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

Payroll & Pension - Police & Fire - FY-2014

In its FY-2014 Adopted Budget, NYC has funded

• 36,164 police officers with a payroll of $3,676.5M and pension cost of $2,320.9M
• 10,910 fire fighters with a payroll of $1,257.5M and a pension cost of $960.7M.
• 114,404 teachers with a payroll of $8,987.5M and a pension cost of $2,917.0M
• 111,642 general workers with a payroll of $8,424.5M and a pension cost of $1.934.0M

Unfortunately, this is the heart of the pension issue for NYC. For every dollar the city pays to a police officer, it is paying 63 cents to the police pension fund and for every dollar it pays to a fire fighter, it pays 76 cents to the fire pension fund.

This is compared to the 33 cents that the city is paying to the teachers pension fund for every dollar it pays to a teacher. Make no mistake, 33 cents is also way out of line but it is far from the insane levels for police and fire.

In addition to the usual investment and funding mistakes the police and fire pension funds have enormous disability burdens, especially the fire fund.

There needs to be a public policy decision made about what is the acceptable pension cost percentage for emergency service employees, teachers, and general government workers. This is the hard point of pension reform.

From calculations ( police , teachers ) that I have done, it appears that for new Tier 6 members (post 4/1/2012) the city will have to make annual pension contributions of 6% of pay for teachers and general workers and 29% of pay for police officers and fire fighters (see note below). Are these percentages acceptable to the voters of NYC?

It is not clear how the disability issue will play out in Tier 6. The benefits are now lower for police and fire. We will have to see if the frequency drops. This is as much a management problem as a pension problem.

Note:
I used an annual salary increase assumption of 2.5% for teacher/general workers and 5% for police and fire. I used a 5.5% pre-retirement assumed rate of return and a 5% post-retirement return. This also assumes that the actuary directs the city to contribute at least 6% and 26% every year and that the trustees adopt an investment policy that earns a 5.5% annual rate of return, a reasonable target.
I've done some research on police salaries and 7% is a more realistic salary increase rate. This increases the employer contribution rate (Tier 6) to 29%

The Haze Over the Disaster Recovery Site at Long Island City - 2013

On March 14, 2013 the NYCERs Board of Trustees adopted resolutions approving the NYCERS administrative and loan operating budgets for FY-2014. The administrative budget was $44.6M with an added $7.6M for fringe benefits. The loan budget was $1.7M with $.3M for fringe benefits. The loan budget is totally paid by the active members through fees for loans. The executive director, Diane D’Alessandro, provided a two and a half page justification for these expenditures.

2011

In September 12, 2011 posting, I wrote about the fiasco surrounding the NYCERS disaster recovery (DR) site at Long Island City (LIC). At the time there was a five year delay in opening the DR site.

2012

In her February, 2012 justification for the FY-2013 NYCERS administrative budget D’Alessandro referred to the DR site issue as follows:

“The build-out of the business continuity site is nearing completion. Once the construction phase is finalized, the installation of the secondary data center will commence. This final phase will extend through FY-2103. Upon completion, the secondary data center will be equipped with a mainframe computer and have the capability for site-to-site data replication and data updating allowing for the eventual elimination of the Sterling Forest backup site. In an emergency, the LIC will have the capacity to house approximately 300 staff working on a two shift model. During normal business, the facility will be utilized for document management, training and IT testing and backup functions.“

In a July 13, 2012 posting, I commented on D’Alessandro’s failure to address the then six year delay in opening the LIC DR site and all the other problems surrounding this project.

2013

Part of the FY-2014 administrative budget is a $2.9M non payroll (OTPS) cost for maintaining the LIC DR site. In her FY-2014 budget justification D’Alessandro makes only the following mention of the LIC site:

“With the completion of the secondary data center at Long Island City (LIC), NYCERS will shift its focus to restructuring the Adams Street data center. Proposed upgrades will improve the utilization of space and enhance cooling, heating and air flow systems. This effort will provide greater energy efficiency, expanded storage capacity and improved functionality.”

From this terse comment you might assume that the DR site is fully functional. You will notice, however, that there is no mention of the actual completion date of the site, the award of a certificate of occupancy or the passage of fire inspection for the LIC site. There is also no mention of maximum occupancy for the site and there is no mention of a full operational test of the site. Remember the original 2006 lease renewal comes up in FY-2016, just two years away.

Given the history of this project it is quite possible that the site is not operational at all in spite of D’Alessandro’s attempt to give that impression. Of course it now seems that replacing the air conditioning unit in the computer room at Adams Street is the new hot item. At least, it appears that is what she is talking about. "Restructuring" and "Upgrades" are not words loaded with a lot of information.

FYI: New York City Labor Costs in FY-2014

Disclaimer: All of the figures listed below come from the NYC OMB web site and the NYS Financial Control Board.

Sometimes the actual hard numbers tell their own story. New York City has budgeted $38.367M ($38+B) for personnel costs in FY-2014. The city will employee 273,120 people during the year.

The fringe costs total $16,021M which leaves $22,346M for actual paychecks. The fringe costs are detailed below:

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NYC Personnel Costs for FY-2014

Category	General	Dept. of Education	Retirees – DOE	CUNY	Cultural Affairs	Totals
Social Security Taxes	$ 945,377,286	$ 774,704,532	na	$25,186,254		$1,745,268,072
Health Insurance Premiums	$2,385,907,769	$1,675,842,974	$ 370,353,278	$40,943,606	$1,503,728	$4,474,551,355
Supplemental Welfare Funds	$ 549,405,510	$ 380,688,742	$ 133,715,336	$15,805,711		$1,079,615,299
Workers Compensation	$ 205,196,474	$ 40,142,415		$1,843,985		$247,182,874
Unemployment Insurance	$ 28,256,171	$ 37,760,989		$539,682		$66,556,842
Workers Comp - Other	$56,200,000					$56,200,000
Disability Insurance		$611,303				$611,303
Annuity Fund Payment		$33,812,860				$33,812,860
Non-city Pensions	$78,415,014					$78,415,014
City Non Actuarial Pensions	$57,667,273					$57,667,273
City Actuarial Pensions	$8,180,622,400					$8,180,622,400

Note: Health insurance premiums cover active workers, retiree under age 65, and retirees over age 65. The union welfare funds, administered by the unions, provide added fringe benefits to members of the participating unions. Both of these items need detailed analysis. I think that the city is not getting its money's worth in these areas. In response to the Emblem Health take over of HIP/GHI in 2008, the city produced a very rational argument against the takeover and the city seems to be aware that there is a fundamental problem with the system. There are very entrenched special interests connected with health insurance and welfare funds. (Note: The city runs the welfare fund for city managers.)

City Actuarial Pension Systems

• $2,917.0M (TRS)
• $1,728.1M (NYCERS)
• $ 205.9M (BERS)
• $2,320.9M (Police)
• $ 960.7M (Fire)

Note: Of the $8,132.6M amount, $357.2M is needed to replace investment fees paid in FY-2012 and $106.8M is needed to replace administrative expenses incurred in FY-2012. The city only incurs 55% of NYCERS investment and administrative costs. NYCERS covers other participating employers, like the Transit Authority.

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?