The Wolves at the Gate.

Yesterday in Detroit a federal judge drove a stake through the heart of public pension funds in the United States. If this decision is upheld on appeal, every public pension fund will have to reevaluate its funding and investment assumptions. From now on any shortage could easily fall on the backs of the public employees and retirees.

It is ironic that in the mid 1970's when New York City came close to bankruptcy, it was the city's pension funds that bailed out the city.

Previously, public employees and retirees reasonably felt that state constitutional provisions protected their pensions. That is no longer true.

Public employees and retirees must become totally aggressive so far as protecting their pensions. There is no legal protection for their pensions. It appears that bankruptcy will trump any legal protection you thought was there.

With this decision it is not clear what type of protection the individual pension trust may have. However, even if the trust is outside the reach of the bankruptcy court, the public employer will be able to walk away from any contractual obligation it has to the employees and retirees. The particular state constitution is null and void in federal bankruptcy court. Unlike bond holders who knew that there was a bankruptcy risk, employees and retirees were totally blindsided.

Ok, what needs to be done going forward. Employees and retirees need to force the public employers to properly fund the pension trust every year and the plan trustees to do a better job investing the assets of the fund. This is most acute for municipal pension funds. You don't see Michigan running into bankruptcy court.

What about here in New York City? Since 2000, New York City with the help of the NYCERS and TRS actuary has been underfunding the five city pension funds, not as bad as New Jersey or Illinois, but still not contributing enough. On top of the underfunding, which has a very natural motivation, the NYCERS trustees, and most likely the trustees at the other four pension funds, have made a mess of the investment performance over the last 14 years.

In the past employees and retirees were far too casual about these issues thinking that it was the city's problem if things went bad. No more. It is their problem, if things go bad. The city can now walk away.

The assets of the NYCERS pension fund belongs to the employees and the retirees, not the city. When it comes to money, you trust no one. I just posted a "to do" list for the new NYCERS chair. I need to add another item. Ask the actuary how does he propose to make up the shortfall that his interest rate assumptions have caused at NYCERS since 2000. Of course, the union representatives on the Board of Trustees should have been on top of this fiasco all along.

But just to get everyone focused on how these problems happen consider the following. From 1996 to 2009 Mike Musuraca sat for DC-37 at all the investment meetings of the NYCERS Board. From my experience as the NYCERS executive director, Musuraca was the most forceful trustee on investment issues. In mid 2008 the NYCERS Board voted to hire Blue Wolf as a private equity manager. On January 23, 2009, Musurarca left NYCERS to work for Blue Wolf. The members and retirees of NYCERS can not allow this type of shit to continue.

NY Times - Pensions - Detroit

On July 20, 2013 Mary Williams Walsh wrote the following highlighted article in the NY Times concerning the newly discovered deficit in the two Detroit municipal pension plans and the city's pending bankruptcy action. Ms. Walsh has written many pension articles in the past. Like most commentators on public pension plan issues, however, she never addresses the whole picture. Not that what she reports is necessarily incorrect but that it is incomplete.

For the record, the one issue I never hear reported is the miserable investment performance of public pension plans and how much this contributes to pension underfunding. There are also many questionable investment decisions that the NY Times never reports. It's a great newspaper but it's not always on the cutting edge.

In this article Ms. Walsh points out a sudden increase in Detroit's reported pension underfunding and lays a large amount of blame at the door of widespread actuarial practices which have lead to long term shortfalls on employers' contributions to most public pension systems around the country.

This is a valid and accurate statement but it is not a secret. Everyone in the public pension community knows that the plan actuaries have not been providing good numbers for a long time. Their chief sin has been the use of investment targets that are far to high. This has systematically lead to underfunding of the plans. It has also lead to reckless investment strategies adopted by plan trustees trying to hit the unrealistic targets. It also created the excuse to hire investment firms with outrageous fee structures.

Generally actuaries are very bright mathematicians but like all of us they are usually short on courage. No one wants to lose his/her job. That is what would happen if an actuary came in with the real numbers. So, they do what most of us would do. They bend and twist to keep the parties with power happy.

Below is an extract from Ms. Walsh's article that describes this problem. Towards the end of the extract Ms. Walsh mentions a "Blue Ribbon Panel" set up by the Society of Actuaries which was formed to look into how to address the reputational risks that "bad" numbers were creating. One of the panel members that she idnetifies is Robert North, the NYCERS and NYCTRS actuary. North has a questionable history on his own interest rate assumptions for the city pension funds. I listed below the interest rate changes he has recommended while working for NYCERS. Walsh doesn't seem to be aware of the inconsistency in having North on this panel.

This made me do a little homework. I checked the Society of Actuaries web site and listed all the panel names below. One of the names that Walsh did not identify was Mike Musuraca. For many years Musuraca worked for DC-37, a municipal union with a recent history of corruption while he was working there. He represented DC-37 on the NYCERS Board of Trustees for investment issues. In 2009 he went work for a private equity firm, Blue Wolf Capital, but not before he voted to hire Blue Wolf as private equity firm for NYCERS. Here is a little more background on Blue Wolf Blue Wolf.

When someone like Walsh has these issues in front of her and she doesn't address them, you wonder whether she serious about the problem.

Extract from NY Times article, July 20, 2013

But that is not what happens. To calculate a city’s pension liabilities, an actuary instead projects all the contributions the city will probably have to make to the pension fund over time. Many assumptions go into this projection, including an assumption that returns on the investments made by the pension fund will cover most of the plan’s costs. The greater the average annual investment returns, the less the city will presumably have to contribute. Pension plan trustees set the rate of return, usually between 7 percent and 8 percent.

...

A few years ago, with the debate still raging and cities staggering through the recession, one top professional body, the Society of Actuaries, gathered expert opinion and realized that public pension plans had come to pose the single largest reputational risk to the profession. A Public Plans Reputational Risk Task Force was convened. It held some meetings, but last year, the matter was shifted to a new body, something called the Blue Ribbon Panel, which was composed not of actuaries but public policy figures from a number of disciplines. Panelists include Richard Ravitch, a former lieutenant governor of New York; Bradley Belt, a former executive director of the Pension Benefit Guaranty Corporation; and Robert North, the actuary who shepherds New York City’s five big public pension plans.

The commplete list of members of the Blue Ribbon Panel

Chair: Bob Stein, FSA, MAAA, Retired, Ernst & Young
Co-Vice Chair: Andrew Biggs, American Enterprise Institute
Co-Vice Chair: Douglas Elliott, Brookings Institution
Bradley Belt, Palisades Capital Management, former executive director of the Pension Benefit Guaranty Corporation
David Crane, Stanford University, former advisor to Gov. Arnold Schwarzenegger, CA
Malcolm Hamilton, FSA, FCIA, Retired, Mercer, senior Fellow, C. D. Howe Institute
Laurence Msall, The Civic Federation (Illinois)
Mike Musuraca, Blue Wolf Capital Partners, former trustee of the NYC Employees Retirement Systems-NYCERS and formerly of American Federation of State, County and Municipal Employees
Bob North, FSA, EA, MAAA, FCA, FSPA, New York City Office of the Actuary
Richard Ravitch, Co-chair, State Budget Crisis Task Force, formerly Lt. Governor of New York
Larry Zimpleman, FSA, MAAA, Principal Financial Group

Assumed Interest Rate History under Robert North (1990 to 2013)

1. 7/1/1995 9.0% to 8.75%
2. 7/1/1999 8.75% to 8.0%
3. 7/1/2011 8.0% to 7.0% (net of fees)

I don't have the documentation describing the origin of the 9% rate and my memory is a bit weak that far back. It is quite possible, however, that North also make the recommendation for 9%.