Wednesday, February 29, 2012

Tier 6 - Pension Math - New Trustees

Just a little math on Cuomo's "pension reform" for government workers.

If a person starts working at age 21 for the city under Tier 6 with a salary of $25,000 and retires at age 65 with a final salary that went up 2.5% per year, his/her pension would be $48,881 after 44 years of service with the city.

If NYCERS earns an annual rate of return of 7% on its investments and uses a 7% annuity factor, this benefit will only cost the city .4% of payroll, $7,855, over the 44 years. That is an average of $179 a year. The employee will have contributed $90,975 over the 44 years.

Maybe with this radical cost shift the workers should have the majority vote on the city pension boards. It might be interesting if the members, retirees, and beneficiaries voted in an open election for the majority of the trustees.


In contrast to the 7% assumption, if NYCERS only earns 5% on its investments and uses a 5% annuity factor, the city's cost for the $48,881 benefit rises drastically to 4.83% of payroll, $94,852, over 44 years. This amount is similar to what the employee must contribute.

The increase in cost for the city makes it every clear how important it is to the city and the employee that the pension funds are careful about their investment decisions. To use a baseball expression, this is all about making contact, not hitting the ball out of the park.

Thursday, February 23, 2012

Tier 6 - Overkill and Stupid

Tier 6 is "pension reform" run wild. We will look back with nostalgia for the time when David Paterson was governor. He was able to get Tier 5 enacted without burning the house down.

Always remember that the current pension crisis in New York has been caused by three things listed in order of impact:

  1. Horrible investment returns
  2. Deliberate underfunding
  3. Mid-career benefit enhancements

The proposed Tier 6 bill makes no attempt to fix the first two problems. Correcting investment failures and runaway investment costs would provide significant immediate cost savings. Funding reform would strengthen the pension funds long term health and remove the the temptation to cheat on annual employer contributions. While there is a need to reform the benefit structure, overkill will invite future attempts to make changes.

There are many bad ideas in the proposed Tier 6.

For example, the new defined contribution plan will provide a nice fat benefit to high paid political appointees. Without a disability benefit it will do nothing for long term employees.

Taking away the loan provision from sanitation and correction workers is strictly punitive. As of today NYPD and FDNY do not have a loan benefit for new members under Tier 3. This exclusion not only has no cost benefit. It actually takes away a valuable investment option from the pension funds. Member loans pay the pension funds a guaranteed 7% annual rate of return on 100% cash backed loan with no investment fees.

Some genius thought that the little provision below would prevent any future changes to this new benefit structure.

§ 81. No enhancement, increase or other alteration or change in the benefit structure provided herein shall be authorized.
The inherent stupidity of this attempt to prevent the world from changing is breath taking. I wonder who actually wrote this proposed legislation. There was obviously a lot of work done in putting it together. But there is a certain meanness in these changes that will eventually lead to its own undoing.

But the following Tier 6 idea is a really pernicious scheme. I've listed one of the occurrences of the the bill text below. This text applies specifically to NYCERS but the pattern is repeated for the other city pension systems. There are comparable texts for the state which are a bit more rational but still have a sting.

Here is the idea behind this scheme. Each year, the city's Director of OMB will determine what the city should pay for the pensions of new employees. If the NYCERS actuary sends the city a bill that is higher, then the new employees will have to pay half of the extra money. If the bill is less than the director's number, then the new employees will get a discount on their contributions.

By the way, the contribution rates for new employees will be either 4%, 5% or 6% depending how much they make each year with time&half overtime excluded but straight time included.

I can not begin to describe the kind of political mischief this will lead to.

The real danger is poor investment returns which cause the city's cost to be higher than the magical OMB number. For every dollar increase that the pension trustees cause by their decisions, fifty cents will come out of the pockets of the new employees. Of course, taxpayers shouldn't have to pay for incompetent trustees either. But I can see these new employees wanting to know what investment manager is contributing to which trustee when the employees are paying half the cost.

c. In years in which the employer contribution rate applicable to members of the New York city employees' retirement system who first became members of such system on or after April 1, 2012 exceeds a rate to be determined by the budget director for the city of New York, with the approval of the New York state director of the budget, such members shall be required to make additional employee contributions of annual wages in addition to those made pursuant to other sections of this chapter in accordance with the following formula: the difference of the employer contribution rate and a rate to be determined by the budget director for the city of New York, with the approval of the New York state director of the budget divided by two. In years in which additional employee contributions are made pursuant to this subdivision, the employer contribution rate to be paid by the city of New York shall be reduced by the value of such additional employee contributions.

d. In years in which the employer contribution rate applicable to members of the New York city employees' retirement system who first became members of such system on or after April first, two thousand twelve is below a rate to be determined by the budget director for the city of New York, with the approval of the New York state director of the budget, the employee contributions made pursuant to other sections of this chapter shall be reduced in accordance with the following formula: the difference of a rate to be determined by the budget director for the city of New York, with the approval of the New York state director of the budget and the employer contribution rate divided by two. In years in which employee contributions are reduced pursuant to this subdivision, the employer contribution rate to be paid by employers shall increase by the value of the employee contributions reduced pursuant to this subdivision.

Friday, February 17, 2012

"Public Pension Suckers for Private Equity"

Please read this February 16, 2012 Forbes article by Edward Siedle.

Then read some of my prior postings on private equity investing: hard reality, zombie funds, and make sense.

Monday, February 13, 2012

New York State Department of Financial Services -- Failure to Supervise

Quoted below are Section 314 of the NYS Insurance Law and Section 13-183 of NYC Administrative Code which authorizes the NYS Department of Insurance to supervise NYCERS.

§ 314. Public retirement and pension systems.

(a) In this section, "system" means an actuarily funded public retirement or pension system of the state of New York or of a municipality thereof.

(b) Notwithstanding any other provision of law to the contrary, the superintendent shall have, in addition to any other powers conferred upon him by law, the following authority with respect to any system:

(1) to require the administrative head or trustees of a system as may be appropriate to file an annual report pursuant to the provisions of section three hundred seven of this article in such form and containing such matters as the superintendent shall prescribe, and to respond in such form as the superintendent may require to any inquiry in relation to transactions or condition of the system or any matter connected therewith pursuant to the provisions of section three hundred eight of this article;

(2) to promulgate and amend from time to time, after consultation with the administrative heads of systems and after a public hearing, standards with respect to actuarial assumptions, accounting practices, administrative efficiency, discharge of fiduciary responsibilities, investment policies and financial soundness; and

(3) to make an examination into the affairs of every system, including compliance with the standards established pursuant to paragraph two hereof, at least once in every five years in accordance with the provisions of sections three hundred ten, three hundred eleven and three hundred twelve of this article and to recover the expenses of such examination from such system in accordance with the provisions of section three hundred thirteen of this article. A copy of each report on examination as filed for public inspection shall be forwarded to the governor, state comptroller and legislature and, in the case of systems of the city of New York, to the mayor, city comptroller and president of the city council.

§ 13-183 State supervision. The retirement system shall be subject to the supervision of the department of insurance in accordance with the provisions of sections three hundred seven, three hundred eight, three hundred nine, three hundred ten, three hundred eleven and three hundred twelve of the insurance law, so far as the same are applicable thereto, and are not inconsistent with the provisions of this chapter.

According to statute the NYS Insurance Department has conducted these audits every five years for as long as I worked at NYCERS and before. I began working at NYCERS in 1973. The last meaningful examination, however, was published in March, 2001. This examination started on October 4, 2000.

There was later examination published on June 25, 2009 during the Patterson administration. This examination was started on February 4, 2004 during the Pataki administration. In 2004 during the course of this examination there were serious confrontations between the Insurance Department and the NYC Comptroller's Office over investment policies at NYCERS.

When the NYS Insurance Department finally published this report, years later, on June 25, 2009, it had, besides being years late, also truncated the exam dropping the last two years of the statutory five year period. The Insurance Department made no acknowledgement of omission and gave no reason for it. Since the examination report was published seven years after the covered period, the report was of little value.

The NYS Insurance Department began a recent examination in early 2010. Based on the statutory five year exam period this examination should cover FY-2005 to FY-2009 and hopefully pick up the two lost years, 2003-2004, dropped from the last published examination. The Insurance Department has not yet published the report of the most recent examination. At best, the Insurance Department is almost three years late with this report.

On October 3, 2011 the NYS Insurance Department was reorganized into the new NYS Department of Financial Services. In November I requested a copy of the report of this 2010 examination from this new department. I was told that the report had not yet been published and there was no expected date for the release of the report.

It is clear that NYS Department of Financial Services has failed in its statutory obligation to properly audit NYCERS since 1999. In fact, it has failed to audit all seven of the NYS public pension plans as well as the numerous variable supplement plans associated with the NYC pension funds.

Thursday, February 9, 2012

Endless Dance on 8%

Based on recent newspaper articles it appears that the NYCERS actuary, Bob North, has finally decided on a new five year interest rate assumption of 7% down from the current 8%.

Ever since the summer of 2002 North has known that the 8% interest rate assumption was too high. The only question was how far off the mark was it and what was the correction going to cost.

The current mayor came into office in 2002 with a budget crisis caused by the bubble and the 9/11 attack. The last thing he want to do was start paying higher pension bills. In fact he didn't even want to pay the 8% costs. He was able to get Albany to give him a three year discount on the full 8% pension costs. So from FY-2003 to FY-2005 the city underfunded the five pension funds.

In the spring of 2004 when NYCERS needed to adopt a new five year interest rate assumption, North recommended keeping the interest at 8% in spite of serious investment losses. Since 2009 when that five year period ended, North, for three years running, has put off making his recommendation on a new five year interest rate assumption.

It now seems he is ready to propose a change from 8% to 7% along with a creative scheme to lessen the cost impact of the change. Unfortunately, even 7% is overly aggressive especially with the Federal Reserve lending the banks money at an almost zero rate. Over the last eleven years the city pension funds have earned an annual rate of return of only 5.1% even with the great closing market figures of June 30, 2011. Of course, this also assumes you believe the fairy tale values that the pension funds report for their private equity and real estate holdings.

Four Problems, Not One

There are basically four pension worlds in NYC. They are the teachers fund, the police fund, the fire fund, and everyone else. "Everyone else" includes correction officers (8,900) and sanitation workers (7,500).

This year, FY-2012, the city (not including the other employers) is ponying up $2.66B for the teachers fund , $2.20B for the police fund , $0.96B for the fire fund, and $1.58B for everyone else. There are significantly different cost structures in each of these funds. It is not constructive to talk about them as if they were one system.

It also doesn't help to throw health insurance costs into the mix. That is a totally different issue with different problems and solutions. For instance, the city could choose to self insure but that would make EmblemHealth extremely unhappy.

Each pension fund has its own particular problems. Police and fire members retire at an early age. Fire fighters have a huge accident disability issue. Since 2009, new police officers and new fire fighters are trapped in the old 1976 Tier 3 benefit with significantly lower benefits than pre-2009 members. Teachers are paid significantly higher salaries than the average city worker and their union has enormous political power. As an example in the spring of 2008 the mayor agreed to give the teachers an improved pension plan with an age 55 & 25 year service requirement. The teachers in the fall of 2009, however, agreed to lower Tier 5 pension benefits for new teachers (Chapter 504/Laws of 2009).

The average city worker ("Everone else") catches a lot of heat over their pensions. But $1.56B for 112,000 workers is a lot cheaper than $2.2B for 35,000 police officers. In light of the Tier 5 structure now in place for new state workers Albany will have to extend that structure to new general city workers.

The primary source, however, of the current pension shortfall for all city pension funds is the miserable investment returns nationwide over the last eleven years. In addition the trustees of the city pension funds have made the situation worse by their overly aggressive investment decisions and their tolerance of run away investment fees.

Last year the trustees are on record as having paid out $395M in fees. Assuming that figure is correct, this significantly increases annual pension costs. The city and the other participating employers must pay back that $395M to the pension funds in FY-2013 along with 8% per year interest (maybe 7%) for the two year lag.

While benefit reform will take years to save money, investment reform will show significant savings immediately. It is obvious that even a 6.1% rate of return over the last eleven years would have saved the pension funds $11B and if the fees were kept at $100M a year, the assets would be an additional $1.2B higher.

Wednesday, February 8, 2012

Average NYCERS Pension for FY-2011 = $22,376

While everyone is crying for pension reform for the city retirement systems, here are a few facts that you won't usually see.

As of June 30, 2011 NYCERS was paying retirement benefits to 151,232 retirees. NYCERS paid a total of $3.384B in retirement allowances in FY-2011.

With a little long division that produces an average annual benefit for a NYCERS retiree of $22,376. So that is the great pension that city workers get.