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.