Tuesday, November 26, 2013

The FY-2013 Pension Investment Fee Increases Hit the Newspapers

In early November, I wrote about the large increase in investment fees in FY-2013 for the five city pension funds

At the end of last week Bloomberg News and the NY Post caught up with this story.

The following is an extract from the NY Post article

“Fees rose in FY 2013 consistent with the recent expansion into alternative asset classes that diversify the portfolio against events like the stock-market collapse in 2008,” said Liu spokesman Matthew Sweeney.
Over the fiscal year, the value of the city’s pension funds rose by 12.1 percent, from $122 billion to $137 million as of June 2013.
Liu’s successor, Scott Stringer, said he plans to take a “hard look” at how much the outside pension managers are getting paid.
“He believes we need to limit costs, ensure payments are commensurate with performance and leverage our size and relationships with other pension funds to negotiate lower fees,” said a Stringer spokesman.

The excuse given by the Comptroller's office for the FY-2013 increase is not supported by the numbers. With respect to NYCERS, the largest fund, the numbers are as follows:

  • 2011: alternate assets equaled $4.5B with total expenses of $145M
  • 2012: alternate assets equaled $6.3B with total expenses of $129M
  • 2013: alternate assets equaled $7.2B with total expenses of $183M

There appears to be no correlation to the size of the alternative assets classes and the the total investment expenses. In addition, there is always a good amount of skepticism about the quoted values of the alternative asset classes. There is no no market value for them and NYCERS must depend upon "estimates" from the asset managers.

In addition, the comptroller's office gives no objective evidence to support the theory that illiquid alternative asset classes diversify and therefore protect the pension fund portfolio against a stock market collapse. In fact there is a concerted effort by the Comptroller's office to hide the details of these investments.

Secondly, the quoted value of the city's pension funds is incorrect. In FY-2013 the value rose from $111.3B to $124.8B. That was a an increase of 10.5% factoring in a positive cash flow of $1.8B. The 12.1% increase was not correct. Interestingly, the stock index/core bond return was 12.26% for 2013 and would have cost far less than $473M in fees.

Thirdly, Scott Stringer has been on the NYCERS Board of Trustees since 2006. The NYCERS investment fees in 2006 were $69M versus $183M last year. Why has he not taken action against this runaway growth over the last eight years? Why hasn't mayor-elect Bill de Blasio taken action over the last four years? As Public Advoctae he has been a trustee on the NYCERS board since 2010.

To be fair, de Blasio and Stringer were not the key players in the investment decisions at NYCERS. That falls to the Comptroller and the major unions on the board with the mayor's representative acquiescing to their decisions.

Wednesday, November 20, 2013

Reality Comes to NYCERS -- Funding Status 2007 - 2013

Below is the NYCERS funded ratio for the last seven years. It charts out a serious problem for NYCERS and in turn for the members, retirees, and the taxpayers of New York City.

This problem is in large part due to the failure of the NYCERS trustees to properly invest the assets of the fund over the last 14 years. See NYCERS income statement history .

Over the last 14 years NYCERS has earned an annual rate of return of 2.11%. From my calculations the index/core strategy would have enabled NYCES to achieve a 3.59% return over the same period. Both of which are significantly short of the 8%/7% actuarial interest rate (AIR) that NYCERS has been using for the last 14 years.

This is a classic "Catch 22" situation. The 8%/7% allowed the city to contribute less to NYCERS in the short term but motivated the NYCERS trustees to adopt an irresponsible investment strategy which allegedly would achieve the 8%/7% target. The end result was under-funding, underperformance, and ironically causing the city to pay more to NYCERS over the long run.

I do not have any concrete evidence of corruption but at some point incompetence rises to the level of criminal.

As of FY-2000, NYCERS had 71% of its assets in a index/core strategy. In 2013, NYCERS had only 39% in a index/core strategy and another 16% in illiquid assets which create uncertainty about the real value of the assets.

Fiscal Year Actuarial Assets Accrued Liability Unfunded Liability Funded Ratio Covered Pyrl Unfunded as % of Pyrl
2013 $42.41B $65.27B $22.86B 65.0% $12.23B 186.9%
2012 $40.33B $62.94B $22.50B 64.2% $12.10B 185.9%
2011 $41.71B $53.05B $11.34B 78.6% $11.88B 95.5%
2010 $40.72B $51.11B $10.39B 79.7% $11.31B 91.9%
2009 $38.93B $49.25B $10.33B 79.0% $10.76B 96.0%
2008 $38.37B $46.60B $8.23B 82.3% $10.13B 81.3%
2007 $39.69B $39.80B $0.10B 99.7% $9.67B 1.1%
.... .... .... .... .... .... ....
2000 $42.39B $42.42B $0.03B 99.9% $7.87B 0.3%

As of July 1, 2011 NYCERS changed actuarial valuation methods going from "frozen initial liability" to "entry age". In simple English, NYCERS started using a real actuarial method as opposed to a delusional one. And I mean "deluuusional" in the way Lewis Black uses it in his comedy routines. NYCERS also switched actuarial interest rates from 8% gross of expenses to 7% net of expenses.

You can clearly see how the NYCERS pension liabilities jumped from $53.1B to $62.9B in 2012 because of the switch from 8% to 7%. You can just imagine what the accrued pension liabilities would be if the actuary used the real rate of return of 2.11%. A straight linear projection would produce an added $50.0B. That is the cost of bad investment decisions.

In 2008, the NYCERS actuary started providing the "entry age" numbers as supplementary information in the CAFR in order to supply the public with better disclosure on NYCERS funding status. That is why my chart changes dramatically from 2007 to 2008. Page 127 in the FY-2013 NYC CAFR shows the the change occurring in 2012 instead of 2008. Everyone tries to delay bad news.

Any funded ratio below 80% is a sign of trouble. The other four city pension funds, unfortunately, have much lower funded ratios than NYCERS.

Wednesday, November 13, 2013

Hot Line for State Pension Fund Audit

In July the NYS Department of Financial Serives (DFS) announced an audit of the seven public pension funds in New York State.

Here's a news article dated yesterday announcing that the DFS has set up a hot line for whistle blowers to report wrong doing at any of the public pension funds in New York State. You can also check the DFS web site for the phone number .

I guess the the DFS auditors have found a need to go around the the management structures at the state and city pension funds to get a more unfiltered view of events at the pension funds.

Or maybe they read my posting about investment consultants.

Friday, November 8, 2013

FY-2013 Investment Returns: NYCERS Fails to Match the S&P 500 Index, Again.

The Comptroller has just released the NYC FY-2013 CAFR (Comprehensive Annual Financial Report) : the city's annual financial statement. Pension investment expenses have increased significantly from FY-2012, $472.5M up from $370.3M. This is a reversal from the previous two years.

Specifically, NYCERS expenses jumped from $129.5M to $183.3M (see original expense history).

As of June 30, 2013, the NYCERS closing balance increased from $42.7B to $47.2B but given the 17.9% increase in the S&P 500 index that number should have been $48.6B (Bond Core = -.95% with a 70/30 allocation). With a waste of $150M in investment expenses NYCERS is short $1.55B for FY-2103 that a prudent investment policy would have provided. For the record NYCERS missed the Index/Core threshold by $2.6B in FY-2012.

The truly scary thought is that if NYCERS had followed a simple prudent investment strategy over the last last 14 years, the June 30, 2013 closing balance would be $58B. In this year's CAFR the actuary estimated the NYCERS current pension liability at $65.3B. A sane investment policy can go a long way in solving pension problems.

Friday, November 1, 2013

Dr. Barry Liebowitz's Retirement

I just cane across this notice below of Dr. Barry Liebowitz's upcoming retirement.

October 28, 2013
By Neal Tepel
New York, NY, - Dr. Barry Liebowitz announced that he will step down as President of Doctors Council SEIU on December 31, 2013, the nation's oldest and largest union of attending physicians and dentists. His notable leadership of Doctors Council has spanned 33 years, one of the longest tenures of a union President in New York City, during which he helped grow the organization from a few hundred members in New York City to a national union for doctors and voice for patients.

I want to take this moment to let every NYC municipal worker know what an enormous impact this labor leader/doctor had on their pension benefits. For over seven years (1981-1988) Dr. Liebowitz and the late Don Meyers fought the city in the NYS courts to stop the illegal exclusion of part-time workers from membership in NYCERS and their lawful pension rights.

After losing battles in the trial and the appellate courts Dr. Liebowitz finally won the war at the N.Y.S. Court of Appeals (Doctors' Council v. NYCERS, 71 N.Y. 2d 889 (1988)) with an unanimous reversal of the lower courts' decisions. I can not overstate how powerful this decision, along with subsequent 1992 Part-Time Pension Law (Chapter 749), was not only to the benefits of part-time workers but for all city workers.

It put the City of New York, the Law Department, and NYCERS on notice that it could not restrict pension benefits unless the state legislature gave them specific authority to curtail those rights granted by the legislature.

This was a case of a union defending its members, something that we don't see a lot these days. Not bad for a doctor!