Nagaswami and the Hedge Funds

2010 - Bloomberg appoints Nagaswami as his investment person on the city pension boards.

2011 - NYCERS starts investing in hedge funds

2012 - Nagaswami leaves the city pension funds and takes a job with a hedge fund.

Tier 6 - Disability Picture for NYC Police, Fire, Corrections, Sanitation, and Detective Investigators Members

Background

As of July 1, 2009 all new NYC police officers and fire fighters were covered by the Tier-3 pension benefit structure.

As of April 1, 2012 all new NYC police officers, fire fighters, correction officers, sanitation workers, and DA detective investigators are covered by the new Tier-6 pension benefit structure.

Tier 6 is an effort at pension benefit reform within New York State. It definitely cuts benefits. It is very expansive but I want to focus on one particular area, disability benefits for these Tier-6 workers.

With respect to these Tier 6 members, the new disability benefits are the old Tier 3 benefits put in place back in 1976, 37 years ago. The one difference is that these benefits are now based on compensation base equal to a five year average earnings as opposed to the old three year average.

The relevant sections of law in Tier 6/Tier 3 with respect to disability benefits are Sections 506 (Ordinary Disability) and 507 (Accident Disability) of the N.Y.S. Retirement &Social Security Law (RSSL).

As of 2009, only the NY Police Pension Fund (NYPPF) and the FDNY Pension Fund (FDNYPF) were involved with the Tier 3 throwback.

As of 2012, Tier 6/Tier 3 involves three pension systems, NYPPF, FDNYPF, and NYCERS. These three systems will have to resurrect the old Tier-3 procedures from the 1976 to 1983 time period. Of the three systems, only NYCERS administered Tier-3 benefits during that time. In 1976, the benefit structure for both NYPPF and FDNYPF remained in Tier 2.

In 1983, Tier 4 superseded Tier 3 state wide. One of the big reasons for the change over to Tier 4 was the administrative problems inherent in Tier 3, especially the Social Security coordination and its tie-in to disability determinations.

These lower Tier 6 disability benefit levels will reduce the number of members retiring for disability. The VSF benefit, for police, fire, and corrections, is only available to service retirees. This benefit along with the long term earnings limitations will push many members to continue working until their 22nd year even when they may qualify for a disability benefit. Members who are profoundly disabled, however, will have no choice but apply for whatever disability benefit they qualify for.

The FDNY will have a special management problem supervising two groups of employees, one with an accident disability benefit = 45% (new fire fighters) and another with a line of duty disability benefit = 75% for all EMS workers, even Tier 6 ones. This makes one think that there will definitely be future changes to this part of Tier 6.

Ordinary Disability Benefits (S.506)

The new Tier 6 ordinary disability benefit is equal to

1. The greater of 33&1/3% of the five year average FAS or 2% times years of service up to 30 years
2. Minus 50% of the primary SS disability benefit or at age 62, 50% of the primary SS retirement benefit (if ineligible for SS disability)
3. Minus 100% of any Workers Compensation (WC) payable
4. Plus full immediate escalation.

To be eligible the member must in active service and have at least 5 years of credited service. Continuous employment in active public service immediately prior to the date of membership in the appropriate retirement system shall also count towards the 5 year requirement. There is no age requirement for the ordinary disability benefit.

The member must be determined to by disabled by the Social Security Administration. If you are older than 65 or do not have a enough quarters to be eligible for SS disability, then the approppriate retirement system Medical Board will make the disability determination. The cause of the disability is not pertinent to granting the benefit.

Retirees receiving ordinary disability benefits are subject to post retirement income limitations. These limitations are the same as apply to the accident disability benefit. See below.

Note: Workers Compensation

NYC police officers, fire fighters, and sanitation workers are not covered by Workers Compensation. Therefore, there is no WC offset for their disability benefits.

Correction officers and DA detective investigations are, however, covered by the city's WC structure. This means there will be WC offsets to their disability benefits, if the member receives any WC payments.

It may be prudent for these members not to claim WC payments since the NYCERS benefit might be reduced to zero by the offset. This would put their city health insurance as retirees at risk. However the WC payments might be greater than the NYCERS benefit with or without the SS offset. The member needs to do some arithmetic to properly balance their benefit structure. I'm sure the relevant unions will provide advice.

A WC offset for an ordinary disability benefit is unusual and raises the issue of whether this benefit is exempt from federal income tax in the same way that accident disability benefits are. The NYC Law Department will have to resolve this issue.

Accident Disability Benefits (S.507)

The Tier-6 benefit is equal to

1. 50% of the five year average FAS
2. Minus 50% of the primary SS disability benefit or at age 62, 50% of the primary SS retirement benefit (if ineligible for SS disability)
3. Minus 100% of any Workers Compensation payable.
4. Plus immediate full escalation. See the escalation section below.

To be eligible the member must in active service. There is no two year filing limitation that existed in Tier-2. There is no service or age requirement for the accident disability benefit. It appears to me that police officers and fire fighters with 22 or more years of service are not eligible while NYCERS members are free of that limitation. This issue will not arise for many years and probably will be changed sometime in the future.

The member must be determined to by disabled either by the Social Security Administration or the appropriate pension Medical Board. In either case, the Medical Board must make a recommendation on whether the associated incident on the job caused the disability and the incident was an accident as per retirement system's legal definition of an accident. These causation and accident determinations are the same as in Tier-2.

The appropriate Board of Trustees makes the final determination on causation and accident. The final disability decision, however, rests with the Social Security Administration or the retirement system's Medical Board.

Members must waive any right to any statutory presumption (i.e. heart bill or lung bill) relating to the cause of the disability or eligibility for disability benefits. This does not apply to World Trade Center presumptions.

Retirees receiving accident disability benefits are subject to post retirement income limitations. See below.

Limitations on Income after Disability Retirement (S.507.d)

There are significant long term income limitations for disability retirees, both for accident and ordinary disability. I have included the exact wording from the statute (S.507.d) below because of the harshness of the restriction. If the retiree loses his/her SS disability benefit or engages in employment or business activity that would make him/her ineligible for SS disability benefits, then his/her retirement system disability benefits cease. This is not just a suspension. The only reprieve is being placed on a preferred eligible list.

S.507.d.

If a member shall cease to be eligible for primary social security benefits before attaining age sixty-five, or, if receipt of social security benefits is not a condition for disability benefits hereunder, shall engage in such employment or business activity as would render such member ineligible for social security disability benefits (had he or she otherwise been eligible), benefits hereunder shall cease.

Provided, however, if such member is otherwise eligible, the state civil service department or appropriate municipal commission shall place the name of such person, as a preferred eligible, on the appropriate eligible lists prepared by it for positions for which such person is stated to be qualified in a salary grade not exceeding that from which such person retired.

In such event, disability benefits shall be continued for such member until such member first shall be offered a position in public service at such salary grade.

Escalation (S.510)

Escalation is designed to provide some protection from the negative effects of inflation over time. A Tier-6 member who retires for either disability benefit is eligible every April 1 for a percentage increase in his/her benefit based on the lesser of 3% or the consumer price index (all items- US city averages as per US Bureau of Labor Statistics) as of the previous December 31.

In the event of a decrease in the CPI, the benefit is decreased by the lesser of 3% or the CPI. The benefit will not decrease below the original benefit.

The CPI changes are cumulative and are brought forward each year. So in effect, there are two running escalation indexes, the all 3% index and the all CPI index.

Escalation becomes payable: 1) For eligible service or vested benefits on April 1 following the 25th anniversary date. The first year is prorated on monthly basis. 2) For accident and ordinary disability and death benefits on April 1st following the date the benefits start. Again the first year is prorated.

Social Security Offset (S.511)

Calculating this offset can get very complicated. But roughly speaking the amount is computed at the time that the member retires from the appropriate retirement system and not at the member’s 62nd birthdate. It does not include any private sector income in computing the Social Security benefit. Only wages from employers who participate in NYS public pension plans are used. All other wages are set to zero. The offset will not include any increases to the Social Security benefit which occur after the member's retirement date. The complexity of this offset is one of the prime reasons that New York State moved to Tier 4 (the SS offset was dropped completely along with automatic escalation) in 1983.

Investment Loss - Allegra Capital

I previously commented on the notice that Allegra Capital Partners IV, LP had exited its limited partnership with NYCERS as of the first quarter of 2011. Pacific Corporate Group had notified the NYCERS trustees of this on September 16, 2011.  NYCERS first invested in the Allegra private equity deal in FY-2000. It was the third private equity deal NYCERS entered into. NYCERS currently has approximately 150 open private equity investments.

Allegra is the second deal to exit. The first was Emerald Infrastructure Development Fund which was a total loss ($1M) of capital for NYCERS.

On December 9, 2011, I asked NYCERS, under the NYS freedom of information law, for the cash flow history between NYCERS and Allegra during the life of the partnership. On July 2, 2012, seven months later, NYCERS notified me that the Comptroller’s office had the cash flow history. I have to assume NYCERS did not have the information even though NYCERS did not specifically say that the agency did not have it.

On July 9, 2012, I requested the information from the Comptroller’s office. I was told it would be sent on August 20, 2012, a six week delay. That is not bad for a FOIL request and I actually received the information on August 20, 2012.

The response, however, was a bit strange. Let me quote the wording of the Comptroller’s email:

“The cash flows below have been provided by the Stepstone Group LLC, the Private Equity consultant to NYCERS.” 

This is troubling since this implies that the Comptroller’s office does not have this information in its own files. This would mean that neither NYCERS nor the Comptroller records what money is moving between NYCERS bank accounts and the private equity managers. 

I suspect that each private equity manager has a blanket approval to draw down against NYCERS bank accounts up to a fixed maximum limit set by contract. It would appear that the only way that the consultant would have this information is from the private equity manager since the Comptroller does not have it.

Bottom line, the private equity managers have direct access to NYCERS bank accounts without NYCERS disbursement authorization and without notification to NYCERS or the Comptroller.  

There is a very specific requirement in the NYCERS section of the NYC Administrative Code. It states as follows:

 “ §  13-137  Payments  from funds. All payments from such funds shall be made by such comptroller upon a voucher signed by the executive director  of the retirement system.”.

It is true that modern investing requires managers to move quickly before a voucher can be processed. All other investment actions, however,  are subsequently reported to NYCERS and the necessary vouchers are produced. This allows NYCERS to keep accounting control of its assets. Of course, private equity investing is not high frequency trading and a 24 hour approval cycle would be reasonable for disbursements to private equity managers.

Legally, NYCERS is responsible for the proper accounting of its assets, not the Comptroller and not a third party private firm.  In addition, as of June 30, 2011, Stepstone was not under contract to NYCERS. Assuming they  began working for NYCERS in FY-2012 any information they have is dependent on work that was done by another contractor, Pacific Corporate Group, over  the last twelve years. 

The cash flows reported may be totally accurate but it is not possible to confirm their accuracy. I don’t know any prudent person who would turn over his check book to a third party.

Now let’s look at the really bad news. With cash flow information provided, the Allegra investment had a rate of return equal to negative 8.24% per year over eleven years. This is equal to a steady loss of  8.24% for 11 years in a row, not just a bad quarter or a year.

NYCERS invested $24M and got back $11.66M. 

On top of the loss of accounting control this was a disastrous investment for NYCERS. As I said before NYCERS has about 150 private equity deals in play. The law of averages projects that NYCERS will break even on these deals, if it’s lucky. It definitely will pay huge annual fees.

This is clearly an imprudent investment strategy for a large pension fund. Heck, it’s a bad strategy for anyone.

For some strange reason the Comptroller is still carrying Allegra on his NYCERS quarterly reports as of March 31, 2012 at a value of $4.74M. This makes you question the accuracy of the quarterly reports.

How far does $10 a month go?

I previously commented on the Workers' Comp issue at NYCERS, specifically as it effects a retired transit police officer who retired 28 years ago on an accident disability benefit.

This week the Chief wrote a front page story about the terrible treatment that this retiree has had to endure at the hands of the current management at NYCERS. It appears that NYCERS is going after 37 disabled retirees for WC payments that NYCERS claims it failed to withhold from the retirees' benefit.

The Chief particularly quotes the NYCERS legal director, Ms. Mazza, as follows: "we're trying to leave them with something in their pocket at the end of the month," referring to the 37 lucky retirees. I guess $10 counts as something or maybe $5 is good enough.

So two weeks ago I get a call from a retired bus driver. He had retired from NYCERS 27 years ago on a accident disability benefit. His bus had been hit by a truck. You guessed it. NYCERS is coming after him for WC payments that NYCERS claims it had not deducted from his $1,486 monthly benefit check. The original benefit was $1,012 and the increase was due to cost of living adjustments over the years.

We're talking about high finance here. In 1985 NYCERS approved the retiree for an annual accident disability benefit equal to the grand amount of $12,151.

In a January 20, 2012 unsigned letter, without any due process, NYCERS notifies the retiree that NYCERS is reducing his monthly pension from $1,486 to $943. Then in June NYCERS comes with the coup de gras. In a June 1, 2012 unsigned letter, NYCERS tells him that he owes NYCERS $173,522 and that NYCERS is going to further reduce his pension to $10 a month until 2027. Yes, I said $10 a month for the next 15 years.

I wonder if Local 100, T.W.U. is aware of this situation. The president of Local 100 is a permanent NYCERS trustee.

First, it has not been determined that there should be a WC offset in this case. It is NYCERS's responsibility to determine whether the WC payments are for the same disability. The Transit Authority WC division should be able to provide NYCERS whith the information to make that determination. NYCERS can then properly notify the retiree of the determination and the evidence supporting the decision. The retiree just might have some information to support a no offset decision. We have to always remember that this is 27 years after the point when this decision should have been made.

Second, if there is an offset, it was NYCERS fault that the offset was not taken. There is no statutory repayment schedule. That means the repayment schedule is discretionary and under no circumstances should it be punitive. In fact, NYCERS needs to be as conciliatory as possible since the agency caused this problem, not the retiree. In fact, there is a legitimate argument that NYCERS has no right to withhold any of the cost of living adjustment amounts.

NYS Department of Financial Services - British Banks or NYS Public Pension Funds

I guess British banks are more important to the NYS Department of Financial Services than in-state public pension funds.

It's been ten years since the NYS DFS has done a meaningful and mandated audit of NYS pension funds but they have time for foreign affairs.

7%: in limbo

I recently commented on the actuary's recommendation and proposed legislation dealing with a new interest rate assumption .

Strangely, the proposed bill was not passed by the legislature in Albany. There was a third bill introduced, S.7804, along with the original two, S.7646 and S.7693. They all seem to be in the rules committee.

I wonder what the budgetary impact will be due to the delay. The city had put aside $900M for this contingency in FY-2012.

Background Update - Disaster Recovery Site: Has NYCERS Fixed the Problem?

Update - July 24, 2018

While doing some research on the current "Legacy Replacement" fiasco, I came across an item in the FY-2012 NYCERS financial statement (CAFR). It was for the cost of the build out for the Long Island City (LIC) disaster recovery site. That cost was $3,791,813 paid out as of June 30, 2012. You will never hear any NYCERS staff mention this number in conjunction with LIC.

End of update.

Original post - July 13. 2012

Last week I received a copy of the NYCERS Administrative Budget for FY-2013.

In September, 2011, I commented on the five year delay in completing the NYCERS Long Island City (LIC) disaster recovery (DR) site.

Based on the NYCERS budget proposal for 2012-2013, the site is now “nearing” completion with a date sometime before June 30, 2013.

There continues to be an ongoing confusion about the completion of this project. On March 25, 2012 in response to a newspaper article about the five year delay in getting the LIC site operational Karen Mazza, the NYCERS legal director, stated that the site would be ready to open on April 1, 2012. Considering the history of this project we’ll need to see the certificate of occupancy before being sure that the site is open. Of course, having a fully functioning alternative site for all agency operations is a whole other story.

The rent for the LIC site for the coming year is $496,500.

In its FY-2013 budget NYCERS’s has increased its headcount to a total of 394 F/T and 25 P/T positions. In addition there are always a significant number of consultants working at NYCERS.

As per the budget document the DR site is projected to only support 150 people at any one time or 300 people using a two shift schedule. The certificate of occupancy and the FDNY inspection will actually determine the working capacity of the site.

The two shift schedule raises contract issues with the unions involved and creates serious hardships for employees stuck with off hours schedules. It also leaves a problem for the remaining 94 employees and consultants and their associated work.

Part of the long delayed plan is to install a second mainframe at LIC with the idea of ending the use of the IBM DR site at Sterling Forest, NY.

This is fundamentally a bad idea. The elimination of the Sterling Forest site means that NYCERS will lose flexibility in its ability to respond to unknown disasters. It also creates personnel, management, and cost challenges in keeping the LIC mainframe in synch with the Adams Street machine. NYCERS is a relatively small organization which needs to avoid high overhead and to leverage its skills with the use of the Sterling Forest site.

Prior to 2005 NYCERS had an IT expert as the executive director. The current executive director has no business experience prior to 2005. This makes NYCERS very susceptible to “pie in the sky” schemes as evidenced by the six year delay in getting this project off the ground.

As per the budget document, NYCERS is also planning to move its document management, training, and IT testing/backup functions to this site.

It is not clear what NYCERS will do with its modern training center at Adams Street. Adams Street is the site where all NYCERS employees are currently working. It is clearly a more efficient site to train employees than LIC.

Moving document management to Long Island City will only create delays in agency functions and increase the difficulty in controlling documents that arrive at Adams Street and then will have to be transported to LIC site for processing.

The current offsite record storage at Bergen Street will be moved to the DR site. This was a pre-2005 concept. I wonder how it survived.