$634.1 Million in Investment Fees for FY-2025 - Growing Risk Level in NYCERS Investments and Runaway Fees.

Runaway Investments fees

In FY-2000 NYCERS paid $37.4 million in investment fees for an asset base of $42.8 billion.

In FY-2023 NYCERS paid $489.9 million in investment fees for an asset base of $82.4 billion.

In FY-2025 NYCERS paid $634.1 million in investment fees for an asset base of $94.3 billion.

The numbers speak for themselves. There is no benefit to these radically increased fees. Clearly, $82.4 million, ($37.4 * 2.2 = $82.4), could cover the $94.3 billion in assets for FY-2025 and produce better results. But the current trustees have no idea what was going on in 2000.

This is a big part of the income inequality in America. This story is not just about NYCERS but every public pension plan in America.

Increasing Investment Risk

In a prior post from January 2020, I outlined a new accounting reporting requirement for government pension plans (GASB 72) mandating that plans report a breakdown of the reliability of the reported value of the plan's investments. The assets are broken down into 3 levels as listed below:

• Level-1 assets - open market - very liquid
• Level-2 assets - open market - not as liquid
• Level- 3 and NAV assets - no open market - not liquid

In addition to these crazy fees noted above, the risky Level-3 assets at NYCERS have grown steadily since 2015. On top of this growth in risky assets, in 2023 there was a law passed in Albany to raise the limit (from 25% to 35%) on the amount of Level 3 and NAV assets in a NYS public pension plan.

In the table below you will see the growth for Level-3 and NAV class assets at NYCERS.

Note: As of FY-2023 NYCERS is relabeling alternative investments as net asset value items rather than Level 3 as a "practical expedient". This is a PR sleight of hand. Nobody wants to be called Level-3. "NAV" is a lot more vague. $19.8 billion (25% of the portfolio) for Level-3 and NAV assets is an obvious red flag for the risk level of the portfolio.

You have to be skeptical about the quoted $22.7 billion for NAV assets and consider a possible 50% reduction for this class.

Ranking of NYCERS Assets via GASB 72

Fiscal Year	Level-1 Assets (in thousands)	Level-2 Assets	Level-3 Assets	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
FY-2021	$42,162,979	$30,981,818	$14,845,548	$1,240	$88,091,585
FY-2022	$32,892,068	$26,386,373	$18,726,172	$1,129	$78,005,742
FY-2023	$35,986,966	$25,235,457	$461,156	$19,845,541	$81,529.120
FY-2024	$35,349,996	$30,145,235	$476,857	$21,630,394	$87,602,482
FY-2025	$39,557,691	$30,719,472	$460,754	$22,669,399	$93,407,315

Investment Expenses for the Assets by Quality for FY-2025

In FY-2025 NYCERS paid the following investment management fees for the different levels:

1. $60.5M for Level 1 assets (FY-2023 fees = $54.7M).
2. $32.9M for Level 2 assets (FY-2023 fees = $25.0M)
3. $464.8M for Level 3 and NAV assets (FY-2023 fees = $375.0M)

One domestic equity manager, Blackrock, handles $14.5 billion in assets with $259,713 in fees. Yes, less than $260,000 dollars for FY-2025.

Again, the numbers speak for themselves. The trustees are being rolled big time - everywhere.

From Bad To Worse

On April 30, 2024, the NYC Comptroller announced new asset allocations for the five NYC pension funds. This announcement boils down to a statement that four of the five pension systems are going to reduce their % of stock holdings and increase their % of garbage assets, otherwise known as "alternative assets". Why would anyone invest in garbage? That is a key question.

The pension trustees, which included the Comptroller, would have you believe their current asset allocations are doing well and that they are going to make them better.

Of course, there is no analysis of the investment performance of the current asset allocations, whether it is better than a basic 60/40 stock and bond asset allocation and whether the new asset allocation will make things better.

That is because that the current asset allocation is doing worse than the basic asset allocation and that an expansion of the current asset allocation will only make the deficit worse.

I won't even get into issue of runaway investment fees for the garbage asset class.

A Message to the New NYCERS Chairperson

You have a huge problem. Your designated investment manager, the NYC Comptroller, is doing a terrible job with investing NYCERS assets, this Comptroller and the last three. NYCERS has an average annual rate of return over the last 15 years of 2.89%.

The Comptroller, however, has the backing of DC-37 which is the largest city union and also a NYCERS trustee. Between the three city unions on the NYCERS Board and the Comptroller these trustees control four votes, a majority of the total seven votes on the Board.

These votes control investment decisions, disability decisions, the NYCERS administrative budget and the budget subsidies from NYCERS to the Comptroller. The three unions are bound together because of disability votes at the Board. They need to back each other up to be able to get closely contested disability cases resolved in their favor.

Without the annual investment delegation from NYCERS Board of Trustees, the Comptroller has very little political influence. With the change in the City Charter in 1990 the mayor essentially controls the Comptroller’s administrative budget. This totally compromises his operating capabilities and his political influence.

If the Chair wishes to provide some relief to the mayor from the city’s huge pension burden, he will have to take away the Comptroller’s power over investment decisions.

This is a complicated task. Since 2005, DC-37 has run NYCERS as patronage mill for its flunkies. That starts with the executive director and spreads throughout the agency. This also includes regular employees who have criminal liabilities and are more than happy to do as they are told.

As the mayor’s appointee to the Board of Trustees, the Chair will need to take on both of these political entities. This will clearly be a hard fight. The investment issue cannot be resolved without addressing the investment delegation and the internal rot at NYCERS. The Chair will have to convince DC-37 that it is in its long term interest to reduce investment costs and raise returns. He will also have to commit to totally honest and sympathetic votes on disabilities that come before the Board of Trustees.

In return DC-37 and the other unions will have to not vote for the annual investment delegation to the Comptroller in June. It will also mean, however, that DC-37 will have to accept reform within NYCERS because the Comptroller will no longer have any incentive to allow NYCERS executive staff to run wild with the agency.

In eliminating the Comptroller from investment management operations the Board will have to hire a truly independent investment consultant and hire internal NYCERS staff to track investment activity. You can see why NYCERS also needs to be reformed. Current investment consultants under contract to NYCERS have structural conflict of interest issues involving the investment community. A large part of their revenue comes from the investment community.

While the Comptroller is the statutory custodian, he has contracted out almost all of its functions. The Comptroller has even turned over the the pension payroll operations to FISA, another city agency. There really isn't much left of the old Comptroller's Office. Ed Koch really did out maneuver Jay Golden.

The Trustees should set the target for total fee expenses at 10 basis points. That would have saved $130M in FY-2014 ($184M-$54M). The Trustees could then focus on a basic Russell-3000 US stock index fund & core investment grade bond Portfolio. Maybe the bonds could be indexed also. This will make running the portfolio and hiring staff much simpler.

Note: As of June 30, 2014 NYCERS had $11.8B in US equity index funds with annual fees of $500,000 for FY-2014 with an annual rate of return of approximately 24.5% gross of fees. But at 0.4 basis points the fees don't really effect returns. Yes, that is correct. NYCERS only paid a 0.4 basis point, not even half a basis point for that return. You can see why investment managers get nervous when you talk indexing.

The Trustees can then drop all the garbage asset classes listed below. This won’t be easy because of the crazy contracts the Comptroller’s office has signed in the past. I consider these contracts illegal because of the secrecy clauses.

Asset Classes to be Dropped:

NYCERS: Unproducive Investment Classes: Values and Fees for FY-2014

Asset Class	Fees Paid	Value as of June 30, 2014	Basis Points
Convertible bonds	$2.1M	$.5B	42
Bank loans	$3.1M	$1.0B	31
Emerging manager- US stocks	$4.4M	$1.0B	44
Emerging managers – Foreign stocks	$.3M	$.05B	60
Emerging managers – US bonds	not reported	$.1B	***
Private equity	$58.0M	$4.0B (guess)	145
Real estate	$20.87M	$2.3B (guess)	90
Infrastructure	not reported	$.02B	***
Hedge funds	$15.5M	$1.9B (guess)	82
Emerging market/active	$9.1M	$2.3B	39
Developed Market equity	$11.8M	$5.4B	22
Junk bonds	$6.9M	$2.1B	33
Opportunistic Fixed	$16.3M	$1.1B	148
Foreign bonds	$.4M	$.3B	13
Active US equity	$14.2M	$5.3B	26
TIP bonds	$1M	$1.5B	7
Subsidy to the Comptroller	$2.3M
Foreign taxes	$8.8M

NYCERS Assets Classes and Investemt Fees for FY-2009

I have listed below the NYCERS investment asset classes. You can also see the June 30th closing balance, the annual rate of return, and the fees for FY-2009. NYCERS does not present investment expenses in this format but it connects investment decisions with their corresponding costs.

For the record NYCERS reported that it incurred $138.2M in investment expenses but actually paid out $143.7M in FY-2009. Particularly notice the fees for the unregistered asset classes at the end of the chart.

Assest Class	Value as of EOY	Rate of Return	Investment Fees
Stocks
Domestic-Indexed	$10,027.49M	-26.44%	$295,108
Domestic- Actively Managed	$2,236.12M	-25.11%	$5,372,371
Domestic- Minority Managers	$463.38M	-27.66%	$3,189,767
Global-Environmental	$217.49M	-26.93%	$1,066,542
Global-Activist	$497.64M	-13.96%	not reported
International-Indexed	$713.11M	-30.68%	$121,603
International-Actively Managed	$2,852.50M	-32.20%	$9,288,427
International-Minority Managers	$30.32M	-30.00%	$463,969
International-Emerging Markets	$823.56M	-31.41%	$2,989.974
Bonds
Domestic-Government	$994.67M	7.04%	$261,158
Domestic-Federal-TIPS-Active	$647.43M	-0.56%	$828,230
Domestic-Federal-TIPS-Indexed	$212.83M	-1.24%	$13,784
Domestic-Corporate	$1,641.72M	2.44%	$1,211,612
Domestic-Mortgage	$3,145.07M	6.26%	$2,200,054
Domestic-High Risk	$1,875.83M	-1.28%	$5,238,162
Domestic-Minority Managers	$82.18M	7.86%	$311,276
Domestic-Convertible	$329.56M	-13.19%	$1,293,305
Domestic-Distressed	$116.67M	NR	NR
Domestic-Targeted Housing	$303.65M	8.92%	$656,432
International	$45.9M	NR	$27,498
International-Dollar Based	$594.49	-5.62%	$457,874
Unregistered
Private Equity-Partnerships	$1,900.90M	NR	$58,232,565
P.E. Organization Costs	NA	NA	$23,508,327
Real Estate-Partnerships	$885.68M	NR	$13,635,566
R.E. Organization Costs	NA	NA	$1,632,330
Cash-In House	$267.05M	2.68%	NA
Consultants
General	NA	NA	$844,821
Private Equity	NA	NA	$2,361,071
Real Estate	NA	NA	$355,326
Legal Costs	NA	NA	$622,026

NYCERS Assets as of June 30, 2009

As of June 30, 2009 the S&P 500 index closed at 919.32. This was a significant increase from the March 31, 2009 close of 797.87. A reasonable estimate of the closing balance of NYCERS assets as of June 30, 2009 is $29.79B up from $28.09B on March 31, 2009. In spite of this $1.7B increase for the 4th quarter, the loss for the full year was still a devastating $9.07B.

The $29.79B balance includes a $1.9B private equity component and $1.1B real estate component. These items are not set at a market value but at an amount equal to the money that was originally invested. There is not reflection of profit or loss in these values. NYCERS has no policy for reporting these investments at their true value.

NYCERS uses the Pacific Corporate Group as its investment consultant for private equity investments. As reported in a recent WSJ article Pacific Corporate Group entered into settlement with the NYS Attorney General Office with respect to investment allegations. It is not clear how the NYCERS trustees are going to respond to this agreement.

The following is a table of NYCERS Assets and Benefits for the last ten years. It is clear that assets are trending down and benefits are trending up. This is not sustainable.

Year	Assets	Benefits & Expenses
2000	$42.8B	$2.54B
2001	$38.1B	$2.78B
2002	$32.8B	$2.57B
2003	$31.5B	$2.89B
2004	$34.1B	$2.80B
2005	$35.5B	$2.92B
2006	$37.2B	$3.06B
2007	$42.5B	$3.34B
2008	$39.7B	$3.22B
2009	$29.8B	$3.45B