NYCERS Profit from 2016 to 2020

Recap

Every year the Comptroller reports on a quarterly basis the rate of return for the NYCERS portfolio. NYCERS’s fiscal year ends on June 30 each year.

Based on the Comptroller’s figures NYCERS has averaged 6.78 % (net of fess) over the last five years. Part of this figure, 2.96%, is created by an inflow of $8.928B in dividends and interest received during the five years.

The rest of the return is created by an increase in the value of the portfolio. The June 30 value of NYCERS’s assets was $69.910B. The starting value in 2016 was $54.289B. That is a 28% increase over the five years. As reference the S&P 500 Index increased from 2063.11 to 3100.29, a 50% increase. 6.78% may seem like an acceptable figure. But what if you could easily increase that return, safely and at a lower cost. There has, unfortunately, never been any comparative analysis of NYCERS’s investment strategy to determine its relative efficiency.

A Better Way

Out of the 40 sub classes of NYCERS's investment strategies, some combination of classes can consistently produce a better long-term return than 6.78%. The NYCERS Russell 1000 Index (stocks) managers have averaged 9.83% (net of fees) over the last five years. The June 30 value of this class was $19.256B

The NYCERS Structure Fixed Income (bonds) managers have averaged 5.47% (net of fees) over the last five years. The June 30 value of this class was $13.427B.

If you calculate a 60/40 stock/bond return using these figures, you will arrive at an 8.09% average rate of return over the last five years. These two classes generate the bulk of the dividends and interest received by NYCERS during the year.

Another aspect of using only this combined class strategy is that you would save at least $750M in fees over the five years.

Fantasy Island

There are three of NYCERS's sub classes of investment strategies, private equities, real estate, infrastructure, that are highly questionable.

The Comptroller has reported the total value of these classes to be $9.272B as of June 30, 2020. That is 13.45% of the total $68.91B NYCERS portfolio. The $9.272B amount is not verifiable, just a guess.

He quoted the 5-year average rate of return for these classes (gross of fees) as: 9.56% (PE), 11.07% (RE), and 11.93% (IF). These rates of return are also not verifiable, just guesses.

These investments do not pay dividends nor interest and incur most of the $750M in fees that would be saved with the two-class strategy. There is, however, a constant flow with these investments, cash going out and cash coming in. Unfortunately, this flow is not reported in the financial statements. I suspect if this cash flow were reported for the last 23 years, there would be changes in the law governing the allowable investments for the city’s pension investments.

NYCERS is an Essential Service to its Members and Retirees

The following NYCERS members are essential workers:

• HHC hospital workers,
• Fire EMS workers,
• MTA subway and bus workers,
• correction officers,
• sanitation workers,
• DEP water and sewage workers,
• DOT highway/street/bridge/ferry workers,
• Police 911 & 311 workers,
• HA maintenance workers,
• TBTA line workers and
• countless others.

Besides getting out the monthly pension checks, NYCERS is required on a critical basis to process retirement applications, disability applications, and death benefit claims.

As of March 15, 2020, NYCERS has been AWOL.

The agency should have been on the front lines supporting the men and women who are risking their lives for people of New York City. The agency has 438 full-time employees and 27 part-timers along with 16 per-diem staff. If you take the time to look up the top salaries at NYCERS, there is no reason that NYCERS should not have committed administrators backing up the city workers out on the street.

These workers are dying and getting disabled. There are also many eligible workers at high risk because of other medical conditions who should be able to quickly and easily retire if their doctors are warning them to stay home.

NYCERS should open its customer service office a la Home Depot. Any member or beneficiary who has a retirement, disability or death claim should be able to directly meet with NYCERS staff and easily get follow up info.

At the very least members should be able file applications in person and receive filing receipts.

There should be at least 50 NYCERS staff on the call center phones every day. Voice messages should be avoided at all costs.

When you give damn, there is always a way.

FY-2021 Budget: A Year of Challanges

On May 14, 2020, the NYCERS Board of Trustees adopted the FY-2021 Admin Budget. The new budget reflects a 3% reduction from the FY-2020 budget due to the economic impact of the Covid-19 virus epidemic. I had previously predicted a much larger reduction.

The amount of the new budget is $78.7M down from the $81.1M in FY-2020. NYCERS chose to take the full 3% reduction in the non-personnel part (OTPS) of the budget and avoid any payroll cuts. This meant that the OTPS amount from FY-2020 was reduced from $45.9M to $42.8M in FY-2021.

While a 3% reduction is significant for any organization, this 3% reduction is a radical cut for NYCERS. Based on planning information in the FY-2020 budget report, NYCERS was planning to increase its OTPS for FY-2021 to $88.0M. This increase was meant to fund the first year the implementation phase of legendary Legacy Replacement Project (LRP).

This “five year” project has been in play since the spring of 2015 and the contract has not yet been awarded. There is a current promise to award the contract in the fall of 2020. As of today, the agency has not been authorized to spend the $46.0M needed to start the actual work on the project. I suspect the agency has delusions that the trustees will approve a budget increase in the fall. In anticipation NYCERS mentions this objective in a note buried in the supporting charts in the budget documents.

A prudent evaluation of the City’s finances would lead to a much more cautious view. This is not a traditional budget crisis for the City. The full impact of the epidemic, on many levels, is unknown. Any attempt to increase the NYCERS budget will run into intense political push back. In fact, it is quite likely that there will be more reductions during the year.

I have been commenting on the LRP project since 2015. The budget that year was $47.3M. Last year it was $81.1M. NYCERS has still not written a line of code for the LRP project. It now looks like it will be another lost year.

In this year’s budget document NYCERS made mindless claims about its Enterprise Risk Management (ERM) program. You can read the verbal garbage below. NYCERS can be forgiven for not having foreseen the Covid-19 disaster but by chasing after a monster five-year IT project, NYCERS set themselves for an epic disaster. Let no one say that they were not warned.

Instead of methodically building small replacement pieces for the old application systems and being in position to adapt to ever changing technology, NYCERS chose to chase after a phantom.

NYCERS did however buy themselves an upgraded website for $40M with annual support cost of $3.0M. NYCERS is the ultimate white whale when it comes to IT contracts.

Verbal Garbage

This is a quote from the executive director's budget letter. I defy anyone to translate this into plain English.

MANAGING RISKS

NYCERS continues to experience a significant amount of change. In recognition of this, we will continue to mature our Enterprise Risk Management and Information Security programs in FY 2021. We will also continue our data cleansing efforts to reduce the risk of having inaccurate data in our new pension administration system. Our data validation practices are also being continuously reviewed and enhanced. Enterprise Risk Management (ERM) Program

NYCERS’ ERM Program was established to enhance enterprise-wide risk governance, including identification, mitigation, management, and monitoring, as well as creating a risk-focused culture.

During the past year, the Enterprise Risk Committee (ERC) made significant progress in maturing NYCERS’ ERM Program. A comprehensive suite of governing documents was developed that includes an Enterprise Risk Charter, Risk Appetite Statement, and Risk Escalation Criteria. The ERC also offered educational webinars to Executives on Finding and Fixing Fraud and Creating a Sustainable Vendor Risk Management Program. NYCERS’ first Fraud Risk Assessment is currently in progress.

In FY 2019, an agency risk assessment was conducted. In FY 2020, the risk assessment was expanded to include division risk assessments in addition to the agency risk assessment. In FY 2021, the risk assessment will be expanded to begin at the unit level, so that the assessment process identifies risks at every level of the organization and surfaces material risks for appropriate action.

NYCERS’ ERM program was created and supported by staff who also have full-time operational roles. Now that the program has been implemented, it requires resources not only to continue to grow the program, but also to monitor the risks that have been identified. In FY 2021, we will continue to mature the ERM program to include additional critical risk identification and mitigation initiatives that will require dedicated attention and expertise, including the development of a robust Vendor/Third Party Risk Management process.

Budgeting in the Plague Year

At the March 12, 2020 NYCERS Board Meeting, the executive director requested five additional workers to address a significant delay (eight to ten months) in finalizing the benefits for new retirees. She stated the delay was due to increased workload and staff turnover. I had previously commented on a six-month delay in producing final option letters in a December 2019 posting.

Obviously, the delay was longer than six months. The director was quite comfortable asking for the five new workers even though she had increased her staff by 36 new workers over the last three years.

One month later at the April 7, 2020 Board Meeting, the Chairperson asked the trustees to lay over the resolution approving the NYCERS FY-2021 Administrative Budget. The reason he gave was the uncertainty of the City’s own FY-2021 budget due to the Covid-19 epidemic.

NYCERS has been radically increasing its admin budget for several years now. In 2015 NYCERS had 392 full-time workers and a budget of $47.3M. In 2020, NYCERS has 433 full-time workers and a budget of $81.1M

Even with a possible federal bailout, the City is going to have to make serious budget reductions for non-critical functions. Prior to 1997, I spent many years dealing with savage budget reductions but this time it is going to be much worse. The NYCERS budget is technically independent of the City’s budget but the trustees are not immune from the impact of the virus.

It is not out of the question that NYCERS will be required to cut $20M from its FY-2021 budget.

While the FY-2020 payroll is only $35.3M, there will be, no doubt, a total hiring freeze in FY-2021 and maybe layoffs, if there is a threat to essential workers. The major contractions, however, will occur in the OTPS budget which is currently $45.9M in FY-2020. This amount was only $21.8M in FY-2018. You can see the possibility of an even greater reductions than the $20M.

The saving grace of these reductions is that NYCERS might get back to doing its basic work correctly and on time. NYCERS may even get back to designing improved application systems with career civil servants rather than with “remote” consultants.

Side Notes:

1. NYCERS currently subsidizes the Comptroller’s Office with $4M/year. That will have to stop.
2. NYCERS is currently spending $240M/year on investment expenses. That will have to be radically reduced. Most pension funds around the country are going to have a war with Wall Street, if the costs are not radically cut.

Early Retirement for all NYCERS Tier-4 62/5 Plan Members, Including Vested Members

Recently a 55 year old Tier 4 NYCERS member told me that NYCERS had denied his retirement application. The resason that they gave him was since he was vested, he had to wait until he was 62 to retire. This reason is not currently supported by law.

Prior to 2000, this reason was valid. (See Section 612 (NYS - RSSL) below).

In 2000, however, the law was changed by Chapter 553 which was enacted as of 10/31/2000, The new law allowed most Tier 4 members to retire early subject scaled benefit reductions. See Section 603.1.2 (NYS RSSL) below. Specifically, as of October 31, 2000, Tier 4 NYCERS members who were not eligible for any of the following special retirement plans

1. 1) 55/25 Plan (Chapter 96),
2. 2) 57/5 Plan (Chapter 96), or
3. 3) the Transit 25/55 Plan

were now entitled to apply for retirement starting age 55 through age 62 with varying levels of benefit reductions.

This statute does not require the member to be in city-service to be eligible to apply. Therefore all members, both in city-service and vested, are eligible. The technical term, “in city-service”, is used when meaning to indicate only members on payroll as opposed to vested members who, by definition, are not on payroll .

As executive director of NYCERS, this is the way I administered this benefit between 2000 and 2005.

I left NYCERS in 2005. Based on my experiences with helping NYCERS members since then, I have found NYCERS legal support to be incompetent and possibly intent on reducing members’ benefits without legal authority.

I have been writing this blog since 2009. It is a great vehicle for presenting information about the horrendously involved pension law which NYC workers have to deal with. I am always amazed that NYCERS does not attempt to communicate with its members through the internet. They could warn members of the pitfalls of the law by laying out in detail how the specific sections of law impact the members. The SPD's are very incomplete when it comes some of the dark corners of the law.

Considering how much money NYCERS spends, you would think that NYCERS would give detailed and precise explanations to members about its decisions, especially when denying benefits.

Teir 4: Relevant Statutes

Effective Sept. 1, 1983 and retroactive to July 1, 1976.

§ 612. Vesting.

a.

A member who has five or more years of credited service, upon termination of employment, other than a member who is entitled to a deferred vested benefit pursuant to any other provision of this article, shall be entitled to a deferred vested benefit at normal retirement age computed in accordance with the provisions of section six hundred four of this article.

As of October 31, 2000, the new Section 603.1.2 (reduction at 27% at age 55)

§ 603. Eligibility for service retirement benefits; age and service requirements.

… i. …

2. A member of the New York city employees' retirement system or the board of education retirement system of the city of New York who has met the minimum service requirement, but who is not

(a) a participant in the twenty-five-year early retirement program, as defined in paragraph ten of subdivision a of section six hundred four-c of this article (as added by chapter ninety-six of the laws of nineteen hundred ninety-five), or

(b) a participant in the age fifty-seven retirement program, as defined in paragraph three of subdivision b of section six hundred four-d of this article, or

(c) a New York city transit authority member, as defined in paragraph one of subdivision a of section six hundred four-b of this article,

may retire prior to normal retirement age, but no earlier than attainment of age fifty-five, in which event,

(this clause was added after 2000)

unless such person is a member of the board of education retirement system of such city who is otherwise eligible for early service retirement pursuant to subdivision c of section six hundred four-i of this article,

the amount of his or her retirement benefit computed without optional modification shall be reduced in accordance with the following schedule:

(i) for each of the first twenty-four full months that retirement predates age sixty-two, one-half of one per centum per month; and

(ii) for each full month that retirement predates age sixty, one-quarter of one per centum per month,

but in no event shall retirement be permitted prior to attainment of age fifty-five.

Tier 6: Cautionary Note

As of April 1, 2012, Tier 6 radically changed this early retirement benefit. The new law added the wording below to Sections 603 and 612. The result of which was to exclude Tier 6 vested members form the early retirement benefit, increase the normal retirement age to 63 for both in-service and vested benefits, and made the early retirement benefit reductions range from 6.5% at age 61 to 52% at age 55. I have highligthed the wording that restrict the benefit.

§ 612. Vesting.

a. …

Anything to the contrary notwithstanding, a member of a public retirement system of the state who first became a member of such system on or after April first, two thousand twelve must have at least ten years of credited service in order to qualify for a deferred vested benefit under this section; such member shall not be entitled to such benefit prior to the member's attainment of age sixty-three; and such deferred vested benefit shall be computed pursuant to subdivision b-1 of section six hundred four of this article.

§ 603. Eligibility for service retirement benefits; age and service requirements.

…

i. …

3. A member of a public retirement system of the state who has met the minimum service requirement, but who is not a New York city transit authority member, as defined in paragraph one of subdivision a of section six hundred four-b of this article, may retire prior to normal retirement age, but no earlier than attainment of age fifty-five, in which event, the amount of his or her retirement benefit computed without optional modification

shall be reduced by six and one-half per centum for each year by which early retirement precedes age sixty-three.

History: NYCERS Admin Expenses

The following is a chart of NYCERS administrative expenses from 2004. The information comes from NYCERS Comprehensive Annual Financial Report. As a point of reference NYCERS had an annual budget of $8.8M in FY-1996, the last year NYCERS was part of the city budget.

NYCERS Admin Expenses

Fiscal Year	Personnel Expenses	Contracts & Consultants	Phone, Mail, & Printing	Rentals	Software, Hardware, Support, Supplies, & Maintenance	Depreciation & Credits	Total
FY-2019	$43,717,712	$15,884,418	$1,114,263	$6,637,959	$14,719,873	$0	$82,073,325
FY-2018	$40,444,145	$4,310,427	$1,072,077	$6,348,888	$7,513,233	$0	$59,688,770
FY-2017	$39,505,894	$3,829,758	$1,561,282	$5,909,352	$8,864,342	$0	$59,670,628
FY-2016	$37,950,289	$4,687,929	$1,360,397	$5,453,383	$7,230,989	$0	$56,682,988
FY-2015	$37,368,409	$3,652,,154	$1,336,002	$5,037,893	$7,239,560	$0	$54,635,018
FY-2014	$33,571,938	$3,773,082	$1,269,387	$4,863,720	$6,952,691	$0	$50,430,818
FY-2013	$33,064,087	$3,102,385	$1,078,411	$4,674,442	$6,797,095	$0	$48,666,420
FY-2012	$32,623,085	$3,088,256	$1,096,186	$4,796,584	$9,780,637	$0	$51,384,748
FY-2011	$31,748,443	$4,108,186	$995,415	$4,741,621	$4,780,811	$0	$46,374,476
FY-2010	$31,527,659	$5,434,495	$1,041,471	$4,278,903	$6,678,071	$715,000	$49,675,599
FY-2009	$30,187,604	$4,043,775	$914,311	$4,047,949	$8,198,354	$1,430,000	$48,821,993
FY-2008	Not Reported
FY-2007	$27,123,219	$2,677,793	$1,055,233	$5,203,902	$4,205,095	$1,430,000	$41,695,242
FY-2006	$24,992,543	$3,124,688	$1,497,895	$4,797,895	$4,472,246	$1,406,132	$40,291,469
FY-2005	$24,474,710	$3,039,970	$827,277	$4,454,258	$3,118,356	$1,392,296	$37,306,867
FY-2004	$22,631,504	$3,124,800	$845,391	$4,192,543	$3,375,187	$1,430,000	$35,559,081

Sunshine and GASB 72

Updated: January 27. 2021

As of FY-2015 NYCERS was required to report a breakdown of the reliability of the reported value of the NYCERS investments. This reporting requirement is based on GASB Statement No. 72. GASB is the Government Accounting Standards Board, comparable to the private sector accounting board, FASB. You can see the history of NYCERS GASB 72 reporting in the table below.

NYCERS describes this requirement as follows:

GASB Statement No. 72, Fair Value Measurement and Application requires the Funds to use valuation techniques which are appropriate under the circumstances and are either a market approach or income approach. GASB 72 establishes a hierarchy of inputs used to measure fair value consisting of three levels.

Level 1 inputs are quoted prices in active markets for identical assets or liabilities.

Level 2 inputs are inputs, other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs are unobservable inputs, and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.

GASB 72 also contains note disclosure requirements regarding the hierarchy of valuation inputs and valuation techniques that was used for the fair value measurements. There was no material impact on the funds financial statements as a result of the implementation of GASB 72.

In plain English,

Level 1 is based on price quotes for stocks published on the public stock exchanges. This makes Level 1 assets very liquid.

Level 2 is based on reported values for bonds and fixed income instruments. This level has market access but not as easy as Level 1.

Level 3 is based on estimates from the general partners of limited partnerships for non publicly traded investments. Level 3 has no real market access.

NYCERS makes no comment on the Net Asset Value group but it looks like this represents hedge fund assets that NYCERS is trying to clear off its books.

Investment fees for the Different Level

Level 3 is the most risky investment class, the most expensive to manage, least reliable and it appears the least productive.

In FY-2019 NYCERS paid the following investment management fees:

1. $39.7M for Level 1 assets plus $26.5M for foreign taxes.
2. $18.4M for Level 2 assets
3. $140.5M for Level 3 assets

Ranking of NYCERS Assets via GASB 72

Fiscal Year	Level 1 Assets (in thousands)	Level 2 Assets	Levle 3 Assests	Assets at Net Asset Value	Total
FY-2014	$27,028,432	$17,437,139	$10,642,729	$0	$55,108,300
FY-2015	$27,707,076	$17,175,757	$10,796,968	$0	$55,679,801
FY-2016	$27,330,534	$15,924,399	$10,377,791	$1,123,861	$54,756,585
FY-2017	$32,312,375	$17,461,428	$10,914,801	$95,987	$60,784,591
FY-2018	$31,219,885	$23,282,843	$10,880,803	$66,675	$65,450,206
FY-2019	$34,128,310	$22,782,825	$11,534,369	$6,979	$68,452,483
FY-2020	$33,647,567	$24,941,479	$11,856,921	$3,735	$70,449,703