Climate Change - Private Equity - NYC Comptroller

On October 22, 2024, Comptroller Lander announced a proposal to curtail the activities of private equity firms that enter into future contracts with three of the NYC pension funds. Police and Fire funds are not part of the proposal.

Conceptually this is a positive effort in dealing with climate change. It is, however, not possible to put into effect.

I have been critical of private equity investments for a long time. They are expensive, high risk, illiquid, and, on average, less effective than the S/P 500 index. They are also black box operations that limited partners have no control over. Limited partners, like the pension funds, commit money to the partnerships and hopefully many years later get their money back and possibly some positive return.

The pension fund trustees have no access to the private equity contracts that the Comptroller signs with private equity partnerships. They are “trade secrets”. Once the Comptroller signs the private equity contract, he has no idea what investment decisions that the general partner makes. He also cannot terminate the contract. The idea of restricting the general partner’s decision is not possible.

I will give Lander the benefit of the doubt and assume that he is not aware of the workings of private equity. That is, however, a scary assumption concerning for the NYC Comptroller.

A serious climate change initiative would be to no longer enter into new private equity contracts. It would also be a money saver.

A Better Way: $92B rather than $81B

Assest Allocation

The most important decision that the NYCERS trustees make is the investment asset allocation of the funds of the trust. The asset allocation is a list of types of investments and the percentage of funds assigned to each type or class. Currently the trustees have chosen a complicated and very expensive allocation. The current list of classes and percentages is as follows:

1. US Equities -28.6%
2. International Equities – 11.5%
3. Emerging Market Equities – 4.9%
4. Fixed Income – Structured – 20.9%
5. Fixed Income – High Yield – 4.1%
6. Fixed Income – TIPS -3.3%
7. Fixed Income – Converts – 1.8%
8. Private Equity – 10.5%
9. Private Real Estate7.3%
10. Private Infrastructure – 2.4%
11. Private Credit – 4.4%

As a reference the allocation in 2000 was as follows:

1. US Equities -56.2%
2. International Equities – 14.9%
3. Fixed Income – Structured – 24.8%
4. Fixed Income – High Yield – 4.0%
5. Private Equity – 0.1%

The NYCERS Annual Finacial Statement

Each year, NYCERS issues a financial statement which includes accounting statements and investments results and costs. In particular, the report posts the rate of return for the entire portfolio and each allocation class. Also posted are the investment expenses for the year.

Rate of Return

In the first table below , “Rate of Return” , there is a list covering 1998 to 2023 of

• rates of return (ROR) for the full NYCERS portfolio and
• the ROR for the two classes, 1) US Equities and 2) Fixed Income – Structure.

You will see that since 2002 the average portfolio ROR is 7.13% (22 years), while the average ROR for the two classes, US Equities and Fixed Income – Structured with a 67%/33% allocation is 7.73% over the same 22 years. So how would this difference translate into a change in the NYCERS annual closing balances? I will try to give you an estimate below.

Notes:

• In 2007, both private equity and investment expenses started a steady long term increase.
• In 2015, NYCERS started to report asset rate of returns net of fees. Prior to that returns were reported gross of fees which inflated returns.

Closing Balances

In the second table below, “Closing Balance for NYCERS”, you will see that

• the closing balances for 2001 at $37.30 billion and
• the closing balance for 2023 at $81.4 billion.

That is an average increase of 4.11% over 22 years. This is less than the average portfolio ROR, 7.13%, because each year a part of portfolio return is used to pay benefits and expenses for that year.

You will also see in this table the investment expenses over the 25 years from 1999 to 2023.

Simulated Closing Balances

In order to gauge the effect of using the simple two class asset allocation, I simulated the closing balances from 2002 to 2023 using the two-class investment strategy, I used the closing balance for 2001, $37.3 billion, as the starting base and created the simulated closing balances for each year as follows (see Closing Balance table below):

• for each year I added the ROR for the actual closing balance to the annual delta created by subtracting the portfolio ROR from the ROR of the two-class strategy and
• then multiplying the previous simulated closing balance by the sum of the two percentages plus one to arrive at the simulated closing balance for that year.

In the early years, the portfolio allocation kept ahead of the two-class strategy but by 2013 the portfolio strategy started to steadily fall behind the two-class strategy. By 2023 the closing balance of the two- class strategy was at $91.59 billion while the portfolio closing balance was only at $81.4 billion. Remember that 2015 is the year that NYCERS stared reporting ROR net of fees.

It is reasonable to suspect that the difference between the two strategies may be greater than the $10 billion.

Private Equity and Real Estate LLC's

As of 2007, you will see in the Rate of Return table that the amount of money being allocated to private equity (2018 - real estae LLC) started to grow significantly. The private equity and real estate classes are very expensive. There is also an issue with their assigned values in the actual NYCERS closing balances. The quoted values of these two assets are very unreliable because there are no public markets for these asset classes. The two-class strategy, however, does not have this problem because they both have public markets trading their assets.

Investment Expenses

Finally, if you focus on the investment expense over the 2002 to 2023 period in the Claoing Balance table, you will see that NYCERS paid a total of $3.9 billion of which $2.0 billion was incurred in the last eight years. My conservative projection of the investment expense for the same period using only the two classes is $1.3 billion, a $2.6 billion difference. I based my estimate on the 2002 ratio of investment expenses to the closing balance, 1.14%. >

NYCERS Rate of Return from 2002 to 2023

Fiscal Year	Total Portfolio ROR	Eq - FI only ROR (67%/33%)	US Equity ROR	Struct F.I. ROR	Private Equity ROR	Real Estate ROR	PE assets (in billions)	RE assets (in billions)
2023	8.18%	11.88%	18.07%	-0.68%	0.50%	-1.85%	$8.427	$5.865
2022	-8.39%	-12.62%	-13.64%	-10.56%	25.02%	29.56%	$7.986	$5.672
2021	26.63%	30.21%	45.14%	-0.09%	49.61%	7.75%	$6.422	$4.360
2020	3.58%	6.92%	4.25%	12.34%	1.83%	1.81%	$4.661	$3.802
2019	7.13%	8.40%	8.37%	8.45%	14.66%	8.47%	$4.657	$3.565
2018	8.56%	9.74%	14.71%	-0.34%	17.83%	12.19%	$4.467	$3.398
2017	12.99%	12.23%	18.09%	0.34%	16.45%	10.24%	$9.259	nr
2016	1.52%	3.29%	1.68%	6.56%	6.36%	12.95%	$9.873	nr
2015	3.11%	4.87%	6.35%	1.88%	12.24%	16.06%	$9.825	nr
2014	17.04%	18.90%	24.96%	6.61%	15.20%	13.20%	$9.630	nr
2013	12.24%	15.35%	22.75%	0.33%	8.38%	12.89%	$8.255	nr
2012	1.32%	4.54%	2.23%	9.24%	7.50%	0.99%	$6.748	nr
2011	23.12%	23.55%	32.50%	5.37%	nr	nr	$5.257	nr
2010	14.09%	15.41%	16.33%	13.54%	nr	nr	$4.123	nr
2009	-18.18%	-15.62%	-26.16%	5.78%	nr	nr	$3.263	nr
2008	-4.60%	-6.31%	-12.84%	6.94%	nr	nr	$2.885	nr
2007	18.39%	15.58%	20.02%	6.58%	nr	nr	$1.834	nr
2006	9.83%	5.98%	9.45%	-1.07%	nr	nr	$0.846	nr
2005	9.22%	8.01%	7.91%	8.21%	nr	nr	$0.536	nr
2004	16.03%	13.98%	20.45%	0.83%	nr	nr	$0.286	nr
2003	3.94%	4.45%	0.72%	12.02%	nr	nr	$0.155	nr
2002	-8.64%	-8.64%	-17.05%	8.42%	nr	nr	$0.098	nr
2002-2023 Average	7.14%	7.73%	9.29%	4.58%	14.63%	10.36%
2001	na	na	na	na	na	na	na	nr
2000	9.43%	7.58%	9.06%	4.57%	nr	nr	$0.036	nr
1999	13.47%	13.97%	19.80%	2.12%	nr	nr	$0.000	nr
1998	21.29%	23.21%	28.55%	12.38%	nr	nr	$0.00	nr
Average	8.34%	9.62%
1998-2023 Average	8.04%	8.59%

Closing Balances of NYCERS Assets from 1999 to 2023

Fiscal Year	Invest Fees (millions)	Simple invest fees (millions)	Close Bal (billions)	CB % change	Delta - Portfolio vs Eq&FI only	Improved % Change	Simulated Close Bal (billions)
2023	$489.90	$93.39	$81.40	5.03%	3.70%	8.73%	$91.59
2022	$319.20	$88.92	$77.50	-9.78%	-4.23%	-14.01%	$84.23
2021	$313.20	$98.56	$85.90	22.89%	3.58%	26.47%	$97.96
2020	$245.70	$80.20	$69.90	2.04%	3.34%	5.38%	$77.45
2019	$240.50	$78.59	$68.50	5.06%	1.27%	6.33%	$73.50
2018	$241.80	$74.81	$65.20	6.36%	1.18%	7.55%	$81.77
2017	$223.80	$70.33	$61.30	10.45%	-0.76%	9.69%	$69.12
2016	$213.00	$63.68	$55.50	1.09%	1.77%	2.86%	$64.27
2015	$231.80	$62.99	$54.90	1.29%	1.76%	3.06%	$58.59
2014	$184.60	$62.19	$54.20	14.83%	1.86%	16.70%	$55.27
2013	$183.30	$54.15	$47.20	10.54%	3.11%	13.65%	$47.37
2012	$129.50	$48.99	$42.70	0.71%	3.22%	3.93%	$41.68
2011	$145.10	$48.65	$42.40	19.77%	0.43%	20.20%	$40.10
2010	$175.30	$40.62	$35.40	10.97%	1.32%	12.29%	$33.36
2009	$138.20	$36.60	$31.90	-19.65%	2.56%	-17.09%	$29.71
2008	$115.30	$45.55	$39.70	-6.59%	-1.35%	-7.94%	$35.83
2007	$98.10	$48.76	$42.50	13.94%	-2.81%	11.14%	$38.92
2006	$69.40	$42.80	$37.30	5.07%	-3.85%	1.22%	$35.02
2005	$53.90	$40.73	$35.50	3.80%	-1.21%	2.59%	$34.60
2004	$42.97	$39.24	$34.20	8.57%	-2.05%	6.52%	$33.73
2003	$29.27	$36.14	$31.50	-3.96%	0.51%	-3.45%	$31.67
2002	$37.63	$37.63	$32.80	-12.06%	0.00%	-12.07%	$32.80
Expense Ratio 20202		114.7%
2002 up Avg				4.11%		5.48%
2001	$41.30		$37.30	-12.85%	$37.30
2000	$37.43		$42.80	2.15%	-1.85%
1999	$25.16		$41.90	1.92%	0.50%
1998	na	na	na	na
Total Expenses 2002-2023	$3,921.48	$1,293.52
Diff in Expenses		$2,627.96

Trump v. United States, a Crime in Plain Sight

What does the United States do when justices on the Supreme Court conspire to obstruct the legitimate prosecution of a criminal?

Trump v. United States

The Supreme Court issued an opinion, “Trump v. United States” on July 1,2024. The six Republican justices signed on to the majority opinion. The three Democratic justices filed damming dissents.

The Court’s decision is illogical, without basis in statute, deceptive in its use of civil immunity and separation of powers, and is in clear opposition to the words of the U.S. Constitution (Article3, Section 3), “he (the president) shall take care that the laws be faithfully executed”. See quote below.

Laws are drafted by the Congress and signed into law or vetoed by the President, an equal partner in the process. Legislation is a joint effort by both parties. There is no separation of powers in the passage of laws. In addition, the Constitution directs the president to enforce the laws that he/she has helped enact.

Opinions of the Supreme Court have never been thought of as criminal action.

In Trump v. United States, however, we must seriously consider the reality that the six Republican justices chose to fabricate an obstacle to the legal process of pursuing a criminal prosecution of a former Republican president. Three of those justices were appointed by the same former Republican president who is currently in this case under indictment for four counts of conspiracy and obstruction.

In short, this opinion is so devoid of honest legal logic that it is corrupt.

Accomplice After the Fact

The decisions to grant an appeal to Trump, the delay in issuing the decision, and the decision to grant him immunity from official acts and presumptive immunity for other acts are grounds for an indictment of the six Republican justices under 18 U.S. Code Section 3, Accomplice After the Fact. See quote below.

An accessory-after-the-fact is someone who assists

1. someone who has committed a crime,
2. after the person has committed the crime,
3. with knowledge that the person committed the crime, and
4. with the intent to help the person avoid arrest or punishment.

An accessory after the fact may be held liable for, among other things, obstruction of justice.

A Supreme Court justice has never been indicted in the 236 years of the Republic. It is clear, however, that these six justices have committed a crime. I am not sure whether the six justices considered whether they could be held criminally liable for an opinion that was fraudulent.

Opinions are not infallible. Many are clearly biased but to prevent chaos the parties bend to the decision even if flawed.

This case, however, is profoundly different. It drives a stake into the heart of the Constitution. We have the plaintiff, a former Republican president accused of crimes against the country in violation to his oath of office, claiming immunity from criminal laws that the Congress and the President have enacted, and the six Republican Supreme Court justices falsely giving him a “get out of jail free card”. This puts the entire Constitution and the United States in jeopardy. For the sake of the Republic, we must prosecute this opinion as a crime.

In the end, the justices are all subject to the laws of the United States. These six justices must be held criminally accountable.

I suspect that the Department of Justice is considering this action and that is why Jack Smith asked for a three week delay.

Notes

U.S. Constitution, Article 2, Section 3.

He shall from time to time give to the Congress information of the state of the union, and recommend to their consideration such measures as he shall judge necessary and expedient; he may, on extraordinary occasions, convene both Houses, or either of them, and in case of disagreement between them, with respect to the time of adjournment, he may adjourn them to such time as he shall think proper; he shall receive ambassadors and other public ministers; he shall take care that the laws be faithfully executed, and shall commission all the officers of the United States.

18 U.S. Code § 3 - Accessory after the fact

Whoever, knowing that an offense against the United States has been committed, receives, relieves, comforts or assists the offender in order to hinder or prevent his apprehension, trial or punishment, is an accessory after the fact.

Except as otherwise expressly provided by any Act of Congress, an accessory after the fact shall be imprisoned not more than one-half the maximum term of imprisonment or (notwithstanding section 3571) fined not more than one-half the maximum fine prescribed for the punishment of the principal, or both; or if the principal is punishable by life imprisonment or death, the accessory shall be imprisoned not more than 15 years.

Employers Should Hire Medicare to Manage Health Insurance Benefits

Proposal

Major employers who want to provide health insurance to their employees should seriously consider pushing for a process to enable Medicare to manage paying the medical bills for their employees and then have the employer reimburse Medicare for the charges with a 3% administrative charge. The employer can choose to cover the full cost or have the employees contribute part of the cost.

Medicare is accepted by most doctors and hospitals all over the United States. In my opinion Medicare is arguably the best health insurance in the US even at 80% coverage. The non covered 20% can be purchased at approximately $200 per month. There are no pre-approval obstacles for needed treatments. Medicare has a good reputation for paying promptly. And the reimbursements to Medicare would be significantly lower than the payments for commercial health insurance. The trend line for Medicare annual cost increases is much lower than commercial insurance.

Annual Medical Cost Data for NYC Employees and Retirees

I recently posted a note outlining the increased cost for health insurance for NYC employees and retirees for the FY-2014 to FY-2023 period. I have done further analysis on the cost data from OLR for the period from 2014 to 2024 period.

Using the GHI charge for Senior Care (20% of the amount paid by Medicare) the health insurance cost for the average Medicare retiree & family in FY-2014 was $12,999 based on the $2,599 payment to Senior Care.

The full cost in FY-2024 was $16,404 based on the $3,280 payment to Senior Care. That was a 26% increase over ten years.

In contrast, the cost for the average employee and family was $10,949 in FY-2014 and $24,325 in FY-2024 (GHI coverage). That is a 122% increase over ten years

The cost of the average non-Medicare retiree and family was $13,080 in FY-2014 and $28,539 in FY-2024 (GHI coverage). That is a 118% increase over ten years.

Medicare retirees usually have more health benefit claims than employees but have smaller families. So, the levels of claims are probably very comparable but not the costs. EmblemHeath administers GHI coverage for NYC. NYC pays EmblemHeath 96% of its $8.4B annual health insurance costs.

Recap

NYC Average Annual Health Insurance Costs

	FY-2014	FY- 2024	% increase over 10 years
Senior Care Costs (20%)	$2,599	$3,280	26%
100% Medicare Retiree Costs	$12,999	$16,404	26%
Employee Costs	$10,949	$24,325	122%
Non- Medicare Retiree	$13,080	$28,539	118%

Reality Finally Caught Up With the NYCERS Budget: FY-2004 to FY-2025

In a June 17, 2022 posting, I outined the history of NYCERS administrative budget.

On May 9, 2024, the NYCERS trustess adopted the FY-2025 admin budget.

It was a 0.05% increase over the FY-2023 budget. See the updated table below. The City finally put the brakes on the NYCERS administrative budget.

Interestingly, the fringe benefit amount increased by 20.74% from the FY-2024 amount. In a very contrary way, NYCERS has significantly underspent its budget appropriation since 2019:

• 2023 - $105.8M
• 2022 - $105.0M
• 2021 - $84.4M
• 2020 - $77.7M

History of NYCERS Admin Budget 1996-2025

Fiscal Year	F/T Count	P/T Count	College Aides / Hourly	PS Budget	OTPS Budget	Fringe	Total	% Increase
2025	501	30	16	$53,679,194	$95,900,865	$16,461,953	$166,042,012	00.05%
2024	501	30	16	$54,290,508	$98,040,138	$13,633,903	$165,964,549	13.37%
2023	485	30	16	$43,016,089	$90,436,500	$12,942,144	$146,394,733	7.92%
2022	483	30	16	$38,397,943	$85,531,063	$11,719,465	$135,648,471	37.94%
2021	474	27	16	$36,842,549	$50,210,145	$11,283,945	$98,336,639	7.10%
2020	438	27	16	$35,262,139	$45,862,557	$10,689,350	$91,814,046	4.97%
2019	428	5	30	$33,592,612	$43,532,302	$10,344,565	$87,469,479	39.44%
2018	411	5	30	$31,704,410	$21,832,718	$9,194,015	$62,731,143	3.55%
2017	401	5	30	$31,056,080	$20,916,796	$8,605,288	$60,578,164	4.81%
2016	392	5	30	$30,233,989	$19,407,619	$8,155,517	$57,797,125	4.70%
2015	392	5	30	$29,131,972	$18,154,572	$7,915,476	$55,202,020	3.68%
2014	383	5	30	$26,813,635	$18,761,240	$7,669,819	$53,244,694	2.18%
2013	380	5	20	$26,623,635	$17,951,822	$7,532,499	$52,107,956	1.93%
2012	372	12	0	$25,756,827	$18,781,428	$6,603,649	$51,122,139	1.14%
2011	372	12	0	$26,046,827	$18,492,228	$6,006,573	$50,545,628	2.76%
2010	372	12	0	$26,046,827	$17,777,228	$5,362,640	$49,186,695	1.88%
2009	371	13	0	$25,189,842	$18,208,861	$4,879,903	$48,278,606	6.22%
2008	371	13	0	$23,597,857	$17,259,313	$4,799,066	$45,656,236	10.80%
2007	364	13	0	$22,616,783	$14,258,471	$4,375,788	$41,251,042	5.73%
2006	342	13	0	$20,255,911	$14,683,855	$4,076,823	$39,016,589	1.01%
2005	342	13	0	$19,737,687	$14,851,355	$3,887,624	$38,476,666	***
2004	334	13	0					***
***								***
1996	154	0	30	$6,199,709	$2,573,715	na	$8,773,424	***

History: NYCERS Administrative Expenses - 2000 to 2023

The following is a chart of NYCERS administrative expenses from 2000. The information comes from NYCERS Comprehensive Annual Financial Report.

As a point of reference NYCERS had an annual budget of $8.8M in FY-1996, the last year NYCERS was part of the city budget.

NYCERS Admin Expenses

Fiscal Year	Personnel Expenses	Contracts & Consultants	Phone, Mail, & Printing	Rentals	Software, Hardware, Support, Supplies, & Maintenance	Depreciation & Credits	Total
FY-2023	$57,736,915	$19,910,959	$1,037,015	$9,282,322	$17,825,949	$0	$105,793,160
FY-2022	$52,303,943	$27,418,528	$1,029,424	$9,329,701	$14,906,397	$0	$104,987,993
FY-2021	$48,693,043	$14,058,975	$1,290,546	$6,617,040	$16,753,334	$0	$87,412,938
FY-2020	$45,736,806	$11,337,750	$1,173,896	$6,870,614	$12,548,240	$0	$77,667,306
FY-2019	$43,717,712	$15,884,418	$1,114,263	$6,637,059	$14,719,873	$0	$82,073,325
FY-2018	$40,444,145	$4,310,427	$1,072,077	$6,348,888	$7,513,233	$0	$59,688,770
FY-2017	$39,505,894	$3,829,758	$1,561,282	$5,909,352	$8,864,342	$0	$59,670,628
FY-2016	$37,950,289	$4,687,929	$1,360,397	$5,453,383	$7,230,989	$0	$56,682,988
FY-2015	$37,368,409	$3,652,154	$1,336,002	$5,037,893	$7,239,560	$0	$54,635,018
FY-2014	$33,571,938	$3,773,082	$1,269,387	$4,863,720	$6,952,691	$0	$50,430,818
FY-2013	$33,064,087	$3,102,385	$1,078,411	$4,674,442	$6,797,095	$0	$48,666,420
FY-2012	$32,623,085	$3,088,256	$1,096,186	$4,796,584	$9,780,637	$0	$51,384,748
FY-2011	$31,748,443	$4,108,186	$995,415	$4,741,621	$4,780,811	$0	$46,374,476
FY-2010	$31,527,659	$5,434,495	$1,041,471	$4,278,903	$6,678,071	$715,000	$49,675,599
FY-2009	$30,187,604	$4,043,775	$914,311	$4,047,949	$8,198,354	$1,430,000	$48,821,993
FY-2008	$28,344,427	$6,401,745	$997,316	$4,138,211	$5,687,716	$1,430,000	$46,999,415
FY-2007	$27,123,219	$2,677,793	$1,055,233	$5,203,902	$4,205,095	$1,430,000	$41,695,242
FY-2006	$24,992,543	$3,124,688	$1,497,895	$4,797,895	$4,472,246	$1,430,132	$40,291,469
FY-2005	$24,474,710	$3,039,970	$827,277	$4,454,258	$3,118,356	$1,430,296	$37,306,867
FY-2004	$22,631,504	$3,124,800	$845,391	$4,192,543	$3,376,187	$1,430,000	$35,559,081
FY-2003						$1,430,000	$34,101,000
FY-2002						$1,430,000	$31,548,000
FY-2001						$1,430,000	$31,584,000
FY-2000	$15,990,745	$1,587,290	$718,686	$1,531,536	$2,691,719	$725,000	$23,244,976

From Bad To Worse

On April 30, 2024, the NYC Comptroller announced new asset allocations for the five NYC pension funds. This announcement boils down to a statement that four of the five pension systems are going to reduce their % of stock holdings and increase their % of garbage assets, otherwise known as "alternative assets". Why would anyone invest in garbage? That is a key question.

The pension trustees, which included the Comptroller, would have you believe their current asset allocations are doing well and that they are going to make them better.

Of course, there is no analysis of the investment performance of the current asset allocations, whether it is better than a basic 60/40 stock and bond asset allocation and whether the new asset allocation will make things better.

That is because that the current asset allocation is doing worse than the basic asset allocation and that an expansion of the current asset allocation will only make the deficit worse.

I won't even get into issue of runaway investment fees for the garbage asset class.