Investment Loss - Allegra Capital

I previously commented on the notice that Allegra Capital Partners IV, LP had exited its limited partnership with NYCERS as of the first quarter of 2011. Pacific Corporate Group had notified the NYCERS trustees of this on September 16, 2011.  NYCERS first invested in the Allegra private equity deal in FY-2000. It was the third private equity deal NYCERS entered into. NYCERS currently has approximately 150 open private equity investments.

Allegra is the second deal to exit. The first was Emerald Infrastructure Development Fund which was a total loss ($1M) of capital for NYCERS.

On December 9, 2011, I asked NYCERS, under the NYS freedom of information law, for the cash flow history between NYCERS and Allegra during the life of the partnership. On July 2, 2012, seven months later, NYCERS notified me that the Comptroller’s office had the cash flow history. I have to assume NYCERS did not have the information even though NYCERS did not specifically say that the agency did not have it.

On July 9, 2012, I requested the information from the Comptroller’s office. I was told it would be sent on August 20, 2012, a six week delay. That is not bad for a FOIL request and I actually received the information on August 20, 2012.

The response, however, was a bit strange. Let me quote the wording of the Comptroller’s email:

“The cash flows below have been provided by the Stepstone Group LLC, the Private Equity consultant to NYCERS.” 

This is troubling since this implies that the Comptroller’s office does not have this information in its own files. This would mean that neither NYCERS nor the Comptroller records what money is moving between NYCERS bank accounts and the private equity managers. 

I suspect that each private equity manager has a blanket approval to draw down against NYCERS bank accounts up to a fixed maximum limit set by contract. It would appear that the only way that the consultant would have this information is from the private equity manager since the Comptroller does not have it.

Bottom line, the private equity managers have direct access to NYCERS bank accounts without NYCERS disbursement authorization and without notification to NYCERS or the Comptroller.  

There is a very specific requirement in the NYCERS section of the NYC Administrative Code. It states as follows:

 “ §  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.”.

It is true that modern investing requires managers to move quickly before a voucher can be processed. All other investment actions, however,  are subsequently reported to NYCERS and the necessary vouchers are produced. This allows NYCERS to keep accounting control of its assets. Of course, private equity investing is not high frequency trading and a 24 hour approval cycle would be reasonable for disbursements to private equity managers.

Legally, NYCERS is responsible for the proper accounting of its assets, not the Comptroller and not a third party private firm.  In addition, as of June 30, 2011, Stepstone was not under contract to NYCERS. Assuming they  began working for NYCERS in FY-2012 any information they have is dependent on work that was done by another contractor, Pacific Corporate Group, over  the last twelve years. 

The cash flows reported may be totally accurate but it is not possible to confirm their accuracy. I don’t know any prudent person who would turn over his check book to a third party.

Now let’s look at the really bad news. With cash flow information provided, the Allegra investment had a rate of return equal to negative 8.24% per year over eleven years. This is equal to a steady loss of  8.24% for 11 years in a row, not just a bad quarter or a year.

NYCERS invested $24M and got back $11.66M. 

On top of the loss of accounting control this was a disastrous investment for NYCERS. As I said before NYCERS has about 150 private equity deals in play. The law of averages projects that NYCERS will break even on these deals, if it’s lucky. It definitely will pay huge annual fees.

This is clearly an imprudent investment strategy for a large pension fund. Heck, it’s a bad strategy for anyone.

For some strange reason the Comptroller is still carrying Allegra on his NYCERS quarterly reports as of March 31, 2012 at a value of $4.74M. This makes you question the accuracy of the quarterly reports.

How far does $10 a month go?

I previously commented on the Workers' Comp issue at NYCERS, specifically as it effects a retired transit police officer who retired 28 years ago on an accident disability benefit.

This week the Chief wrote a front page story about the terrible treatment that this retiree has had to endure at the hands of the current management at NYCERS. It appears that NYCERS is going after 37 disabled retirees for WC payments that NYCERS claims it failed to withhold from the retirees' benefit.

The Chief particularly quotes the NYCERS legal director, Ms. Mazza, as follows: "we're trying to leave them with something in their pocket at the end of the month," referring to the 37 lucky retirees. I guess $10 counts as something or maybe $5 is good enough.

So two weeks ago I get a call from a retired bus driver. He had retired from NYCERS 27 years ago on a accident disability benefit. His bus had been hit by a truck. You guessed it. NYCERS is coming after him for WC payments that NYCERS claims it had not deducted from his $1,486 monthly benefit check. The original benefit was $1,012 and the increase was due to cost of living adjustments over the years.

We're talking about high finance here. In 1985 NYCERS approved the retiree for an annual accident disability benefit equal to the grand amount of $12,151.

In a January 20, 2012 unsigned letter, without any due process, NYCERS notifies the retiree that NYCERS is reducing his monthly pension from $1,486 to $943. Then in June NYCERS comes with the coup de gras. In a June 1, 2012 unsigned letter, NYCERS tells him that he owes NYCERS $173,522 and that NYCERS is going to further reduce his pension to $10 a month until 2027. Yes, I said $10 a month for the next 15 years.

I wonder if Local 100, T.W.U. is aware of this situation. The president of Local 100 is a permanent NYCERS trustee.

First, it has not been determined that there should be a WC offset in this case. It is NYCERS's responsibility to determine whether the WC payments are for the same disability. The Transit Authority WC division should be able to provide NYCERS whith the information to make that determination. NYCERS can then properly notify the retiree of the determination and the evidence supporting the decision. The retiree just might have some information to support a no offset decision. We have to always remember that this is 27 years after the point when this decision should have been made.

Second, if there is an offset, it was NYCERS fault that the offset was not taken. There is no statutory repayment schedule. That means the repayment schedule is discretionary and under no circumstances should it be punitive. In fact, NYCERS needs to be as conciliatory as possible since the agency caused this problem, not the retiree. In fact, there is a legitimate argument that NYCERS has no right to withhold any of the cost of living adjustment amounts.

NYS Department of Financial Services - British Banks or NYS Public Pension Funds

I guess British banks are more important to the NYS Department of Financial Services than in-state public pension funds.

It's been ten years since the NYS DFS has done a meaningful and mandated audit of NYS pension funds but they have time for foreign affairs.

7%: in limbo

I recently commented on the actuary's recommendation and proposed legislation dealing with a new interest rate assumption .

Strangely, the proposed bill was not passed by the legislature in Albany. There was a third bill introduced, S.7804, along with the original two, S.7646 and S.7693. They all seem to be in the rules committee.

I wonder what the budgetary impact will be due to the delay. The city had put aside $900M for this contingency in FY-2012.