The Comptroller's Office and Simple Arithmetic

NYCERS released its FY-2014 Comprehensive Annual Financial Report (CAFR) on Jan. 1, 2105. This report is submitted to the GFOA every year and is supposed to be a standardized financial report for all state and local government entities in the US. In addition, it is supposed to provide information to the general public, especially to actual and potential lenders, about the entity’s financial health and the level of risk involved with lending to the entity.

There is a significant section in the NYCERS CAFR dealing with investment details that are prepared by the NYC Comptroller’s Office. This is the first report produced by the current Comptroller. In this section on page 114 is a chart of the rates of return for the total portfolio and the major assets classes within the portfolio covering the three years 2012, 2013, 2014. There are also 3 year, 5 year, and 10 year averages. The chart alleges that the rate of return for the NYCERS portfolio for FY-2014 was 17.04% compared to a benchmark of 16.81%. There is no supporting documentation for this number but a reasonable person would conclude that it is accurate.

The audited income statement in the CAFR (page 82), however, tells another story. Based on numbers in the income statement which were signed off by the outside CPA firm, the opening balance for the NYCERS portfolio on 7/1/2013 was $47,194.6M and the closing balance as of 6/30/2014 was $54,422.0M. The income statement also indicates that NYCERS had a positive cash flow of $691.0M in FY-2014. Based on these numbers NYCERS had a total rate of return of 13.85% in FY-2014, (($54,422.0 - $691)/ $47,194)-1).

This same pattern has been occurring, at least, as far back as 2010 as you can see from the figures below drawn from prior CAFR’s:

• - Year: Reported vs Actual
• - 2014: 17.04% vs 13.85%
• - 2013: 12.24% vs 8.81%
• - 2012: 1.32% vs -1.14%
• - 2011: 23.12% vs 19.39%
• - 2010: 14.09% vs 10.68%

The other figures quoted in this schedule on page 114 are much more difficult to compute and I have no confidence that the Comptroller was any more successful with the math for these numbers. In particular, he quoted 15.2% rate of return for NYCERS’s private equity contracts. I suppose he is referring to the eight contracts that terminated in FY-2014. Of course, you might easily be misled and think that he was referring to the entire class. That would wrong and he is very carefully never to report rates of return for open contracts.

But let’s get back to 15.2%. Of the eight contracts that closed in FY-2014, either by exiting or sale on the secondary market, the Comptroller is not providing any cash flow histories for these contracts. Not only do I think the 15.2% is incorrect but I think the rate of return on these closed contracts showed a loss like the Allegra contract. If I am wrong, all we need is the cash flow histories on the eight contracts to compute their correct rates of return. If I am right, you will never see their cash flow histories.

What makes this more outrageous is that over the last 15 years, members of NYCERS have contributed $5.4B out of their own paychecks into NYCERS along with $21.8B of taxpayers’ money that has also been contributed. Oh, I forgot. Members are taxpayers too.

If the Comptroller’s Office cannot perform simple arithmetic, then the NYCERS Board of Trustees has a serious problem with renewing its annual delegation of investment authority to the Comptroller.

The fact that the rates of return are consistently inflated raises the suspicion that it was done on purpose. The investment figures are not audited. NYCERS actual average annual rate of return over the last 15 years is 2.89%, a little scary.

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

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.

Slow Motion - Another Year at 8%

Bob North, the NYCERS actuary, is kicking the can down the road for another year. For the second year in a row, North has failed to recommended a new 5 year expected rate of return for the five city pension funds. That means another one year extension of the irresponsible 8% interest rate.

In plain English, this means the city & the other participating employers can continue to uderfund the pension plans for another year. Of course, things could be worse. New Jersey use 8.25% but then again, New Jersey doesn't make any pension contributions at all.

See the write up on this pending bill.

North has known for years that he needed to recommend a new interest rate in FY-2009, the last year of the last five year period. I know Bob moves slowly but this is glacial. No one wants to amputate a leg but if you don't, the gangrene will kill you.

A prudent rate would be 6%. But the city is between a rock and hard place. Because the city uses fairly accurate accounting, it has budgeted $7.49B in payments to the five pension funds for FY-2011. This is a huge number in spite of the inflated 8% assumption. A 6% rate could easily add $3B more to the cost for FY-2011.

The biggest threat to any pension plan is underfunding, followed by lousy investment decisions. What ever the benefits are, rich or poor, the driving force is funding. The city delayed paying its full pension costs and now time is running out.

One positive note. Compared to other public pension systems, the city is a saint.