Saturday, February 28, 2009

Recent Investment History and Current Collapse

On March 31, 2000 NYCERS had assets worth $44B.

Then the bubble burst.

By March 31, 2003 NYCERS had lost $16B and had assets only worth $28B.

Then the real estate bubble started to inflate.

On September 30, 2007 NYCERS had assets worth $43B. It was almost back to the level of 2000 not counting inflation for 7-1/2 years and the fact that annual benefits had grown from $2B to $3B.

Then the real estate bubble burst.

On December 31, 2008 NYCERS had assets worth only $30B, a $13B loss in 15 months.

The $30B is even worse than it appears. In 2000 NYCERS had invested only $7M in illiquid alternative investments. As of December 31, 2008 NYCERS had increased that investment to $3.1B. NYCERS, however, does not have a market estimate of what that $3.1B is worth.

The end result is that NYCERS is only sure about $27B of its assets.

Unfortunately the S&P 500 Index has dropped 168 points in the first two months of 2009. NYCERS has most likely lost another $2.5B in that period. The market shows no signs of recovery and in fact will most likely lose more value before a recovery starts.

The recent losses have seriously upset NYCERS aggressive asset allocation strategy which is heavily weighted towards equity (70%), both domestic and foreign. NYCERS will need to perform a very careful review of its liability requirements and its associated asset allocation policy.

Strangely, in September, 2008 NYCERS decided to start a 3% allocation to a hedge fund strategy. NYCERS has yet to report any returns from this strategy.

Friday, February 27, 2009

Board of Trustees

NYCERS is administered by a board of trustees. There are eleven trustees on the board. Eight are elected city officials and three are presidents of the unions with the largest membership in NYCERS.

The NYC Comptroller and the Public Advocate are trustees, as are the five Borough Presidents. You can see the shadow of the old Board of Estimate in NYCERS’s board. Actually prior to 1968, the Board of Estimate administered the pension system. Interestingly, the mayor is not a trustee but appoints a person to be a trustee. That person is also the statutory chair of the board.

The director of the city’s Office of Labor Relations is required annually to verify the status of the three unions with the largest membership in NYCERS. The director has never performed this annually verification.

DC-37 currently is one of the union trustees on the board. DC-37 has a history of internal widespread corruption which resulted in receivership by the national union, AFSCME, in the late 1990’s.

The trustees are responsible for the investment decisions of pension system.

The Comptroller is the statutory custodian of the assets. Historically this meant that the Comptroller had the actual physical possession of the securities owned by the pension system. Long ago, the Comptroller ceased to be able to be the actual custodian and for many years has contracted out this function to a custodian bank. Currently this bank is the Bank of New York. For many years, it was Citibank.

The trustees are statutorily authorized to delegate their investment authority to the Comptroller. The trustees do this each June for the following 12 months. This delegation has no stated rationale and the Comptroller has no obvious investment expertise. For the sake of obvious prudence the trustees have hired outside experts to advise them on investment decisions and outside managers to actually execute those decisions. Unfortunately, the trustees underpay their investment advisers and overpay their investment managers. This results in questionable advice and overpriced performance.

It is clear to everyone that the trustees have no particular skill in investment matters. The trustees, however, have over the years felt free to claim credit for the investment performance of the assets of the pension system. I wonder if they will feel free to accept blame for that performance.

Sunday, February 22, 2009

Domestic Partners eligible for Accidental Death Benefits

In 2000 the NYS legislature expanded the list of eligible beneficiaries for benefits payable in the event of an accidental death of a member of the pension system. There are only a few accidental deaths that occur each year, usual less than five. There was, however, intense political pressure to provide this benefit to domestic partners, especially to members and their partners who were not eligible to marry.

An accidental death, as opposed to an ordinary death, is one which is caused by an "accident" on the job. The term "accident" has a legal definition.

For example, an event where a member dies on the job due to heart attack with no unusual circumstances, would not qualify as a accidental death. It would of course be considered an ordinary death for benefit purposes. If a sanitation worker is hit and killed by a car while collecting garbage, his/her beneficiaries, however, would be eligible for a accidental death benefit.

This change to the law was broadly written. It added a new final class of beneficiaries to the list of eligible accidental death beneficiaries. This class was defined as the group of beneficiaries chosen by the member to receive his/her ordinary death benefit. There are no restrictions on who a member may designate as his/her beneficiaries for the ordinary death benefit. For example, a member could designate everyone on his church bowling team.

The historical policy idea behind the accidental death benefit is to provide for the family of the deceased member, first the spouse, then the children, then the dependent parents, and now the domestic partners.

In accord with an old fashion sense of order, the spouse is the primary eligible beneficiary but only as long as he/she does not remarry. Upon remarriage the minor children (Tier 1&2: age 18 --Tier 4: age 25) become the eligible beneficiaries until they come of age. Then a surviving dependent father or mother of the deceased member becomes eligible. Interestingly spouses of deceased police officers, firefighters, and sanitation workers (Tier 1&2) may remarry without losing the accidental death benefit.

The wording in the new law, however, created a significant expansion of the benefit structure of the accidental death benefit. The operation of the list of eligible beneficiaries under the accidental death benefit is a cascading sequence of beneficiaries as the previous class becomes ineligible.

Now, when the proceeding beneficiary classes are exhausted, this new class of beneficiaries become eligible for this benefit. The class consists of the beneficiary or beneficiaries designated by the member to receive the benefit payable upon an non-accidental death of the member. These beneficiaries are now eligible for the accidental death benefit for the rest of their lives.

This change in the law makes any ordinary death beneficiary of any age eligible for the accidental death benefit, not just domestic partners. A members should factor this into his/her decision to designate beneficiaries for the ordinary death benefit. The member is now, in effect, able to also designate beneficiaries for his/her accidental death benefit.

This is a real change in the accidental death benefit. The payout window now expands from an average of 35 years to 70 years assuming that a member has designated his/her children as beneficiaries. It also makes spouses eligible for the benefit after remarriage, if the member had designated the spouse as a beneficiary. The spouse would continue to receive the benefit or again receive the benefit after the eligible children come of age. Of course the children, as ordinary death beneficiaries, could also become partial beneficiaries for the rest of their lives. Individual benefit payments would change as beneficiaries in this class die.

Saturday, February 21, 2009

Tier 4 members and 10 year cutoff of 3% contributions

As of 2000 the Tier 4 pension law was changed with respect to the required time period that a member must contribute 3% of each paycheck to the pension system NYCERS, TRS, and BERS. The old 30 year time frame was changed to a 10 year period of "credited" service or 10 years as a member (strange, but that is the wording in the law). Credited service includes paid employment (in "city service") as a member of the retirement system and any prior service that was purchased or that was transferred from another N.Y.S. pension system. Purchased military service also counts towards credited service.

A member of the pension system can purchase service at anytime while he/she is a member of the pension system but that service is only credited to the member after he/she has earned two years of membership service.

The reason I am raising this issue is that if a member postpones buy back prior service, he/she may wind up paying more money into the pension system than he/she has to.

For example: a member, with two years of membership service who buys back eight years of prior service with a lump sum payment, no longer has to pay the standard 3% Tier 4 payroll contribution as of the date of the deposit of the lump sum.

The cost of the purchased service is 3% of the original payroll earnings brought forward with 5% interest.

A member may purchase prior service by payroll deductions. It is, however, more complicated to nail down the exact date on which a member has ten years of credited service. The pension system is required to make that determination.

If that same member waits until he/she has been a member for ten years (anniversary date), he/she will pay a higher cost for the purchased service because of the higher interest charge due to the longer time period. More importantly that member will also have paid 3% of his/her earnings for the eight years of membership service and the additional eight purchased years.

The clear lesson is buy the service as quickly as possible. For tax purposes you should use the "457" Deferred Comp plan option to make the lump sum payment. Generally you should try to save some money in the "457" plan offered by NYC (there is also a "401k" plan) but be very careful with the investment options.

One caveat: Once you are credited with ten years of service, your vested benefit is locked in and you can not withdraw your 3% contributions from the pension system if you resign from "city service". You can still transfer to another N.Y.S. pension system.

Monday, February 16, 2009

The five NYC pension systems

There are five public retirement systems in which City of New York participates. They are:

  • 1) NYC Employees Retirement System (NYCERS)
  • 2) NYC Teachers Retirement System (TRS)
  • 3) NY Police Pension Fund (NYPPF)
  • 4) Fire Department of NY Pension Fund (FDNYPF)
  • 5) Board of Ed Employees Retirement System (BERS).

Each one is quite different. Each has its own board of trustees. Each has different benefit structure and demand for benefits. This in turn creates different cash flow requirements.

NYCERS has a diverse membership with multiple participating employers in addition to the city. There are three union locals represented on the board of trustees.

TRS has a mostly uniform membership with one basic participating employer, the city. It also has a very powerful labor union, the UFT, holding 3 out of 7 votes on the board of trustees.

NYPPF has a membership made up of only police officers (all ranks) and the city is the only participating employer. This system offers a 20 year and out retirement plan. There are five union locals represented on the board of trustees

FDNYPF, like NYPPF, has a membership made up of only firefighters (all ranks) and the city is the only participating employer. This system offers a 20 year and out plan but has a very high occurrence of disability retirements. There are four union locals represented on the board of trustees

BERS is a relatively small system with a membership made up of non-teaching employees and substitute teachers working for the NYC Board of Education (aka the Department of Education). There are two union locals represented on the board of trustees.

............................Assets as of June 30, 2008......... City contribution for FY-2009

  • NYCERS .......................$39.7B ..........................................$1.14B
  • TRS ...........................$32.3B ...........................................$2.11B
  • NYPPF .........................$21.1B ..........................................$1.86B
  • FDNYPF .......................$ 7.2B ..........................................$ .82B
  • BERS .........................$ 2.2B ............................................$ .12B

It is clear that the chief source of pension costs for the city comes from the teacher, police and fire systems. NYCERS has a much lower per member annual cost. It has at least 95,000 city members. This translates into a $12,000 per member cost for FY-2009.

To effectively reduce the city’s pension costs the city will have to focus on the teachers, police and fire pension benefit costs. The city will also have to seriously review the investment policies of each of the five retirement systems.