Monday, November 9, 2015

Changing Stories about the 2015 Pension Investment Fee Explosion

On Nov. 3, 2015 I pointed out the investment fee explosion for the five NYC pension funds and the Comptroller's lame comments about the fees and the miserable performance of the pension funds. I also made the comment that I suspected "the Comptroller's Office was in shambles when it comes to accurate records of the payment of investment fees."

On Nov. 4, 2015 the Comptroller was quoted in P&I with a new story about why the fees are so high. It's no longer that the assets have increased or that they are being more comprehensive. The following is the the new excuse.

“Since we started the hard work of reforming the investment environment 22 months ago, we've uncovered layer after layer of Wall Street fees,” city Comptroller Scott Stringer said Wednesday in an e-mail. Mr. Stringer is the fiduciary for the five pension funds that make up the $162.9 billion retirement system.

“In our review of this year's financial report we've found even more charges — millions of dollars in 'incentive fees' — that had gone largely unreported in previous reports,” Mr. Stringer added.

“While we believe we've captured the bulk of the fee data, we will continue to refine our reporting and transparency processes until we have a complete picture of all fees and expenses paid,” said Eric Sumberg, a spokesman for Mr. Stringer, in an e-mail. “The comptroller has made transparency and fee disclosure priority issues for his administration.”

It has been clear for years that the investment fee problem is out of control. $522M is an obscene amount to pay for investing the assets of the five city pension funds. In the past I have been clear that 10 basis points should be the target level for fees.

Now this year we learn that the situation is worse ($705M) and not totally nailed down.

The obvious questions are:

  • Now that the Comptroller has uncovered all these layers of fee, why hasn't he reported all the details?
  • How did the fees go unreported in the first place?
  • How were the unreported fees paid?
  • how would you describe the unreported fees?
  • Who received the unreported fees?
  • What are the dollar amounts of the fees and the recipients?
  • How do you know that you have found all the fees?
  • Are the fees necessary given the miserable performance of the managers?
  • How accurate is the 2014 CAFR which the Comptroller released last year?
  • In general how reliable are any of the figures that the Comptroller has reported? Maybe this why the NYS DFS can never get the pension audits done. The black hole is too deep.

The final and most crucial question is, will the Comptroller release all the pension investment contracts to the public or will he continue to keep them secret and hidden from the public in spite of the fact that they are paid with taxpayer and employee money? When a contract has a clause that is prohibited by law, the contract is void. Of course, one of the parties must take action to void the contract.

Note: For the record the five funds do not have $162.9B in assets. They have $145.7B as of June 30, 2015. The TRS & BERS TDA's have $28.9B and the Police, Fire, and Correction Force VSFs' have $3.8B. The TDA and VSF funds are not available for covering the pension liabilities of the five funds. The Comptroller's Office always likes to quote the combined amounts but it is not accurate.

Note: Comptroller Stringer has been a trustee of NYCERS since 2006. Of course, he is not the only trustee.

Tuesday, November 3, 2015

Bad Year for the NYC Pension Funds - FY-2015 - Investment Fees and Performance

The Comptroller released the NYC FY-2015 Comprehensive Annual Financial Report (CAFR) on Friday, October 30, 2015. The following are some points from the press release:

The City pension systems earned $4.746 billion in net investment income in FY15 and paid benefits totaling $13.4 billion during FY15. Employer and employee contributions to the City pension systems were $10.0 billion and $1.8 billion, respectively;

The City pension systems paid investment expenses totaling $708.9 million in FY15, an increase over FY14 that primarily reflects increased assets under management and more comprehensive fee disclosure and reporting;

These numbers are accurate but they are presented in a deceptive way.

The five funds received $1.94B in interest payments and $2.66B in dividends during 2015. They also earned $73M in securities lending income. That adds up to $4.67B. It does not take much skill to collect interest and dividend payments. It definitely does not take $708.9M in fees, a $183.0M increase from last year.

Listed below are the fees (pension funds only) for the last 14 years. You can see from the numbers that the "increased assets under management" comment is not valid. Of course previous reported fees may be inaccurate but that's not what "more comprehensive" means. I have a strong feeling that the Comptroller's office is in shambles when it comes to accurate records of the payment of investment fees.

  • Year: -- Fees ---- Assets
  • 2015: $705.0M ($145.7B)
  • 2014: $522.0M ($144.5B)
  • 2013: $472.5M ($124.8B)
  • 2012: $370.3M ($111.3B)
  • 2011: $395.7M ($111.0B)
  • 2010: $426.8M ($90.0B)
  • 2009: $339.3M ($79.5B)
  • 2008: $310.2M ($101.9B)
  • 2007: $262.0M ($110.9B)
  • 2006: $192.7M ($96.0B)
  • 2005: $158.2M ($90.6B)
  • 2004: $131.6M ($86.5B)
  • 2003: $ 96.7M ($78.1B)
  • 2002: $101.9M ($80.7B)

On July 30, 2015, P&I reported that the Comptroller estimated that the city pension funds had a 3.3% rate of return for FY-2015. Of that amount 3.1% is due to interest and dividends paid to the pension funds.

Based on the details in the CAFR, the total pension assets for the five funds increased only 0.198% in FY-2015. In addition, this miserable number is based on unreliable asset values for private equity, real estate, and hedge fund classes. Note that two of the funds have avoided getting sucked into the hedge fund swamp.

The opening balance for the city pension funds (no TDA and no VSF) was $144.5B. The closing balance was $145.7B. With a $0.9B positive cash flow you get a 0.198% increase in asset value.

The other bruising fact in the city's CAFR, along with the $183M increase in fees, is the $1.294B that was skimmed off from the TRS & BERS pension funds to the TRS & BERS TDA funds and the $672M that was skimmed off to the VSF funds.

In FY-2015, the S&P 500 index rose 5.2% (from 1960.23 to 2063.11). NYCERS reported a 1.88% net of fee return on its structured fixed income class (Treasures, Corporates, & Mortgage Backed Securities) with a benchmark of 2.08%. With the 70%/30% asset allocation that the funds are currently using, the projected increase in asset value for FY-2015 could easily have been 4.24%, not 0.198%. That would have been a $150.95B closing balance instead of $145.67B.

That is $5B in one year. This why investment decisions are so important. The state implements Tier 6 and the trustees blow it all on bad investments.

All five of the pension funds had a decease in their funding status in FY-2015. The levels weren't great to start with. Here is the bad news.

  • NYCERS went from 75.32% to 73.13%.
  • TRS went from 71.79% to 68.04%.
  • BERS went from 78.60% to 75.33%.
  • Police went from 74.44% to 73.85%.
  • Fire went from 63.78% to 62.79%.

Here are the accounting numbers for the five city pension funds:

Money Coming In for FY-2015

(in millions)Five FundsNYCERS TRS BERS Police Fire
employee contributions $1,015.0 $467.1 $158.6 $39.6 $241.1 $108.6
employer contributions $9,986.8 $3,160.3 $3,270.0 $258.1 $2,309.6 $988.8
other contributions$55.5 $55.5
interest $1,939.5 $635.7 $758.5 $36.9 $392.8 $115.6
dividends $2,661.8 $795.3 $889.2 $46.2 $703.7 $227.4
SL income $72.5 $26.5 $20.3 $2.7 $18.0 $5.0
other ($64.9) $4.1 $0.3 ($115.1) $4.6 $41.2
Cash-in $15,666.2 $5,089.0 $5,152.4 $268.4 $3,669.8 $1,486.6

Money Going Out for FY-2015

(in millions)Five FundsNYCERS TRS BERS Police Fire
Benefits $11,994.1 $4,235.6 $4,024.3 $223.2 $2,360.5 $1,150.5
Transfers from TRS & BERS to TDA$1,294.0 $0.0 $1,249.0 $45.0 $0.0 $0.0
Payments to VSF * $12.2 $11.9 $0.0 $0.0 $0.3 $0.0
Transfers (Pension to VSF) * $660.0 $30.0 $0.0 $0.0 $590.0 $40.0
Investment expenses * $705.0 $231.8 $203.0 $10.1 $192.1 $68.0
Admin expenses * $141.9 $54.6 $58.4 $11.0 $17.9 $0.0
other $7.1 $7.1 $0.0 $0.0$0.0 $0.0
Cash-out * $14,814.3 $4,571.5 $5,534.7 $289.3 $3,160.8 $1,258.5
Net Cash * $851.9 $517.5 ($382.3) ($20.9) $509.0 $228.1

Closing Balances & Asset Increases for FY-2015

(in millions)Five FundsNYCERS TRS BERS Police Fire
Open Bal: $144,538.0 $54,422.0 $44,490.0 $3,279.3 $31,750.9 $10,595.8
Close Bal $145,674.8 $54,889.3 $44,254.7 $3,359.8 $32,356.0 $10,815.0
Net Change $1,136.80 $467.30 ($235.30) $80.50 $605.10 $219.20
Cash Flow: $851.9 $517.5 ($382.3) ($20.9) $509.0 $228.1
Open Bal Adj:$144,538.0 $54,422.0 $44,107.7 $3,258.4 $31,750.9 $10,595.8
Close Bal Adj:$144,823.4 $54,371.8 $44,254.7 $3,359.8 $31,847.0 $10,586.9
Net Change Adj:$285.4 ($50.2) $147.0 $101.4 $96.1 ($8.9)
Rate of Asset Increase: 0.197% -0.092% 0.333% 3.112% 0.303% -0.084%