Wednesday, July 29, 2009

GASB Statement #50

In May, 2007, the Government Accounting Standards Board, GASB, issued Statement No. 50. Its purpose was to standardize the reporting of the funded status of public pension plans throughout the country. This directive went into effect for the five city pension funds with the financial reporting for the year ending June 30, 2008.

This reporting requirement led to the inclusion of a new table on page 101 in the city’s FY-2008 comprehensive annual financial report, CAFR. This table uses a more standard generally accepted actuarial cost method than the statutory method used by the city pension funds.

These two different methods paint very different pictures of the funded status of the city pension funds. With the new standard method, the funded status of NYCERS has fallen from 136% in 1999 to 80% in 2009. In simple terms, this means that NYCERS has $8 for every $10 it owes. The statutory method reports that for 2009 NYCERS is 100% funded. The NYCERS actuary, however, concedes that the numbers produced using the statutory method “provide limited insight into the ongoing financial performance of the Plan”.

There is no comment by the actuary in either the city or the NYCERS CAFR report about the impact of the standard funded status. The information is clearly stated in the financial report but is completely ignored, at least publicly.

The situation is even worse in the other four city pension funds as indicated on page 101 of the FY-2008 city CAFR. (TRS: 71.8%, BERS: 73.2%, Police: 69.5%)

The funding status at the FDNY pension fund is even more alarming. The standard method indicates a 55.8% funded status for FY-2008 with a benefit payout of $915M based on a payroll of $1B, and a closing balance for the year of $7.2B. The city is making enormous contributions as you can see below and the actuary has only begun to reflect the recent market losses in these costs.

Fiscal YearCity Contribution to FDNY pension fund

Thursday, July 16, 2009

More Details on the Perjury Story

At the end of June I posted a story about perjury by the HR director at NYCERS and the involvement of the legal director at NYCERS and the investigator at DOI. The following is a portion of deposition given by the NYCERS legal director, Karen Mazza, in November, 2006. She earns approximately $162,000/yr. The testimony deals directly with her involvement with these apparently improper activities surrounding the perjury.

Just a reminder. When someone answers that he/she can not remember, there is the possibility that he/she is withholding information in a way that does not perjure him/herself. It is the classic sign of a non-cooperating witness.

Portions of the Mazza Deposition from November 21, 2006

Page 59

Q.: Do you have any current recollection that you advised the DOI investigators that you had deleted the Baksh revision E-mails?

A. No, I don't have any recollection.

Q. We have had marked as Exhibit 23 to the DeFreitas deposition 0745, a summary of a conversation in which it appears that you advised DOI on that date, July 22, 2004, that you had deleted the Baksh resume E-mails. Do you see that?

A. Yes.

Q. Does this refresh your recollection that your first statement to DOI about revising the Baksh resumes was subsequent to your testimony on July 13, 2004?

MR. MARKS: Objection to the form. You mean about deleting E-mails? Have your question read back. MS. CARROLL: Read it back. (Record read.)

Q. You have looked at Exhibit 23?

A. Yes.

Q. It is a fact, is it not, that July 22, 2004 is the first time you tell DOI that you (Page 60) deleted the Baksh resumes that indicate your actions with respect to that resume?

MR. MARKS: The E-mails. MS. CARROLL: Yes.

A. Yes.

Q. You never mention the E-mail deletion prior to July 22, 2004 to DOI, right?

A. No.

Q. That is correct?

A. That is correct.

MS. CARROLL: Mark this E-mail dated 7/29/04 as Mazza Exhibit 3. (Mazza Exhibit 3, E-mail dated 7/29/04, marked for identification, as of this date.)

Q. I will direct your attention to the upper part of the memo. What do you mean you're uncomfortable if anybody in-house asks to see your deleted E-mails; uncomfortable about what?

A. I wanted to know if anybody else was asking to look at those deleted E-mails.

Q. That wasn't my question. I understand that. That is what it says. My question to you is, why were you uncomfortable about this Page 61 information being recoverable, the deleted E-mails?

MR. MARKS: Objection to the form.

A. I wasn't uncomfortable with it being recoverable. I was uncomfortable with other people asking to see it.

Q. I am reading what you wrote. "I am somewhat uncomfortable with this info being recoverable." That is not my words. That is what it says here. My question is, when you wrote this, why did you say that? What were you uncomfortable with about having this information, that is the deleted E-mails, being recoverable?

MR. MARKS: Objection to the form.

A. That is not -- what I wrote is not what I meant. When I say recoverable, I meant being seen by somebody else.

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

A. Right.

Q. Why were you uncomfortable that the E-mails that you had deleted would be seen by somebody else "in-house"? Why? Page 62

A. My purpose in writing that paragraph was, we were in the middle of a DOI investigation and I wanted to know if anybody else was asking Kin to show them my deleted E-mails.

Q. You're not answering my question. I asked you, using your own words, why were you uncomfortable with this information being recoverable. I am asking you why.

A. I answered you and said that –

Q. No, you haven't answered me. Why were you uncomfortable; because it would show that you doctored a resume?

A. No.

Q. Why were you uncomfortable; because you deleted E-mails and it related to a subject that you were sitting on a panel?

A. What I said to you in my answer previously was that what I wrote is not what I meant.

Q. You're a lawyer, Ms. Mazza. The trade of a lawyer is the usage of words. I want to know, what did you mean when you used the words, I am somewhat uncomfortable with this information being recoverable? At that time, what did you Page 63 mean?

MR. MARKS: Objection to the form.

Q. What did you mean?

A. What I meant was, I want to know if Mr. Murphy was asking to see my deleted E-mails. That is what I meant.

Q. Did you tell DeFreitas or Kin Mak or anybody that you were concerned that Mr. Murphy would see your deleted E-mails?

A. No.

Q. Why Mr. Murphy?

A. Because we were in the middle of a DOI investigation.

Q. Why shouldn't DOI get the deleted E-mails regarding the allegation that you doctored the Baksh resume?

A. I didn't say DOI shouldn't get the E-mails.

Q. Well, they couldn't get them because you deleted them, right?

MR. MARKS: Objection to the form.

Q. Isn't that right; DOI couldn't get the E-mails regarding the Baksh resume because you deleted them, right? Page 64

A. Correct.

Q. There was an effort to try to retrieve the deleted E-mails, isn't that right? DOI was trying to retrieve them?

A. Yes.

Q. In fact, your testimony that there was no back-up tapes, that is incorrect; isn't that right?

MR. MARKS: Objection to the form.

A. There are back-up tapes but only for a certain amount of time.

Q. The statement that there were no back-up tapes is inaccurate?

MR. MARKS: That is not what she testified to. You asked whether she testified there were back-up tapes on which the E-mail tapes would be on, not whether the agency has any back-up tapes, period. MS. CARROLL: We will go back over it.

Q. At or about the time that the inquiry was being made by DOI, there were back-up tapes for E-mails; isn't that right?

A. Yes.

Q. In fact, there were back-up tapes for Page 65 E-mails going back a year; isn't that right?

A. That, I don't know.

Q. Then you can't give testimony that there weren't, right? There is a difference between if you know a thing or you're guessing. In 2004, whether or not there were back-up tapes for the E-mails you deleted, your testimony is that you don't know, right?

MR. MARKS: Objection to the form.

A. I know there were not because when they tried to find them, they couldn't find them.

Q. How do you know that? How do you know that they couldn't find them?

A. Because I was told by DOI.

Q. Who told you in DOI that Kin Mak could not get back-up tapes for your deleted E-mails?

A. I don't remember.

Q. Did you have contact with somebody other than DeFreitas during the course of the investigation of the allegation against you regarding the revision of the Baksh resume?

A. There was Alberta Ancrum also working on that case.

Q. Anybody else? Page 66

A. Vinnie Green was also working on the case.

Q. Did you have conversation with any of those people, Ancrum, Green or DeFreitas, regarding the matter of whether there were back-up tapes for the deleted E-mails?

A. Someone from DOI told me they could not recover the E-mails.

Q. They told you this verbally or in an E-mail?

A. I believe it was verbally.

Q. You're the subject of one of the allegations, right?

A. Yes.

Q. Your testimony is that you deleted E-mails regarding the revision of the Baksh resume, right?

A. Yes.

Q. You're telling me that with respect to the issue of whether there were back-up tapes which would produce the E-mails that documented what, in fact, you did, DOI tells you, the subject, that the back-up tapes don't exist?

A. Yes. Page 67

Q. Did DOI also tell you whoever it was of these three, Ancrum, Green or DeFreitas, that they couldn't obtain the deleted E-mails from the fire department E-mail system?

A. No.

MR. MARKS: I will let you go on with this questioning -- MS. CARROLL: We are getting to it -- MR. MARKS: This is a case brought by Mr. Murphy concerning defamation. MS. CARROLL: This is very much into the legally being a reckless disregard for the truth.

Q. Why were you concerned that Mr. Murphy would have access to the deleted E-mails if the back-up was discovered, the back-up files?

A. I was just concerned.

Q. It is a fact, is it not, that you at no time during the interview process for HR director told Mr. Murphy that you had revised Baksh's resume?

A. I didn't tell Mr. Murphy that I had been asked to look at Felita's suggestions for --

Q. You tracked things and moved things Page 68 around, right?

MR. MARKS: Objection to the form.

A. I didn't move things around. I made suggestions about what --

Q. -- for moving things around.

A. Correct.

Q. When you testified at DOI, you testified that you didn't know whether or not Baksh had, in fact, adopted your suggestions; isn't that right?

A. Yes.

Q. But, in fact, you had as a member of the panel the Baksh resume that she submitted for the position, right?

A. Yes.

Q. By reference to the E-mails that you had which included the original resume and the resume that she submitted to the panel, you in fact uniquely did have access to the information that would answer that question?

MR. MARKS: Objection to form.

A. If I still had the E-mail in my E-mail box.

Q. There is no question, Ms. Mazza, that Page 69 as of the time of the interview which was only a brief period after you received the E-mail from Browne that you still had the Baksh-related E-mails, right? Isn't that right?

A. I may have.

Q. The date of Exhibit 22 to the DeFreitas deposition is dated January 28, 2004. This is from Baksh to Browne which gets forwarded to you, right?

A. Yes.

Q. This E-mail existed at the time that Baksh was, in fact, interviewed, isn't that correct? You didn't delete the E-mails between January of 2004 and the date of the interviews?

A. I don't know when I deleted the E-mails.

Q. You have no recollection that it postdated the actual interview by Baksh?

A. I don't know when I deleted the E-mails.

Q. Did you talk to the NYCERS trustees or anybody else at NYCERS about these tapes, the back-up tapes for the E-mails?

A. No. Page 70

Q. You said Jodi Nagel resigned. Was she on maternity leave?

A. Yes.

Q. Did she have to resign because she was on maternity leave?

A. It was just something Ms. Nagel, now Mrs. Rodman, decided to stay home and be a stay-at-home mom.

Q. Subsequent to your interview at DOI, did you have any contact with any of the trustees regarding the investigation? And I include Bratcher in this question.

A. I don't remember.

Q. Did you speak with Ms. Stark regarding the matter?

A. I don't remember.

Q. Did you send any E-mails to anyone additional to DeFreitas regarding the investigation of the allegations in the anonymous letter?

A. I don't remember.

Q. In addition to the E-mails concerning the Baksh resume, did you delete other E-mails?

A. I am sorry. Say that again. Page 71

MS. CARROLL: Read it back. (Record read.)

A. Oh, yes.

Q. Did you ever speak with Musaraca subsequent to the time that you testified at DOI?

A. I speak to Mr. Musaraca frequently.

Q. That is a silly question. Sorry. Prior to the DOI report coming out and subsequent to your testimony, did you speak to Musaraca?

A. Mr. Musaraca, yes. He is one of my trustees.

Q. Did you speak to him about the investigation of the anonymous letter at any time between July 13, 2004 and March 1, 2005 when the DOI report came out?

A. I don't remember.

Q. Did you ever have any conversation with him about the allegations against you subsequent to testifying and prior to the DOI report?

A. I really don't remember.

Q. What about E-mails?

A. I really don't remember.

Q. Would you have your E-mails from that Page 72 period?

A. No.

Q. You destroyed all the E-mails?

MR. MARKS: Objection.

A. Yes.

Q. Is there any back-up name for them?

A. I don't know.

Q. When did you first see the DOI report on the allegations raised in the June 1 anonymous letter?

A. The day of the trustees meeting.

Q. At the trustees meeting?

A. No.

Q. What were the circumstances?

A. A copy of it was left in my office.

Q. By whom?

A. I have no idea.

Q. When?

A. The morning of the trustees meeting.

Q. Prior to the meeting?

A. Yes.

Q. Without any indication as to who left it there?

A. It was on my chair. Page 73

Q. I want to make sure I have this exactly correct. On March 1, 2005, there is a DOI report. The records in this case indicate that there was a meeting on March 10, 2005 on that report. It is your testimony that on the morning of March 10, 2005, there is a copy of the DOI report on your chair?

A. Yes.

Q. Did you have any conversation with any of the trustees prior to March 10, 2005 regarding the fact that that there was a DOI report?

A. I don't remember.

Q. When you saw this DOI report on your chair on March 10, did you know prior to that that there had been a determination by DOI?

A. I think so.

Q. How did you first find out there was a DOI determination on the allegations raised in the June 1 anonymous letter?

A. I know I spoke to Vinnie Green that week, in that time period. He told me they were coming out with a report, but I don't remember when it was. Page 74

Q. Did he tell you what the conclusion was?

A. He told me they were referring the allegation regarding me to COIB.

Q. Vinnie Green is Vincent Green?

A. Yes.

Q. He called you or you called him?

A. He called me.

Q. You were a subject of the investigation. Why was he speaking to you?

MR. MARKS: Objection to the form.

Q. Before the report was issued.

A. I don't know.

Q. Do you have a personal relationship with him?

A. No.

Q. Well, you're a subject. He is investigating you. Why did he tell you he was calling you about it?

MR. MARKS: Objection to the form.

A. I don't know why he called me.

Q. Did he tell you that there were Page 75 findings against Mr. Murphy in this conversation?

A. No.

Q. Was it one phone call or more?

A. One.

Q. When you got this phone call, what did you do with that information?

A. Nothing.

Q. You didn't tell Mr. Murphy?

A. No.

Q. Did you speak to any of the trustees about this?

A. No.

Q. Prior to the meeting on March 10, 2005 in which the DOI findings are discussed, you know there is a letter. You know that they are referring your part to COIB and you have no conversation with any trustees; is that right?

A. I don't -- no, I don't.

Q. Not with Bratcher, not with Stark?

A. No.

MS. CARROLL: Let's take a break.

(Recess taken.)

Q. On the date of the March 10, 2005 trustees meeting which considers, among other…

Friday, July 10, 2009

The 8% Delusion

The governor is ready to sign a bill (A8933/S5918) sponsored by the city to extend for one year the 8% actuarial assumed rate of return for the assets of the city pension funds. This rate of return controls the size of the city's annual pension costs. It is so important that it requires legislation. It is not left up to the discretion of the actuary or the pension board trustees.

Maintaining the 8% rate of return is crucial to the city's budget. If the 8% were lowered to 7 or 6%, the required contribution would radically increase. Even with the 8% rate, the employer’s contributions for the five city pension funds in FY-2010 are $7.6B. In the city's case, it is paying $6.4B or 17.5% of its totally payroll.

Once upon a time in the 1990’s, 8% was a realistic target but not since 2000 has anyone been able maintain an 8% trend. Over the last ten years, the actual rate of return for the five city pension funds has averaged only 2.4%. The pension funds have missed their rate of return target by $53B during this period. This figure, however, is only the sum of the shortfalls for each year. It doesn't capture the significant effect of annual compounding.

As an example, since 2000 NYCERS has missed its 8% target by $24B. If it had achieved 8%, NYCERS would have a closing balance of $63B as of June 30, 2009. Instead, it has closing balance of $29.8B, $33B less than the $63B. The additional $9B shortage beyond the $24B is the result of annual compounding.

In addition to the obvious underfunding that the 8% target rate has produced, it has also had a nasty impact on the investment strategy pursued by the pension funds. Because the 8% target was a high threshold, the actuary for the pension funds advised the trustees of the funds that a conservative investment plan would never support the 8%.

A conservative strategy is something along the line of a 50/50 split between domestic stocks and high grade government/corporate bonds. While this is conservative for a mature pension fund, it still has a significant level of risk. In the current market, the city pension funds might still have lost significant assets.

In the NYCERS fund, the trustees have 46% of the assets in domestic stocks, 28% in higher risk investments, and only 29% in high grade bonds. NYCERS lost $9B in FY-2009. The conservative strategy could have possibly reduced that loss to $6B for the year.

The 8% rate has caused both underfunding and higher investment losses. The pension funds must become more transparent, if they are to survive. There is too much closed door arm twisting going on.

Tuesday, July 7, 2009

NYCERS Assets as of June 30, 2009

As of June 30, 2009 the S&P 500 index closed at 919.32. This was a significant increase from the March 31, 2009 close of 797.87. A reasonable estimate of the closing balance of NYCERS assets as of June 30, 2009 is $29.79B up from $28.09B on March 31, 2009. In spite of this $1.7B increase for the 4th quarter, the loss for the full year was still a devastating $9.07B.

The $29.79B balance includes a $1.9B private equity component and $1.1B real estate component. These items are not set at a market value but at an amount equal to the money that was originally invested. There is not reflection of profit or loss in these values. NYCERS has no policy for reporting these investments at their true value.

NYCERS uses the Pacific Corporate Group as its investment consultant for private equity investments. As reported in a recent WSJ article Pacific Corporate Group entered into settlement with the NYS Attorney General Office with respect to investment allegations. It is not clear how the NYCERS trustees are going to respond to this agreement.

The following is a table of NYCERS Assets and Benefits for the last ten years. It is clear that assets are trending down and benefits are trending up. This is not sustainable.

YearAssetsBenefits &