DFS and the Elusive Pension Audits

It is June 26, 2017, a sunny June day. It is also two years ago that the NYS Department of Financial Services announced a major audit of the seven major NYS retirement systems.

There are still no audits reports from DFS.

For the record, DFS is scared to death to publish any reports on the seven retirement systems. DFS knows how bad the situation is. They can either report the facts and create sheer terror, or they can fake it and be on record for hiding the facts.

Just stop billing the retirement systems for your bullshit audits and save the taxpayers some money.

The State Insurance Department Finally Wakes Up!

On Monday, July 29, 2013, the NYS Department of Financial Services (DFS) finally woke up.

In June of 2012, I had pointed out the agency's failure to do its job. And, again in March of this year I detailed continuing delay in its statutory obligation.

DFS is now initiating audits of the seven NYS retirement systems.

For the record, DFS has not released a report since the 2000-2002 audit for NYCERS.

I am absolutely certain that NYCERS needs a rigorous top to bottom audit of everything that it is supposed to be doing. Maybe DFS now has the hard focus it will need to get this job done.

How boring our lives would be without politicians.

NYS Insurance Department - Strange Delay

Since 1937, the NY State Insurance Department (“Department”) has had supervisory authority over NYCERS. See Section 13-183 (NYC Administrative Code) below:

§ 13-183 State supervision. The retirement system shall be subject to the supervision of the department of insurance in accordance with the provisions of sections three hundred seven, three hundred eight, three hundred nine, three hundred ten, three hundred eleven and three hundred twelve of the insurance law, so far as the same are applicable thereto, and are not inconsistent with the provisions of this chapter.

This statute requires NYCERS, as of March 1 of each year, to file an annual report with the Department. The Department controls the format of this report and requires a great deal of detail about NYCERS assets and operations. In some ways, it is comparable to fillings that the SEC requires public corporations to make.

The statute also requires the Department to conduct a periodic audit (“examination”) of NYCERS.

Over the years, the Department has conducted this examination of NYCERS on a five year cycle. The last full five year examination was 1995-1999.

In 2004 the Department began what I thought was going to be the 2000-2004 examination. By law, NYCERS is required to pay the cost of the examination. By July 2005, a draft of the examination was completed according to the Department. I was forced out as NYCERS executive director in March, 2005. During 2004, there was an ongoing conflict between the Department and the NYC Comptroller over investment issues at NYCERS.

As a point of interest, there was also conflict between the Department and the NYS Comptroller over the examination of the NYSLERS. In retrospect, there probably was a lot to have conflict over.

For an unknown reason the Department did not release the final NYCERS examination until June 25, 2009. In addition, the examination only covered 2000-2002, a three year period as opposed to the standard five year period. No reason was given.

This report highlighted 4 key findings:

1. NYCERS should make a greater effort to facilitate the examiner’s request for information on future examinations.
2. NYCERS did not have a comprehensive Investment Policy Statement that governed, controlled, and monitored its investment activities.
3. The NYCERS Board’s interactions with the Comptroller (BAM) and legal counsel (NYC Corp Counsel) indicate that the trustees need to be diligent regarding the inherent potential institutional conflict of counsel.
4. With regards to loaned securities, the Board and the Comptroller’s office did not give clear guidance to Citibank (custodial bank for city pension assets) on how to deal with downgraded securities in the portfolio.

The first item reflects the Comptroller’s reluctance to turn over documents to the Department.

The second item motivated the trustee to prepare an investment policy statement.

The third item is an ongoing dilemma. Legal advice given by NYC Corp Counsel to NYCERS is always subservient to Corp Counsel’s commitment to the mayor. The trustees, however, should require the Corp Counsel to include a declaration on all written legal advice that there is no conflict between the interests of NYCERS and the mayor with respect to the given advice. If there is, Corp Counsel should recuse itself.

The fourth item involves securities lending and the risk of default on securities held in the multi billion dollar leveraged portfolio that the custodian bank maintains for NYCERS. NYCERS is very shy about publicly reporting on the assets in this portfolio. Securities lending is a very complex process. General details are not readily available. Securities lending, however, is one of the biggest operations on Wall Street.

In FY-2009 NYCERS began paying the Department for a new examination. The normal pattern would be an examination for the 2005-2009 time frame. The 2003-2004 period, however, is still unreported and may be picked up in the current examination.