Saturday, November 19, 2016

Structure of the CO-VSF

The CO-VSF Board has five trustees, the NYCERS chair(one vote), the Comptroller (one vote), the Finance Commissioner (one vote), the head of COBA (one & half votes) and the head of the Correction Captains union (half vote). By statute the NYCERS actuary is the actuary for the Co-VSF. I am not sure when the CO-VSF Board last met. This board along with the actuary should be publicly informing the CO-VSF retirees what is happening with the 2016 payments and providing them with supporting documentation. With modern technology this is an easy lift.

CO-VSF is required to publish a financial statement every year in the City Record - NYC Admin Code - § 13-194.7

7. The variable supplements board shall publish annually in the City Record a report for the preceding year showing the assets of the correction officers' variable supplements fund and a statement as to the accumulated cash and securities of such fund as certified by the comptroller, and shall set forth in such report such other facts, recommendations and data as the board may deem pertinent.
NYS DFS has issued only one audit of the CO-VSF system.

The following text is from that audit:

A. History

Chapter 657 of the Laws of 1999 established the Correction Officers Variable Supplements Fund (“COVSF” or the “Fund”) and the Correction Captains’ and Above Variable Supplements Fund (“CCAVSF”). Chapter 255 of the Laws of 2000 (“Chapter 255/00”) combined the COVSF and the CCAVSF into one amended fund (Correction Officers Variable Supplements Fund) effective December 29, 1999.

The Fund operates pursuant to the provisions of Title 13, Chapter 1 of the Administrative Code of the City of New York (“ACNY”). It provides supplemental benefits to members of the Uniformed Correction Force (“UCF”) that retire on or after July 1, 1999, with 20/25 or more years of service from the New York City Employees’ Retirement System (“NYCERS”).

Under current law, the Fund is not to be construed as constituting a pension or retirement system. Instead, it provides supplemental payments, other than pension or retirement system allowances, in accordance with applicable statutory provisions. The New York State Legislature has reserved to itself and the State of New York the right and power to amend, modify, or repeal the Fund and the payment it provides.

Thursday, November 17, 2016

NYCERS, Is This Really a Ponzi Scheme?

In the NYCERS FY-2015 CAFR on page 189 you will find the updated Solvency Test issued by the NYCERS actuary.

The last year listed on the chart is 2013. The actuary has always been slow in doing his/her work. On the last line there are several amounts:

  1. $7.6B = the total contributions made by active workers plus the 5% interest they have earned on their money.
  2. $36.2B = the pension liability for all current retirees (7% assumed interest rate)
  3. $30.6B = the employer financed pension liability for all active workers (7% assumed interest rate)
  4. $47.3B = the actuarial value of NYCERS assets

What the City/Employers Actually Pay for Active Workers

Workers are currently contributing approximately 3.6% of payroll into NYCERS. In FY-2015, workers contributed $457.1M to NYCERS and the covered payroll was $12.7B.

For argument sake let us assume the city and the other employers are contributing $3 for each $1 that the workers are contibuting. That would be 10.8% of payroll. Lets assume that the $3 earn the same conservative 5% that worker's $1 earns. That would mean that there should be at least $22.8B along with the $7.6B set aside for the active workers. That would be $22.8B to cover a $30.6B liability. Wrong!

Faking It

If you go back to the last line in the chart, you will see that the actuary is claiming that both the liability for all current retirees, $36.2B, and the workers contributions, $7.6B, are 100% funded. She is also valuing NYCERS's assets at $47.3B.

So when you start with $47.3B and you subtract $36.2B and $7.6B, you are left with only $3.5B. That is $3.5B to cover a $30.6B liability for active workers. This is a truly frightening conclusion.

The Other City Pension Funds

The story only gets worse. The Police Pension Fund is in the same shape as NYCERS with only $2.3B to cover a $17.9B liability for working police officers (page 151 of the FY-2015 NYPPF CAFR).

Teachers and the Fire Funds are in totally worse shape. The Fire Pension Fund has NO money to cover a $5.2B liability for working firefighters and only $8.0B to cover a $10.5B liability for current retired firefighters (page 151 of the FDNYPF FY-2015 CAFR).

Teachers with over a 100,000 working teachers has NO assets to cover their $18.6B pension liability and only $31.9B to cover the $37.5B pension liability for retired teachers (page 120 of the NYC-TRS FY-2015 CADR).

This grim picture is based on the unrealistic 7% assumed interest rate assumption. You don't want to do the arithmetic for a lower interest rate assumption. Just going from 7% to 6% at NYCERS increases the unfunded liability from $20.2B to $28.0B (page 114 of NYCERS FY-2016 CAFR)

What is Really Going On

Of course, there is one major flaw. The current retirees benefits are not fully funded. Most of the pension contributions the city and the other employers are making each year are catch up payments covering pensions being paid to current retirees.

The city and other employers paid $3.4B to NYCERS in FY-2016. The workers paid $485.5M. Three times what the workers paid is $1.5B. Under our 3 for 1 scenario it is reasonable to conclude that $1.9B went to cover retirees benefits not current workers. This is actually a Ponzi scheme and not an actuarially funded pension plan. It is a lot like the Social Security benefit system.

What is actually going on is that the city and other employers are trying to pay two different pension bills each year. One for active workers and the other for former workers who are now collecting pensions from NYCERS. You can just imagine the political nightmare this is. Part of the ongoing pension funding issue is not just about pensions for current workers. It is the huge mass of current retirees whose benefits the city did not properly secure when the workers retired.

How did this happen?

When a worker retires, the actuary can very accurately compute the cost of the benefit. She, however, can be very prudent or a total screw up. You know where this going. A 62 year old retiree is going to get a pension of $40,000 a year for the rest of his/her life. The actuary can say that $400,000 will cover this benefit or she can say that $520,000 will cover the cost.

Now if the fund hasn't even put aside the $400,000, you can imagine how they feel about the $520,000 cost figure. In either case there is going to be catch up, even if the fund is hitting its interest targets. Needless to say pension funds are not known for hitting their interest targets

One thing that NYCERS active workers should immediately demand is that their annual statement be expanded to include how much the city or their employer have contributed on their behalf during the year for their future pension benefit. The statement should also include an opening balance of employer contributions and how those assets performed during the year. And don't let anyone tell you it can't be done.

Monday, November 14, 2016

Correction Officer VSF (COVSF) Payment for 2016

The NYCERS Board had their November Regular Meeting last Thursday. In the last 5 minutes of a two hour long meeting the actuary's representative dropped a bomb on the retired Correction Officers. They were not going to get their VSF payment this year.

Last Saturday my blog got inundated with hits, almost a thousand inquiries on my most recent posting on NYCERS's poor investment performance in FY-2016. Guess who gets hammered when NYCERS trustees screw up? Not the trustees but the retired Correction Officers.

Also something funny happened in FY-2016. NYCERS clawed back $52.724M from the COVSF. You can see in my previous posting the regular "skim" to the COVSF for the last six years.

COVSF History 2013-2016
Year Open Balance Interest Earned "Skim" Payments Close Balance
FY-2013: $35.925M $0.038M $0.000M $0.000M $35.963M
FY-2014: $35.963M $0.020M $190.000M $38.014M $187.969M
FY-2015: $187.969M $0.010M $30.012M $78.285M $139.706M
FY-2016 $139.706M $0.184M -$52.7240M $82.149M $5.017M

Tuesday, November 8, 2016

How Do You Lose $174M in a Rising Market?

On October 31, 2016 the Comptroller's Office released the city's Comprehensive Annual Financial Report (CAFR) for FY-2016. This report, in particular, contains the basic financial information for the city's five pension funds.

Based on this report, NYCERS lost $174.2M in asset value during FY-2016 and had a closing balance of $55.59B. Even worse,during the same period the five city pension funds plus the TDA & VSF funds, in total, lost $1.323B in assets.

At a September NYCERS investment board meeting the Comptroller's representative, Scott Evans, presented a performance report to trustees that stated that the fund had earned a return of 1.76% for the year.

What he did not say was that NYCERS had lost $174.2M of assets during the year and obviously he did not explain how that had happened. In a year that the index/core rate of return was 3.9%, NYCERS assets fell by -0.32%.

This is absolutely unacceptable. In three of the last six years NYCERS lost assets. All six years were up markets. See the table below.

The Index/Core Performance for FY-2016

During FY-2016 the S&P500 Index increased in value from 2063.11 to 2098.86, a 1.7% increase for the year. Not good but above water.

The NYCERS bond core target was 7.16% for FY-2016. According to the September performance report NYCERS managed a 6.64% return in this asset class. That was C+ grade but not a loss of capital.

With a 60/40 stock asset allocation the fund should have produced a 3.904% increase in assets with a closing balance of $57.85B.

So how did NYCERS lose $174.2M in capital, a -0.32% loss?

Over the last 17 years NYCERS has managed to leave over $25B on the table because of investment decisions made by Comptrollers and trustees. There is no personal penalty for trustees if they fail to do their job. Hell, they don't even get fired. They just go to work for investment mangers.

NYCERS Investment Fees for FY-2016

NYCERS paid $212.9M in investment fees during FY-2016. That is 38 basis points on the closing balance of $55.59B. NYCERS should never pay more than 10 basis points in fees, even for beating the index/core strategy. 10 basis points is $55.6M, a savings of $157M.

Of course beating the index/core strategy is not possible for a pension fund over a long period of time. Investment returns over a long period of time always reverts to the mean, if you are lucky. Trying to beat the mean will cause a pension fund to fall short of average market returns over extended periods of time.

Six Year Review

Look at the last two rows in the table below. In only one year did NYCERS outperform the Index/Core rate of return. Just adding up the shortages for the six years listed below adds up to $4.2B. If you compounded the shortages for the six years, the loss is over $10B. When you compound the shortages over the last 17 years, the calculation produces a $25B loss.

Why do the trustees always make these bad decisions? Follow the money. Who is getting the extra $157M in fees. Who is making and receiving campaign contributions?

The following table is a recap of NYCERS income statements from FY-2011 to FY-2016:

Income Statement History
Year FY-2016 FY-2015 FY-2014 FY-2013 FY-2012 FY-2011
Employee contributions $485.5M $467.1M $447.7M $437.8M $403.6M $413.7M
Employer contributions $3.366B $3.160B $3.114B $3.047B $3.017B $2.387B
Interest income(bonds) $692.8M $635.8M $658.7M $624.7M $528.0M $492.2M
Dividends(stocks) $836.5M $795.3M $739.7M $696.7M $637.1M $619.9M
Securities Lending $29.7M $26.5M $8.8M $27.8M $25.0M $23.4M
Income-In $5.413B$5.089B$4.974B$4.884B $3.941B$4.616B
Benefits/refunds $4.403B $4.236B $3.990B $3.851B $3.689B $3.569B
Transfers to the other pension funds $7.4M $7.1M $7.2M $5.3M $5.0M $4.4M
Skim to VSF's -$41.2M $41.9M $202.1M $12.3M $12.4M $12.4M
Investment Expenses $213.0M $231.8M $184.6M $183.3M $129.5M $145.1M
Administrative expenses $56.7M $54.6M $50.4M$48.7M $51.4M$46.4M
Income-Out $4.638B$4.571B$4.283B$4.101B$3.888B$3.770B
Net Income $774.4M $518.1M $691.0M $783.0M $728.0M $164.1M
Actual Cl. Bal.$55.489B$54.889B$54.442B$47.195B$42.655B$42.409B
Index/Core Cl.Bal.$57.806B$57.107B$55.171B$47.863B$45.523B$42.107B
Shortage $2.317B $2.217B $0.749B $0.668B $2.868B -$0.302B
Actual RR -0.317% -0.093% 13.850% 8.806% -1.136% 19.391%
Index/Core RR 3.904% 3.981% 15.437% 10.373% 5.626% 18.537%