Phantom Payments of $140M Paid Over Seven Years

Since FY-2006 NYCERS has paid approximately $140M in private equity and real estate organizational costs. While NYCERS is required to identify the recipients of all investment payments, NYCERS has consistently failed to identify the parties receiving this money. This is not the money that NYCERS has paid to individual private equity and real estate partnerships (i.e. $67.4M in FY-2012).

Without disclosure this at least creates the appearance of corruption.

Total investment costs during this seven year period amounted to $871M.

NYCERS Investment History: 2002 – 2009

In light of the recent negative investigative findings by DOI of the former NYCERS Chair of the Board of Trustees, it would be prudent for the trustees to review the investment decisions that occurred during her tenure from 2002 to 2009.

As background, DOI found that the Chair failed to implement corrective actions with respect to the city’s property valuation system. Such actions were agreed upon by all parties in response to a major 2002 bribery scandal in the property valuation system. The Chair subsequently lied about implementing these actions. During this seven year period NYCERS’s started making significant real estate investments, as outlined below.

In addition, there is an alleged claim of interference by the Chair in the property valuation of the Met-Life Building just prior to its 2005 sale for $1.74B to a limited partnership which included both NYCERS and NYCTRS. The NYCERS Chair was also the Chair at NYCTRS at the time. This allegation was reported to the Manhattan DA’s office in 2006 but no action was taken. The new DOI report should prod the DA to wake up.

Considering the huge increase in private equity investments during the same period along with the associated scandal at the NYSLERS pension fund in Albany, the trustees should expand their review to this asset class also.

To complete their due diligence the Trustees should review the unresolved perjury and conspiracy charges still pending against senior NYCERS management.

As of June 30, 2002 the assets of NYCERS were reported to be worth $32.2B with no real estate investments and $96M in private equity.

As of June 30, 2009 the assets of NYCERS were reported to be worth $30.9B with $885M in real estate investments and $1.9B in private equity.

Private Equity Underwater

Recently, I have been trying to get NYCERS to turn over the detail quarterly reports of the performance of the NYCERS private equity and real estate investments.

Note: These investments are generally limited partnerships where NYCERS pays two percent annual fees and 20% of the profits to the general partner in return for 2 to 3% above the S&P 500 index. The trustees, however, never see the actual contracts with these investment managers and they really don’t know what the details are. NYCERS has been investing in limited partnerships since FY-2000. Hevesi was the NYC Comptroller and the NYCERS designated investment manager at that time. Hevesi was instrumental in moving the real control of the investment contracts from the trustees to the Comptroller’s office.

NYCERS gets these reports from the Comptroller’s office. The reports are written by investment consultants that are under contract to NYCERS. NYCERS refuses to make these reports public. My opinion is that the data in the reports are extremely embarrassing and that, while some investments are doing well, others are a disaster, for example: Shamrock Capital.

As of June 30, 2010, the alleged value of these investments, aka “fair market” value, was $3.4B according to the Comptroller’s general quarterly report. Since there are no independent market values for these assets, any stated value is just a guess. The Comptroller stopped putting the general quarterly reports on his web site in 2005. The last one posted was for the March 31, 2005 quarter.

NYCERS, however, must file annual NY State Insurance Department Reports (SIR) as of June 30 of every year on March 1 of the following year. Interestingly the SIR requires that NYCERS list all private equity investments along with their actual costs and their fair values.

The NYCERS SIR for June 30, 2010 states that the actual cost of private equity investments was $4.48B and their fair value is $4.12B. After investing for 11 years, NYCERS is underwater with a -8.0% loss on its private equity investments. NYCERS Russell 3000 index performance for the last 10 years is -0.9%. The good news is the 10 year loss for private equity as of June 30, 2009 was -15%.

What is truly insulting about this comparison is that NYCERS paid the private equity managers $108.1M in FY-2010 and only $535,817 to it two Russell 3000 index managers who managed $8.56B.

As a postscript, I have very little confidence in the accuracy of these figures because of the lack of internal control of the accounting of investment activity at NYCERS.

Low Risk/Low Cost versus High Risk/High Cost

In the 12 months ending December 31, 2009, the S&P 500 index gained 23.5%, moving from 903.25 to 1115.10. At the same time, NYCERS total assets rose by 17.5% from $30.4B to $35.7B driven by the same market rebound.

In particular, NYCERS holdings with its domestic stock indexed managers, and its government and corporate bond managers gained 22.3%, closing the year at $15.5B up from $12.7B. The interesting aspect of this is that NYCERS paid only $1.8M in management fees for this return.

At the same time, the rest of the portfolio returned 16.2% moving from $17.7B to $20.6B. For this performance, NYCERS paid $132.2M.

If the NYCERS trustees had invested the entire portfolio with the indexed stock and the government/corporate bond managers, the portfolio would have been worth $37.2B instead of $35.7B and NYCERS would have saved $130M in fees.

Managers	Assets 12/31/2008	Assets 12/31/2009	Return %	Fees - 2009
US Stock Index	$9.651B	$12.333B	27.80%	$295,108
US Government Bond	$1.229B	$1.007B	-18.03%	$261,158
US Corporate Bond	$1.794B	$2.161B	20.48%	$1,211,612
Sub-total	$12.675B	$15.503	22.31%	$1,767,878
Total Portfolio
Actual Reported	$30.396B	$35.727B	17.54%	$134,000,000
Low Risk - Low Cost	$30.396B	$37.179B	22.31%	$4,000,000

This is a clear example how a low risk/low cost strategy actually is more profitable than a high risk/high cost strategy. NYCERS makes no attempt to review the effectiveness of its investment decisions.

A note of warning: NYCERS lost $387.2M on its real estate investments in 2009, a 32.7% loss.