Wednesday, January 30, 2013

Mayor Bloomberg and the NYCERS Trustees

The structure of the NYCERS Board of Trustees is defined by Section 13-103 of the NYC Admin Code.

The Trustees are:

  1. the Mayor's representative who is the chairperson,
  2. the Comptroller,
  3. the Public Advocate,
  4. the five Borough Presidents, and
  5. the chief executive officer of each of the three employee organizations who represent the largest number of employees who are members of NYCERS.

Up until 2009 there was no problem with this composition of the Board. But when Martha Stark was shunted over to CUNY from Finance, some brilliant staffer in City Hall decided to make the mayor the chairperson of the Board.

In his most recent written designation of his representative the mayor uses the following wording:

Prusuant to New York City Administrative Code Section 13-103, I hereby designate Ms. Carolyn Wolpert, as my representative to exercise the discretionary powers and duties granted to me as Chairperson of the Board of Trustees of the New York City Employees' Retirement System Pension Fund and related variable supplement funds. Janice Emery, Elizabeth Botwin, David Frankel, John Grathwol, Omair Hassan, Raymond Sarola and Justin Holt, in that order, will serve as my alternate representatives in Ms. Wolpert's absence.

Just for contrast here are the exact words from Section 13-103:

1. A representative of the mayor who shall be appointed by the mayor and who shall be entitled to cast one vote. The mayor, by a written authorization filed with the board, may designate one or more members of his or her office to act in the place of such representative, in the event of his or her absence. Such representative or designee acting in his or her place shall be chairperson of the board.

For the record the world won't come to an end because of this botched designation.

But what it does show is a flawed attitude towards NYCERS by City Hall. First of all the mayor has no discretionary powers and duties granted to him as the Chairperson of the NYCERS Board. He is not the Chairperson of the NYCERS Board. He is not even a trustee of the NYCERS Board. In fact I think it is correct to say that the trustees do not have discretionary powers but are strictly bound by statutory and fiduciary obligations.

Why can't the mayor just designate a representative to the NYCERS Board and leave the misplaced sense of power at home. He should focus on the quality of his representative to the NYCERS Board. Some of his past choices have been very questionable.

Yesterday the mayor presented his FY-2014 budget. It had an $8,076(MM) pension cost for the five city actuarial pension funds.

Part of that cost was $357(MM) for investment expenses incurred in FY-2012 plus two years of 7% interest charges. You can reference the investment expenses in the FY-2012 CAFR on page 162 and while you're there look at pages 115 and 121. The five funds earned a miserable 1.4% on their assets in FY-2012 but the investment managers were well paid.

I wonder whether the mayor would be satisfied paying that kind of money for that kind of result on his assets?

Sunday, January 20, 2013

The Dog Ate My Homework. Why Is Mazza Spending $411K?

In 1996 the NYS legislature gave NYCERS the authority to pay its administrative expenses out of the assets of the system independent of the city budget structure. Prior to this law NYCERS was part of the regular budget process applicable to standard city agencies.

In drafting the proposed budget legislation the NYC Law Department particularly included the following provision (S.13-103.c.(5) of the NYC Admin Code)

(5) The provisions of chapter seventeen of the charter shall continue to apply to the retirement system and the retirement system shall constitute an agency for the purposes of such chapter seventeen. The board of trustees shall not obtain any legal services by the retention of employees or by contract unless the corporation counsel shall consent thereto.

You can easily guess why the Law Department wanted this limitation on NYCERS new budgeting authority.

Susan Sanders worked for many years as an attorney in the pension division of the NYC Law Department. At some point after 2005 she left the Law Department for the private sector.

As of FY-2009 NYCERS reported in its Comprehensive Annual Financial Report on page 177 that it had paid Ms. Sanders $104,000 for legal services in 2009. In the same way, NYCERS reported payments to Ms. Sanders for FY-2010, FY-2011, and FY-2012 of $99,750, $100,000, and $107,250, all for legal services. That is a total of $411,000 over four years. I’m sure, if she’s a pensioner, that she has the proper waivers.

On January 11, 2013, in response to my request for a copy of the authorization from the NYC Law Department for Ms. Sanders’ legal services contract with NYCERS, I received the following reply from the NYCERS Records Officer who incidentally works for the director of the NYCERS legal division:

“In response to your inquiry for a copy of the Authorization from the Law Department pertaining to Susan Sanders, please be advised that Susan Sanders does not have a Legal Services Contract with NYCERS. Therefore, there is no information that can be submitted at this time.”

I’m not exactly sure but someone at NYCERS is either grossly incompetent or a pathological liar.

For the record, the director of the NYCERS legal division is Karen Mazza. I wonder if NYCERS has a copy of the authorization from the Law Department for the retention of Mazza as NYCERS general counsel. In 1997 I hired her as an administrative staff analyst, not as a general counsel.

I also wonder if DOI ever finished the perjury investigation involving Mazza and Baksh/Ramsami.

Wednesday, January 9, 2013

Phantom Payments of $140M Paid Over Seven Years

Since FY-2006 NYCERS has paid approximately $140M in private equity and real estate organizational costs. While NYCERS is required to identify the recipients of all investment payments, NYCERS has consistently failed to identify the parties receiving this money. This is not the money that NYCERS has paid to individual private equity and real estate partnerships (i.e. $67.4M in FY-2012).

Without disclosure this at least creates the appearance of corruption.

Total investment costs during this seven year period amounted to $871M.

The Impact of the Drop in the Assumed Interest Rate to 7%

The NYCERS actuary, Bob North, has finally started using 7% as the assumed interest rate in the financial statements for the city pension funds. The new rate still requires authorization legislation from Albany. That by itself is a whole other story.

With the new rate the funding status of all five pension funds has dropped significantly in FY-2012 from the levels in FY-2011.

  1. NYCERS 64.2% from 78.6%
  2. TRS..... 58.9% from 64.1%
  3. Police... 60.1% from 71.3%
  4. Fire..... 48.2% from 56.8%
  5. BERS.... 57.8% from 68.7%

While 7% is more realistic than 8%, the city funds have only earned 4.82% over the last 13 years since FY-2000. That is a great argument for a 5% assumed interest rate. The end result of this miscalculation on the interest rate has been a long term short fall on the necessary annual contributions to the pension funds.

The historical rate of return on stocks is 6.8% and for bonds it's 3.5%. Actuaries should not be playing with these rates. A standard prudent pension plan should operate within a 50/50 range of stocks and bonds depending on the level of annual benefit payments that the plan is required to make. A 5.15% interest rate should be almost a mandatory upper limit for interest rate assumptions.

It is always painful to see pension plans being damaged by bad behavior when it is so easy to to run a successful plan.

Sunday, January 6, 2013

Investment Failure for NYCERS in FY-2012

The books for FY-2012 are closed. NYCERS’s closing balance for FY-2012 was $42.655B. This represents a 1.02% profit from the $42.409B closing balance for FY-2011. The profit is due to dividends and interest payments of $1.165B.

Unfortunately, there was is only a .58% increase in the valve of the NYCERS portfolio and there was a loss of $481.7MM in the fair value of its investments.

The S&P 500 Index, a broad gauge of the US stock market, increased from 1320 to 1365 during FY-2012, a 3.4% increase. If NYCERS had matched the S&P 500 Index, that loss would have been an increase of $1.442B.

The Russell 3000 index, a broader gauge of US companies, went from 790.00 to 803.63, a 1.73% increase. This index would have produced an increase of at least $734MM.

This poor performance was in spite of a $633MM jump in employer contributions which increased from $2.387B to $3.017B (Cash Statement shows only $2.661B)in FY-2012. While Albany in 2012 was radically cutting the pension benefit structure for all new employees, the NYCERS trustees were digging the whole deeper.

There was no press release from NYCERS acknowledging this disappointing investment result for 2012.

Hidden away on page 74 of NYCERS 2012 Comprehensive Financial Statement is the following comment on NYCERS financial highlights for 2012:

Financial Highlights — NYCERS’ net assets held in trust for benefits have increased by $246 million (.6%) from $42.4 billion at June 30, 2011 to $42.7 billion at June 30, 2012. The main reason for the modest increase was that the increase in value of the Plan’s bonds and private equity segments, along with the increase in employer contributions, were enough to offset the losses in the domestic and international equities markets.

It is unclear why NYCERS had losses in its domestic and international equities assets, since the domestic and international indexes were up for the year ending June 30, 2012. A subsequent NYCERS comment below appears to contradict the above quote.

Investment Performance — Investment performance results for fiscal year 2012 were generally consistent with related benchmarks. Domestic equities returned 2.23%, which significantly trailed the Russell 3000 benchmark of 3.84%. International equity holdings returned 13.62%, slightly below the MSCI EAFE Index of 13.83%. Fixed income securities returned 7.05%, significantly below the NYC Core Plus Five Index of 9.35%.

What is clear, however, is that there are serious questions about the investment decisions being made by the NYCERS trustees.

For the record, this is the first year NYCERS is reporting hedge fund investments with a value of $833MM or $929MM depending on which report you look at. The Comptroller reported this asset class with a -2.14% loss for the year ending June 30, 2012.

As a word of caution, while the market value of fixed income assets increased $632MM ($13.222B - $12.590B) based on prices from open market trading, the private equity assets were “reported” to have increased by $669MM ($5.925B - $5.256B). The private equity increase, unlike fixed income assets and employer contributions, is unverifiable and most probably exaggerated.

The last 12 years have been a disaster for NYCERS investments. The closing balance on June 30, 2000 was $42.824B. On June 30, 2012 it was still only $42.655B. While this represents an average annual profit of 3.71% due dividends and interest payments, the assets have been totally stagnant.

Some of this problem is due to financial crises beyond the trustees control but the trustees, like desperate gamblers, have raised the risk level of the portfolio over the last 12 years in a manner that is inappropriate for a prudent pension fund with a mandated $3.758B in annual benefit payments.

No one ever holds the trustees accountable for their actions.

Thursday, January 3, 2013

Missing data from Comptroller's On-line Pension Library

Sometimes pointing out missing data is a story all by itself.

The Comptroller has developed a website to give more transparency to city and pension finances. I'm afraid he has found out that delivering on that transparency is a lot more awkward than he thought. Check the index for the NYC Comptroller's On-line Pension Library.

The following are missing items:

  1. NYCERS Investment Agendas
    1. June, 2011
    2. October, 2011
    3. June 26, 2012
    4. November 20, 2012
    5. December 18, 2012
  2. NYCERS Investment Meeting Minutes
    1. All of 2011
    2. All of 2012
  3. NYCERS regular meeting Minutes
    1. November, 2011
    2. December, 2011
    3. All of 2012
  4. NYCERS Monthly Performance Report
    1. October, 2011
    2. June, 2012
    3. November, 2012
    4. December, 2012
  5. Quarterly Reports (Dropped once before by Thompson after March, 2005)
    1. Q3 & Q4, 2011
    2. Q1, Q2, & Q3, 2012

The Comptroller's Pension Checkbook Checkbook Integration web page is also a joke.

The Comptroller was able to get the Police Pension Fund to participate in 2011 but NYCERS and TRS has left the Comptroller whistling in the dark since then.