Friday, December 16, 2011

Hard Reality of Private Equity

At the NYCERS investment board meeting on September 16, 2011, the NYCERS private equity (PE) consultant, Pacific Corporate Group (PCG), notified the trustees that one of its PE investments, Allegra Capital Partners IV, had exited during the first quarter of 2011. See the Wikipedia quote below:

A private equity fund's ultimate goal is to sell or exit its investments in portfolio companies for a return, known as internal rate of return (IRR) in excess of the price paid. These exit scenarios historically have been an IPO of the portfolio company or a sale of the company to a strategic acquirer through a merger or acquisition (M&A), also known as a trade sale. Increasingly, more common has been a sale of the portfolio company to another private equity firm, also known as a secondary sale. In prior years, another exit strategy has been a preferred dividend by the portfolio company to the private equity fund to repay the capital investment, sometimes financed with additional debt.

I have previously commented on the problems of PE investments for public pension funds.

PCG stated that this is the second NYCERS PE investment to exit since the PE program was started in 1999. I suspect that the first PE investment to exit was the Emerald Infr. Dev. Fund. It was a disaster with a total loss of capital equal to $1M and fees for two years (2009 & 2010) equal to $754,338.

PCG did not give the trustees any specifics on the close out of the 12 year old Allegra partnership. But from the PE investment recap you can extract some of the bad news. NYCERS invested $24M in this partnership and received back $11.7M. That is a 51% loss of capital and obviously, a negative IRR.

To rub salt in the wound, NYCERS paid Allegra $2.2M in fees from 2000 to 2010. The fees may be even higher. Since 2005, there are four years with missing fee data. I left NYCERS in 2005.

PCG is reporting a -9.2% IRR for these two exited PE investments. PCG, however, provides no documentation supporting this number.

The only way to calculate an accurate value of a PE investment’s IRR is with the full cash flow history for the partnership. NYCERS members and retirees are entitled to this history. They have the right to a public reckoning of all investments.

When it comes to accurate data, there is a high flight risk with any PE investment. In addition, I have a strong suspicion that NYCERS has been derelict in its responsibility to seek and maintain the necessary information to protect the funds it placed with PE managers.

Wednesday, November 30, 2011

What do you get for $2.9M?

A notice in the October 31, 2011 issue of the City Record indicated that NYCERS had award a contract to the Caudwell Wingate Company, LLC for the demolition and build-out of a disaster recovery site. The amount of the award was $2,897,271. This was a negotiated acquisition.

There is a problem with this contract. NYCERS does not have a budget authorization for this $2.9M item in its FY-2012 budget. The trustees will need to modify the FY-2012 budget to cover this expense. As of now, the NYCERS executive director does not have the authority to sign this contract unless the trustees have authorized the funds needed to pay for it.

What is NYCERS supposed to be getting for this $2.9M? In April of this year, the NYCERS legal department described the work as follows: “ to include but not limited to demolition of existing walls, installation of walls, HVAC, lighting, flooring, electrical, millwork, new operable partition wall and sink in pantry”. That must be some sink. This work is being done on a single floor in an old warehouse site where a retail firm used to store some of its inventory. In passing, it appears that the NYCERS legal department has been reassigned to procurement and site management.

When is this project going to be completed? MaƱana.

Who is Caudwell Wingate and what are their political connections? This week the NY Times had an interesting story about a boiler installation contract at the new Yankee Stadium.

Considering that NYCERS signed the lease for the disaster recovery site in L.I.C. in 2006 and it is still not yet operational, the trustees should be closely monitoring everything involved with this project.

Everyone is screaming about a pension crisis. This is the type of management failure that causes a crisis.

Saturday, November 19, 2011

The Mayor and the New Pension Investment Board

At the NYCERS investment meeting on Tuesday, 11/15/2011, Liu's first deputy comptroller, Mr. Eric Eve, had to sit and take a pounding from the NYCERS trustees who were left out in the cold about the 10/27/2011 press release announcing the "proposal" for a new pension investment board. The press release was lead by the mayor with the comptroller in tow.

So why was everyone throwing verbal rocks at Eric Eve while Ms. Ranji Nagaswami, the mayor's appointed NYCERS trustee, sat comfortably at the head of the table? You would think that the mayor had nothing to do with trying to cut two major unions, the Public Advocate, and the five borough presidents out of the the investment decision process at NYCERS.

How did Bloomberg dump this pile of garbage in Liu's lap and walk away with clean hands?

Of course, Mr. Eve did not give any specific details of the how this new board would be structured and operate. I suspect that is because either he had no details or because any hard details would have pissed the hell out of the trustee who had not been consulted. But I think it's was really equal parts of both. For example, it was very "unprofessional" of him to say that passion was going to be one of the requirements for membership on the new investment board. How do you evaluate passion?

You wonder where elected officials find these staff people.

Wednesday, November 16, 2011

Chapter 514 - Laws of 2011 - Police & Fire Retirement at Dismissal

Chapter 514 was signed into law on 9/23/2011. It deems a Tier 1 & 2 member of the NYPPF and the FDNYPF with 20 or more years of police or fire service to be retired as of the date he/she is dismissed Failure by the member to give the full 30 day filing notice due to termination will not impair the member’s retirement benefit. This law does not affect new members hired after 6/30/2009 since they are covered by Tier 3.

There is one negative aspect of this new law. There appears to be a pension forfeiture provision for a felony conviction, if a police or fire member avails himself of this exception to the 30 day filing requirement for retirement.

The provision states that a member (this word creates some uncertainty as to whether it applies to a pensioner) with 20 years of service will forfeit his/her retirement benefit if he/she is convicted of a felony in NYS, or an offense either in another state or under federal law that would be a felony in NYS.

Current Tier 1 & 2 police & fire members are generally not subject to this forfeiture since they have grandfather rights prior to 9/23/2011. I suspect, however, the only time the forfeiture issue would arise is when a member used the 30 day exception with his/her deemed retirement at termination.

I am not sure what the pension funds’ will do with respect to future felony convictions for dismissed retirees.

Thursday, November 10, 2011

Not Ready for Prime Time - Proposal for Central Investment Board for City Pension Funds

The Proposal

On October 27, 2011 the mayor and the comptroller issued a joint press release. The release announced an agreement in principal to reform investment governance and management of the five city pension funds. Any joint policy initiative by two political rivals is usually a significant event. Six union trustees joined in the announcement.

In the past I have commented on the lunacy and high risk investment decisions which specifically the NYCERS trustees have engaged in since 2000. NYCERS is the largest of the five city pension funds. The NYCERS trustees are established by statute and include the mayor’s representative and the comptroller, the public advocate, the five borough presidents, and three major city unions. There are definitely changes that the pension funds need to make. This proposal, however, misses the mark completely. The tools are already there but no one wants to use them.

As a rationale, the mayor's press release stated:

The proposal is intended to insulate management of pension assets from any political office, further professionalize it and make it more consistent with industry best practices. The proposal aims to increase investment returns, lower the City’s pension costs, protect and strengthen pensions for current and future retirees, enhance accountability and guard against the possibility of fraud and corruption.

Current Investment Authority

The mayor seems to be unaware that the city pension trustees already have the authority and resources to depoliticize the investment process, professionalize the investment staff, and implement "best practices". For the last ten years the mayor has not used that authority. It is significant that he chose Martha Stark be his representative at the pension boards for his first seven years in office.

The five city pension systems currently delegate, on a annual basis, their investment authority to the comptroller (Section 13-702 of the NYC Admin Code). This creates a centralized investment system managed by the comptroller. The comptroller usually hires a CIO who reports to him. The comptroller also has a permanent investment staff within his Bureau of Asset Management (BAM). The five pension systems subsidize the comptroller's operating budget to cover the costs of running these investment operations.

Section 13-702 also permits the trustees of any of the city pension funds to rescind their delegation of the comptroller at anytime. If the trustees are unhappy with interference of political forces in the investment process or the lack of investment performance, they can assume direct responsibility of their own investment process. They can hire necessary support staff. In addition, each of the five city pension already has its own outside investment consultant which the trustees have hired. These consultants could easily provide the expertise needed by the trustees to operate their own investment function.

Loss of Power for the Comptroller

The proposed investment board would clearly accomplish one thing. It will reduce the status of the comptroller in the investment process and impact his ability to raise campaign contributions. From a purely political point of view, political actors never willingly surrender power. There is a funny smell in the air here. It may not be a coincidence that federal authorities are investigating the comptroller's campaign fund raising activities.


With regards to investment performance no one with any certainty can say that the new investment board will be able to improve performance by 1% or more over the current arrangement. It is just as likely that the new board would produce a 1% drop in performance. This is the standard type of delusional comments you find in marketing propaganda.

Structure of New Board

Who will sit on the new board? It will be particularly difficult determining who will be members of the new board and what the voting structure will be. I can not imagine any trustee not wanting to be on the investment board. So much for a more simple and effective board. It is clear that the Public Advocate and the five borough presidents will want to remain involved. I am sure that the same will be true for all unions currently involved.

There will also be pressure from unions currently not on the boards. I know for a fact the Correction Force and Sanitation Force unions would love to have a seat at the table.

As seen in subsequent news articles, the mayor failed to check with at least seven of the NYCERS trustees, a majority of the NYCERS board. These trustees have made it clear that they have serious questions about the proposal.

Each of the five city pension funds has a distinct financial profile which impacts investment decisions . For example, as of June 30, 2010, the FDNY pension fund was 56% funded and NYCERS was 80% funded, a significant difference. They have different cash flow demands. The funds will continue to be separate accounting entities and trusts. The trustees of each fund are the prime legal fiduciaries of the funds. It will not be possible to remove their responsibility for the investment process of their associated fund assets.

The NYCERS fund, specifically, has other significant participating employers besides the city. In the past OTB was a major participant. There are some really complex issues embedded in these pension systems.

There is no mention in the proposal how this new investment board will be funded. There was no mention of the current civil service of the the existing staff at BAM. Who would approve the investment board's annual operating budget and the fees paid to outside managers? Assets of any of the pension funds can only be disbursed upon the public approval of the associated board of trustees.

Staff for the New Board

There is always a presumption that the compensation for investment staff should be free of government compensation limits. This opinion is tied into what type of investing you want to do. I have expressed my opinion that public pension funds should follow a lower risk/lower cost strategy. This strategy would allow the pension board effectively manage their assets with staff paid within the city pay structure. The 2008 financial crisis taught us all how irresponsible and incompetent highly paid investment professionals can be.

The mayor wants the pension funds to emulate Harvard and Yale. Pension funds are very different from endowment funds in that pension funds must make mandatory annual payouts no matter what the pension fund earns on it investments. Without mandatory payouts, endowments can tolerate higher risk profiles than pension funds. This is where higher compensation might become an issue. But then again, higher risk is not a guarantee of higher return.

The Chief Investment Officer

The proposal envisions a permanent CIO described below:

A Chief Investment Officer will lead the new investment management entity. The Chief Investment Officer will report to the new pension investment board – not to any individual elected official – and will be appointed to a fixed term that will not coincide with citywide election cycles

It will be no easier for the investment board to hire a new CIO than it is for the comptroller . The CIO will clearly be an at-will employee. There will definitely be a certain level of politics associated with the investment board. An truly independent CIO is not logical when the trustees are the fiduciaries of the five pension funds.

The Comptroller's Duties as Custodian and Disbursement Agent

By statute the comptroller is the custodian and the cash disbursement agent for the five pension funds. While the custodian function has been contracted out for many years, the disbursement function means that the comptroller is responsible for the cash management operations for the five pension funds. This separation of control is a very sound arrangement. It is a good accounting practice and guards against fraud. It should not be changed. It should, however, be reinforced. The accounting control of investment management fees is a disaster.


The more I think about this proposal, the more I am convinced that it is a public relations effort with no connection to reality.

Tuesday, October 18, 2011

NYC Department of Investigation – Can You Trust DOI?

In the spring of 2009, two and half years ago, I reported to both the Department of Investigation (DOI) and the NYCERS trustees an act of perjury (deliberately giving a false statement under oath) by Felita Baksh (aka Ramsami) during a sworn DOI interview.

In response to my notice, one of the trustees, the former Public Advocate, asked that DOI investigate the matter and report back to the Public Advocate and to me. The Public Advocate was the only party to take any action or acknowledge my allegation. In response, DOI notified the Public Advocate that it was forwarding the matter to the Department of Finance IG for review. DOI did not notify me of this action but the Public Advocate did.

I provided all parties with a copy of the verbatim testimony of the DOI interview of Baksh from July, 2004. The interview was given under oath. In a very careful manner, the DOI interviewers gave Baksh a second chance to correct her original false testimony after warning her that she was under oath. She did not change her testimony. The false testimony related to the help Baksh received from Karen Mazza, a staff attorney at NYCERS, in regards to Baksh’s fraudulent appointment as HR director at NYCERS in 2004.

You might be wondering how DOI managed to miss this almost certain act of perjury during one of its own interviews. In 2004, DOI chose not to make a verbatim transcript from the audio tape of the interview. DOI chose, instead, to allow the lead investigator, Carol DeFreitas, to make a summary from the audio recording of the interview. DeFreitas was not one of the DOI investigators who interviewed Baksh. DOI had put her in charge of the investigation even though she was only a temporary employee recently on loan from Martha Stark. DeFreitas was actually a Department of Finance employee receiving a pay check from Finance and not DOI.

Subsequently, DeFreitas became involved with Mazza in an effort to hide the extent of the help that Mazza gave to Baksh. In addition, Mazza pulled another NYCERS employee, Kin Mak, into the cover up. Mak, an IT staffer, enabled Mazza to hide incriminating emails but not before Mak made copies of all the emails that pertained to the events surrounding the investigation.

Those copies are safely tucked away at Mak’s home in Pennsylvania. Those emails, I suspect, cast a wide net and have crippled the investigation into the Baksh perjury charge because of the people implicated by the emails.

I previously reported all of this in a series of postings: perjury, DOI, and sleeping trustees.

Recently, in response to a FOIL request for DOI’s closing memo for the investigation of the perjury charge, DOI refused to release any information. DOI claims that the information is exempt under FOIL because it would be an “unwarranted invasion of personal privacy” and it was “compiled for law enforcement purposes and would identify a confidential source or reveal confidential information relating to a criminal investigation”.

It is clear that the perjury charge against Baksh is public record. There is no personal privacy to protect in this case. If DOI finds that this public charge is untrue, it should at least clear Baksh’s name. But I am very certain that DOI found the charge to be true. It appears that DOI does not want to deal with the charge and the web of corruption that goes along with it.

The majority of DOI’s work is allegedly for law enforcement purposes. DOI is claiming the closing memo would identify a confidential source. That can’t be it. I publicly supplied them with all the information they need to reach a conclusion on the charge. In addition, after two and half years, I don’t think that there is any criminal investigation going on. It is completely reasonable to conclude that DOI is protecting one or more people.

Unfortunately, DOI has not given a report on the investigation to the Public Advocate or to me.

Even more unfortunately, the current Public Advocate has made no effort to obtain the closing memo from DOI even after being questioned about the investigation.

In closing, the perjury allegation is almost certainly true and therefore, almost certainly the NYCERS trustees are allowing three criminals to continue to work at NYCERS. This raises suspicions about the judgement and integrity of the trustees.

Monday, October 17, 2011

Does Private Equity Make Sense for NYCERS? No.

Recently the Comptroller as part of his effort to increase transparency has started posting the full agendas of investment meetings held by the NYCERS Board of Trustees. NYCERS has ten of these meetings every year in addition to the ten regular meeting where administrative and disability issues are handled.

Prior to these postings NYCERS had refused my FOIL requests for these full agendas. NYCERS reason for the denial was that some of the material was discussed in executive session. Of course that is not a valid reason for denial but I didn’t have the financial resources to file a court challenge. It will be interesting to see if the Comptroller continues to make these items and future items available on his web site

What I was looking for in particular in the full agendas were the reports on private equity and real estate performance produce by the two consulting firms monitoring the partnerships.

The reports have some interesting data which allowed me to approximate the actually performance of the partnerships. The data includes the total cash-in, the total cash-out, an estimate of the “market” value of NYCERS portion of the partnership, and an estimate of the internal rate of return (IRR) for each partnership. I used quotes around the word market because there is no open market for the buying and selling of limited partnerships.

To perform an exact internal rate of return (IRR) for these partnerships you would require a full date specific history of each cash transaction between NYCERS and the partnership including all fees and the partnership would have to be dissolved with a final closing cash-out to NYCERS. I know that NYCERS is not currently maintaining the transaction data and therefore is not able to confirm the IRR of any of its partnerships. I don’t know what method the consultants are using to produce their IRR’s.

In order, however, to do some cross checking on the consultant’s estimated IRR’s I used the data from the report and the history of the estimated market values of the partnerships. This allowed me to estimate an IRR that I have more confidence in.

For example, NYCERS oldest private equity partnership, VS&A Communications Partners III, first shows up in FY-1999. As of March 31, 2011 it had a reported value of $14.56M. The consultants quoted an IRR of 6.2% for VS&A for the period from 12/15/1998 to 10/30/2010.

Not very impressive but, I suspect, overly optimistic.

The cash-in amount for the 13 years was $50.23M and the cash-out amount was $53.43M. Assuming a final cash-out payment on 6/30/2011 of $14.56M("value" as of 3/31/2011), my estimate of their IRR is a 4.3% annual rate of return.

In addition, NYCERS has paid $5.9M in fees to VS&A from FY-1999 trough FY-2011.

As a comparison, NYCERS government bond managers have an annual rate of return over the last 15 years of 7.13%. The fees in FY-2010 for NYCERS government bond portfolio with an asset value of $994.66M were $255,000. These assets are total liquid and have minimum risk.

VS&A is a typical private equity manager. With the explosion of the number of private equity partnerships in business to service the public pension arena, the rates of return will become locked into average market returns at best and more likely will average worse than the S&P 500 index but with obscenely higher fees. NYCERS has 140 private equity contracts, 4 of which have closed down without any public report by NYCERS.

I have professional opinions on what is happening here but I will let the numbers speak for themselves.

Friday, October 14, 2011

Out of Control Investment Fees

Every June the NYCERS actuary presents to the trustees his estimate of what the pension costs will be for the next year. The total bill for FY-2012 is $2.587B. The city's share of that cost is $1.403B. The rest is charged to other participating employers.

As part of the $2.587B amount, there are two non-benefit items. They are investment expenses and administrative expenses. The charge for investment expenses is $204M and for administrative expenses, it is $55M.

The $204M figure grabbed my attention when I saw it. I have previously complained about obscene growth in investment fees but there is a real kick to the actuary's $204M charge.

I have listed below the investment fee charges since 2000. I can not believe that the trustees think these increases are rationale.

  1. $27.2 (2000)
  2. $38.5 (2001)
  3. $40.0 (2002)
  4. $40.6 (2003)
  5. $31.6 (2004)
  6. $46.4 (2005)
  7. $00.0 (2006)
  8. $53.8 (2007)
  9. $80.9 (2008)
  10. $114.5 (2009)
  11. $134.5 (2010)
  12. $161.1 (2011)
  13. $204.4 (2012)

In 2006, the city had the law changed so that expenses were paid two years after the fact rather than one year, thus producing a payment holiday.

On a smaller scale administrative expenses have gone up 40% since 2005, from $35.3M to $55.1M. Does anyone think that service at NYCERS has increased 40% over that time period. It sure wasn't the completion of the disaster recovery site.

Wednesday, October 12, 2011

Let Sleeping Dogs Lie.

I just received my quarterly pension PR letter from Comptroller Liu. Liu couldn't resist the temptation to claim credit along with the trustees for the pension funds' good investment performance during FY-2011 (June 30, 2011).

Number one, this is like taking credit for the sunshine. The S&P 500 index went from 1030 (6/30/2010) to 1320 (6/30/2011) during FY-2011, a 28% increase.

Number two, this also means the trustees and the Comptroller are responsible for losses when they occur, like the $3.5B that NYCERS lost in the last 3 months.

The best we can hope for from the trustees is not to screw things up too much. They are the last people in the world that anyone would willing trust money to. Of course, Bloomberg has managed to raise his own personal net worth to $19.5B from $4.5B since coming to office.

Tuesday, September 20, 2011

Accounting Problems with Investment Fees at NYCERS

In May, 2010, in response to a FOIL request I received a copy of NYCERS internal accounting charts of investment expenses for FY-2008 and FY-2009.

This year NYCERS has chosen to deny my FOIL requests for the accounting charts for FY-2009, FY-2010, and FY-2011.

Each year, on December 31st, NYCERS files a Comprehensive Annual Financial Report (CAFR) for the previous fiscal year ending on June 30th. This report includes a detailed listing of all investment vendors under contract to NYCERS and the fees paid to the vendors. This reporting is on an accrual basis. In plain English, that means if you don’t have the billing data when you are closing the books, you make a best guess at the amount, enter that amount, and make offsetting entries in the next year report when the data comes in. You don’t leave the entry blank.

As I have mentioned in the past NYCERS does not control the payment process for the investment vendors. The Comptroller does. NYCERS is dependent on the Comptroller for the billing and payment data needed for the accounting function. It is very clear why you normally don’t run a business like this. You have no way of vouching for the correctness of your accounting statements.

In this defective arrangement, when NYCERS receives billing and payment notices from the Comptroller’s Office, it records that information in its internal spreadsheets. This should be the basis of what appears in the CAFR statement. That is not what is happening. While the CAFR amounts are incomplete, the internal charts at NYCERS are even more incomplete.

Here is what is happening at NYCERS.

NYCERS currently has 92 managers of registered securities, 141 private equity managers, and 39 real estate managers. On its face, having this many managers is a red flag of a system out of control.

The FY-2009 CAFR statement quoted investment expenses at $138.1M. The corresponding internal NYCERS accounting chart amount is $97.4M, a $40M shortage.

The FY-2010 CAFR amount was $175.2M. NYCERS is now refusing to disclose what amount is recorded in its internal accounting chart.

The FY-2009 CAFR listing was missing entries for

  • 2 managers of registered securities
  • 27 private equity partnerships
  • 8 real estate partnerships.

The FY-2009 internal chart was missing

  • 8 managers of registered securities
  • 28 private equity partnerships
  • 7 real estate partnerships.

The FY-2010 CAFR listing was missing entries for

  • 2 managers of registered securities
  • 31 private equity partnerships
  • 6 real estate partnerships.

Again NYCERS will not disclose the internal accounting chart for FY-2010 and therefore we don’t know the number of missing managers for FY-2010 in this chart.

The bottom line is that NYCERS accounting for investment fees is out of control as seen from defects in both the CAFR and the internal accounting reports. Aggravating this lack of control is the enormous amounts of money at play in these fees. The fees for FY-2011 are on track to reach $220M.

The following is another sign of a system adrift. In a September 7, 2011 Bloomberg article, the Comptroller refused to disclose the recipients of $32M in fees that NYCERS paid in FY-2010 under the cover of organization fees for private equity and real estate partnerships.

The Comptroller claimed an exemption from the state Freedom of Information Law. The actual response was that the payments “are derived from information from the private equity companies and real estate partnerships which if disclosed would cause substantial injury to the competitive position” of the firms. This is the same reason NYCERS gave me for refusing my FOIL request this year for NYCERS internal accounting charts for Investment fees.

I can not imagine how disclosing what NYCERS paid a vendor would hurt the vendor’s competitive position. Independent of the state FOIL law, all NYCERS distributions are public record since they have to be approved by a resolution of the Board of Trustees. Such resolutions must be voted on in public session of a board meeting. This is all designed to protect against fraud and corruption.

As a point of reference, the NYC Teachers Retirement System does not report paying any organization fees.

All of this is a clear sign of an unacceptable risk to the integrity of the assets of the system.

The NYS Insurance Department just finished its multi-year examination of NYCERS. I will be curious if they comment on this glaring failure of financial control. The last report, unfortunately, covered only FY-2000 to FY-2002 and was only released in June, 2009.

Monday, September 12, 2011

Phantom Disaster Recovery Site at Long Island City

In 1997, after NYCERS received independent budgeting authority, we began developing a computer disaster recovery plan. In conjunction with IBM and its Sterling Forest site we constructed a process where we were able restore our computer systems at Sterling Forest along with our key operations. This plan only supported about 50 operations employees.

In February, 2000, we moved NYCERS from 220 Church St. to 335 Adams Street in Brooklyn. This new office site had 3 general office floors (21 to 23) and a mezzanine site where we located our customer service center, our call center, and medical board division for handling disabilities.

After of 9/11, everyone in the New York metropolitan area became very aware of the potential for wide spread disasters.

In early 2004, NYCERS experienced two minor business interruptions at our new office site. One was a broken sprinkler pipe on the 24th floor and the other was a fire in an electrical closet on the 8th floor. The water damage was minor but the fire closed the 3 main office floors for a week. We were lucky that the mezzanine still had power. We had installed a second data line from Sterling Forest to the mezzanine along with the main data line on the 23th floor. We also had installed a backup PBX in the mezzanine which allowed the call center to operate after two days.

While the recovery was a great success, it was clear to me that any long term outage would be unacceptable with respect to agency’s work load and the management our staff of 370 employees.

I proposed to the trustees as part of the FY-2005 budget package that NYCERS should explore a possible alternate work site in the event of a local disaster at 335 Adams Street. We would be looking for site within the city, on a different power grid, with decent mass transit access, capable of housing at least 250 workers at one time, capable of being linked up to Sterling Forest, 335 Adams Street, and other city data centers, and finally not too expensive.

The site would have to have the potential to be fully outfitted but we would start with only a minimal kernel for immediate operations. This would include a full technology infrastructure. We would slowly install non-critical equipment over time. In the event of a disaster, we would expedite that process. The site would have the added advantage of allowing us more frequent and realistic disaster testing.

I was looking for a 5 year lease with an option to renew. I was hoping the city would have developed a local DR site for general city agencies within that time frame. That was wishful thinking. I had told the trustees that after we had identified a site, I would present them with a total cost proposal and plan for their final approval.

The Deputy Director of Administration, Niki Browne, was in charge of the search. Late in 2004 Ms. Browne identified a potential site in Long Island City. It was, however, warehouse space and had many issues to be resolved. Unfortunately in June of 2005, Ms. Browne was removed from the project and it was turned over to Karen Mazza. Needless to say, this project is above her pay grade. In fact, Mazza, a lawyer, has serious problems with filling out time sheets, handling her emails, and analyzing legislation.

In October, 2005, Martha Stark and the trustees appointed Diane D’Alessandro as the new executive director of NYCERS.

On of May 31, 2006, D’Alessandro signed a lease with 30TH Place Holdings, LLC for space on the 10th floor of The Factory Building, 30-00 47th Avenue, Long Island City, NY (LIC). This was the site that Ms. Browne had originally identified. The term of the lease was ten years with an option to renew for 5 years. The dimensions of the space were not specified in the lease. NYCERS began paying rent circa 2/1/2007 ($141,905 for FY-2007).

The annual rents for the ten years are listed at the end of this posting. These amounts do not include taxes, HLtP, or water charges.

In her February 25, 2011 letter to the trustees presenting the FY-2012 budget, D’Alessandro notified the trustees that the development of the disaster recovery facility was continuing. She also stated that the LIC site will have the capacity to house two shifts of 150 people. NYCERS currently has 396 employees and a large number of consultants.

I have recently commented on the fact that as of this past summer basic construction of the LIC site had not yet been started. This is over five years since the lease was signed.

D’Alessandro makes no mention to the trustees of this enormous delay in getting the site operational. She also does not mention the fact that, even if the site is made operational, it will not be able to handle the full current workforce. This is beginning to fit the CityTime pattern as far as the loss of time and money. NYCERS has budgeted over $8.7M from FY-2007 to FY-2012 for the LIC site.

NYCERS actually spent over $2.2M between FY02007 and FY-2009 on the LIC site. As of FY-2010, NYCERS stopped publicly reporting the ongoing rent payments and the associated costs for the LIC site.

This lack of disclosure is not unique to the LIC site. It applies to all NYCERS paid administrative expenses. The trustees no longer have any way of checking on actual spending at NYCERS. You can be sure the Comptroller is not auditing the financial controls at NYCERS. He has enough trouble managing the investment expenses for the pension funds. And, I wouldn’t count on the outside accounting firm either.

My professional opinion is this site is seriously flawed and will never be able to function at any acceptable level as a business disaster recovery site for NYCERS. I suspect that at the time of the lease signing NYCERS had not solved all the operational problems connected to the site and that some of those problems are intractable. Let’s hope NYCERS has the good sense not to extend the lease in 2016.

Annual rents for each year of the ten year lease for 30-00 47th Ave, LIC, NY:

  1. $362,076
  2. $370,222
  3. $378,552
  4. $387,070
  5. $479,335
  6. $490,120
  7. $501,148
  8. $512,423
  9. $523,953
  10. $535,742

Friday, August 19, 2011

The Vanishing Act on Investment Fee Reporting

The Problem

In FY-1997, NYCERS paid $17.3M in investment fees for a portfolio worth $31.7B.

In FY-2010, NYCERS paid over $175M in investment fees for a portfolio worth $35.4B.

Yes, that is a 1,000% increase in 14 years.

On its face, this is gross negligence on the part of the NYCERS trustees. Why would anyone pay 10 times more for an inferior product? These numbers are not a mistake. It really is as bad as it appears.


Prior to 1987, all NYCERS investment managers were paid directly by the NYC Comptroller from the city budget. In 1987, the trustees approved the direct payment of its equity (stock) investment managers from the assets of the pension fund. This change of payment method was due to a deadlock between the then Mayor, Ed Koch, and the Comptroller, Harrison J. Golden, over the approval of the equity manager contracts at the old Board of Estimate. Before its elimination by Koch’s charter commission in 1989, the Board of Estimate was required to approve all significant city contracts.

From FY-1987 to FY-1996, the NYCERS trustees approved the equity manager’s contracts. The annual cost started at $2M in 1987 and reached $4.6M in 1996. The executive director signed both the contracts and the associated payment vouchers for these managers(S.13-137 of the NYC Admin Code). During this period, the bond managers continued to be paid directly from the city budget.

Out of Control

In FY-1997, the NYCERS trustees surrendered control of all of their investment manager contracts and the associated payment process to Alan Hevesi, the then NYC Comptroller and now convicted felon.

In return, as part of an annual renewal resolution, the trustees required the Comptroller to provide an estimate of the total annual fees for the upcoming year along with a detailed listing of each manager and the fee estimate for that manager. The Comptroller was also required to provide, contemporaneously, the amount of the payments made and copies of the supporting audited invoices to the executive director for his/her review.

In a real Catch-22 situation, the Comptroller is also the statutory auditor of all payments made by NYCERS (S.13-103.g of the NYC Admin Code).

At that time, I directed the agency’s accounting division to start maintaining investment expense charts for each year. The chart was designed to record fee expenses by quarter for services incurred during the quarter. The fee amounts entered in the charts were based on the information provided by the comptroller to me as the executive director.

The charts do not close on June 30 each year. The accounting division continuously updates them as data comes in from the comptroller’s office, very often many months after June 30. Strictly speaking, these are not formal accounting documents since they don’t have a closing date but are an historical record of what was paid for services rendered during any given quarter.

Unfortunately, the submitted billing data has never been complete or timely. The estimates of the managers' fees, however, were provided each June with the adoption of the renewal resolution. That is until June of 2010.

As of June, 2010, however, the Comptroller stopped providing the NYCERS trustees with budgeted estimates of the investment fees for the upcoming year. This was the beginning of an effort to cut off information on this fiasco.

My best guess for FY-2011 is $200M and for FY-2012, $225M.

Cover Up

On December 17, 2010, I made a Freedom of Information Law (FOIL) request to NYCERS for a copy of the current investment manager expense charts for FY-2009, FY-2010, and FY-2011. On August 10, 2011, after seven follow up requests, NYCERS refused my request using the following excuse:

Your request is being denied pursuant to §87 2(d) “are trade secrets or are submitted to an agency by a commercial enterprise or derived from information obtained from a commercial enterprise and which if disclosed would cause substantial injury to the competitive position of the subject enterprise”.

I’m not sure which of these excuses NYCERS is using. I’m sure there can be no legal basis for a government agency not reporting the amount of money being paid to a vendor. For background read the 2005 opinion from the NYS Commission on Open Government.

This denial is a sharp change in policy by NYCERS. The agency had previously honored my FOIL requests for these documents. Specifically, on May 28, 2010, NYCERS gave me current copies of the FY-2009 and FY-2008 expense charts.

In addition, NYCERS allegedly published accurate investment fees for each individual manager for FY-2010 in the NYCERS 2010 Comprehensive Annual Financial Report (CAFR). This would support the fact that the data in the FY-2010 investment expense chart is already in the public domain.

Last year, however, I pointed out to NYCES how much the data in the expense charts deviated from the amounts reported in the FY-2008 and the FY-2009 CAFR reports. I expect that NYCERS realized that the agency’s tracking process was seriously broken. In addition, the agency had no way of fixing it since the comptroller office does not have an effective control of the payment process for the investment managers either.

This in turn raises serious questions about the quality of the accounting that is the basis of the formal CAFR reporting of these investment fees.

When a government agency denies the public access to basic information, it usually is because of a desire to hide incompetence but sometimes it is corruption. We need only look at the pattern we saw with City Time to realize that you can never overestimate the incompetence of government agencies.

This fee problem is not restricted to NYCERS alone. The five city pension funds paid a total of $426.9M in investment fees in 2010. This cost item dwarfs almost any other city contract and it is growing at annual rate of 27% since 2005.

In closing, not only does the public not know what the fees are, but neither do the trustees. Well, at least, they've got plausible deniability.

Friday, July 15, 2011

Robert Steel and Pension Delusions

Toady the NY Times reported on statements made by Robert Steel on Thursday at the Princeton Club in Manhattan. Mr. Steel is the mayor’s deputy mayor for economic development. Mr. Steel was speaking about fixing the NYC pension funds.

Mr. Steel thinks that that by increasing the pension funds’ investments in international stocks would produce higher returns for the pension funds. If this is true, what has the mayor been doing for the last nine and half years? He is the dominant trustee on all of the five city pension systems.

Of course, Mr. Steel may be totally wrong about achieving higher returns with increased exposure to foreign stocks. Just imagine owning more Greek, Irish, Portuguese, Spanish, and Italian stocks. Is that a good idea?

On Thursday he also complained that the pension funds only had a 20% return in FY-2011, while the S&P 500 index had risen 31% in the same period. This statement exposes Mr. Steel’s lack of understanding of pension systems.

The fact that the S&P 500 was up 31% means that a prudent pension could earn 31% on that portion of its balanced portfolio of which it was prudent enough to put in an S&P 500 index fund with its low fee structure. This is what the NYC pension funds generally do but they must also diversify. Only a fool puts all his eggs in one basket.

NYCERS, the largest of the city pension funds, has 34.8% of it assets in US stock index funds, 8.3% in US actively invested stocks, 28.3% position in mostly US bonds, 18% in international stocks, and 10.2% in private equity/real estate limited partnerships. The quoted 20% is a rational return for a prudent investor.

Every investor, however, should do a constant review of comparative strategies in order to make well founded decisions for the future. That is something that the NYC pension funds do not do. Neither does Mr. Steel. I have previously criticized NYCERS investment strategies. There is much that can be done to save a great deal of money.

The mayor has been in office now for nine and half years. Investment strategies can be corrected immediately, as opposed to benefit strategies which take decades. Salary and overtime decisions are also items under direct management control. Why should Albany return authority to the city on pension issues when Albany had to take it away in the first place because of the city’s past mistakes?

Mr. Steel stated that he wants to consolidate the operations of the five city pension systems. The city and the other participating employers might gain some savings but the political hurdles are huge. If the mayor wasn’t able to merge BERS in to NYCERS over the last nine and half years, I don’t think he will have much success in the next two and half years. Besides, the big immediate money is in reforming the investment process. But that will require incredible political integrity, a rare bird.

Wednesday, July 13, 2011

Loss of Transparency on Investment Fees

In FY-1997 Alan Hevesi, the then Comptroller, made a power grab for full contract and payment authority of the investment managers of NYCERS. In spite of statutory requirement of two person accounting control of the payment process and no statutory authority to delegate contracting authority to a single trustee, the Law Department rolled over for the Comptroller and gave him control.

At the time, I objected to the violation of the statutory requirement that NYCERS approve all payments before the Comptroller paid them. I was amazed that the Law Department ignored the statutory language. Of course, the Comptroller would have had to give NYCERS a copy of each of the investment contracts and that would have exposed the terms of the contracts.

Since FY-1997 until FY-2010, Comptroller Thompson’s last year in office, the trustees have adopted an annual resolution granting this “authority” to the Comptroller. The resolution has always had the clause stating an estimated total cost for the coming year. For example see the clause for FY-2010, R-41 (6/11/09), listed below. In addition, the Comptroller also provided a detailed schedule of individual managers and estimated fees for the coming year.

“Resolved, that the estimated fees allocated to the System for Fiscal Year 2010 shall be approximately $159,941,361.34 and be it further “

But for FY-2011 and FY-2012, Comptroller Liu has submitted resolutions dropping the above resolve clause. See R-1 (6/22/2010) & R-35 (6/9/2011). And, of course, he submitted no detailed schedules of individual fees. The trustees now have no idea what the total amount might be or the estimated amount each manager is going to be paid.

While the Comptroller is supposed to report all payments contemporaneous to NYCERS, the reporting process has always been slipshod. The Comptroller’s office has never given NYCERS a full accounting of what fees he/she has paid in any given year. With the rising costs, however, this weakness is becoming more dangerous. The potential for fraud is huge. The fact that the Comptroller is a statutory auditor of all NYCERS payments is ironic.

The mayor could change this process by having the Law Department issue an opinion stating that the payment process must adhere to S.13-137 of the NYC Admin code and that the trustees do not have the statutory authority to delegate their contracting responsibility to one trustee.

§ 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.

Since 2003, these fees have accelerated out of control. For the record, the actual investment fees for FY-2010 were $175.2M, $16M more than estimated. In contrast, the fees for FY-2003 were $29.3M.

Considering the current budget constraints, these fees are obscene. On top of this, there is a clear attempt to obscure the scale of these fees.

Thursday, June 30, 2011

Five Years Lost on Disaster Recovery Site

Five years ago (FY-2007) NYCERS signed a lease for a site in Long Island City to be used as a backup site for NYCERS in case of disaster at its downtown Brooklyn office.The annual rent is approximately is $375,000.

On June 27, 2011 Karen Mazza, a staff attorney at NYCERS placed a notice in the City Record that NYCERS was soliciting a negotiated acquisition for the demolition and build-out of a disaster recovery data center. The due date is July 8, 2011, a 12 day turnaround. Don't hold your breath.

It took almost five years for NYCERS to move from the lease signing to the selection of contractor to build the data center at the disaster recovery site. In order for the site to be a step up from the current IBM Sterling Forest D.R. program, the site will also have to be built out to accommodate at least 250 employees working alternate shifts. This would allow NYCERS to continue business operations for extend periods of time (i.e.: six months) in the event of a disaster.

It is clear that NYCERS has already wasted $1.6M on lease payments alone, not counting any other associated costs. That money came from contributions from members, retirees, and employers who are stakeholders in the pension fund. It is reasonable to assume that this current effort will fail as has efforts since FY-2007.

As of FY-2010 NYCERS has stopped reporting a detailed reconciliation of budgeted and actual expenses to the trustees. Needless to say, the trustees don't seem to care.

Saturday, June 11, 2011

Simple pension math

Now that Cuomo has floated his new Tier 6 pension plan proposals, it's time to do a little pension math.

Elected officials generally skipped basic math when they were in school. Facts usually interfere with political careers. Pensions, however, are all about the numbers. That is when everyone is behaving. Of course, someone always misbehaves and that is where the trouble starts.

Andrew wants everyone to work until 65, contribute 6% of pay, and not have any overtime in the pension benefit. I guess the employees won't have to pay 6% on overtime pay then.

Age 65 retirement creates serious management issues but sounds tough. Police, fire, sanitation, corrections, and heavy labor positions, however, will all need special retirement ages and these are the areas with heavy pension costs. I'm also not sure that everyone will be keen on 65 year old teachers, either. 62 has always been a good general target.

I wonder why Bloomberg gave the teachers an age 57 benefit in 2008. Maybe, it was because he was trying to change term limits in 2008.

The overtime issue is just a lot of noise. If you are using the current Tier 4 five year compensation window, it is very difficult for an employee to inflate his/her final compensation. The city also can exercise some management control but then again we are talking about political appointees and not competent managers.

Now for a little math. The 6% employee contribution rate for every year of service is a interesting idea. Let's see what pension benefit that it would support.


  1. an employee starts working at age 30
  2. his/her starting annual salary is $25,000
  3. he/she averages a 2% pay raise every year
  4. the employer also contributes 6% of pay every year (that is $66,341 total each for both employee and employer)
  5. the assets earn a conservative 6% a year,
then the employee can retire at age 62 with a fully funded annual annuity of $33,226.

His/her final salary would be $46,189. His/her three year final average salary would be $45,289. His/her pension reserve would be equal to $352,943 using the 6% rate of return. The $33,226 is generated by dividing an IRS 6%/age 62 annuity factor of 10.6222 into the pension reserve ($352,943/10.6222). That is an annuity equal to 73.36% of the three year average.

The pre 2000 Tier 4 benefit at age 62 was 63% of the employees three year average. With the employee only contributing 3% and a 6% rate of return, the employer would have had to contribute 7.3% of earnings to support the 63% benefit.

You can see that a 6% contribution by the employee will raise the benefit percentage for the employee and reduce the employer's contribution rate even with the conservative 6% investment rate of return. The employees, however, will have to make sure the trustees stop gambling (my opinion) with the employees' money.

It is interesting that the NYCERS makes a guaranteed 7% interest on all pension loans to active employees. That is 7% per annum compared to the average 2.4% per annum total return that the trustees have earned over the last eleven years.

Wednesday, June 8, 2011

Comptroller's Pension Report 2000-2010

On April 6, 2011, Comptroller Liu released a report analyzing NYC pension cost over the last decade. This is generally a good report. It is a more complete look at the NYC pension problem than what most commentators produce. Liu has his agenda like everyone else but he is way out in front on content and balance.

The starting year used in the report is 1986. That was the year Harrison Goldin started submitting city financial reports to the GFOA. At the time, I thought it was a PR exercise but it was a major step towards transparency for city and pension financial records.

The heart of the report, on page 2, focuses on what Liu considers the most relevant causes of the NYC pension underfunding problem. I have listed them below along their FY-2010 increased cost:

  1. lower investment returns - $3.1B
  2. benefit enhancements put in place in 2000 - $2.1B
  3. actuarial losses and revisions - $790M
  4. benefit enhancements put in place after 2000 - $264M
  5. higher than expected investment and administrative fees - $313M.

Lower Investment Returns

The report correctly identifies the prime cause of underfunding as the market collapse since March, 2000. But on this key point, the report fails to add the fact that the pension fund trustees exacerbated the market collapse by poor investment decisions.

The actual closing balance as June 30, 2010 of the five city pension funds was $89.9B. In comparison, the closing balance as of June 30, 2000 was $105.6B, a decrease of $15.7B over ten years. It is also distrubing that approximately 10% of the 89.9B is in illiquid limited partnerships whose values are only an estimates.

The employer pension contributions for the 11 years from 2000 to 2010 were $42.9B. The employee contributions for these same 11 years were $7.4B.

The pension contributions (city only) for FY-2010 were 11.2% of the total city budget ($6.651B vs. $59.479B). The total for all employers for all five pension funds was $7.765B for FY-2010.

With the $42.9B contributions, if the funds had earned 8% each year during this period, the closing balance would be $168.8B. No one would be discussing any pension crisis.

In his simulation for the five pension funds, the Comptroller estimated the June 30, 2010 closing balance at $139.2B. Rather than the actual $42.9B, Liu used a much lower level of employer contributions, $11.8B, for the 11 year period from 2000 to 2010.

As of June 30, 2010, the NYCERS actuary, Bob North, estimated (using the EAN method) the pension liabilities for the five pension funds at $145.8B. This generates a short fall of $56B ($145.8B - $89.9B).

Using a more traditional 4.5% of the total city budget for employer contributions ($28.1B), I estimated that the 8% June 30, 2010 closing balance for the five pension funds would have been $151.6B.

The $151.6B figure would easily cover North’s estimate of pension liabilities even with the increased benefit structures outlined in the report. You, therefore, can make a plausible argument that the investment collapse caused the entire problem.

Bad Investment Decisions

But the killer point is that as of the summer of 2002 all parties knew that 8% was an irrational investment target.

But because of the trustees’ adherence to the 8% target, (see my March 15 posting), the pension funds continued to follow their 70%/30% investment strategy after the 2000-2003 market collapse and even increased the risk level with an new 11% commitment to private equity and real estate. This was motivated by the desire to avoid paying the higher employer contributions that would have been required with a lower more realistic target rate. In the end, they wound up paying more and getting less. They lost on both ends.

The impact of the collapsing markets was magnified by the 8% decision. In my March 15 posting, I stated that if NYCERS had adopted a conservative strategy from 2005 to 2010, it would have increased the its closing balance for 2010 from $35.4B to $42.8B. Projecting this number to all 5 systems, the closing balance could have been $108.7B instead of the $89.9B, an $18.8B increase.

It is unrealistic for us to expect the trustees to admit such a huge mistake. So they blame all the loss on the market collapse and accept no responsibility. They do, however, regularly claim credit for investment increases.

The actual flat rate of return for the 5 city pension funds for 2000-2010 was 3.85%. You can see the specific rates of returns for 2001 to 2010 on page 6. In contrast, NYCERS 10 year rate of return on its government bonds was 7.72% as of June 30, 2010. It is easy to see the impact of aggressive investment decisions. There are bad decisions in the investment world.

Note: The 2000 market value reset issue, see page 4, is important but rarely mentioned. In a classic case of bad timing, March, 2000 was the start of the market collapse. On page 5 you can see how the level of employer contributions (1983 to 1999) benefited from the long bull market and the pension benefit reforms under Tier 3 & 4. The sharp drop, however, in the 2000 employer contributions was due to the market restart.

Benefit Enhancements Put in Place in 2000

This is a very comprehensive breakdown of the pension benefit improvements from 2000 to 2008. See pages 18 & 19. This is the most intriguing part of the report. It attempts to quantify the effects of the benefit enhancements. It catalogues and presents purported annual costs for individual benefit enhancements. It puts the benefits in a cost framework. I am, however, skeptical of the accuracy of the cost figures. Assuming that they are accurate, it provides a guideline for corrective action with respect to the benefit structure.

I do, however, particularly question the estimated cost for the city of the state wide COLA benefit enacted in 2000. Liu claims that this benefit costs the city $1.373B in FY-2010. I doubt that the cost is that high.

For this benefit, the city has an exposure to about 180,000 pensioners.

  1. NYCERS: 72,000
  2. TRS: 79,000
  3. BERS: 10,000
  4. Police: 8,000
  5. Fire: 11,000

Generally at age 62, the annual COLA on average starts at $300 and grows by $300 per year per pensioner for his/her remaining lifetime. This benefit conservatively has a life cycle on average of 18 years.

This translates into an average annual cost of a $2,250 per pensioner or a $486M ($300 * 18 / 2 * 180,000) total annual cost on a pay as you go basis. This benefit does not grow after it reaches a steady state.

This means that the $1.373B cost for FY-2010 seems to be way off track, even considering an effort for future funding.

This type of discrepency means that the benefit costs have to be more carefully researched with extensive documentation supporting the estimated costs. .

Actuarial Losses and Revisions

Actuarial profits and losses occur when the actuary makes mistakes in his assumptions. If he/she is too conservative, then you have a profit. If he/she is too aggressive, then you have a loss. I don't think this is really a cause of increased pension costs but reflects a bias on the actuary's part to reduce pension costs.

Benefit Enhancements Put in Place After 2000

What is interesting about this point is why has the current mayor agreed to give any benefit improvements during this period. He has also given significant salary increases during his nine years in office in spite of the huge pension overhang that has existed since 2002. In particular, the two 4% increases given to DC-37 in the fall of 2008, concurrent with the fall of Lehman, are disturbing at best.

Higher Than Expected Investment and Administrative Fees

This is a valid area of concern which Liu is presenting using the two year lag.

On an accrual basis, the five systems incurred investment costs of $101.9M for FY-2002. The FY-2010 cost was $462.8M, a 454% increase. I did not start with FY-2000 because prior year’s investment costs were bundled along with securities lending costs and were not broken out in the CAFR reports.I have previously commented on the insanity gripping the trustees concerning investment fees.

Two of the systems, NYCERS and TRS, incurred administrative costs of $52.9M for FY-2000. The FY-2010 figure is $115.7M. NYPPF started incurring costs in FY-2002($8M) and BERS($4M) in FY-2003. Liu, quite correctly, allows for 3% per annum increase which would have produced a FY-2010 cost of $86M. The actual cost of $115.7M reflects a 6.3% average annual increase for the 10 years, way above the rate of inflation.

Both of these costs must repaid by the employers two years later with a 8% annual interest charge. For example the $115.7M admin charge for FY-2010 must be paid in FY-2012 with interest totaling $134.9M. The $462.8M charge must paid back in FY-2012 at $539.8M. These costs are directly under the control of the trustees. Why are trustees letting them costs run wild?

Liu attempts to compare these cost to other public pension funds. That is a waste of time. If everyone is jumping of the cliff, are you going to jump off the cliff too?


There is an excellent closing to the report on page 12. It calls for increasing investment income while reducing volatility. It, however, fails to own up to the failings of the trustees with respect to past investment decisions and to the exploding investment and administrative costs that the trustees have immediate control over.

There is a grudging consensus that the pension benefit structure needs to be cut back at the city, at least to the Tier 5 level at the state. Most of the benefit reform is already in place. Newly hired city police officers and firefighters are under Tier3 and newly hired teachers are under Tier 5. Newly hired general city workers will have to moved to Tier 5 in the same manner as general state workers.

But this benefit reform must be coupled with a strategey that adopts a more prudent, conservative and effective investment plan and outlaws all campaign contributions to any pension fund trustee from any contractor who is work for funds.

Wednesday, May 25, 2011

Where the City's Pension Money Goes - FY-2012

For FY-2012, the city has budgeted the following amounts for the five pension funds. As of June 30, 2009, the very efficient NYCERS actuary reported the number of members and retirees of the the five pension which I have also included.

SystemCity AmountsAll MembersAll Retiree
TRS: $2,658.6M129,308 70,825
Never Never Land: $950.9M******

Never Never Land is my nick name for a contingency fund which the city claims it might need. That is in contrast to teachers, and fire houses. Last year $603M was budgeted for Never Never Land and never used.

Note: Only 55%, approximately, of the NYCERS members & retirees are city workers.

Monday, May 23, 2011

Private Equity Underwater

Recently, I have been trying to get NYCERS to turn over the detail quarterly reports of the performance of the NYCERS private equity and real estate investments.

Note: These investments are generally limited partnerships where NYCERS pays two percent annual fees and 20% of the profits to the general partner in return for 2 to 3% above the S&P 500 index. The trustees, however, never see the actual contracts with these investment managers and they really don’t know what the details are. NYCERS has been investing in limited partnerships since FY-2000. Hevesi was the NYC Comptroller and the NYCERS designated investment manager at that time. Hevesi was instrumental in moving the real control of the investment contracts from the trustees to the Comptroller’s office.

NYCERS gets these reports from the Comptroller’s office. The reports are written by investment consultants that are under contract to NYCERS. NYCERS refuses to make these reports public. My opinion is that the data in the reports are extremely embarrassing and that, while some investments are doing well, others are a disaster, for example: Shamrock Capital.

As of June 30, 2010, the alleged value of these investments, aka “fair market” value, was $3.4B according to the Comptroller’s general quarterly report. Since there are no independent market values for these assets, any stated value is just a guess. The Comptroller stopped putting the general quarterly reports on his web site in 2005. The last one posted was for the March 31, 2005 quarter.

NYCERS, however, must file annual NY State Insurance Department Reports (SIR) as of June 30 of every year on March 1 of the following year. Interestingly the SIR requires that NYCERS list all private equity investments along with their actual costs and their fair values.

The NYCERS SIR for June 30, 2010 states that the actual cost of private equity investments was $4.48B and their fair value is $4.12B. After investing for 11 years, NYCERS is underwater with a -8.0% loss on its private equity investments. NYCERS Russell 3000 index performance for the last 10 years is -0.9%. The good news is the 10 year loss for private equity as of June 30, 2009 was -15%.

What is truly insulting about this comparison is that NYCERS paid the private equity managers $108.1M in FY-2010 and only $535,817 to it two Russell 3000 index managers who managed $8.56B.

As a postscript, I have very little confidence in the accuracy of these figures because of the lack of internal control of the accounting of investment activity at NYCERS.

Wednesday, May 11, 2011

Where Did the $603M Go?

Last year as part of the the city's pension budget of $7.481B, there was a contigency reserve of $603M. It was supposed to cover modifications to actuarial assumptions that were to be enacted into law. It now appears that $603M is not going to be paid to the pension funds. The city's pension cost for FY-2011 is now only $6.883B. I suspect the legislation was delayed. So where did that money go? Did city just save it or did they use it somewhere else?

The pension contigency for FY-2012 is $951M. Is it really needed? Will the legislation be again delayed? This whole issue of public pensions has drifted into Never Never Land. The truth has vanished and all we have left is delusions.

Friday, April 15, 2011

Actual returns vs 8% returns

This is just a quick note inspired by the Comptroller's recent pension report. I will post a full analysis later.

The amount of employer contributions to the 5 city pension funds from 2000 to 2010 is $42.9B. If the funds made 8% each year in this period, the pension assets would be $168.9B, instead of $89.9B.

If the employers had contributed a flat line 4.5% of budget, the contributions would have been $28.1B. With this amount an 8% return would have raised the pension assets to $151.6B.

The Comptroller's 8% estimate assume an employer contribution of $11B over the 11 years producing a pension asset value of $139B. I actually estimated the asset value at $129.7B with this contribution assumption.

Wednesday, March 16, 2011

The Cost of Bad Investment Decisions

For quite awhile I have been criticizing the NYCERS investment strategy as being overly risky and expensive. I have pointed out the radical growth in fees over the last eight years. I have not, however, given any specifics about how this risky strategy actually produces lower profits than a more conservative, less expensive strategy. So I recently ran a simulation of the NYCERS portfolio for the period from 2005 to 2010 using a conservative strategy.

Simply stated NYCERS uses a 70% stock/30% bond strategy. In addition, NYCERS has multiple variations within both of these classes. If, in 2005, NYCERS had returned to its traditional 50% stock/50% bond allocation and used only indexed stock funds and core bond classes, the simulation showed that NYCERS would have had a closing balance of $43B in FY-2010 instead of $35B. Listed below are the results of the simulation along with with the actual results since 2005.

*Closing BalanceProfit/LossClosing BalanceProfit/Loss

You will notice that the conservative strategy produced better results and smaller swings in the returns than the current aggressive approach. This is due to better profit/loss figures, higher dividend/interest payments, and lower investment fees. All of this creates a better operating environment for a mature pension plan that paid out $3.4B in benefits for FY-2010.

Another advantage of the conservative strategy is that it is totally liquid and based on published market values. The actual NYCERS closing balance for FY-2010 has a $3.5B component that is illiquid and not based on market values. This raises reliability issues about the actual value of this component.

To my knowledge the NYCERS investment advisor, Callan Associates, has never run this type of comparison simulation.

The fees for the conservative strategy would have been only $15M as opposed to the $175M that NYCERS actually paid in FY-2010. Of course there would have no lunches, dinners, golf outings, or campaign contributions with this strategy. There would also have been no temptation for possible bribes either.

The next time you hear someone attack public pension plans, point out to them that investment decisions by elected officials are the most immediate threat to the solvency of the pension plans.