How the Rich Take from the Poor: Investment Costs from 2000 to 2024

Listed in the chart below are the investment expenses for asset classes in the NYCERS portfolio, in particular , U.S. equities and private equity funds.

The chart clearly lays out systematic lunacy in NYCERS investment strategy as highlighted by the differences in these two classes. One, U.S. equities is effective and inexpensive and the other, private equity, is ineffective and grossly expensive.

Private equity and other limited partnerships have exploded in the last 25 years. NYCERS is not alone in this insanity. Many other pension funds are infected with this disease including the other four city pension funds.

We all know the story of "The Emperor's New Clothes". This emperor is not only vain but deaf, dumb, and blind. On a more fundamental basis this is how the rich legally take from the poor.

Overview

As of June 30, 2024, NYCERS had a closing balance of $87.93 billion in assets up from $82.43 in FY-2023.

NYCERS paid $572.03 million in investment expenses in FY-2024 up from $489.90 million in FY-2023.

The total expenses for the five city pension funds were $1.95 billion for FY-2024.

The City is always pressed for revenue and yet it allows this bleeding to continue.

U.S. Stocks

Of the $87.93B amount, NYCERS reported $$22.10B in U.S. stocks for which NYCERS paid $16.76 million in management fees.

Of the $22.10B amount, $15.26 billion was in two index funds for which NYCERS paid only $307,483 in management fees.

The value of this asset class is based on the closing values of U.S. stock markets as of June 30, 2024. The open markets make this asset class totally liquid.

NYCERS reported that this class had a rate of return for the year of 22.98% for FY-2024. This figure is based on the closing market stock prices as of June 30th of the previous year and the current year, dividends paid during the year, and the purchase and sale of stocks during the year. Fees are netted out starting in 2015.

Private Equity

Of the $87.93B amount, NYCERS reported $9.20 billion in private equity funds for which NYCERS paid $229.09 million in fees and organization costs.
NYCERS provides no description of what organization costs are. Of the $229.09 million amount organization costs were $64.74 million.

The value of this asset class is based on a best guess (NAV) by the 81 general partners running all the private equity funds. This is because there are no public markets for private equity funds. You have to take this number with a big grain of salt. Some general partners manage more than one fund.

NYCERS reports that this class had a rate of return for the year of 5.09% for FY-2024.

NYCERS does not document how this number is arrived at. Actually, there is no rate of return for private equity funds as a class, only for individual funds and only at the point when the fund closes and makes its last distribution. Each fund should be reported out when it closes. Of course, this would create tremendous PR problems. While some funds may have respectable returns in spite of high fees, others would be horrific disasters.

I suspect, however, that the black box contracts that NYCERS signs with the general partners prohibit NYCERS from publishing the final results.

Also, because there are no public markets for private equity funds, this class is not liquid. NYCERS could possibly sell its position in a particular fund but only at a steep discount and only if there was a buyer.

Investment Expense Tables 2020-2024

Investment Costs for Different Classes

CLass/Year (in millions)	2024	2023	2022	2021	2020	*	2015	2010	2005	2000
Fixed Income	$26.63	$24.99	$26.95	$27.65	$23.92	*	$17.81	$14.80	$10.35	$10.22
US Equities	$16.75	$13.67	$16.88	$14.71	$8.85	*	$17.06	$14.68	$6.47	$8.74
Private Equity	$163.36	169.77	$77.61	$67.94	$66.09	*	$40.35	$58.77	$9.70	$2.83
Private Eq. Org. Costs	$64.73	$34.69	$19.82	$19.16	$21.73	*	$13.03	$28.84	*	*
Alternative Opport/Global FI	$34.17	31.22	$21.65	$21.70	$14.97	*	$12.65	*	*	*
Alternative Opport/Global FI Org. Costs	$2.40	3.88	$1.67	$1.76	$0.25	*	$4.51	$0.0	*	*
Private Real Estate	89.93	$75.18	$46.68	$43.20	$31.96	*	$17.78	$17.32	$1.66*	*
Real Estate/Infrastructure Org. Costs	$38.41	23.64	$20.21	$10.68	$8.17	*	$5.11	$3.15	*	*
Infrasructure	$39.98	$36.64	$20.80	$15.72	$13.32	*	*	*	*	*
International Equities	$45.44	41.11	$44.69	$41.38	32.22	*	$31.73	$28.15	$15.84	$14.82
Hedge Funds	*	*	*	*	*	*	$39.79	*	*	*
Mutual Fund - Domestic Equity	*	*	*	*	*	*	-$0.01*	$0.65*	*	*
Mutual Fund - Mortgages	$0.27	$0.27	$0.29	$0.32	$0.30	*	$1.62	$0.90	*	*
Teasury Infaltion Protect Secs.	*	*	*	*	*	*	$1.34	$0.88	$0.05	*
Mutual Fund - Bank Loan	$0.0	$0.0	$0.01	$0.71	$1.36	*	$3.34	*	*	*
Consultants	$2.50	$2.55	$2.45	$2.72	$2.82	*	$3.51	$4.44	$1.45	$0.71
Legal Fees	$0.75	$1.12	$0.70	$0.66	$0.67	*	$0.10	*	*	*
Foreign Taxes	$40.57	$25.59	$39.70	$37.90	$24.07	*	$15.48	$1.12	*	*
Subsidy to Comptroller	$3.92	$3.64	$3.94	$4.26	$4.02	*	2.11	*	*	*
Miscellaneous	$2.43	$1.89	$5.15	$2.81	$2.19	*	$4.51	$1.57	$0.60	$0.12
Total Expenses	$572.3	$489.90	$349.22	$313.23	$245.67	*	$231.76	$175.26	$46.11	$37.43
Total Assets (in billions)	$87.93	$82.43	$78.53	$87.08	$70.25	*	$55.03	$35.38	$35.53	$42.82

In Plain Sight - Growing Risk Level in NYCERS Investments and Runaway Fees.

Runaway Investments fees

In FY-2000 NYCERS paid $37.4 million in investment fees for an asset base of $42.8 billion.

In FY-2023 NYCERS paid $489.9 million in investment fees for an asset base of $82.4 billion.

The numbers speak for themselves. There is no benefit to these radically increased fees. Clearly, twice the $37.4 million in fees from FY2000 could cover the $82.4 billion in assets for FY-2023. But the current trustees have no idea what was going on in 2000.

This is a big part of the income inequality in America. This story is not just about NYCERS but every public pension plan in America.

Increasing Investment Risk

In a prior post from January 2020, I outlined a new accounting reporting requirement for government pension plans (GASB 72) mandating that plans report a breakdown of the reliability of the reported value of the plan's investments. The assets are broken down into 3 levels as listed below:

• Level-1 assets - open market - very liquid
• Level-2 assets - open market - not as liquid
• Level- 3 and NAV assets - no open market - not liquid

In addition to these crazy fees noted above, the risky Level-3 assets at NYCERS have grown steadily since 2015. On top of this growth in risky assets, this year there was a law passed in Albany to raise the limit (from 25% to 35%) on the amount of Level 3 and NAV assets in a NYS public pension plan.

In the table below you will see the growth for Level-3 and NAV class assets at NYCERS.

Note: As of FY-2023 NYCERS is relabeling alternative investments as net asset value items rather than Level 3 as a "practical expedient". This is a PR sleight of hand. Nobody wants to be called Level-3. "NAV" is a lot more vague. $19.8 billion (25% of the portfolio) for Level-3 and NAV assets is an obvious red flag for the risk level of the portfolio. You can be sure that $19.8B is the upper bound for this class and that a 50% reduction is a real possibility.

Ranking of NYCERS Assets via GASB 72

Fiscal Year	Level-1 Assets (in thousands)	Level-2 Assets	Level-3 Assets	Assets at Net Asset Value	Total
FY-2014	$27,028,432	$17,437,139	$10,642,729	$0	$55,108,300
FY-2015	$27,707,076	$17,175,757	$10,796,968	$0	$55,679,801
FY-2016	$27,330,534	$15,924,399	$10,377,791	$1,123,861	$54,756,585
FY-2017	$32,312,375	$17,461,428	$10,914,801	$95,987	$60,784,591
FY-2018	$31,219,885	$23,282,843	$10,880,803	$66,675	$65,450,206
FY-2019	$34,128,310	$22,782,825	$11,534,369	$6,979	$68,452,483
FY-2020	$33,647,567	$24,941,479	$11,856,921	$3,735	$70,449,703
FY-2021	$42,162,979	$30,981,818	$14,845,548	$1,240	$88,091,585
FY-2022	$32,892,068	$26,386,373	$18,726,172	$1,129	$78,005,742
FY-2023	$35,986,966	$25,235,457	$461,156	$19,845,541	$81,529.120

Investment Expenses for the Assets by Quality for FY-2023

In FY-2023 NYCERS paid the following investment management fees for the different levels:

1. $54.7M for Level 1 assets (FY-2019 fees = $39.7M).
2. $25.0M for Level 2 assets (FY-2019 fees = $18.4M)
3. $375.0M for Level 3 and NAV assets (FY-2019 fees = $140.5M)

Again, the numbers speak for themselves. The trustees are being rolled big time - everywhere.

How to Do Investment Fees the Right Way - TRS and Its TDA Fund

TRS is one one the five NYC pension funds, the one that covers NYC teachers. Actually TRS is two funds, a defined benefit fund (DB) and a defined contribution fund (DC). TRS calls its DC fund the TDA Program. The TDA program is funded by payroll deductions (approximately $1.0B/year) from the teachers. This fund is teachers' money, not tax payers' money. Well not really. The DB fund guareantees a 8.25% and 7% rate of return on fixed income assests in the TDA fund. But that is another story for another day.

The following list is the closing balances of the two funds as of June 30th of following years:

• Year - DB Fund - TDA Fund
• 2020 -- $59.3B -- $37.0B
• 2021 -- $78.3B -- $43.0B
• 2022 -- $64.0B -- $42.2B
• 2023 -- $67.9B -- $45.4B

You can see from the numbers that the TDA fund runs a tighter ship than the DB fund. The TDA fund grew by 22.7% over the three years while the DB fund only grew by 14.5%. Eeven though the TDA rate of return is is impressive compared to the DC fund, what rally is superhuman is the investment fees that the TDA fund pays versus the DC fund. See the fees for the two funds over the four years listed below:

• Years - DB Fund - TDA Fund
• 2020 -- $290.8M -- $0.6M
• 2021 -- $405.7M -- $13.7M
• 2022 -- $535.3M -- $24.2M
• 2023 -- $518.9M -- $11.2M

How does the TDA spend so little on fees and does so much better that the DB fund???

Just For Fun - Who Got the $245M

NYCERS spent $245M in FY-2020 on investment expenses. All together the five city funds spent $879M.

There is a link below where you can view the detailed list of who NYCERS paid the money to. The link is nine pages long. The first page is a summary and the the next eight pages list all the managers, the assets under management, and the fees received for the year. NYCERS has about 350 investment managers.

NYCERS needs to disclose this information in its comprehnsive annual financial report (CAFR). The full CAFR report is almost 200 pages long. I suspect the NYCERS Trustees have never looked at this data.

So here are the details

Look at a page 2 of the link. There are four entries, all for Blackrock. There are three fixed income items (corporate, government, mortgage) and one domestic equity entry (Russell 1000 - Core). That is all you need to run a $67B portfolio. Just scale up the amounts under management. The fees would drop down to $16M and annual rate of return would go up 1 to 2%.

NYCERS Profit from 2016 to 2020

Recap

Every year the Comptroller reports on a quarterly basis the rate of return for the NYCERS portfolio. NYCERS’s fiscal year ends on June 30 each year.

Based on the Comptroller’s figures NYCERS has averaged 6.78 % (net of fess) over the last five years. Part of this figure, 2.96%, is created by an inflow of $8.928B in dividends and interest received during the five years.

The rest of the return is created by an increase in the value of the portfolio. The June 30 value of NYCERS’s assets was $69.910B. The starting value in 2016 was $54.289B. That is a 28% increase over the five years. As reference the S&P 500 Index increased from 2063.11 to 3100.29, a 50% increase. 6.78% may seem like an acceptable figure. But what if you could easily increase that return, safely and at a lower cost. There has, unfortunately, never been any comparative analysis of NYCERS’s investment strategy to determine its relative efficiency.

A Better Way

Out of the 40 sub classes of NYCERS's investment strategies, some combination of classes can consistently produce a better long-term return than 6.78%. The NYCERS Russell 1000 Index (stocks) managers have averaged 9.83% (net of fees) over the last five years. The June 30 value of this class was $19.256B

The NYCERS Structure Fixed Income (bonds) managers have averaged 5.47% (net of fees) over the last five years. The June 30 value of this class was $13.427B.

If you calculate a 60/40 stock/bond return using these figures, you will arrive at an 8.09% average rate of return over the last five years. These two classes generate the bulk of the dividends and interest received by NYCERS during the year.

Another aspect of using only this combined class strategy is that you would save at least $750M in fees over the five years.

Fantasy Island

There are three of NYCERS's sub classes of investment strategies, private equities, real estate, infrastructure, that are highly questionable.

The Comptroller has reported the total value of these classes to be $9.272B as of June 30, 2020. That is 13.45% of the total $68.91B NYCERS portfolio. The $9.272B amount is not verifiable, just a guess.

He quoted the 5-year average rate of return for these classes (gross of fees) as: 9.56% (PE), 11.07% (RE), and 11.93% (IF). These rates of return are also not verifiable, just guesses.

These investments do not pay dividends nor interest and incur most of the $750M in fees that would be saved with the two-class strategy. There is, however, a constant flow with these investments, cash going out and cash coming in. Unfortunately, this flow is not reported in the financial statements. I suspect if this cash flow were reported for the last 23 years, there would be changes in the law governing the allowable investments for the city’s pension investments.

Private Markets: Legalized "Theft" - Unreported $129M in Incentive Fees

NYCERS issues a Comprehensive Annual Financial Report (CAFR) every December. This report is suppose to be a accurate picture of the financial information for NYCERS during the previous fiscal year (July-June). The FY-2018 report stated that total investment expenses was $241.8M and as part of that amount the private market investments expenses were $130.0M as listed in the first chart below:

In contrast to the CAFR statement prepared by the outside accounting firm, the Comptroller in September, 2018 released a FY-2018 performance report prepared by State Street. On page 27 of that report State Street lists the expenses for private market investments. You can see in the second chart below that the total fund investment fees were $346.03M and as part of that amount private market fees were $272.45M.

The $346.03M does not included foreign taxes ($26.M), payments to the Comptroller ($4.2M), payments to consultants & law firms ($4.2M), and miscellaneous expenses ($2.1M) which are included in the CAFR's $241.8M expense amount.

For many years NYCERS has not defined the term "Organization Costs". The Comptroller, however, uses a different term for these costs, "Partnership Expense". I now suspect that the term means meals, travel expenses, and any other expense that the general partner can pass along to the limited partners.

But what is more disturbing is that there are incentive fees listed by the Comptroller. The total for these fees are $129.51M . These fees have never been listed in the NYCERS CAFR. This is the main reason that that the Comptroller is reporting $346M and NYCERS is only reporting $242M. There is obviously a serious flaw in NYCERS accounting. And by the way, what managers are being paid the incentive fees? Why are they being paid these fees?

As a closing comment on this obscene waste of money, lets simplify the problem:

NYCERS pays private market partnerships

• $272.45M in fees for handling assets with an "alleged" value of $9.95B,

while it pays only

• $73.58M in fees to public market managers for handling assets with open market value of $52.75B.

NYCERS Asset Class & Fees from CAFR - FY-2018

Private Market Asset Class	End of Year Asset Value	Fees	Organization Costs	Total Expenses	Basis Points	Rate of Return
Private Equity	$4,470M	$50,117,502	$13,064,536	$63.18M	141.2	17.8%
Opport.& Global FI	$1,851M	$15,534,877	$1,820,851	$17.35M	93.5	7.0%
Real Estate & Infrastructure	$3,792M	$40,993,082	$9,510,109	$50.50M	133.2	12.19%
Hedge Fund	$68.0M	$345,733		$0.35M	50.843	8.43%
Totals - Private Markets	$10,181M			$131.48M
Totals - All Classes	$65,206M			$241.8M

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NYCERS Asset Class & Fees from Comptroller's September 30, 2018 Performance Report

Private Market Asset Class	Avg. Asset Value (billions)	Management Fees (millions)	Partnership Expenses (millions)	Fees&Expns-Basis Points	Incentive Fees (millions)	Incentive Basis Points	Total Fees (millions)	Total Basis Points
Hedge Fund	$0.075	$0.550	$0	72.0bp	$0	0.0bp	$550.03	72.0bp
Private Equity	$4.432	$51.02	$17.51	154.64bp	$88.03	198.63bp	$156.57	353.26bp
Real Estate	$3.349	$33.10	$8.497	124.21bp	$31.66	94.53bp	$73.26	218.74bp
Infrastructure	$0.328	$8.433	$3.098	128.69	$0.863	28.31bp	$12.394	138.32bp
Opportunistic Fixed Income	$1.763	$15.578	$10.615	148.57bp	$3.482	19.75bp	$29.673	168.32bp
Private Market Assets Total	$9.947	$108.99	$39.72	149.19bp	$124.04	124.69bp	$272.45	273.88bp
All Assest Total	$62.699	$176.80	$39.22	34.43bp	$129.51	20.66bp	$346.03	55.19bpbp

How to Piss Away $242M

Now that I have your attention, let me bore you with the numbers.

In FY-2018, the NYCERS portfolio opened at $61.3B and closed at $65.2B. With interest and dividends, NYCERS had a rate of return of 8.56%. For that return NYCERS spent $241.8B on investment expenses. That was almost a quarter of a billion dollars and represents 39.5 basis points based on the opening balance. At the same time Jane Doe earned 14.34% on her standard S&P 500 index fund for basically no cost.

NYCERS is well aware of the low cost/high return index strategy. During FY-2018, the system consolidated its five existing stock index funds (four large cap and one mid cap) into one fund.

The new fund, Blackrock Russell-1000 Core Index had a closing value of $14.828B on June 30, 2018. The fee for the last quarter of the year was $83,775. (NYCERS FY-2018 CAFR page 144). The Comptroller quoted a 3 month rate of return of 3.84%. The five retired funds cost $424,000 for the first nine months of FY-2018.

Projected for a whole year, NYCERS would have earned 15.36% on $14B for a cost of only $347,100.

Costs for the Five City Funds

On a larger scale what is even more shocking is that the five NYC pension funds spent $999.4M on investment expenses. That's right, just shy of one billion dollars in one year. The opening balance for the five funds was $201.0B and closed with $217.0B. That is 50 basis points based on the opening balance.

There is never any quantitative justification for this level of cost.

It is my opinion, however, that large pension systems as a general rule should be able expense their investment operations for 10 basis points or less. To support this opinion consider the following disussion.

NYCERS Details

The following table is a listing of NYCERS fees by asset class and style as reported by the FY-2018 NYCERS CAFR starting on page 144. It is an eye opening read.

In the table three items are highlighted. They represent limited partnership contracts (approx. 200) that the Comptroller has signed and the trustees have never seen. Their EOY asset values and rates of return are highly questionable in so far as the numbers are provided by the general partner and can not be publicly confirmed. I would use a 20% discount rate on these three asset classes. They are the highest cost asset classes and i would also be skeptical of their expense numbers.

On an ethical basis the limited partnerships very often and in a hidden manner engage in actions designed to extract the greatest amount of money with greatest damage to society.

In addition, these contracts can not be terminated. The general partner is in total control of the term of the contract and the demand for new funds from the limited partners during the life of the contract.

One bright spot is that NYCERS has reduced its exposure to the hedge fund class.

See the last column in the table for what I think is the proper diversification of the NYCERS portfolio after discarding the risky high cost asset classes. It looks like you would be able to get away with a $30M cost for the year.

What would the return for this portfolio? The current NYCERS asset allocation is 67% stocks and 33% bonds. Bonds did terrible in FY-2018. Structured and high yield returned -.03% but the R-1000 core index fund returned 15.36%. So you wind up with a total 10.27% total return for the year. Not bad for a $30.0M cost

By the way what did NYCERS get for the $2.1M under miscellaneous expenses? I've given up trying to find out what organization ("Org") costs are.

NYCERS Asset Class & Fees

Asset Class	Fees	EOY Asset Value	Basis Points	Rate of Return	Proper Allocation
Fixed Income
Structured	$5,318,152	$14,057M	3.3	-0.34%	$22.0B
High Yield	$7,391,750	$2,602M	28.4	1.65%	4.0B
All Other	$6,096,651	$1,257M	48.5		$0.0B
US Equity
Passive	$476,096	$14,359M	0.3	15.3%	$37.0B
Active	$7,053,690	$3,102M	22.7	13.34%	$0.0B
US SC Equity Passive fees:	$15,649	$334M	0.5	20.83%	$0.5B
Private Equity	$50,117,502	$4,470M	141.2	17.8%	$0.0B
(plus Org costs)	$13,064,536
PE-Opport.& Global FI	$15,534,877	$1,851M	93.5	7.0%	$0.0B
(plus Org costs)	$1,820,851)
Real Estate & Infrastructure	$40,993,082	$3,792M	133.2	12.19%	$0.0B
(plus Org costs)	$9,510,109
Foreign Equity	$41,508,658	$8,226M	82.7	11.4%	$0.0B
(plus Taxes =)	$26,456,516
Hedge Fund	$345,733	$68.0M	50.843	8.43%	$0.0B
Target-Mortgage	$1,515,348	$819M	18.5	-0.69%	$1.0B
TIPS	$496,907	$2,585M	2.0	2.18%	$2.0B
Bank Loan	$3,661,246	$1,139M	32.2	4.73%	$0.0B
Consultant Fees:	$3,769,671
Legal Fees:	$405,499
Subsidy to Comptroller:	$4,203,498
Misc. Expenses:	$2,061,778
Total	$241.8M

NYCERS Income Flow during FY-2018

Note: During FY-2018 NYCERS received:

1. $ 523.5M - contributions from members
2. $ 3,377.0M - contributions from employers
3. $ 878.6M - interest income
4. $ 897.9M - dividend income
5. $ 27.1M - securities lending income
6. $ 3.4M - other income

During FY-2018 NYCERS paid out:

1. $ 4,882.6M - benefits and withdrawals
2. $ 9.1M - transfers to other retirement systems
3. $ 10.9M - payments to VSF (Transit&Housing Police)
4. $ 205.0M - payments to VSF - Correction Force
5. $ 241.8M - investment expenses
6. $ 59.7M - NYCERS operating expenses

NY Times: NYC Pension Funds and "Operational Failure"

On Tuesday, January 26, 2016, the NY Times reported the public release of a study analyzing the investment capabilities of the NYC Comptroller's Office. The NY Times article focused on the expression "danger of operational failure" to summarize the opinion of the report. The city paid Funston Advisory Services $1.4M for the 406 page report.

According to the following exert below from the report, the Comptroller's Office is currently not up to the job and needs lots of money to get the office into shape.

Our overall conclusion is that additional resources are required or the current investment strategy presents a very high level of operational risk. This is a problem that has been growing over the course of multiple administrations. It requires a long-term solution, long-term leadership, the support of the Systems, and long-term resourcing, but it also demands immediate action.

Continuous improvement (doing what BAM already does, but better) is necessary but not sufficient. Discontinuous improvement (doing new things in new ways) is also required. Unfortunately, given its existing resources and demands, BAM’s management currently has little or no capacity to implement many of the recommendations of this report.

To me it appears that the study was designed to help the Comptroller hold onto his annual designation as investment manager and his control over the investment process at the five city pension funds. I also suspect that the Mayor's Office is pushing to outsource the management functions of the pension fund so as to remove the heavy political influence that emanates from the Comptroller's Office.

As a example of this political influence, one of the people listed by Funston Advisory as a member of their team is a man named Jon Lukomnik. Jon worked for The NYC Comptroller Alan Hevesi from 1994 to 1998 as his representative on the NYCERS Board of Trustees. In FY-1997 Jon lead the move to allow Hevesi complete control of all of the NYCERS investment contracts and the payment of the fees outlined in those contracts. This is exactly one of the primary sources of the current chaos in the Comptroller's Office. As NYCERS executive director I specifically opposed this move in 1997 but for some reason the mayor's Law Department went along with this take over.

As long ago as 2011, I pointed out the improper activities by the Comptroller's Officewhen it came to investment contracts and fees for the pension funds. As recently as November of 2015, I again pointed out the mess at the Comptroller's Office. This report, however, documents in details how bad the internal operational problems are at the Office of the Comptroller.

The real reason the Comptroller's Office has become overwhelmed with the investment process is that trustees of the five city pension funds have made terrible investment decisions over the last 15 years.

The solution to the trouble at the Comptroller's Office is not more staff, higher salaries, and more spending. The real change needed is much more simple than what the report recommends but just as radical.

Instead of spending more money and hiring more people, all five funds should radically simplify their investment strategies. Invest only in 1) direct US stock index funds (S&P 500 or Russell 3000) and 2) Treasury, high rated corporate, and agency bonds.

They should reduce the number of investment managers and have a target of ten managers for each fund. They should also set a target for investment fees of 10 basis per year.

When the dust settles, the Comptroller's Office will be able to do its job with mere mortals. The five pension funds will earn more returns on their assets, pay far less in fees and the city will save on pension costs.

Of course, the Comptroller would be totally irrelevant politically and lots of of people on Wall Street would be out of a job.

While the trustees are reforming things, they should consider the following suggestion. Since the pension funds are already paying the Comptroller to do such a tenuous job managing their investment activities, they should put out a RFP for the work to see if they could get the job done better at lower cost. That is what the Comptroller did with his pension custodial and cash management work.

And another thought. Don't you think that when a new Comptroller comes into office, that he/she will want to replace all those highly paid provisionals in the Bureau of Asset Management with his/her own "experts".

The following is another quote from the report that is indicative of the quality of the report:

The reduction in the number of investment committee meetings will go a long way toward alleviating BAM’s workload. This reduction will free up executive time to address much needed strategic and operational improvements, but BAM still requires additional resources for both staffing and modernized systems. In combination with our recommendations, BAM can make significant progress toward becoming a world-class investment operation.

If the proposed reduction of investment committee meetings had failed to be accepted, we believe BAM and the Systems would have had a basic choice to consider: 1) increase the level of BAM resources to fully implement the recommendations (people, processes and systems) contained in this report; or 2) reduce the complexity of the asset allocation to a level which can be supported by the current level of resourcing.

This is utter garbage. The jamming of the monthly investment board meetings for the five city pension funds into one meeting accomplishes only one thing. That is the staff at the Comptroller's Office only has to put on its dog and pony show once a month instead of five times. The cock and bull story about the five board meetings per month being such a burden is just a smoke screen for the total chaos that is happening in the Comptroller's Office.

It is interesting that up to 70% of any investment meeting is held in hidden executive session. How does the Comptroller's staff handle access to info for specific pension fund that it deems to be covered by executive session when five different groups of trustees are sitting in the meeting? I hope everyone realizes that the five funds do make different investment decisions. TRS has actually been able to avoid investing in hedge funds.

Of course, we all know that there is very little that honestly qualifies for executive session.

If there wasn't so much garbage in the investment portfolios, it would take the Comptroller's staff one day to prepare for a regular investment board meeting. Of course you might start to wonder what they were doing for the rest of the month.

The Board of Trustees for each of the five systems are responsible for the prudent investment of the each of the funds, not the Comptroller. His/her annual delegation is at the discretion of the trustees of each of the five funds.

Changing Stories about the 2015 Pension Investment Fee Explosion

On Nov. 3, 2015 I pointed out the investment fee explosion for the five NYC pension funds and the Comptroller's lame comments about the fees and the miserable performance of the pension funds. I also made the comment that I suspected "the Comptroller's Office was in shambles when it comes to accurate records of the payment of investment fees."

On Nov. 4, 2015 the Comptroller was quoted in P&I with a new story about why the fees are so high. It's no longer that the assets have increased or that they are being more comprehensive. The following is the the new excuse.

“Since we started the hard work of reforming the investment environment 22 months ago, we've uncovered layer after layer of Wall Street fees,” city Comptroller Scott Stringer said Wednesday in an e-mail. Mr. Stringer is the fiduciary for the five pension funds that make up the $162.9 billion retirement system.

“In our review of this year's financial report we've found even more charges — millions of dollars in 'incentive fees' — that had gone largely unreported in previous reports,” Mr. Stringer added.

“While we believe we've captured the bulk of the fee data, we will continue to refine our reporting and transparency processes until we have a complete picture of all fees and expenses paid,” said Eric Sumberg, a spokesman for Mr. Stringer, in an e-mail. “The comptroller has made transparency and fee disclosure priority issues for his administration.”

It has been clear for years that the investment fee problem is out of control. $522M is an obscene amount to pay for investing the assets of the five city pension funds. In the past I have been clear that 10 basis points should be the target level for fees.

Now this year we learn that the situation is worse ($705M) and not totally nailed down.

The obvious questions are:

• Now that the Comptroller has uncovered all these layers of fee, why hasn't he reported all the details?
• How did the fees go unreported in the first place?
• How were the unreported fees paid?
• how would you describe the unreported fees?
• Who received the unreported fees?
• What are the dollar amounts of the fees and the recipients?
• How do you know that you have found all the fees?
• Are the fees necessary given the miserable performance of the managers?
• How accurate is the 2014 CAFR which the Comptroller released last year?
• In general how reliable are any of the figures that the Comptroller has reported? Maybe this why the NYS DFS can never get the pension audits done. The black hole is too deep.

The final and most crucial question is, will the Comptroller release all the pension investment contracts to the public or will he continue to keep them secret and hidden from the public in spite of the fact that they are paid with taxpayer and employee money? When a contract has a clause that is prohibited by law, the contract is void. Of course, one of the parties must take action to void the contract.

Note: For the record the five funds do not have $162.9B in assets. They have $145.7B as of June 30, 2015. The TRS & BERS TDA's have $28.9B and the Police, Fire, and Correction Force VSFs' have $3.8B. The TDA and VSF funds are not available for covering the pension liabilities of the five funds. The Comptroller's Office always likes to quote the combined amounts but it is not accurate.

Note: Comptroller Stringer has been a trustee of NYCERS since 2006. Of course, he is not the only trustee.

Bad Year for the NYC Pension Funds - FY-2015 - Investment Fees and Performance

The Comptroller released the NYC FY-2015 Comprehensive Annual Financial Report (CAFR) on Friday, October 30, 2015. The following are some points from the press release:

The City pension systems earned $4.746 billion in net investment income in FY15 and paid benefits totaling $13.4 billion during FY15. Employer and employee contributions to the City pension systems were $10.0 billion and $1.8 billion, respectively;

The City pension systems paid investment expenses totaling $708.9 million in FY15, an increase over FY14 that primarily reflects increased assets under management and more comprehensive fee disclosure and reporting;

These numbers are accurate but they are presented in a deceptive way.

The five funds received $1.94B in interest payments and $2.66B in dividends during 2015. They also earned $73M in securities lending income. That adds up to $4.67B. It does not take much skill to collect interest and dividend payments. It definitely does not take $708.9M in fees, a $183.0M increase from last year.

Listed below are the fees (pension funds only) for the last 14 years. You can see from the numbers that the "increased assets under management" comment is not valid. Of course previous reported fees may be inaccurate but that's not what "more comprehensive" means. I have a strong feeling that the Comptroller's office is in shambles when it comes to accurate records of the payment of investment fees.

• Year: -- Fees ---- Assets
• 2015: $705.0M ($145.7B)
• 2014: $522.0M ($144.5B)
• 2013: $472.5M ($124.8B)
• 2012: $370.3M ($111.3B)
• 2011: $395.7M ($111.0B)
• 2010: $426.8M ($90.0B)
• 2009: $339.3M ($79.5B)
• 2008: $310.2M ($101.9B)
• 2007: $262.0M ($110.9B)
• 2006: $192.7M ($96.0B)
• 2005: $158.2M ($90.6B)
• 2004: $131.6M ($86.5B)
• 2003: $ 96.7M ($78.1B)
• 2002: $101.9M ($80.7B)

On July 30, 2015, P&I reported that the Comptroller estimated that the city pension funds had a 3.3% rate of return for FY-2015. Of that amount 3.1% is due to interest and dividends paid to the pension funds.

Based on the details in the CAFR, the total pension assets for the five funds increased only 0.198% in FY-2015. In addition, this miserable number is based on unreliable asset values for private equity, real estate, and hedge fund classes. Note that two of the funds have avoided getting sucked into the hedge fund swamp.

The opening balance for the city pension funds (no TDA and no VSF) was $144.5B. The closing balance was $145.7B. With a $0.9B positive cash flow you get a 0.198% increase in asset value.

The other bruising fact in the city's CAFR, along with the $183M increase in fees, is the $1.294B that was skimmed off from the TRS & BERS pension funds to the TRS & BERS TDA funds and the $672M that was skimmed off to the VSF funds.

In FY-2015, the S&P 500 index rose 5.2% (from 1960.23 to 2063.11). NYCERS reported a 1.88% net of fee return on its structured fixed income class (Treasures, Corporates, & Mortgage Backed Securities) with a benchmark of 2.08%. With the 70%/30% asset allocation that the funds are currently using, the projected increase in asset value for FY-2015 could easily have been 4.24%, not 0.198%. That would have been a $150.95B closing balance instead of $145.67B.

That is $5B in one year. This why investment decisions are so important. The state implements Tier 6 and the trustees blow it all on bad investments.

All five of the pension funds had a decease in their funding status in FY-2015. The levels weren't great to start with. Here is the bad news.

• NYCERS went from 75.32% to 73.13%.
• TRS went from 71.79% to 68.04%.
• BERS went from 78.60% to 75.33%.
• Police went from 74.44% to 73.85%.
• Fire went from 63.78% to 62.79%.

Here are the accounting numbers for the five city pension funds:

Money Coming In for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
employee contributions	$1,015.0	$467.1	$158.6	$39.6	$241.1	$108.6
employer contributions	$9,986.8	$3,160.3	$3,270.0	$258.1	$2,309.6	$988.8
other contributions	$55.5		$55.5
interest	$1,939.5	$635.7	$758.5	$36.9	$392.8	$115.6
dividends	$2,661.8	$795.3	$889.2	$46.2	$703.7	$227.4
SL income	$72.5	$26.5	$20.3	$2.7	$18.0	$5.0
other	($64.9)	$4.1	$0.3	($115.1)	$4.6	$41.2
Cash-in	$15,666.2	$5,089.0	$5,152.4	$268.4	$3,669.8	$1,486.6

Money Going Out for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
Benefits	$11,994.1	$4,235.6	$4,024.3	$223.2	$2,360.5	$1,150.5
Transfers from TRS & BERS to TDA	$1,294.0	$0.0	$1,249.0	$45.0	$0.0	$0.0
Payments to VSF *	$12.2	$11.9	$0.0	$0.0	$0.3	$0.0
Transfers (Pension to VSF) *	$660.0	$30.0	$0.0	$0.0	$590.0	$40.0
Investment expenses *	$705.0	$231.8	$203.0	$10.1	$192.1	$68.0
Admin expenses *	$141.9	$54.6	$58.4	$11.0	$17.9	$0.0
other	$7.1	$7.1	$0.0	$0.0	$0.0	$0.0
Cash-out *	$14,814.3	$4,571.5	$5,534.7	$289.3	$3,160.8	$1,258.5
*
Net Cash *	$851.9	$517.5	($382.3)	($20.9)	$509.0	$228.1

Closing Balances & Asset Increases for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
Open Bal:	$144,538.0	$54,422.0	$44,490.0	$3,279.3	$31,750.9	$10,595.8
Close Bal	$145,674.8	$54,889.3	$44,254.7	$3,359.8	$32,356.0	$10,815.0
Net Change	$1,136.80	$467.30	($235.30)	$80.50	$605.10	$219.20
Cash Flow:	$851.9	$517.5	($382.3)	($20.9)	$509.0	$228.1
Open Bal Adj:	$144,538.0	$54,422.0	$44,107.7 $3	,258.4	$31,750.9	$10,595.8
Close Bal Adj:	$144,823.4	$54,371.8	$44,254.7	$3,359.8	$31,847.0	$10,586.9
Net Change Adj:	$285.4	($50.2)	$147.0	$101.4	$96.1	($8.9)
Rate of Asset Increase:	0.197%	-0.092%	0.333%	3.112%	0.303%	-0.084%

Parting Gift from the Old NYCERS Actuary

Last year I wrote short note on the history of the investment fees paid by the five pension fund sponsored by New York City.

On January 30, 2013 the Governor signed Chapter 3 of the Laws of 2013 changing the assumed interest rate for the five pension funds from 8% gross of fees to 7% net of fees. the legislation was drafted the NYCERS actuary, Robert North. It did a lot of other things but that was the big item. One of those minor things, however, deals with how city repays to the five pension funds the investment expenses incurred by the pension funds in the previous fiscal year (see below: S.13-705, NYC Admin Code). These expenses include the subsidy that the pension funds pay to the Comptroller for his regular operating budget that is part of the total city budget adopted by the City Council.

Beginning in FY-1999 the original legislation required the city to pay in FY-2000 with 8% interest all investment expenses incurred in FY- 199. This meant that these expenses were treated as operating expenses and not long term capital expenses. This is a very sound accounting practice. This legislation was also drafted by the NYCERS actuary.

You can further see that that starting with FY-2005 the law was changed to allow the city to repay expenses two years later rather than one year, so that FY-2005 was paid back in FY-2007 rather that in FY-2006. Again with 8% interest. This amending legislation was also drafted by the actuary.

You can also see that the law was again changed starting with FY-2010. And again it was drafted by the actuary. This change allows the city to treat the repayment of investment expenses as a long term capital expense rather than an operating expense. The new change also dropped the interest rate charge, in effect making this a interest free loan. Needless to say this is not a sound accounting practice. It gave the current city administration a payment holiday now and dropped the costs on a future city administration. This is how a pension crisis is born.

The new statute is listed below. It is the last item at the end of thirty two sections amending the NYC Admin Code. The new language is underlined as is standard.

§ 32. Subdivision d of section 13-705 of the administrative code of the city of New York, as amended by chapter 152 of the laws of 2006, is amended to read as follows:

d. In each city fiscal year, beginning with investment expenses paid during the nineteen hundred ninety-eight--nineteen hundred ninety-nine fiscal year, whenever the income, interest or dividends derived from deposits or investments of the funds of a retirement system are used pursuant to subdivision b of this section to pay the expenses incurred by such retirement system in acquiring, managing or protecting invest- ments of its funds, the monies so paid shall be made a charge to be paid by each participating employer otherwise required to make contributions to such retirement system no later than the end of the fiscal year next succeeding the fiscal year during which such monies were drawn upon, provided,

however, that where such charge is for such investment expenses paid during fiscal year two thousand four--two thousand five or during any subsequent fiscal year, such charge shall be paid by each such participating employer no later than the end of the second fiscal year succeeding the fiscal year during which such monies were drawn upon

, provided further that the provisions of this subdivision shall not apply to investment expenses paid during the two thousand nine--two thousand ten fiscal year or during any subsequent fiscal year.

In the event that such retirement system has more than one participating employer, the actuary shall calculate and allocate to each such partic- ipating employer its share of such charge.

All charges to be paid pursu- ant to this subdivision shall be paid at the regular rate of interest utilized by the actuary in determining employer contributions to the retirement system pursuant to the provisions of paragraph two of subdi- vision b of section 13-638.2 of this title.

When You Buy a Ferrari and You Really Need a Pickup Truck

What happens when you buy a Ferrari, when you need a pickup truck?

You pay 10 times too much for what you need, you don't get what you need, and you pay a lot for mechanics. What you do get is a fast car.

It's too bad that the NYCERs doesn't even get a fast car when they make the wrong investment decisions.

Here's the the bill for the mechanics. And once again NYCERS is not even getting Ferrari mechanics.

As of August 2, 2015 the Comptroller increased the salaries of his investment staff. The story is that the five city pension funds were convinced to pay for the increases through their mindless subsidy to the Comptroller's budget. Of course, that is an illusion. It is the NYC taxpayers and the NYC employees who are paying for these increases. In fact, the employees pay twice, once as a taxpayer and a second time through their pension payroll deductions.

All the lucky people listed below are provisional employees. I wonder how permanent civil servants feel about that?

This is in addition to the five investment consultants that NYCERS paid $3.2M in FY-2014. Consultants are not the managers who do the actual investing but "experts" who advise the trustees on how oversee the managers.

Salary Increases at the Comptroller's Office

Count	Name	Civil Service Title	Assignment	% Increase	New Salary	Old salary	New Hire
1	Scott Evans	Pension Investment Advisor	CIO	56%	$350,000	$224,359
2	Michael Garland	Admin Staff Analyst	Corporate Governance	56%	$265,000	$169,872
3	John Merseburg	Admin Staff Analyst	Public Equities	93%	$250,000	$129,650	yes
4	Niel Messing	Admin Manager	Hedge Funds	67%	$250,000	$149,701
5	Alexis Done	Admin Staff Analyst	Private Equity	75%	$280,000	$160,000
6	Martin Gantz	Admin Staff Analyst	Fixed Income	62%	$280,000	$172,840
7	Yvonne Nelson	Admin Staff Analyst	Real Estate	69%	$265,000	$156,805
8	Petya Nikolova	Admin Staff Analyst	Infrastructure	59%	$250,000	$157,233
9	Miles Draycott	Admin Staff Analyst			$265,000
10	Evan Nahnsen	Admin Manager			$180,000
11	Noraina Pares	Admin Staff Analyst			$130,000
12	Tatiana Pohotsky	Admin Manager			$160,000
13	Wesley Pulisic	Admin Manager			$180,000
14	Steven Veloric	Admin Accountant			$160,000
15	Scott Zdrazil	Admin Manager			$170,000
16	Marc Gross	Admin Staff Analyst			$110,000	$70,833	yes
17	Vistoria Hui	Admin Staff Analyst			$120,000	$85,000	yes
18	Janet Londond-Valle	Admin Staff Analyst			$130,000
19	Karen Barclay	Admin Manager			$160,000
20	Shachi Bhatt	Admin Staff Analyst			$160,000
21	Yi Feng	Admin Manager			$180,000
22	Millicen Budhai-Robinson	Admin Staff Analyst			$110,000
23	Eneasz Kadziela	Admin Manager			$130,000
24	Lakhir Kaur	Admin Manager			$110,000	$70,000	yes
25	Louis Lent	Admin Accountant			$110,000
26	Barbara Nersten	Admin Accountant			$120,000	$70,789	yes
				Total =	$4,875,000

A Message to the New NYCERS Chairperson

You have a huge problem. Your designated investment manager, the NYC Comptroller, is doing a terrible job with investing NYCERS assets, this Comptroller and the last three. NYCERS has an average annual rate of return over the last 15 years of 2.89%.

The Comptroller, however, has the backing of DC-37 which is the largest city union and also a NYCERS trustee. Between the three city unions on the NYCERS Board and the Comptroller these trustees control four votes, a majority of the total seven votes on the Board.

These votes control investment decisions, disability decisions, the NYCERS administrative budget and the budget subsidies from NYCERS to the Comptroller. The three unions are bound together because of disability votes at the Board. They need to back each other up to be able to get closely contested disability cases resolved in their favor.

Without the annual investment delegation from NYCERS Board of Trustees, the Comptroller has very little political influence. With the change in the City Charter in 1990 the mayor essentially controls the Comptroller’s administrative budget. This totally compromises his operating capabilities and his political influence.

If the Chair wishes to provide some relief to the mayor from the city’s huge pension burden, he will have to take away the Comptroller’s power over investment decisions.

This is a complicated task. Since 2005, DC-37 has run NYCERS as patronage mill for its flunkies. That starts with the executive director and spreads throughout the agency. This also includes regular employees who have criminal liabilities and are more than happy to do as they are told.

As the mayor’s appointee to the Board of Trustees, the Chair will need to take on both of these political entities. This will clearly be a hard fight. The investment issue cannot be resolved without addressing the investment delegation and the internal rot at NYCERS. The Chair will have to convince DC-37 that it is in its long term interest to reduce investment costs and raise returns. He will also have to commit to totally honest and sympathetic votes on disabilities that come before the Board of Trustees.

In return DC-37 and the other unions will have to not vote for the annual investment delegation to the Comptroller in June. It will also mean, however, that DC-37 will have to accept reform within NYCERS because the Comptroller will no longer have any incentive to allow NYCERS executive staff to run wild with the agency.

In eliminating the Comptroller from investment management operations the Board will have to hire a truly independent investment consultant and hire internal NYCERS staff to track investment activity. You can see why NYCERS also needs to be reformed. Current investment consultants under contract to NYCERS have structural conflict of interest issues involving the investment community. A large part of their revenue comes from the investment community.

While the Comptroller is the statutory custodian, he has contracted out almost all of its functions. The Comptroller has even turned over the the pension payroll operations to FISA, another city agency. There really isn't much left of the old Comptroller's Office. Ed Koch really did out maneuver Jay Golden.

The Trustees should set the target for total fee expenses at 10 basis points. That would have saved $130M in FY-2014 ($184M-$54M). The Trustees could then focus on a basic Russell-3000 US stock index fund & core investment grade bond Portfolio. Maybe the bonds could be indexed also. This will make running the portfolio and hiring staff much simpler.

Note: As of June 30, 2014 NYCERS had $11.8B in US equity index funds with annual fees of $500,000 for FY-2014 with an annual rate of return of approximately 24.5% gross of fees. But at 0.4 basis points the fees don't really effect returns. Yes, that is correct. NYCERS only paid a 0.4 basis point, not even half a basis point for that return. You can see why investment managers get nervous when you talk indexing.

The Trustees can then drop all the garbage asset classes listed below. This won’t be easy because of the crazy contracts the Comptroller’s office has signed in the past. I consider these contracts illegal because of the secrecy clauses.

Asset Classes to be Dropped:

NYCERS: Unproducive Investment Classes: Values and Fees for FY-2014

Asset Class	Fees Paid	Value as of June 30, 2014	Basis Points
Convertible bonds	$2.1M	$.5B	42
Bank loans	$3.1M	$1.0B	31
Emerging manager- US stocks	$4.4M	$1.0B	44
Emerging managers – Foreign stocks	$.3M	$.05B	60
Emerging managers – US bonds	not reported	$.1B	***
Private equity	$58.0M	$4.0B (guess)	145
Real estate	$20.87M	$2.3B (guess)	90
Infrastructure	not reported	$.02B	***
Hedge funds	$15.5M	$1.9B (guess)	82
Emerging market/active	$9.1M	$2.3B	39
Developed Market equity	$11.8M	$5.4B	22
Junk bonds	$6.9M	$2.1B	33
Opportunistic Fixed	$16.3M	$1.1B	148
Foreign bonds	$.4M	$.3B	13
Active US equity	$14.2M	$5.3B	26
TIP bonds	$1M	$1.5B	7
Subsidy to the Comptroller	$2.3M
Foreign taxes	$8.8M

By the Numbers – Private Equity at NYCERS – 2011 to 2015

Since 2011 NYCERS has dropped the following number of private equity contracts:

• 2010 – 3
• 2011 – 4
• 2012 – 7
• 2013 – 0
• 2014 – 8

It is not clear how many of these contracts were standard exits and how many were sold at a loss. NYCERS has provided no cash flow history for these dropped contracts except one. That was Allegra in 2012. That is because I requested the information. You can read about the Allegra disaster in one of my previous postings.

It is reasonable to assume that most of these dropped contracts were equally bad.

Everyone knows that the private equity industry is feeding off of the US public pension fund structure. It is a malignant cancer but no one wants to publicly admit it because that admission would make the public pension funds look like fools and would put most private equity firms out of business.

Now, for the bad news. NYCERS has continued to enter into new private equity contracts since 2010 as you can see from the numbers below:

• 2010 – 8
• 2011 – 5
• 2012 – 7
• 2013 – 7
• 2014 – 14
• 2015 – 3 (as of Sept. 30, 2014)

You would have thought that NYCERS would be quietly trying to get out from under these flawed investment deals but no. There is no end to this stupidity.

NYCERS’s private equity fees for FY-2014 were $44.1M for 142 contracts allegedly worth $4.0B. Don’t bet the ranch on that figure. There is an added charge for private equity organizational costs of $13.9M (page 120). No one knows who this money was paid to except that it has a private equity label.

The sum of the two costs is $58.0M. That is 145 basis points or a 1.45% annual charge. Another serious problem is that NYCERS is not reporting 33 of the 142 contracts in its fee schedule on page 135. Enough said.

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

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 New Chair of the NYCERS Board of Trustees

Mayor de Blasio will soon be appointing a new commissioner for the Department of Finance. The position, unfortunately, has a tradition of being filled with political operatives as opposed to public finance/taxation professionals.

The commissioner is, ex officio, a trustee of both the city police and fire pension funds.

The mayor will also be appointing his representative on both the NYCERS and TRS Boards of Trustees. The Mayor can appoint anyone to these two unpaid positions. On the NYCERS board the mayor's representative is the statutory chair. At TRS the chair is elected by the trustees.

Because of the mayor's enormous political and budgetary power, the mayor's representative is the most important member of the NYCERS Board of Trustees.

Prior to 1990, the power structure of the NYCERS Board of Trustees, to a large extent, mirrored the Board of Estimate which was the original governing body of NYCERS up until 1968. With the destruction of the Board of Estimate in 1990 the mayor's power within the city increased radically. That was alos true at NYCERS.

While the mayor's representative has only one vote, it is the most important vote. Even a dissenting vote from the chair on an investment decision is a warning signal to the other trustees.

Mayor Bloomberg's appointees to the NYCERS and the TRS Boards have been a disaster. The mayor has constantly complained about the rising costs of pensions during his three terms but his representatives have failed to control investment costs or institute a sound investment strategy that earns a market rate of return.

Mayor de Blasio's appointee will have the challenge of bringing the annual investment costs for the five pension funds down from the $472.5M (FY-2013) to a rational annual amount of $100M (FY-2002) along with pushing to adopt an index/core strategy which has the potential to earn on average an additional $1.5B a year in asset value for the five city pension funds.

With respect to NYCERS here are some operational recommendations that I hope the mayor's new representative considers:

1. Hire a totally independent investment consultant with no revenue connections to the investment management community.
2. Make all investment contracts public record and provide every trustee with a copy of each contract. It is most likely that the trustees have never seen any of these contracts.
3. Make the Board's investment meetings totally open for all items unless the Law Department gives written direction that a specific item must be dealt with in executive session.
4. Put in place a tight accounting control of the invoice/payment process for all investment expenses and publicly report all payments to the trustees at each meeting and once a year provide the trustees with a copy of the final annual reconciliation of investment expenses for the year.
5. Utilize the NYCERS web site to provide public disclosure of investment data and decisions. The Comptroller's attempt in this area has failed to deliver on the information it promised to provide.
6. Make available to the trustees the full cash flow history of each private equity, real estate, and hedge fund contract on a real time basis. (NYCERS web site)
7. Explore the feasbilty of dropping of all asset classes that do not fit within a index/core strategy.
8. Set 10 basis points as the general limit on fees for all investment contracts. I suspect that this will be a very effective screen for unproductive investments.
9. Almost certainly drop all emerging manager contracts unless their fees are brought under the 10 basis point limit.
10. Review the quality of NYCERS's senior administrative management. This staff was put in place while Martha Stark was chair.
11. On an annual basis provide the trustees with a copy of a complete reconciliation of administrative expenses, This report was dropped in FY-2010. (NYCERS web site)
12. Radically upgrade the agency's monthly production report to include open and closing transaction balances along with incoming work, work completed during the month, and aging information on the outstanding work. (NYCERS web site)

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.

FY-2013 Investment Returns: NYCERS Fails to Match the S&P 500 Index, Again.

The Comptroller has just released the NYC FY-2013 CAFR (Comprehensive Annual Financial Report) : the city's annual financial statement. Pension investment expenses have increased significantly from FY-2012, $472.5M up from $370.3M. This is a reversal from the previous two years.

Specifically, NYCERS expenses jumped from $129.5M to $183.3M (see original expense history).

As of June 30, 2013, the NYCERS closing balance increased from $42.7B to $47.2B but given the 17.9% increase in the S&P 500 index that number should have been $48.6B (Bond Core = -.95% with a 70/30 allocation). With a waste of $150M in investment expenses NYCERS is short $1.55B for FY-2103 that a prudent investment policy would have provided. For the record NYCERS missed the Index/Core threshold by $2.6B in FY-2012.

The truly scary thought is that if NYCERS had followed a simple prudent investment strategy over the last last 14 years, the June 30, 2013 closing balance would be $58B. In this year's CAFR the actuary estimated the NYCERS current pension liability at $65.3B. A sane investment policy can go a long way in solving pension problems.