Wednesday, June 27, 2012

The New 7% Law - Pension Costs for the City

The legislature is looking at two pieces of proposed legislation dealing with the assumed rate of interest for the five city pension funds. The two pieces of legislation both incorporate the NYCERS & TRS actuary's recommendation for a new five year assumed interest rate dropping it from the current 8% to 7%.

The recommendation is three years late. The actuary has not written a fiscal note for either of the two bills. I suspect the actuary doesn't want to be on record describing the details of his own recommendations. Both bills are the same except for language dealing withh the FDNY VSF funds and possible funding shortfalls in those funds.

The actuary is appointed by the NYCERS trustees and the NYCTRS trustees. He is, however, paid directly by the city or in other words by the mayor. His annual salary is $250,000.

In the table below is the budget impact of the interest change. There are many other changes being implemented at the same time which I will outline below.

SystemCity AmountsAll MembersAll Retiree
FY-2012 & 8%FY-2012 & 7%FY_2013 & 7% June 30, 2010June 30, 2010
TRS: $2,564.4M$2,656.4M$2,755.0M 130,620 72,356
Fire:$948.7M$1,004.7M$1,005.4M 11,13617,140
BERS:$161.7M$213.7M$204.5M 27,18413,969
Contingency for 7%: $950.9M***********
City Totals$8,252.5M$7,876.6M$8,024.3M

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

The impact of the interest rate change has obviously been blunted. But it is also clear from the chart that pension costs vary greatly over the work force. This in turn creates difficult management problems. I don't pretend to have solutions for them but they should not be hidden behind blanket characterizations.

As I previously noted, this legislation allows the city and the other participating employers to amortized investment expense costs rather than pay them two years later. This created a significant short term savings in pension costs starting in FY-2012, the year that the 7% rate becomes effective. Specifically, the savings for FY-2012 will be $493M and for FY-23 $453M.

In FY-1997 the pension funds started paying these investment expenses directly as opposed to the city paying them out of the Comptroller's operating budget. In 1999, legislation was passed requiring the city and the other employers to reimburse the pension funds the following year for these expenses plus one year's interest. This was done to separate long term liabilities from short term expenses. In 2006, legislation was passed to change the payment year from one to two years later plus interest.

The proposed legislation also has provisions to guarantee the VSF funds. Listed below is the wording for the Correction VSF at NYCERS. There comaparable sections for the two Police and the two Fire VSF funds. These provisions may or may not be necessary but they definitely have nothing to do with the assumed rate of interest for the pension funds.

§ 6. Subparagraph 3 of paragraph (e) of subdivision 4 of section 13-194 of the administrative code of the city of New York, as added by chapter 255 of the laws of 2000, is amended to read as follows:

(3) Except as otherwise provided in subdivision eleven of this section and in sections 13-195 and 13-195.1 of this chapter, nothing contained in this section shall create or impose any obligation on the part of the retirement system, or the funds or monies thereof, or authorize such funds or monies to be appropriated or used for any payment under this section or for any purpose thereof.

§ 7. Section 13-194 of the administrative code of the city of New York is amended by adding a new subdivision 11 to read as follows:

11. In the event that, for any calendar year covered by a payment guarantee, the assets of the variable supplements fund are not suffi- cient to pay benefits under this section for such year, an amount suffi- cient to pay such benefits shall be appropriated from the contingent reserve fund of the retirement system and transferred to the correction officers' variable supplements fund.

The mayor, in his FY-2013 budget presentation, stated the following recommendations from the actuary:

  1. Seven percent actuarial interest rate assumption (legislation)
  2. new life expectancy tables
  3. new experince relating to rates of retirement and disability
  4. a new funding method, Entry-Age Normal Cost Method (legislation)
  5. implementation of a market value restart
There was no mention of the delay in paying investment expenses or the mandated funding for shortages in the VSF funds. In addition the market value restart (taking immediate credit for the current recovery in the market) provides funding relief but is not sound actuarial practice.

Friday, June 22, 2012

Tier 6 Costs and the new 7% Interest Rate - June, 2012

Now that the final specifics of Tier 6 have been locked into place and the legislature is about to adopt a new reduced assumed rate of interest (7%), I wanted rework my previous cost estimates for an average Tier 6 benefit.

I just caught the story that North didn't put a fiscal note of his new 7% assumed interest rate recommendation. This is after delaying his recommendation for three years. This forced the governor to issue a message of necessity. He hates doing that especially for someone else. Of course, this allows North to avoid giving the plain English specifics of this proposed legislation.

For instance, this law will allow the the city to postpone replacing the pension investment expenses paid in FY-2010 and any years later. There was a $493M payment scheduled to be made in FY-2012 and a $453M payment to be made in FY-2013. They will be rolled into long term pension costs paid back over 22 years. This was quite a trick on North's part.

If a person starts working at age 21 for the city under Tier 6 with a salary of $25,000 and retires at age 63 with a final salary that went up 2.5% per year ($67,126), his/her pension would be $45,215 after 42 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 2.15% of payroll, $39,151, over the 42 years. That is an average of $933 a year. The employee will have contributed $60,127 over the 42 years.

Even though 7% is better than 8%, it is still far from realistic. Unfortunately, a more prudent 5% interest rate would also be a more costly interest rate. The bottom line with 7% is that the city is still underfunding its pension costs, even the reduced Tier 6 benefit structure.

In contrast to the 7% assumption, if NYCERS uses a 5.5% target on its investments and uses a 5% annuity factor, the city's cost for the $45,215 benefit rises from 2.15% to 4.43% of payroll, $80,670, over 42 years. That is average of $1,921 per year.

I know these numbers just make peoples eyes glaze over but that is one of the reason poor decisions continue to be made. If done right, pension can have reasonable costs and reasonable benefits.

As I have said before, it is every clear how important it is to the city and the employee that the pension fund trustees are prudent about their investment decisions. High risk/high cost strategies do not work for pension funds.

Monday, June 11, 2012

After 28 years...

I just received an email from a retired Transit Police officer. I have listed it below. He retired from NYCERS on an accident disability benefit in 1984.

Generally a transit police accident disability benefit is offset by the workers’ compensation (WC) award granted to the police officer, but only if that award was for the same disability for which NYCERS granted the accident disability pension.

As part of the process of paying the accident disability benefit NYCERS initially lowers the ¾’s benefit by the amount of a full WC award. I remember it being $400/week. NYCERS then waits for the documentation on the WC award. When NYCERS receives the notice of award, it finalizes the monthly accident disability award for the pensioner. In this case, finalized in 1984, NYCERS did not offset the NYCERS benefit by the WC award.

Most likely this was done because the WC award was not related to the disability on which NYCERS was retiring the member. It appears from the retiree’s comments below that that was the case.

In February, NYCERS initially suspended this retiree’s pension for four months with the resulting health insurance nightmare. In June NYCERS has notified the retiree that it will restore the pension but with a 75% reduction in order to recoup the WC payments for the last 28 years. This will take 8 years. The retiree is now 70 years old.

NYCERS is legally required to correct its errors and this can be very harsh sometimes on members and retirees. Any corrective action, however, needs to be supported by clear evidence and proper notice. Failure to file out a discretionary form does not create the legal authority to suspend and/or reduce a pension benefit.

NYCERS in the last seven years has adopted an autocratic atitude towards its members and pensioners. It has forgotten that the purpose of the agency is to serve the members and retirees, not the other way around. I directly have seen many mistakes by NYCERS and failures to communicate to its members and retirees.

The ironic part of this disregard is that NYCERS has an independent administrative budget which the legislature granted the agency to insure that there was sufficient resources so that the agency could properly serve the members and retirees.

As this case stands right now, in order to restore his full pension this retiree may have to mount a legal challenge against NYCERS. Where does a retiree with a reduced pension get the money to hire a lawyer?

If the NYCERS trustees are unaware of this arbitrary and capricious behavior, they are now on notice.

Sent 5/26/2012

Dear Mr. Murphy,

NYCERS has suspended my pension. They claim since I am receiving Workers' Comp it should be deducted from my Accidental Disability pension. I told them the Workers' Comp is for a different injury than what I received my Accidental Disability pension. I have not received a written response from NYCERS to any of my written requests. I have constantly been given the run around from them. Promised phone calls never materialize. Requests for my file were ignored until recently when I received 3 pages after repeated letters and phone calls from me.

The suspension of my pension was initiated when I didn't return a form they allegedly sent me. On Feb 1, 2012 I checked my bank account before writing checks to pay my bills. I discovered that my pension had not been deposited. I called NYCERS and they said I had to fill out form F354 asking if I was receiving Workers' Comp payments and if I was I had to also submit the most recent "Notice of Decision" from Workers' Compensation Board.

I told them any "Notice of Decision" would be over 28 years old or more and I didn't have it and would have to get it from Workers' Comp. They said they would not restore my pension until NYCERS received both form F354 and and the "Notice of Decision".

I asked NYCERS to send me a form F354 and called the Workers' Compensation Board who said my files were archived in Albany. I wrote to Albany requesting my files. What I eventually received was the "Notice of Decision", a statement of discontinuance of other cases and a letter stating that my file had been destroyed. The "Notice of Decision" said I was receiving Workers' Comp for injury to my "right thumb".

I requested my retirement records from NYCERS to see if that was the same injury as I was granted my Accidental Disability pension for. I was given a run around, medical said payroll had it, payroll said medical had it, then I was told it was archived etc etc. Without that information, I could not complete form F354. The suspension of my pension continued.

In addition, earlier this month I went for a medical exam and was told I needed an MRI to see if I had a tumor in my head, I was also told my health insurance was discontinued as of April 1st of this year. Neither NYCERS nor the NYC Health Benefits Program Retirees Unit notified me that my health insurance would be cut off, or of this discontinuance of my health plan. So as of this date, every medical visit I made had unknowingly to me at the time, has gone unpaid by my insurance plan and I cannot afford to seek medical attention without my pension. This put me a horrible position, no pension, no medical insurance for my wife and my self.

When I finally received some information from NYCERS, I discovered that the records indicate that I received my Accidental Disability pension for injury to my right wrist (carpal tunnel syndrome) and my back, there was no mention of injury to my right thumb as the "Notice of Decision" granted me Workers' Comp for. I filled out form F354 and wrote on it that the Workers' Comp payment may not be related to my pension and followed that up with calls to NYCERS payroll and legal telling them I believed the Workers' Comp and Accidental disability were from different injuries. My statements fell on deaf ears. They said they were going to start deducting my current Workers Comp payment from my pension starting with the June check which they said they will send barring any problem, and they will have to figure out how much I owe going back 28 years and how they were going to get it.

I called the NYC Health Benefits Program Retirees Unit who told me that in order to get my health insurance reinstated they needed a letter of reinstatement from NYCERS and that it could be faxed to them.

I called NYCERS and spoke to the Legal Dept who said that Payroll Dept would have to issue the letter of reinstatement, that they would email and phone Payroll to have them fax the letter and explain to them the urgency of it.

As of this date my insurance has not been reinstated, I have received no mailing of a letter of reinstatement that I could send to the Health Benefits program. Certified letters, emails requesting this have been ignored. Phone calls to legal only gets me an answering machine, but my message has gone unanswered.

Workers Comp records have been destroyed, my 28 to 30 year old records from the medical facility where I was treated have been destroyed. It seems patently unfair for NYCERS to wait this long when most of the evidence supporting my position has been destroyed to raise this issue. It seems also unfair that my pension was suspended without my receiving due process.

I was a very active cop, making many arrests of violent suspects and received many injuries over the course of my career serving the people of NY City. Besides the financial and medical hardships NYCERS has imposed on me and my family, I took their actions very personal.

I learned CPR on my own time to better serve the community and recommended that the Dept. have all police officers learn it and that resuscitators should be placed in every RMP, which the Dept followed up on and I used to save lives. I gave up two weeks of my vacation time to attend a course in practical Spanish language authorized by the Dept. to help the Spanish speaking community in NYC.

I have received many commendations for my actions as a police officer including Cop of the Month and Cop of the Year awards. So you can see why I find it hurtful to be treated by NYCERS in this manner after all the good work I did for the City.

Even if I were able to work, at my age, in my medical condition and in this economy I doubt if I could find a job that I could do to make up for any reduction in my pension

I would appreciate any assistance you can give me.


Friday, June 1, 2012

NYCERS Investment History: 2002 – 2009

In light of the recent negative investigative findings by DOI of the former NYCERS Chair of the Board of Trustees, it would be prudent for the trustees to review the investment decisions that occurred during her tenure from 2002 to 2009.

As background, DOI found that the Chair failed to implement corrective actions with respect to the city’s property valuation system. Such actions were agreed upon by all parties in response to a major 2002 bribery scandal in the property valuation system. The Chair subsequently lied about implementing these actions. During this seven year period NYCERS’s started making significant real estate investments, as outlined below.

In addition, there is an alleged claim of interference by the Chair in the property valuation of the Met-Life Building just prior to its 2005 sale for $1.74B to a limited partnership which included both NYCERS and NYCTRS. The NYCERS Chair was also the Chair at NYCTRS at the time. This allegation was reported to the Manhattan DA’s office in 2006 but no action was taken. The new DOI report should prod the DA to wake up.

Considering the huge increase in private equity investments during the same period along with the associated scandal at the NYSLERS pension fund in Albany, the trustees should expand their review to this asset class also.

To complete their due diligence the Trustees should review the unresolved perjury and conspiracy charges still pending against senior NYCERS management.

As of June 30, 2002 the assets of NYCERS were reported to be worth $32.2B with no real estate investments and $96M in private equity.

As of June 30, 2009 the assets of NYCERS were reported to be worth $30.9B with $885M in real estate investments and $1.9B in private equity.