What the Comptroller Won't Tell You

The chart below is a report card for the investment performance of the NYCERS trustees over the last 14 years. The Comptroller has never presented this type of report. The trustees have never demanded this type of analysis. It is "crystal" clear why neither party does.

The avgerage actual annual rate of return over the last 14 years is 2.11%. No one wants to have to explain this long term sub par performance. It has been a rough 14 years for pension fund investing.

Over the years NYCERS has had a general asset allocation of 70% in stocks and 30% in bonds. With that allocation and using a US stock index fund and a core bond strategy the market would have given NYCERS an average annual rate of return of 3.59% over the last 14 years. This is not anything to write home about but it would have produced an extra $11B over the $47B closing balance that NYCERS had at the end of 2013.

On a side issue, you can see how dangerous the actuary's 8%/7% interest rate assumption is.

The 2000 closing balance, $42.9B, was 99.9% based on market values. In contrast, the 2013 closing balance, $47.2B, is only 85% market based due to the illiquid non-market based components of the current portfolio. The $47.2B includes a $7.2B estimate for private equity, real estate, and hedge fund assets. This estimate is always open to question and raises the very real possibility that the $11B shortfall is even larger.

In conjunction with this rise in illiquid assets NYCERS has shifted out of the the index/core strategy that it previously followed. In 2000, the NYCERS portfolio was 71% invested in an index/core strategy. By 2013 NYCERS had only a 39% position in the index/core strategy.

To be accurate the trustess outperformed the market four times (marked in column 4) over the last 14 years but it was not enough to make up for the damage incurred in the other 10 years.

The last column of the chart lists the investment fees incurred each year. You can see that from 2000 to 2004 these fees were in the range of 10 basis points. Since 2005, the trustees have lost control of these fees. I suspect that the trustees are most likely not aware of the actual fees being paid or the content of the investment contracts they have agreed to.

NYCERS - Actual Returns Versus Index/Core Returns 2000 to 2013

Fiscal Year	Close Balance	Net Cash Flow	Actual Rate of Return	Index/Core Return (70%/30%)	S&P/Bond Returns	Index/Core Close Balance	Fees
1999	$41.9B	$	%	%	%	$	$
2000	$42.8B	-$412M	3.14%	5.52%	6%/4.47%	$43.8B	$32.5M
2001	$38.1B	-$558M	-11.86%	-7.58%	-15.8%/11.65%%	$40.0B	$41.3M
2002	$32.8B	-$1,028M	-11.44%	-10.82%	-19.2%/8.65%	$34.8B	$37.6M
2003	$31.5B	-$1,511M	0.62%	2.36%	-1.5%/11.47%	$34.0B	$29.3M
2004	$34.2B	-$1,202M	12.71%	12.08%	17.1%/0.43%	$36.8B	$35.1M
2005	$35.5B	-$756M	6.30%	5.56%	4.4%/8.2%	$38.1B	$53.9M
2006	$37.3B	-$711M	7.10%	4.23%	6.6%/-1.36%	$39.0B	$69.4M
2007	$42.5B	$368M	13.03%	14.75%	18.46%/6.33%	$45.2B	$98.1M
2008	$39.7	$314M	-7.32%	-8.10%	-14.9%/7.67%	$41.9B	$115.3M
2009	$31.9B	$313M	-20.46%	-17.50%	-28.2%/7.40%	$35.0B	$138.2M
2010	$35.4B	$72M	10.68%	11.63%	12.1%10.49%	$39.3B	$175.3M
2011	$42.4B	$164M	19.39%	20.94%	28.1%/4.15%	$47.8B	$145.1M
2012	$42.7B	$728M	-1.14%	5.01%	3.1%9.35%	$51.0B	$129.5M
2013	$47.2B	$783M	8.81%	12.26%	17.9%/-0.95%	$58.2B	$183.3M

NY Times - David Chen - Bloomberg - Investments

On February 16, 2013 David Chen wrote an article in the NY Times about the NYC Teachers' Retirement System decision to divest itself of any investments in five gun companies.

The catch to the story was that the vote was 4 to 1. The opposition vote came from the a trustee appointed by the mayor.

Mr. Chen went on to state in his article that

"The mayor has long recused himself from any pension decisions because his company, Bloomberg L.P., does business with all the pension funds, his aides noted."

After over 11+ years in office this is the first time I have heard that mayor has had a long held policy of recusing himself from pension decisions.

Bloomberg L.P. does not do business with NYCERS and I suspect that is true for the other four city pension funds.

While the mayor is not a trustee of any of the five funds, his appointed representative at NYCERS has consistently voted on all resolutions voted on by the Board of Trustees. Again I suspect that is true at the other four funds.

My point is that Mr. Chen needs to do a little more homework when dealing with the mayor's office and pension issues.

It is ironic that Mayor Bloomberg's fortune has grown so well over the last 11+ years, while the city pension funds have struggled during his tenure in office.

Mayor Bloomberg and the NYCERS Trustees

The structure of the NYCERS Board of Trustees is defined by Section 13-103 of the NYC Admin Code.

The Trustees are:

1. the Mayor's representative who is the chairperson,
2. the Comptroller,
3. the Public Advocate,
4. the five Borough Presidents, and
5. the chief executive officer of each of the three employee organizations who represent the largest number of employees who are members of NYCERS.

Up until 2009 there was no problem with this composition of the Board. But when Martha Stark was shunted over to CUNY from Finance, some brilliant staffer in City Hall decided to make the mayor the chairperson of the Board.

In his most recent written designation of his representative the mayor uses the following wording:

Prusuant to New York City Administrative Code Section 13-103, I hereby designate Ms. Carolyn Wolpert, as my representative to exercise the discretionary powers and duties granted to me as Chairperson of the Board of Trustees of the New York City Employees' Retirement System Pension Fund and related variable supplement funds. Janice Emery, Elizabeth Botwin, David Frankel, John Grathwol, Omair Hassan, Raymond Sarola and Justin Holt, in that order, will serve as my alternate representatives in Ms. Wolpert's absence.

Just for contrast here are the exact words from Section 13-103:

1. A representative of the mayor who shall be appointed by the mayor and who shall be entitled to cast one vote. The mayor, by a written authorization filed with the board, may designate one or more members of his or her office to act in the place of such representative, in the event of his or her absence. Such representative or designee acting in his or her place shall be chairperson of the board.

For the record the world won't come to an end because of this botched designation.

But what it does show is a flawed attitude towards NYCERS by City Hall. First of all the mayor has no discretionary powers and duties granted to him as the Chairperson of the NYCERS Board. He is not the Chairperson of the NYCERS Board. He is not even a trustee of the NYCERS Board. In fact I think it is correct to say that the trustees do not have discretionary powers but are strictly bound by statutory and fiduciary obligations.

Why can't the mayor just designate a representative to the NYCERS Board and leave the misplaced sense of power at home. He should focus on the quality of his representative to the NYCERS Board. Some of his past choices have been very questionable.

Yesterday the mayor presented his FY-2014 budget. It had an $8,076(MM) pension cost for the five city actuarial pension funds.

Part of that cost was $357(MM) for investment expenses incurred in FY-2012 plus two years of 7% interest charges. You can reference the investment expenses in the FY-2012 CAFR on page 162 and while you're there look at pages 115 and 121. The five funds earned a miserable 1.4% on their assets in FY-2012 but the investment managers were well paid.

I wonder whether the mayor would be satisfied paying that kind of money for that kind of result on his assets?

The Mayor and the New Pension Investment Board

At the NYCERS investment meeting on Tuesday, 11/15/2011, Liu's first deputy comptroller, Mr. Eric Eve, had to sit and take a pounding from the NYCERS trustees who were left out in the cold about the 10/27/2011 press release announcing the "proposal" for a new pension investment board. The press release was lead by the mayor with the comptroller in tow.

So why was everyone throwing verbal rocks at Eric Eve while Ms. Ranji Nagaswami, the mayor's appointed NYCERS trustee, sat comfortably at the head of the table? You would think that the mayor had nothing to do with trying to cut two major unions, the Public Advocate, and the five borough presidents out of the the investment decision process at NYCERS.

How did Bloomberg dump this pile of garbage in Liu's lap and walk away with clean hands?

Of course, Mr. Eve did not give any specific details of the how this new board would be structured and operate. I suspect that is because either he had no details or because any hard details would have pissed the hell out of the trustee who had not been consulted. But I think it's was really equal parts of both. For example, it was very "unprofessional" of him to say that passion was going to be one of the requirements for membership on the new investment board. How do you evaluate passion?

You wonder where elected officials find these staff people.

The 30 Year History of Investing at NYCERS

Over the last 30 years NYCERS has lost money in only five years. They are 2001, 2002, 2003, 2008, and 2009. Something very fundamental has gone wrong with NYCERS in the last eight years. In 2000 NYCERS was worth $43B. Today it is worth only $31B.

The mayor, however, has done very well in the last eight years. His personal wealth has gone from $4B to $16B. It's nice know that someone knows what he is doing.

It's too bad he wasn't able to be as successful as the chair of the NYCERS Board of Trustees. Eight times in the last eight years he has approved the annual authorization of Bill Thompson as the investment manager for NYCERS. He has also approved every investment decision that NYCERS trustees have made in the last eight years.