FY-2021 Was a Very Good Year for the City Pension Funds -- $57.5B Increase

Short and sweet, read pages numbered 218 and 219 from the NYC FY-2021 CAFR.

Pages 136 to 144 are interesting reading about the cost of non-pension benefits to retirees.

Just For Fun - Who Got the $245M

NYCERS spent $245M in FY-2020 on investment expenses. All together the five city funds spent $879M.

There is a link below where you can view the detailed list of who NYCERS paid the money to. The link is nine pages long. The first page is a summary and the the next eight pages list all the managers, the assets under management, and the fees received for the year. NYCERS has about 350 investment managers.

NYCERS needs to disclose this information in its comprehnsive annual financial report (CAFR). The full CAFR report is almost 200 pages long. I suspect the NYCERS Trustees have never looked at this data.

So here are the details

Look at a page 2 of the link. There are four entries, all for Blackrock. There are three fixed income items (corporate, government, mortgage) and one domestic equity entry (Russell 1000 - Core). That is all you need to run a $67B portfolio. Just scale up the amounts under management. The fees would drop down to $16M and annual rate of return would go up 1 to 2%.

Private Markets: Legalized "Theft" - Unreported $129M in Incentive Fees

NYCERS issues a Comprehensive Annual Financial Report (CAFR) every December. This report is suppose to be a accurate picture of the financial information for NYCERS during the previous fiscal year (July-June). The FY-2018 report stated that total investment expenses was $241.8M and as part of that amount the private market investments expenses were $130.0M as listed in the first chart below:

In contrast to the CAFR statement prepared by the outside accounting firm, the Comptroller in September, 2018 released a FY-2018 performance report prepared by State Street. On page 27 of that report State Street lists the expenses for private market investments. You can see in the second chart below that the total fund investment fees were $346.03M and as part of that amount private market fees were $272.45M.

The $346.03M does not included foreign taxes ($26.M), payments to the Comptroller ($4.2M), payments to consultants & law firms ($4.2M), and miscellaneous expenses ($2.1M) which are included in the CAFR's $241.8M expense amount.

For many years NYCERS has not defined the term "Organization Costs". The Comptroller, however, uses a different term for these costs, "Partnership Expense". I now suspect that the term means meals, travel expenses, and any other expense that the general partner can pass along to the limited partners.

But what is more disturbing is that there are incentive fees listed by the Comptroller. The total for these fees are $129.51M . These fees have never been listed in the NYCERS CAFR. This is the main reason that that the Comptroller is reporting $346M and NYCERS is only reporting $242M. There is obviously a serious flaw in NYCERS accounting. And by the way, what managers are being paid the incentive fees? Why are they being paid these fees?

As a closing comment on this obscene waste of money, lets simplify the problem:

NYCERS pays private market partnerships

• $272.45M in fees for handling assets with an "alleged" value of $9.95B,

while it pays only

• $73.58M in fees to public market managers for handling assets with open market value of $52.75B.

NYCERS Asset Class & Fees from CAFR - FY-2018

Private Market Asset Class	End of Year Asset Value	Fees	Organization Costs	Total Expenses	Basis Points	Rate of Return
Private Equity	$4,470M	$50,117,502	$13,064,536	$63.18M	141.2	17.8%
Opport.& Global FI	$1,851M	$15,534,877	$1,820,851	$17.35M	93.5	7.0%
Real Estate & Infrastructure	$3,792M	$40,993,082	$9,510,109	$50.50M	133.2	12.19%
Hedge Fund	$68.0M	$345,733		$0.35M	50.843	8.43%
Totals - Private Markets	$10,181M			$131.48M
Totals - All Classes	$65,206M			$241.8M

--------------------------------------------------------------------------------------------------------

NYCERS Asset Class & Fees from Comptroller's September 30, 2018 Performance Report

Private Market Asset Class	Avg. Asset Value (billions)	Management Fees (millions)	Partnership Expenses (millions)	Fees&Expns-Basis Points	Incentive Fees (millions)	Incentive Basis Points	Total Fees (millions)	Total Basis Points
Hedge Fund	$0.075	$0.550	$0	72.0bp	$0	0.0bp	$550.03	72.0bp
Private Equity	$4.432	$51.02	$17.51	154.64bp	$88.03	198.63bp	$156.57	353.26bp
Real Estate	$3.349	$33.10	$8.497	124.21bp	$31.66	94.53bp	$73.26	218.74bp
Infrastructure	$0.328	$8.433	$3.098	128.69	$0.863	28.31bp	$12.394	138.32bp
Opportunistic Fixed Income	$1.763	$15.578	$10.615	148.57bp	$3.482	19.75bp	$29.673	168.32bp
Private Market Assets Total	$9.947	$108.99	$39.72	149.19bp	$124.04	124.69bp	$272.45	273.88bp
All Assest Total	$62.699	$176.80	$39.22	34.43bp	$129.51	20.66bp	$346.03	55.19bpbp

New York City - CAFR - FY-2018 - NYCERS Financials

Every Halloween New York City releases its Comprehensive Annual Financial Report (CAFR). This year was no exception. The report is a very dry document but full real information. You need to be a little skeptical but generally it is accurate within the guidelines of accounting practice.

The report in particular includes financial reports for the five city retirement systems. That is why I am always interested in the release. Around the the New Year each individual system releases its own CAFR but the City CAFR is the first look at how the five funds performed for the year.

NYCERS opened the year (7/1/2017) with assets worth $61.3B and closed the year with a balance of $65.2B. That is a $3.9B (6.36%) increase.

For FY-2018 the S&P 500 index opened at 2423.4 and closed at 2718.37, a 12.17% increase.

During FY-2018 NYCERS received:

1. $ 523.5M - contributions from members
2. $ 3,377.0M - contributions from employers
3. $ 878.6M - interest income
4. $ 897.9M - dividend income
5. $ 27.1M - securities lending income
6. $ 3.4M - other income

During FY-2018 NYCERS paid out:

1. $ 4,882.6M - benefits and withdrawals
2. $ 9.1M - transfers to other retirement systems
3. $ 10.9M - payments to VSF (Transit&Housing Police)
4. $ 205.0M - payments to VSF - Correction Force
5. $ 241.8M - investment expenses
6. $ 59.7M - NYCERS operating expenses

The end result is that NYCERS had a positive income flow of $289.4M and an asset increase of $3,889.97M for the year. The $289.4 inflow reduced the rate of return for the year from 6.36% to 5.85%.

The NYCERS actuary reported in her FY-2018 GASB report (Appendix A page 4) that NYCERS has 33% of its assets in fixed income (bonds) and 67% in equities (stocks&real estate).

The key question when analyzing NYCERS's annual rate of return is whether it is above or below market expectations. NYCERS never answers this question. It just reports the numbers as if they are acceptable

Strange Accounting at the CO-VSF and NYCERS

There appears to be some strange entries in the CO-VSF financial statements (City CAFR's) over the last several years.

• In the fiscal year ending June 30, 2014 there is an entry for $38M for benefit payments. There wer was no VSF benefit payments in December, 2013. There was also an entry for $190M for a skim from NYCERS to CO-VSF. The year opened with a balance of $36M and closed with a balance of $188M
• In the fiscal year ending June 30, 2015 there is an entry for $78M for benefit payments. The skim entry was $30M. The year closed at $140M.
• In the fiscal year ending June 30, 2016 there is an entry for $82M for benefit payments. The skim entry was -$53M. The year closed at $5M.

In May, 2015 NYCERS appointed a new actuary, Ms. Sherry Chan. The NYCERS actuary is also the CO-VSF actuary. The NYCERS chair and the Comptroller are also trustees of the CO-VSF Board.

In a May 12, 2016 resolution the NYCERS Board and the NYCERS actuary stated that there was a mistake in FY-2014 skim. The skim should have been only $137M and not $190M. In response to this screw up NYCERS pulled $53M out of the CO-VSF.

It is not clear wheteher the -$53M entry was just an accounting correction or an actual movement of money from CO-VSF to NYCERS. I do not know whether there is any legal authority that allows money to flow back to NYCERS from the CO-VSF.

In a Nov. 4, 2016 letter to the CO-VSF Board the NYCERS actuary, Ms. Chan, states on page 3 that there will be no skim in FY-2017 into the CO-VSF.

The actuary states that the skim is based whether the FY-2016 return on NYCERS's equity investments exceeds the average yield on the 10 year U.S. Treasury Notes by 115%.

She does not define what are NYCERS equity investments nor does she describe how she computes the returns. In particular she does not state whether hedge funds, or private equity and real estate partnerships are included in the equity investment class and how she would compute their returns considering that they are illiquid. For the record she does not state specifically what was NYCERS's return on its equity investments in FY-2016. She does not state what was the average yield on the 10 year U.S. Treasury Notes or how that number was computed.

If there is no skim, then there was a deficit for the CO-VSF for FY-2016. She does not mention what that resulting deficit was. There should be running chart year by year showing what the excess or deficit is and what the skim hurdle is.

She also states that the market value of the CO-VSF assets as of June 30, 2016 is $47M. She provides no details or support for this statement. The city CAFR states that the June 30, 2016 CO-VSF closing balance was $5M. For the record the city CAFR also does not detail the CO-VSF assets.

As far as I know there is no documentation about the investment activity for the CO-VSF. With a 3% return rate interest rate on a $35M bond portfolio, you should expect a $1.5M interest flow each year into the fund. The reported interest earned was $184,000 in 2016, $10,000 in 2015, $20,00 in 2014, and $38,000 in 2013. There is something very strange going on.

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.

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%

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 Funds	NYCERS	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 Funds	NYCERS	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 Funds	NYCERS	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%

Investment Fees for NYC Pension Funds since 2000 - Good Work If You Can Get It

The Comptroller just came out with the city's financial statement on Halloween. One of the interesting items in the report is the amount paid in investment fees for the five city pension funds. FY-2015 continued the insane upward trend as you can see from the list below. The grand total for the last 15 years is $4.0B. Yes, that is billion. All for 3.6% rate of return, maybe.

1. 2014 - $530.2M
2. 2013 - $472.5M
3. 2012 - $370.3M
4. 2011 - $395.7M
5. 2010 - $426.8M
6. 2009 - $339.3M
7. 2008 - $310.2M
8. 2007 - $262.0M
9. 2006 - $192.7M
10. 2005 - $158.2M
11. 2004 - $131.6M
12. 2003 - $ 96.7M
13. 2002 - $101.9M
14. 2001 - $100.0M
15. 2000 - $100.0M

FY-2013 Investment Returns: NYCERS Fails to Match the S&P 500 Index, Again.

The Comptroller has just released the NYC FY-2013 CAFR (Comprehensive Annual Financial Report) : the city's annual financial statement. Pension investment expenses have increased significantly from FY-2012, $472.5M up from $370.3M. This is a reversal from the previous two years.

Specifically, NYCERS expenses jumped from $129.5M to $183.3M (see original expense history).

As of June 30, 2013, the NYCERS closing balance increased from $42.7B to $47.2B but given the 17.9% increase in the S&P 500 index that number should have been $48.6B (Bond Core = -.95% with a 70/30 allocation). With a waste of $150M in investment expenses NYCERS is short $1.55B for FY-2103 that a prudent investment policy would have provided. For the record NYCERS missed the Index/Core threshold by $2.6B in FY-2012.

The truly scary thought is that if NYCERS had followed a simple prudent investment strategy over the last last 14 years, the June 30, 2013 closing balance would be $58B. In this year's CAFR the actuary estimated the NYCERS current pension liability at $65.3B. A sane investment policy can go a long way in solving pension problems.

A Message to the New Trustees in 2014

On January 1, 2014 all of the elected officials on the five city pension funds will be new people. Actually the NYCERS trustees will be doing a little musical chairs. The union reps will generally remain unchanged.

The Bill de Blasio will, I assume, will be appointing a new chairperson for the NYCERS Board of Trustees. This can be any person the mayor chooses. It is an unpaid position. It would be intriguing if he choose a former executive director. At least it wouldn't cost the city any money.

In spite of public perception the new Comptroller will only be one of the eleven trustees at NYCERS and acts only as investment agent for the full board. (See Note below)

All of the new trustees, not only the Comptroller, should focus on their prime responsibility as trustees, protecting and building the assets of the system. It is clear to me that the departing trustees failed in that duty.

The following is a list of the money spent by NYCERS for investment services since 1997. It totals $1.4B over 16 years. This covers only one of the five city pension funds. The five system total is in the $3.0B range

1. $17,3M (1997)
2. $26.1M (1998)
3. $27.4M (1999)
4. $32.5M (2000)
5. $41.3M (2001)
6. $37.6M (2002)
7. $29.3M (2003)
8. $35.1M (2004)
9. $53.9M (2005)
10. $69.4M (2006)
11. $98.1M (2007)
12. $115.3M (2008)
13. $138.2M (2009)
14. $175.3M (2010)
15. $145.1M (2011)
16. $129.5M (2012)
17. $183.3M (2013)

1997 was the year that NYCERS began paying all of its investments expenses from the assets of the fund.

1997 was also the year that Alan Hevesi hijacked the contacting and payment process for investment managers. The trustees, including the mayor's representative, were truly stupid in letting him do this, as future events have shown. At the time I objected to this statutory violation but the Law Department said it was ok.

As background, 1987 was the first year that NYCERS started paying any investment expenses. At that time Ed Koch and Jay Goldin got into a pissing contest at the old Board of Estimate over approving contracts for equity managers for the pension funds. So Jay Goldin went to the trustees to get the contracts paid from the assets of the funds. Prior to 1987 these expenses were paid directly out of the city budget. For some reason the bond managers continued to be paid directly from the city budget until 1997.

I have never before put this complete list together. The patterns are fascinating. For the fiscal years from 1997 to 2002 the fees under Hevesi climbed from $17M to $37M. From 2003 to 2010 under Thompson the fees jumped from $29M to $175M. From 2011 to 2012 under Liu the fees dropped from $145M to $129M. The drop is encouraging but the fees are still way out of control. 2013 saw a reverse in this drop with a jump to $183M.

As a point of reference in FY-1999 NYCERS assets grew from $37.5B to $41.0B with fees of $27M. In FY-2009 NYCERS assets dropped from $38.9B to $30.9B with fees of $138M. It appears that there is most probably no benefit gained from higher investment fees and in fact quite the opposite.

How does this crap keep going on for years and years?

Note:
Comment from the last (2002) NYS Insurance Department Report of Examination:

The highest governing body at NYCERS is its board of trustees. The trustees are fiduciaries for NYCERS, its members and its retirees. The trustees delegate NYCERS investment functions to the New York City Comptroller, pursuant to Section 13-702 of the New York City Administrative Code. The investment powers transferred to the Comptroller are subject to written delegations which may not exceed one year. Although this authority is renewed annually, the System is not required to use the Comptroller for investment services. The investment services provided to NYCERS by the Comptroller are provided through the Bureau of Asset Management (BAM), a division of the Comptroller’s office. The delegated powers authorize the Comptroller of the City of New York to make any investment which NYCERS trustees are authorized to make. Also, the Comptroller is authorized to hold, sell, assign, transfer, or dispose of any of the properties, securities or investments in which any of the funds of the System have been invested.

Section 136.2 of Department Regulation No. 85 states in part: (b) “Administrative head shall mean,…the board of trustees of a retirement system, in their individual and collective capacities”

Section 136.6 of Department Regulation No. 85 states in part:
“(a) The administrative heads are fiduciaries and as such shall act solely in the interests of the members and beneficiaries of the systems they administer. They shall perform their responsibilities in a manner consistent with those of a reasonably prudent person exercising care, skill and caution.
(b) The assets of a system shall at all times be under the control of the administrative head.
(c) No investment or loan transaction shall be made by a system unless the same has been approved by the administrative head. The administrative head may delegate its powers of investment to a committee or agent of the administrative head within well-defined established guidelines. Such committee or agent shall render timely written reports of its activities to the administrative head under a schedule to be established by the administrative head and shall render special reports whenever requested by the administrative head.
(d) In respect to the delegation of investment powers, the administrative head shall periodically review: (1) the present holdings in the investment account; (2) any marked changes in the account during the preceding period; (3) the reasons for such changes and the results achieved thereby; (4) the investment activity in the account including the rate of turnover; and (5) any other factors the administrative head considers pertinent to an analysis of the financial performance and planning, consistent with its obligation as a fiduciary.”

As outlined in Department Regulation No. 85, the trustees are the fiduciaries of the System and as such must act solely in the interests of its members and beneficiaries. No board collectively, no trustee individually, nor any administrative head, can delegate their fiduciary obligations to others. They must perform their responsibilities in a manner consistent with those of a reasonably prudent person exercising care, skill and caution. The Regulation requires that the assets, at all times, be under the control of the trustees and that investments and loan transactions be approved by the trustees. Department Regulation No. 85 allows the trustees to delegate its investment powers within well–defined established guidelines and with the rendering of timely written reports of its activities to the trustees under a schedule established by the trustees. At a minimum, the Department believes that appropriate implementation of such guidelines requires a comprehensive Investment Policy Statement.