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.