Again, DFS and the Pension Audits.

Today the temporary head and the press officer of the NYS DFS suddenly resigned. This is after Lawsky left in June.

What happened to the audits of the seven state and city pension funds?

DFS is an agency in free fall.

Paper Tiger - the N.Y.S. Department of Financial Services - Pension Fund Audits

In July of 2013 the N.Y.S. Department of Financial Services (DFS) with a lot of fanfare announced the start of an audit of the seven state & city pension funds.

It's now January 20, 2015 and DFS has not yet produced any of the pension audits. Just a reminder, DFS has not produced an audit of NYCERS since 2002 in spite of the agency's statutory obligation to produce an audit every five years.

Of course, DFS collected $611,536 from NYCERS during FY-2014 for audit work that DFS supposedly did during that year.

When I saw the charges for 2014, I thought I'd do a little research. Here are the DFS audit charges to NYCERS since 2004:

• 2004: $ 55,007
• 2005: $ 64,612
• 2006: $361,681
• 2009: $179,542
• 2010: $ 32,009
• 2011: $ 29,713
• 2014: $611,536

This is an agency adrift. They are lost.

More Haze Over Long Island City

In September I wrote about the adoption of the NYCERS budget for FY-2014 at the March 14, 2013 NYCERS Board of Trustees meeting. I pointed out the scant reference to the issues surrounding the disaster recovery site at Long Island City (L.I.C.) in the executive director's written presentation on the budget. In a terse sentence she implied that the L.I.C. disaster recovery project was now functioning after an seven year delay.

I was curious whether any of the trustees had any questions at the meeting about this fiasco. So I made a FOIL request of the public minutes of the board meeting where the $52.2M budget was approved. This is the relevant exert form the minutes of the March 14, 2013 NYCERS Board of Trustees regular meeting:

CHAIRPERSON WOLPERT:
All in favor?
(A chorus of "Ayes.")
Any opposed?
Motion carries.
Item 2 on the agenda is a report by the budget committee, of which I am chair, so I will report on that.

I think NYCERS really did an incredible job presenting their budget to us. There was beautiful and substantively informative PowerPoint presentation. All of the really knowledgeable staff was there to answer any questions we had. For me, I think everything was in order.

I don't know if anybody on the budget committee or anybody else has any questions?

MS. O'CONNELL (DC-37):
A comment to echo your comments, Carolyn. I think Diane and staff did an excellent job of keeping the focus on member services, and also moving the institution forward in terms of technology and making progress in that regard. So I thank the executive director and staff for their efforts.

CHAIRPERSON WOLPERT:
With that, a motion to approve the budget?

MS. D"ALESSANDRO(executive director):
...Then we move into the actual proposed budget for fiscal 2014 which is 2B(i) in your packet, and essentially it is the administrative budget for fiscal 2014 with $26,620,635 for PS expenses; $17,951,822 for other than personal expenses; qnd a total budget of $44,575,457 for fiscal 2014. (there is an additional $7.6M in fringe costs)

CHAIRPERSON WOLPERT:
Any questions on this resolution?
Is there a motion to approve?

MS. O'CONNELL:
Motion.

MS. STRYKER(Local 237, Teamsters):
Second.

CHAIRPERSON WOLPERT:
All in favor?
(A chorus of "Ayes.")
Any opposed?
Motion carries.

As you can see from the quoted text above, that there was no substantive discussion about this major expenditure. The text is devoid of any concrete information other than the fact that the regular NYCERS admin budget for FY-2014 will be $44.5M. (actually $52.2M)

One thing that caught my attention was the comment about the "beautiful and substantively informative PowerPoint presentation". I thought that it would be wonderful to read the presentation given to the budget committee. So I made a follow up FOIL request for it. That was on October 18, 2013. I made a second request on November 11, 2013 and on December 3, 2013 I received the following response from NYCERS.

Please be advised that your request under the Freedom of Information Law for NYCERS PowerPoint presentation outlining the FY-2014 administrative budget given to the Trustees budget committee is being denied.

The information you are seeking is considered inter-agency or intra-agency materials. Said materials were not presented to the Board of Trustees or listed as an Agenda Item at any NYCERS Regular/Investment meeting.

If you wish to appeal this denial, please contact Diane D’Alessandro, (Executive Director) of NYCERS.

It is clear to me that this reason for denial is evasive and incorrect. Listed below is the exact wording from the state web site about this specific reason for denying a FOIL request:

(g) are inter-agency or intra-agency communications, except to the extent that such materials consist of:
i. statistical or factual tabulations or data;
ii. instructions to staff that affect the public;
iii. final agency policy or determinations; or
iv. external audits, including but not limited to audits performed by the comptroller and the federal government;

As per the meeting minutes, the Chairperson points to the PowerPoint presentation as the basis of the budget committee's recommendation for approval of the proposed budget.I think it is safe to say the document was the basis of a final agency policy or determination, the adoption of the agency's $52.2M FY-2014 administrative budget.

In addition, I suspect that the Budget Committee falls under the N.Y.S. Open Meetings Law. That means material provided to the committee is public record. I don't think the committee had any reason to conduct its meeting in executive session.

Needless to say, while I will never see this PowerPoint presentation, I am sure that the N.Y.S. Department of Financial Services auditors will demand to see this presentation. They should also demand a physical inspection of the L.I.C. site and observe actual full disaster drill, not some empty "trust me" claim.

You would think that NYCERS management would have been anxious to provide the public a clear picture of the status of the Long Island City disaster recovery site. Now, because of this failure to disclose, it seems reasonable to conclude that the PowerPoint presentation is inaccurate and a poor basis for adopting the FY-2014 budget. Besides the mess at Long Island City what other disasters are the NYCERS management hiding.

State Insurance Audit Checklist

Since July 29. 2013 the State Insurance Department (NYS DFS) has accessed my blog 29 times. So I thought I would provide them with a suggested reading list. Below is a starting list. If I see something else that looks interesting, I'll add to the list.

• Who got the $140M?
• Why was the Transit Operating Force death benefit changed?
• The former chair of the NYCERS Board of Trustees
• Why is NYCERS paying the Comptroller?
• The civil service qualifications for the current NYCERS executive director
• Unaccounted investment fees , background , and more
• Investment madness
• Lack of disclosure on private equity and real estate transactions
• Hedge funds
• Private equity managers
• Delays in processing loans
• Examples of SPD errors ( A , B )
• NYCERS perjury
• D.O.I. and the perjury charge
• Funny wrinkle to the perjury and corruption story
• The WC offset nightmare
• Denial of due process
• The assumed interest rate
• Finally 7%, sort of
• Delays in pension benefit revisions
• The Met-Life building
• Disaster recovery site at L.I.C.
• Allegra Capital and lack of accounting oversight
• Harassment of EMS disabled retirees, and more
• Outside legal services
• Background on past State Insurance Department reports

Tier 6: Benefits vs Costs

I've created a spreadsheet modeling the pension benefit for a typical long term city worker under Tier 6. Comments about problems with public pension plans rarely go into specific details relating benefits with costs. It is always helpful to examine the details to get a true picture of problem.

Let us assume a city employee starts working for the city (and joins NYCERS) at age 22 with a salary of $25,000. If the member gets on average a 2.5% pay increase each year (probably too optimistic) and works to age 55 or age 63, his/her annual pension benefit under Tier 6 will be:

• Age 63: $51,768 based on a five year avg. salary of $65,527, 42 years of service, and $60,127 required employee contributions.
• Age 55: $17,619 based on a five year avg. salary of $53,782, 34 years of service, and $42,428 required employee contributions.

What is very interesting about these benefits is how the city's cost for theses benefits fluctuate based on what NYCERS actually earns on its investments.

Currently NYCERS is using a 7% assumed interest rate (AIR) for its assets. (See Chapter 3 of the Laws of 2013 .) This is the rate of return that NYCERS projects that it will earn each year on its assets. NYCERS also currently uses 7% annuity factors to calculate the present value of pension benefits at the point of retirement. Again, this is a rate of return assumption over the lifetime of the retiree.

The city's costs for these two benefits under the 7% assumption are:

• The age 63 benefit has a present value of $495,566 which requires the city to contribute $52,809 over 42 years or 2.9% of salary each year. This amount along with the $60,127 contributed by the member will generate a sum equal to $496,983 at retirement.
• The age 55 benefit has a present value of $193,213 which requires the city to contribute $17,099 over 34 years or 1.3% of salary each year. This amount along with the $42,428 contributed by the member will generate a sum equal to $193,966 at retirement.

If, however, NYCERS earns on average only 5% on its assets, the cost to the city changes significantly. This would also require NYCERS to use a 5% annuity factor at retirement to calculate the benefit's present value. As a historical note NYCERS used 4% annuity factors up until the late 1980's when it switched to 7% factors to blunt the cost of eliminating gender discrimination ordered by federal courts. The change in costs for a 5% rate of return are listed below:

• The age 63 benefit has a present value of $587,356 which requires the city to contribute $152,964 over 42 years or 8.4% of salary each year. This amount along with the $60,127 contributed by the member will generate a sum equal to $586,272 at retirement.
• The age 55 benefit has a present value of $235,984 which requires the city to contribute $61,820 over 34 years or 4.7% of salary each year. This amount along with the $42,428 contributed by the member will generate a sum equal to $235,870 at retirement.

It is incredibly clear from these figures ($52,809 vs $152,964) that the NYCERS trustees must be consistently successful with their investment decisions. There needs to be a hard and open review each year on whether the trustees made the 7% target or failed to get the job done. It can not be hidden in executive sessions behind closed doors. There must be a public record of investment failures. You only have to look at Detroit. It is the workers and retirees who are at risk of being destroyed. The trustees are long gone working for hedge & private equity funds.

At the very least, the NYS Department of Financial Services should be critiquing the investment performance of all seven public pension funds in New York State. The last report only covers up to 2002, which is over 11 years ago. It is strange that DFS will be starting a new audit at NYCERS in FY-2014 and they still haven't produced any report since 2002.

Teachers Retirement System - Why is it $4.4B short

I recently became aware that the NYC Teachers Retirement System (TRS) has had a regular and significant negative cash flow as far back as 2000 and maybe further. The total negative cash flow for the 13 years is $8.8B . In plain English a negative cash flow for a city pension fund means that the employee and employer contributions, interest payments, and dividends are less than expenses and pension payments. That leads to liquidating assets to cover the shortfall and creates a permanent handicap when it comes to investment returns.

This raises a question about the actuary's funding strategy for TRS.

None of the other four city pension funds have had consistent negative cash flows over the same time period. As of June, 2012 these four funds have reached or surpassed their pre-crash 2007 values. From the table below you can see that TRS is $4.4B short of its 2007 asset value.

TRS has a serious investment problem. Of course, in FY-2012 the other four funds didn't do so well with their positive cash flows. The five funds managed to turn $1.45B into $306.5M in a market that was was up 3.4% for the year.

The New York State Department of Financial Services (DFS) has not done a statutory examination report on any of the five city pension funds since at least 2003. This is in spite of the fact that the pension funds have paid DFS for the associated audits.

Asset Values and Cash Flows for the Five City Pension Funds: (2007 - 2012)

Pension Fund	2007	2009	2012	2012	2012
	Closing Balance	Closing Balance	Closing Blanace	Asset Change	Net Cash Flow
NYCERS	$42,514.3M	$31,903.4M	$42,655.3M	$246.3M	$728.0M
TRS	$37,142.8M	$23,077.5M	$32,774.8M	-$826.7M	-$472.3M
BERS	$2,179.5M	$1,536.6M	$2,310.6M	-$13.0M	-$46.4M
Police Fund	$21,905.5M	$17,424.1M	$25,479.9M	$731.0M	$944.0M
Fire Fund	$7,202.7M	$5,576.8M	$8,124.7M	$169.0M	$268.0M
Total	$110,944.7M	$79,518.3M	$111,345.3M	$306.5M	$1,452.4M