de Blasio, Taxes, Pension Investments, and Universal Pre-K

In the first budget that Mayor de Blasio will have to submit, FY-2015, he will have to include an amount of $541.0M that represents the repayment of $472.5M in pension investment fees incurred in FY-2013 along with two years of 7% interest charges, $68.5M. Actually it will be little less because the public authorities will have to pick up $82.5M of the $472.5M cost.

In addition the FY-2015 pension costs will include $2.2B in missed investment earnings that the pension trustees failed to capture.

At the same time in order to fund universal pre-K Mayor de Blasio is trying to get Albany to raise the city income tax rate from 3.87% to 4.41% for income over $500,000.

Maybe it's time to clean house before traveling to Albany.

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

The FY-2013 Pension Investment Fee Increases Hit the Newspapers

In early November, I wrote about the large increase in investment fees in FY-2013 for the five city pension funds

At the end of last week Bloomberg News and the NY Post caught up with this story.

The following is an extract from the NY Post article

“Fees rose in FY 2013 consistent with the recent expansion into alternative asset classes that diversify the portfolio against events like the stock-market collapse in 2008,” said Liu spokesman Matthew Sweeney.
...
Over the fiscal year, the value of the city’s pension funds rose by 12.1 percent, from $122 billion to $137 million as of June 2013.
...
Liu’s successor, Scott Stringer, said he plans to take a “hard look” at how much the outside pension managers are getting paid.
“He believes we need to limit costs, ensure payments are commensurate with performance and leverage our size and relationships with other pension funds to negotiate lower fees,” said a Stringer spokesman.

The excuse given by the Comptroller's office for the FY-2013 increase is not supported by the numbers. With respect to NYCERS, the largest fund, the numbers are as follows:

• 2011: alternate assets equaled $4.5B with total expenses of $145M
• 2012: alternate assets equaled $6.3B with total expenses of $129M
• 2013: alternate assets equaled $7.2B with total expenses of $183M

There appears to be no correlation to the size of the alternative assets classes and the the total investment expenses. In addition, there is always a good amount of skepticism about the quoted values of the alternative asset classes. There is no no market value for them and NYCERS must depend upon "estimates" from the asset managers.

In addition, the comptroller's office gives no objective evidence to support the theory that illiquid alternative asset classes diversify and therefore protect the pension fund portfolio against a stock market collapse. In fact there is a concerted effort by the Comptroller's office to hide the details of these investments.

Secondly, the quoted value of the city's pension funds is incorrect. In FY-2013 the value rose from $111.3B to $124.8B. That was a an increase of 10.5% factoring in a positive cash flow of $1.8B. The 12.1% increase was not correct. Interestingly, the stock index/core bond return was 12.26% for 2013 and would have cost far less than $473M in fees.

Thirdly, Scott Stringer has been on the NYCERS Board of Trustees since 2006. The NYCERS investment fees in 2006 were $69M versus $183M last year. Why has he not taken action against this runaway growth over the last eight years? Why hasn't mayor-elect Bill de Blasio taken action over the last four years? As Public Advoctae he has been a trustee on the NYCERS board since 2010.

To be fair, de Blasio and Stringer were not the key players in the investment decisions at NYCERS. That falls to the Comptroller and the major unions on the board with the mayor's representative acquiescing to their decisions.

DOI and Mazza

The Department of Investigation (DOI) recently released a fraud report involving theft of NYCERS checks.

Below is an excerpt from the beginning of the report which was 23 pages long and dealt with the loss of nearly $384,000 from NYCERS. The report, while accurate about the fraudulant cashing of NYCERS benefit checks, is a lot to do about a relatively small issue. DOI rarelly reports a complete accounting of the actual convictions and prison sentences that result from its investigations.

I want, however, to point out specifically the mention of Commissioner Gill Hearn's thanks to Karen Mazza at the end of the excerpt. Of course, Gill Hearn doesn't mention that she has not completed the investigation that DOI had committed to pursue into perjury and corruption charges against Mazza and other NYCERS management staff. I am sure the financial impact of corrupt management at NYCERS is far greater than $384,000.

FOR IMMEDIATE RELEASE
CONTACT: DIANE STRUZZI
WEDNESDAY, MAY 9, 2012
(212) 825-5931
DOI RELEASES PENSION FRAUD REPORT INVOLVING EIGHT SEPARATE CASES IN WHICH INDIVIDUALS ATTEMPTED TO DEFRAUD OR DEFRAUDED NYCERS OF MORE THAN $400,000
ROSE GILL HEARN, Commissioner of the New York City Department of Investigation (“DOI”), released a report today detailing eight recent investigations into fraud upon the New York City Employees’ Retirement System (“NYCERS“), the country’s largest municipal pension system. The eight investigations included in this report are the most recent that DOI has conducted and illustrate a range of fraudulent schemes that include family members and beneficiaries of deceased pensioners taking NYCERS funds they were not entitled to receive and the theft of NYCERS checks by ndividuals who falsely claimed they had not received the funds. These eight investigations identified nearly $384,000 in NYCERS funds that individuals wrongfully obtained and an attempt to obtain approximately $17,200, which was thwarted by DOI and NYCERS. Five of the eight individuals have already been criminally charged and three of those individuals have pleaded guilty, with one individual receiving a 60-day jail sentence just last week. A copy of the report is attached to this release.
...
Commissioner Gill Hearn thanked NYCERS Executive Director Diane D’Alessandro, NYCERS Director of Security Craig Thornton, and NYCERS General Counsel Karen Mazza, and their staffs, for their assistance and cooperation in these investigations.