FYI: New York City Labor Costs in FY-2014

Disclaimer: All of the figures listed below come from the NYC OMB web site and the NYS Financial Control Board.

Sometimes the actual hard numbers tell their own story. New York City has budgeted $38.367M ($38+B) for personnel costs in FY-2014. The city will employee 273,120 people during the year.

The fringe costs total $16,021M which leaves $22,346M for actual paychecks. The fringe costs are detailed below:

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NYC Personnel Costs for FY-2014

Category	General	Dept. of Education	Retirees – DOE	CUNY	Cultural Affairs	Totals
Social Security Taxes	$ 945,377,286	$ 774,704,532	na	$25,186,254		$1,745,268,072
Health Insurance Premiums	$2,385,907,769	$1,675,842,974	$ 370,353,278	$40,943,606	$1,503,728	$4,474,551,355
Supplemental Welfare Funds	$ 549,405,510	$ 380,688,742	$ 133,715,336	$15,805,711		$1,079,615,299
Workers Compensation	$ 205,196,474	$ 40,142,415		$1,843,985		$247,182,874
Unemployment Insurance	$ 28,256,171	$ 37,760,989		$539,682		$66,556,842
Workers Comp - Other	$56,200,000					$56,200,000
Disability Insurance		$611,303				$611,303
Annuity Fund Payment		$33,812,860				$33,812,860
Non-city Pensions	$78,415,014					$78,415,014
City Non Actuarial Pensions	$57,667,273					$57,667,273
City Actuarial Pensions	$8,180,622,400					$8,180,622,400

Note: Health insurance premiums cover active workers, retiree under age 65, and retirees over age 65. The union welfare funds, administered by the unions, provide added fringe benefits to members of the participating unions. Both of these items need detailed analysis. I think that the city is not getting its money's worth in these areas. In response to the Emblem Health take over of HIP/GHI in 2008, the city produced a very rational argument against the takeover and the city seems to be aware that there is a fundamental problem with the system. There are very entrenched special interests connected with health insurance and welfare funds. (Note: The city runs the welfare fund for city managers.)

City Actuarial Pension Systems

• $2,917.0M (TRS)
• $1,728.1M (NYCERS)
• $ 205.9M (BERS)
• $2,320.9M (Police)
• $ 960.7M (Fire)

Note: Of the $8,132.6M amount, $357.2M is needed to replace investment fees paid in FY-2012 and $106.8M is needed to replace administrative expenses incurred in FY-2012. The city only incurs 55% of NYCERS investment and administrative costs. NYCERS covers other participating employers, like the Transit Authority.

The State Insurance Department Finally Wakes Up!

On Monday, July 29, 2013, the NYS Department of Financial Services (DFS) finally woke up.

In June of 2012, I had pointed out the agency's failure to do its job. And, again in March of this year I detailed continuing delay in its statutory obligation.

DFS is now initiating audits of the seven NYS retirement systems.

For the record, DFS has not released a report since the 2000-2002 audit for NYCERS.

I am absolutely certain that NYCERS needs a rigorous top to bottom audit of everything that it is supposed to be doing. Maybe DFS now has the hard focus it will need to get this job done.

How boring our lives would be without politicians.

Retreat from Indexing or How to Make Wall Street Rich

In March, 2000 the NYCERS pension fund was worth $44.4B. Half of that, $22.3B (50+% of assets), was invested in US equity Russell-3000 index strategy run by two firms, Merrill Lynch and Barclay Global. Prior to 2000 there had been only one manager, Bankers Trust/Deutsche Bank fund. It cost NYCERS $438,000 in fees to run $22.3B. As early as 1980 NYCERS had been a pioneer in using indexing for its US equity assets. In particular, the Russell-3000 index strategy is profitable, comprehensive, and low cost. Perfect for a mature pension fund like NYCERS.

As of March, 2013 the NYCERS pension fund was worth $46.3B. But the Russell 3000 index fund has been cut and a lot redundant index funds have been added. The total US equity index assets is now $14.3B but with annual fees equal to $2.3M. You can see the details: below:

• Russell 3000 $6.325B, 20102 annual fees equal to $456,000
• S&P 500 ---- $3.978B, 20102 annual fees equal to $103,000
• S&P 500 ---- $0.340B, 20102 annual fees equal to $327,000
• Russell 2000 $0.198B, 20102 annual fees equal to $ 39,000
• S&P 400 ---- $2.462B, 20102 annual fees equal to $ 82,000
• Russell 1000 $1.033B, 20102 annual fees equal to $1,294,000

It's like like the trustees have lost their way. All of the added indexes are subsets of the Russell-3000. There is no value gained by this proliferation of funds. Only the managers are gaining with added fees. This fall off in the index strategy, however, is the root cause of the explosion in management fees. The trustees cut this strategy to free up assets for other less valuable strategies, like private equity.

NY Times - Pensions - Detroit

On July 20, 2013 Mary Williams Walsh wrote the following highlighted article in the NY Times concerning the newly discovered deficit in the two Detroit municipal pension plans and the city's pending bankruptcy action. Ms. Walsh has written many pension articles in the past. Like most commentators on public pension plan issues, however, she never addresses the whole picture. Not that what she reports is necessarily incorrect but that it is incomplete.

For the record, the one issue I never hear reported is the miserable investment performance of public pension plans and how much this contributes to pension underfunding. There are also many questionable investment decisions that the NY Times never reports. It's a great newspaper but it's not always on the cutting edge.

In this article Ms. Walsh points out a sudden increase in Detroit's reported pension underfunding and lays a large amount of blame at the door of widespread actuarial practices which have lead to long term shortfalls on employers' contributions to most public pension systems around the country.

This is a valid and accurate statement but it is not a secret. Everyone in the public pension community knows that the plan actuaries have not been providing good numbers for a long time. Their chief sin has been the use of investment targets that are far to high. This has systematically lead to underfunding of the plans. It has also lead to reckless investment strategies adopted by plan trustees trying to hit the unrealistic targets. It also created the excuse to hire investment firms with outrageous fee structures.

Generally actuaries are very bright mathematicians but like all of us they are usually short on courage. No one wants to lose his/her job. That is what would happen if an actuary came in with the real numbers. So, they do what most of us would do. They bend and twist to keep the parties with power happy.

Below is an extract from Ms. Walsh's article that describes this problem. Towards the end of the extract Ms. Walsh mentions a "Blue Ribbon Panel" set up by the Society of Actuaries which was formed to look into how to address the reputational risks that "bad" numbers were creating. One of the panel members that she idnetifies is Robert North, the NYCERS and NYCTRS actuary. North has a questionable history on his own interest rate assumptions for the city pension funds. I listed below the interest rate changes he has recommended while working for NYCERS. Walsh doesn't seem to be aware of the inconsistency in having North on this panel.

This made me do a little homework. I checked the Society of Actuaries web site and listed all the panel names below. One of the names that Walsh did not identify was Mike Musuraca. For many years Musuraca worked for DC-37, a municipal union with a recent history of corruption while he was working there. He represented DC-37 on the NYCERS Board of Trustees for investment issues. In 2009 he went work for a private equity firm, Blue Wolf Capital, but not before he voted to hire Blue Wolf as private equity firm for NYCERS. Here is a little more background on Blue Wolf Blue Wolf.

When someone like Walsh has these issues in front of her and she doesn't address them, you wonder whether she serious about the problem.

Extract from NY Times article, July 20, 2013

But that is not what happens. To calculate a city’s pension liabilities, an actuary instead projects all the contributions the city will probably have to make to the pension fund over time. Many assumptions go into this projection, including an assumption that returns on the investments made by the pension fund will cover most of the plan’s costs. The greater the average annual investment returns, the less the city will presumably have to contribute. Pension plan trustees set the rate of return, usually between 7 percent and 8 percent.

...

A few years ago, with the debate still raging and cities staggering through the recession, one top professional body, the Society of Actuaries, gathered expert opinion and realized that public pension plans had come to pose the single largest reputational risk to the profession. A Public Plans Reputational Risk Task Force was convened. It held some meetings, but last year, the matter was shifted to a new body, something called the Blue Ribbon Panel, which was composed not of actuaries but public policy figures from a number of disciplines. Panelists include Richard Ravitch, a former lieutenant governor of New York; Bradley Belt, a former executive director of the Pension Benefit Guaranty Corporation; and Robert North, the actuary who shepherds New York City’s five big public pension plans.

The commplete list of members of the Blue Ribbon Panel

Chair: Bob Stein, FSA, MAAA, Retired, Ernst & Young
Co-Vice Chair: Andrew Biggs, American Enterprise Institute
Co-Vice Chair: Douglas Elliott, Brookings Institution
Bradley Belt, Palisades Capital Management, former executive director of the Pension Benefit Guaranty Corporation
David Crane, Stanford University, former advisor to Gov. Arnold Schwarzenegger, CA
Malcolm Hamilton, FSA, FCIA, Retired, Mercer, senior Fellow, C. D. Howe Institute
Laurence Msall, The Civic Federation (Illinois)
Mike Musuraca, Blue Wolf Capital Partners, former trustee of the NYC Employees Retirement Systems-NYCERS and formerly of American Federation of State, County and Municipal Employees
Bob North, FSA, EA, MAAA, FCA, FSPA, New York City Office of the Actuary
Richard Ravitch, Co-chair, State Budget Crisis Task Force, formerly Lt. Governor of New York
Larry Zimpleman, FSA, MAAA, Principal Financial Group

Assumed Interest Rate History under Robert North (1990 to 2013)

1. 7/1/1995 9.0% to 8.75%
2. 7/1/1999 8.75% to 8.0%
3. 7/1/2011 8.0% to 7.0% (net of fees)

I don't have the documentation describing the origin of the 9% rate and my memory is a bit weak that far back. It is quite possible, however, that North also make the recommendation for 9%.

FY-2013 Was a Good Year. Thank God for the S&P 500 Index.

According to the Comptroller's quarterly reports NYCERS started FY-2012 at $41.6B and it's going to end the year, June 30, 2013, at approximately $47.4B. How did NYCERS do so well? Simple, the S&P 500 Index went from 1362.16 to 1606.28. And for the record that performance is almost free to any investor.

A Message to the New Trustees in 2014

On January 1, 2014 all of the elected officials on the five city pension funds will be new people. Actually the NYCERS trustees will be doing a little musical chairs. The union reps will generally remain unchanged.

The Bill de Blasio will, I assume, will be appointing a new chairperson for the NYCERS Board of Trustees. This can be any person the mayor chooses. It is an unpaid position. It would be intriguing if he choose a former executive director. At least it wouldn't cost the city any money.

In spite of public perception the new Comptroller will only be one of the eleven trustees at NYCERS and acts only as investment agent for the full board. (See Note below)

All of the new trustees, not only the Comptroller, should focus on their prime responsibility as trustees, protecting and building the assets of the system. It is clear to me that the departing trustees failed in that duty.

The following is a list of the money spent by NYCERS for investment services since 1997. It totals $1.4B over 16 years. This covers only one of the five city pension funds. The five system total is in the $3.0B range

1. $17,3M (1997)
2. $26.1M (1998)
3. $27.4M (1999)
4. $32.5M (2000)
5. $41.3M (2001)
6. $37.6M (2002)
7. $29.3M (2003)
8. $35.1M (2004)
9. $53.9M (2005)
10. $69.4M (2006)
11. $98.1M (2007)
12. $115.3M (2008)
13. $138.2M (2009)
14. $175.3M (2010)
15. $145.1M (2011)
16. $129.5M (2012)
17. $183.3M (2013)

1997 was the year that NYCERS began paying all of its investments expenses from the assets of the fund.

1997 was also the year that Alan Hevesi hijacked the contacting and payment process for investment managers. The trustees, including the mayor's representative, were truly stupid in letting him do this, as future events have shown. At the time I objected to this statutory violation but the Law Department said it was ok.

As background, 1987 was the first year that NYCERS started paying any investment expenses. At that time Ed Koch and Jay Goldin got into a pissing contest at the old Board of Estimate over approving contracts for equity managers for the pension funds. So Jay Goldin went to the trustees to get the contracts paid from the assets of the funds. Prior to 1987 these expenses were paid directly out of the city budget. For some reason the bond managers continued to be paid directly from the city budget until 1997.

I have never before put this complete list together. The patterns are fascinating. For the fiscal years from 1997 to 2002 the fees under Hevesi climbed from $17M to $37M. From 2003 to 2010 under Thompson the fees jumped from $29M to $175M. From 2011 to 2012 under Liu the fees dropped from $145M to $129M. The drop is encouraging but the fees are still way out of control. 2013 saw a reverse in this drop with a jump to $183M.

As a point of reference in FY-1999 NYCERS assets grew from $37.5B to $41.0B with fees of $27M. In FY-2009 NYCERS assets dropped from $38.9B to $30.9B with fees of $138M. It appears that there is most probably no benefit gained from higher investment fees and in fact quite the opposite.

How does this crap keep going on for years and years?

Note:
Comment from the last (2002) NYS Insurance Department Report of Examination:

The highest governing body at NYCERS is its board of trustees. The trustees are fiduciaries for NYCERS, its members and its retirees. The trustees delegate NYCERS investment functions to the New York City Comptroller, pursuant to Section 13-702 of the New York City Administrative Code. The investment powers transferred to the Comptroller are subject to written delegations which may not exceed one year. Although this authority is renewed annually, the System is not required to use the Comptroller for investment services. The investment services provided to NYCERS by the Comptroller are provided through the Bureau of Asset Management (BAM), a division of the Comptroller’s office. The delegated powers authorize the Comptroller of the City of New York to make any investment which NYCERS trustees are authorized to make. Also, the Comptroller is authorized to hold, sell, assign, transfer, or dispose of any of the properties, securities or investments in which any of the funds of the System have been invested.

Section 136.2 of Department Regulation No. 85 states in part: (b) “Administrative head shall mean,…the board of trustees of a retirement system, in their individual and collective capacities”

Section 136.6 of Department Regulation No. 85 states in part:
“(a) The administrative heads are fiduciaries and as such shall act solely in the interests of the members and beneficiaries of the systems they administer. They shall perform their responsibilities in a manner consistent with those of a reasonably prudent person exercising care, skill and caution.
(b) The assets of a system shall at all times be under the control of the administrative head.
(c) No investment or loan transaction shall be made by a system unless the same has been approved by the administrative head. The administrative head may delegate its powers of investment to a committee or agent of the administrative head within well-defined established guidelines. Such committee or agent shall render timely written reports of its activities to the administrative head under a schedule to be established by the administrative head and shall render special reports whenever requested by the administrative head.
(d) In respect to the delegation of investment powers, the administrative head shall periodically review: (1) the present holdings in the investment account; (2) any marked changes in the account during the preceding period; (3) the reasons for such changes and the results achieved thereby; (4) the investment activity in the account including the rate of turnover; and (5) any other factors the administrative head considers pertinent to an analysis of the financial performance and planning, consistent with its obligation as a fiduciary.”

As outlined in Department Regulation No. 85, the trustees are the fiduciaries of the System and as such must act solely in the interests of its members and beneficiaries. No board collectively, no trustee individually, nor any administrative head, can delegate their fiduciary obligations to others. They must perform their responsibilities in a manner consistent with those of a reasonably prudent person exercising care, skill and caution. The Regulation requires that the assets, at all times, be under the control of the trustees and that investments and loan transactions be approved by the trustees. Department Regulation No. 85 allows the trustees to delegate its investment powers within well–defined established guidelines and with the rendering of timely written reports of its activities to the trustees under a schedule established by the trustees. At a minimum, the Department believes that appropriate implementation of such guidelines requires a comprehensive Investment Policy Statement.

Pay a Lot : Get a Little in Return -- Who Would Have Guessed

Thr following link is a press release from a research group in Maryland. The intro is:

ROCKVILLE, MD — A new study shows that state pension systems that pay the most for Wall Street money management get some of the worst investment returns. The study, conducted by the Maryland Public Policy Institute and the Maryland Tax Education Foundation, reviewed investment returns and fee ratios for 35 state pension systems and found startling results.

The gory details are in this six page study .