$23,077.5M	$32,774.8M	-$826.7M	-$472.3M
BERS	$2,179.5M	$1,536.6M	$2,310.6M	-$13.0M	-$46.4M
Police Fund	$21,905.5M	$17,424.1M	$25,479.9M	$731.0M	$944.0M
Fire Fund	$7,202.7M	$5,576.8M	$8,124.7M	$169.0M	$268.0M
Total	$110,944.7M	$79,518.3M	$111,345.3M	$306.5M	$1,452.4M