Phantom Disaster Recovery Site at Long Island City

In 1997, after NYCERS received independent budgeting authority, we began developing a computer disaster recovery plan. In conjunction with IBM and its Sterling Forest site we constructed a process where we were able restore our computer systems at Sterling Forest along with our key operations. This plan only supported about 50 operations employees.

In February, 2000, we moved NYCERS from 220 Church St. to 335 Adams Street in Brooklyn. This new office site had 3 general office floors (21 to 23) and a mezzanine site where we located our customer service center, our call center, and medical board division for handling disabilities.

After of 9/11, everyone in the New York metropolitan area became very aware of the potential for wide spread disasters.

In early 2004, NYCERS experienced two minor business interruptions at our new office site. One was a broken sprinkler pipe on the 24th floor and the other was a fire in an electrical closet on the 8th floor. The water damage was minor but the fire closed the 3 main office floors for a week. We were lucky that the mezzanine still had power. We had installed a second data line from Sterling Forest to the mezzanine along with the main data line on the 23th floor. We also had installed a backup PBX in the mezzanine which allowed the call center to operate after two days.

While the recovery was a great success, it was clear to me that any long term outage would be unacceptable with respect to agency’s work load and the management our staff of 370 employees.

I proposed to the trustees as part of the FY-2005 budget package that NYCERS should explore a possible alternate work site in the event of a local disaster at 335 Adams Street. We would be looking for site within the city, on a different power grid, with decent mass transit access, capable of housing at least 250 workers at one time, capable of being linked up to Sterling Forest, 335 Adams Street, and other city data centers, and finally not too expensive.

The site would have to have the potential to be fully outfitted but we would start with only a minimal kernel for immediate operations. This would include a full technology infrastructure. We would slowly install non-critical equipment over time. In the event of a disaster, we would expedite that process. The site would have the added advantage of allowing us more frequent and realistic disaster testing.

I was looking for a 5 year lease with an option to renew. I was hoping the city would have developed a local DR site for general city agencies within that time frame. That was wishful thinking. I had told the trustees that after we had identified a site, I would present them with a total cost proposal and plan for their final approval.

The Deputy Director of Administration, Niki Browne, was in charge of the search. Late in 2004 Ms. Browne identified a potential site in Long Island City. It was, however, warehouse space and had many issues to be resolved. Unfortunately in June of 2005, Ms. Browne was removed from the project and it was turned over to Karen Mazza. Needless to say, this project is above her pay grade. In fact, Mazza, a lawyer, has serious problems with filling out time sheets, handling her emails, and analyzing legislation.

In October, 2005, Martha Stark and the trustees appointed Diane D’Alessandro as the new executive director of NYCERS.

On of May 31, 2006, D’Alessandro signed a lease with 30TH Place Holdings, LLC for space on the 10th floor of The Factory Building, 30-00 47th Avenue, Long Island City, NY (LIC). This was the site that Ms. Browne had originally identified. The term of the lease was ten years with an option to renew for 5 years. The dimensions of the space were not specified in the lease. NYCERS began paying rent circa 2/1/2007 ($141,905 for FY-2007).

The annual rents for the ten years are listed at the end of this posting. These amounts do not include taxes, HLtP, or water charges.

In her February 25, 2011 letter to the trustees presenting the FY-2012 budget, D’Alessandro notified the trustees that the development of the disaster recovery facility was continuing. She also stated that the LIC site will have the capacity to house two shifts of 150 people. NYCERS currently has 396 employees and a large number of consultants.

I have recently commented on the fact that as of this past summer basic construction of the LIC site had not yet been started. This is over five years since the lease was signed.

D’Alessandro makes no mention to the trustees of this enormous delay in getting the site operational. She also does not mention the fact that, even if the site is made operational, it will not be able to handle the full current workforce. This is beginning to fit the CityTime pattern as far as the loss of time and money. NYCERS has budgeted over $8.7M from FY-2007 to FY-2012 for the LIC site.

NYCERS actually spent over $2.2M between FY02007 and FY-2009 on the LIC site. As of FY-2010, NYCERS stopped publicly reporting the ongoing rent payments and the associated costs for the LIC site.

This lack of disclosure is not unique to the LIC site. It applies to all NYCERS paid administrative expenses. The trustees no longer have any way of checking on actual spending at NYCERS. You can be sure the Comptroller is not auditing the financial controls at NYCERS. He has enough trouble managing the investment expenses for the pension funds. And, I wouldn’t count on the outside accounting firm either.

My professional opinion is this site is seriously flawed and will never be able to function at any acceptable level as a business disaster recovery site for NYCERS. I suspect that at the time of the lease signing NYCERS had not solved all the operational problems connected to the site and that some of those problems are intractable. Let’s hope NYCERS has the good sense not to extend the lease in 2016.

Annual rents for each year of the ten year lease for 30-00 47th Ave, LIC, NY:

1. $362,076
2. $370,222
3. $378,552
4. $387,070
5. $479,335
6. $490,120
7. $501,148
8. $512,423
9. $523,953
10. $535,742

The Vanishing Act on Investment Fee Reporting

The Problem

In FY-1997, NYCERS paid $17.3M in investment fees for a portfolio worth $31.7B.

In FY-2010, NYCERS paid over $175M in investment fees for a portfolio worth $35.4B.

Yes, that is a 1,000% increase in 14 years.

On its face, this is gross negligence on the part of the NYCERS trustees. Why would anyone pay 10 times more for an inferior product? These numbers are not a mistake. It really is as bad as it appears.

History

Prior to 1987, all NYCERS investment managers were paid directly by the NYC Comptroller from the city budget. In 1987, the trustees approved the direct payment of its equity (stock) investment managers from the assets of the pension fund. This change of payment method was due to a deadlock between the then Mayor, Ed Koch, and the Comptroller, Harrison J. Golden, over the approval of the equity manager contracts at the old Board of Estimate. Before its elimination by Koch’s charter commission in 1989, the Board of Estimate was required to approve all significant city contracts.

From FY-1987 to FY-1996, the NYCERS trustees approved the equity manager’s contracts. The annual cost started at $2M in 1987 and reached $4.6M in 1996. The executive director signed both the contracts and the associated payment vouchers for these managers(S.13-137 of the NYC Admin Code). During this period, the bond managers continued to be paid directly from the city budget.

Out of Control

In FY-1997, the NYCERS trustees surrendered control of all of their investment manager contracts and the associated payment process to Alan Hevesi, the then NYC Comptroller and now convicted felon.

In return, as part of an annual renewal resolution, the trustees required the Comptroller to provide an estimate of the total annual fees for the upcoming year along with a detailed listing of each manager and the fee estimate for that manager. The Comptroller was also required to provide, contemporaneously, the amount of the payments made and copies of the supporting audited invoices to the executive director for his/her review.

In a real Catch-22 situation, the Comptroller is also the statutory auditor of all payments made by NYCERS (S.13-103.g of the NYC Admin Code).

At that time, I directed the agency’s accounting division to start maintaining investment expense charts for each year. The chart was designed to record fee expenses by quarter for services incurred during the quarter. The fee amounts entered in the charts were based on the information provided by the comptroller to me as the executive director.

The charts do not close on June 30 each year. The accounting division continuously updates them as data comes in from the comptroller’s office, very often many months after June 30. Strictly speaking, these are not formal accounting documents since they don’t have a closing date but are an historical record of what was paid for services rendered during any given quarter.

Unfortunately, the submitted billing data has never been complete or timely. The estimates of the managers' fees, however, were provided each June with the adoption of the renewal resolution. That is until June of 2010.

As of June, 2010, however, the Comptroller stopped providing the NYCERS trustees with budgeted estimates of the investment fees for the upcoming year. This was the beginning of an effort to cut off information on this fiasco.

My best guess for FY-2011 is $200M and for FY-2012, $225M.

Cover Up

On December 17, 2010, I made a Freedom of Information Law (FOIL) request to NYCERS for a copy of the current investment manager expense charts for FY-2009, FY-2010, and FY-2011. On August 10, 2011, after seven follow up requests, NYCERS refused my request using the following excuse:

Your request is being denied pursuant to §87 2(d) “are trade secrets or are submitted to an agency by a commercial enterprise or derived from information obtained from a commercial enterprise and which if disclosed would cause substantial injury to the competitive position of the subject enterprise”.

I’m not sure which of these excuses NYCERS is using. I’m sure there can be no legal basis for a government agency not reporting the amount of money being paid to a vendor. For background read the 2005 opinion from the NYS Commission on Open Government.

This denial is a sharp change in policy by NYCERS. The agency had previously honored my FOIL requests for these documents. Specifically, on May 28, 2010, NYCERS gave me current copies of the FY-2009 and FY-2008 expense charts.

In addition, NYCERS allegedly published accurate investment fees for each individual manager for FY-2010 in the NYCERS 2010 Comprehensive Annual Financial Report (CAFR). This would support the fact that the data in the FY-2010 investment expense chart is already in the public domain.

Last year, however, I pointed out to NYCES how much the data in the expense charts deviated from the amounts reported in the FY-2008 and the FY-2009 CAFR reports. I expect that NYCERS realized that the agency’s tracking process was seriously broken. In addition, the agency had no way of fixing it since the comptroller office does not have an effective control of the payment process for the investment managers either.

This in turn raises serious questions about the quality of the accounting that is the basis of the formal CAFR reporting of these investment fees.

When a government agency denies the public access to basic information, it usually is because of a desire to hide incompetence but sometimes it is corruption. We need only look at the pattern we saw with City Time to realize that you can never overestimate the incompetence of government agencies.

This fee problem is not restricted to NYCERS alone. The five city pension funds paid a total of $426.9M in investment fees in 2010. This cost item dwarfs almost any other city contract and it is growing at annual rate of 27% since 2005.

In closing, not only does the public not know what the fees are, but neither do the trustees. Well, at least, they've got plausible deniability.

Robert Steel and Pension Delusions

Toady the NY Times reported on statements made by Robert Steel on Thursday at the Princeton Club in Manhattan. Mr. Steel is the mayor’s deputy mayor for economic development. Mr. Steel was speaking about fixing the NYC pension funds.

Mr. Steel thinks that that by increasing the pension funds’ investments in international stocks would produce higher returns for the pension funds. If this is true, what has the mayor been doing for the last nine and half years? He is the dominant trustee on all of the five city pension systems.

Of course, Mr. Steel may be totally wrong about achieving higher returns with increased exposure to foreign stocks. Just imagine owning more Greek, Irish, Portuguese, Spanish, and Italian stocks. Is that a good idea?

On Thursday he also complained that the pension funds only had a 20% return in FY-2011, while the S&P 500 index had risen 31% in the same period. This statement exposes Mr. Steel’s lack of understanding of pension systems.

The fact that the S&P 500 was up 31% means that a prudent pension could earn 31% on that portion of its balanced portfolio of which it was prudent enough to put in an S&P 500 index fund with its low fee structure. This is what the NYC pension funds generally do but they must also diversify. Only a fool puts all his eggs in one basket.

NYCERS, the largest of the city pension funds, has 34.8% of it assets in US stock index funds, 8.3% in US actively invested stocks, 28.3% position in mostly US bonds, 18% in international stocks, and 10.2% in private equity/real estate limited partnerships. The quoted 20% is a rational return for a prudent investor.

Every investor, however, should do a constant review of comparative strategies in order to make well founded decisions for the future. That is something that the NYC pension funds do not do. Neither does Mr. Steel. I have previously criticized NYCERS investment strategies. There is much that can be done to save a great deal of money.

The mayor has been in office now for nine and half years. Investment strategies can be corrected immediately, as opposed to benefit strategies which take decades. Salary and overtime decisions are also items under direct management control. Why should Albany return authority to the city on pension issues when Albany had to take it away in the first place because of the city’s past mistakes?

Mr. Steel stated that he wants to consolidate the operations of the five city pension systems. The city and the other participating employers might gain some savings but the political hurdles are huge. If the mayor wasn’t able to merge BERS in to NYCERS over the last nine and half years, I don’t think he will have much success in the next two and half years. Besides, the big immediate money is in reforming the investment process. But that will require incredible political integrity, a rare bird.

Loss of Transparency on Investment Fees

In FY-1997 Alan Hevesi, the then Comptroller, made a power grab for full contract and payment authority of the investment managers of NYCERS. In spite of statutory requirement of two person accounting control of the payment process and no statutory authority to delegate contracting authority to a single trustee, the Law Department rolled over for the Comptroller and gave him control.

At the time, I objected to the violation of the statutory requirement that NYCERS approve all payments before the Comptroller paid them. I was amazed that the Law Department ignored the statutory language. Of course, the Comptroller would have had to give NYCERS a copy of each of the investment contracts and that would have exposed the terms of the contracts.

Since FY-1997 until FY-2010, Comptroller Thompson’s last year in office, the trustees have adopted an annual resolution granting this “authority” to the Comptroller. The resolution has always had the clause stating an estimated total cost for the coming year. For example see the clause for FY-2010, R-41 (6/11/09), listed below. In addition, the Comptroller also provided a detailed schedule of individual managers and estimated fees for the coming year.

“Resolved, that the estimated fees allocated to the System for Fiscal Year 2010 shall be approximately $159,941,361.34 and be it further “

But for FY-2011 and FY-2012, Comptroller Liu has submitted resolutions dropping the above resolve clause. See R-1 (6/22/2010) & R-35 (6/9/2011). And, of course, he submitted no detailed schedules of individual fees. The trustees now have no idea what the total amount might be or the estimated amount each manager is going to be paid.

While the Comptroller is supposed to report all payments contemporaneous to NYCERS, the reporting process has always been slipshod. The Comptroller’s office has never given NYCERS a full accounting of what fees he/she has paid in any given year. With the rising costs, however, this weakness is becoming more dangerous. The potential for fraud is huge. The fact that the Comptroller is a statutory auditor of all NYCERS payments is ironic.

The mayor could change this process by having the Law Department issue an opinion stating that the payment process must adhere to S.13-137 of the NYC Admin code and that the trustees do not have the statutory authority to delegate their contracting responsibility to one trustee.

§ 13-137 Payments from funds. All payments from such funds shall be made by such comptroller upon a voucher signed by the executive director of the retirement system.

Since 2003, these fees have accelerated out of control. For the record, the actual investment fees for FY-2010 were $175.2M, $16M more than estimated. In contrast, the fees for FY-2003 were $29.3M.

Considering the current budget constraints, these fees are obscene. On top of this, there is a clear attempt to obscure the scale of these fees.

Five Years Lost on Disaster Recovery Site

Five years ago (FY-2007) NYCERS signed a lease for a site in Long Island City to be used as a backup site for NYCERS in case of disaster at its downtown Brooklyn office.The annual rent is approximately is $375,000.

On June 27, 2011 Karen Mazza, a staff attorney at NYCERS placed a notice in the City Record that NYCERS was soliciting a negotiated acquisition for the demolition and build-out of a disaster recovery data center. The due date is July 8, 2011, a 12 day turnaround. Don't hold your breath.

It took almost five years for NYCERS to move from the lease signing to the selection of contractor to build the data center at the disaster recovery site. In order for the site to be a step up from the current IBM Sterling Forest D.R. program, the site will also have to be built out to accommodate at least 250 employees working alternate shifts. This would allow NYCERS to continue business operations for extend periods of time (i.e.: six months) in the event of a disaster.

It is clear that NYCERS has already wasted $1.6M on lease payments alone, not counting any other associated costs. That money came from contributions from members, retirees, and employers who are stakeholders in the pension fund. It is reasonable to assume that this current effort will fail as has efforts since FY-2007.

As of FY-2010 NYCERS has stopped reporting a detailed reconciliation of budgeted and actual expenses to the trustees. Needless to say, the trustees don't seem to care.

Simple pension math

Now that Cuomo has floated his new Tier 6 pension plan proposals, it's time to do a little pension math.

Elected officials generally skipped basic math when they were in school. Facts usually interfere with political careers. Pensions, however, are all about the numbers. That is when everyone is behaving. Of course, someone always misbehaves and that is where the trouble starts.

Andrew wants everyone to work until 65, contribute 6% of pay, and not have any overtime in the pension benefit. I guess the employees won't have to pay 6% on overtime pay then.

Age 65 retirement creates serious management issues but sounds tough. Police, fire, sanitation, corrections, and heavy labor positions, however, will all need special retirement ages and these are the areas with heavy pension costs. I'm also not sure that everyone will be keen on 65 year old teachers, either. 62 has always been a good general target.

I wonder why Bloomberg gave the teachers an age 57 benefit in 2008. Maybe, it was because he was trying to change term limits in 2008.

The overtime issue is just a lot of noise. If you are using the current Tier 4 five year compensation window, it is very difficult for an employee to inflate his/her final compensation. The city also can exercise some management control but then again we are talking about political appointees and not competent managers.

Now for a little math. The 6% employee contribution rate for every year of service is a interesting idea. Let's see what pension benefit that it would support.

Given:

1. an employee starts working at age 30
2. his/her starting annual salary is $25,000
3. he/she averages a 2% pay raise every year
4. the employer also contributes 6% of pay every year (that is $66,341 total each for both employee and employer)
5. the assets earn a conservative 6% a year,

then the employee can retire at age 62 with a fully funded annual annuity of $33,226.

His/her final salary would be $46,189. His/her three year final average salary would be $45,289. His/her pension reserve would be equal to $352,943 using the 6% rate of return. The $33,226 is generated by dividing an IRS 6%/age 62 annuity factor of 10.6222 into the pension reserve ($352,943/10.6222). That is an annuity equal to 73.36% of the three year average.

The pre 2000 Tier 4 benefit at age 62 was 63% of the employees three year average. With the employee only contributing 3% and a 6% rate of return, the employer would have had to contribute 7.3% of earnings to support the 63% benefit.

You can see that a 6% contribution by the employee will raise the benefit percentage for the employee and reduce the employer's contribution rate even with the conservative 6% investment rate of return. The employees, however, will have to make sure the trustees stop gambling (my opinion) with the employees' money.

It is interesting that the NYCERS makes a guaranteed 7% interest on all pension loans to active employees. That is 7% per annum compared to the average 2.4% per annum total return that the trustees have earned over the last eleven years.

Comptroller's Pension Report 2000-2010

On April 6, 2011, Comptroller Liu released a report analyzing NYC pension cost over the last decade. This is generally a good report. It is a more complete look at the NYC pension problem than what most commentators produce. Liu has his agenda like everyone else but he is way out in front on content and balance.

The starting year used in the report is 1986. That was the year Harrison Goldin started submitting city financial reports to the GFOA. At the time, I thought it was a PR exercise but it was a major step towards transparency for city and pension financial records.

The heart of the report, on page 2, focuses on what Liu considers the most relevant causes of the NYC pension underfunding problem. I have listed them below along their FY-2010 increased cost:

1. lower investment returns - $3.1B
2. benefit enhancements put in place in 2000 - $2.1B
3. actuarial losses and revisions - $790M
4. benefit enhancements put in place after 2000 - $264M
5. higher than expected investment and administrative fees - $313M.

Lower Investment Returns

The report correctly identifies the prime cause of underfunding as the market collapse since March, 2000. But on this key point, the report fails to add the fact that the pension fund trustees exacerbated the market collapse by poor investment decisions.

The actual closing balance as June 30, 2010 of the five city pension funds was $89.9B. In comparison, the closing balance as of June 30, 2000 was $105.6B, a decrease of $15.7B over ten years. It is also distrubing that approximately 10% of the 89.9B is in illiquid limited partnerships whose values are only an estimates.

The employer pension contributions for the 11 years from 2000 to 2010 were $42.9B. The employee contributions for these same 11 years were $7.4B.

The pension contributions (city only) for FY-2010 were 11.2% of the total city budget ($6.651B vs. $59.479B). The total for all employers for all five pension funds was $7.765B for FY-2010.

With the $42.9B contributions, if the funds had earned 8% each year during this period, the closing balance would be $168.8B. No one would be discussing any pension crisis.

In his simulation for the five pension funds, the Comptroller estimated the June 30, 2010 closing balance at $139.2B. Rather than the actual $42.9B, Liu used a much lower level of employer contributions, $11.8B, for the 11 year period from 2000 to 2010.

As of June 30, 2010, the NYCERS actuary, Bob North, estimated (using the EAN method) the pension liabilities for the five pension funds at $145.8B. This generates a short fall of $56B ($145.8B - $89.9B).

Using a more traditional 4.5% of the total city budget for employer contributions ($28.1B), I estimated that the 8% June 30, 2010 closing balance for the five pension funds would have been $151.6B.

The $151.6B figure would easily cover North’s estimate of pension liabilities even with the increased benefit structures outlined in the report. You, therefore, can make a plausible argument that the investment collapse caused the entire problem.

Bad Investment Decisions

But the killer point is that as of the summer of 2002 all parties knew that 8% was an irrational investment target.

But because of the trustees’ adherence to the 8% target, (see my March 15 posting), the pension funds continued to follow their 70%/30% investment strategy after the 2000-2003 market collapse and even increased the risk level with an new 11% commitment to private equity and real estate. This was motivated by the desire to avoid paying the higher employer contributions that would have been required with a lower more realistic target rate. In the end, they wound up paying more and getting less. They lost on both ends.

The impact of the collapsing markets was magnified by the 8% decision. In my March 15 posting, I stated that if NYCERS had adopted a conservative strategy from 2005 to 2010, it would have increased the its closing balance for 2010 from $35.4B to $42.8B. Projecting this number to all 5 systems, the closing balance could have been $108.7B instead of the $89.9B, an $18.8B increase.

It is unrealistic for us to expect the trustees to admit such a huge mistake. So they blame all the loss on the market collapse and accept no responsibility. They do, however, regularly claim credit for investment increases.

The actual flat rate of return for the 5 city pension funds for 2000-2010 was 3.85%. You can see the specific rates of returns for 2001 to 2010 on page 6. In contrast, NYCERS 10 year rate of return on its government bonds was 7.72% as of June 30, 2010. It is easy to see the impact of aggressive investment decisions. There are bad decisions in the investment world.

Note: The 2000 market value reset issue, see page 4, is important but rarely mentioned. In a classic case of bad timing, March, 2000 was the start of the dot.com market collapse. On page 5 you can see how the level of employer contributions (1983 to 1999) benefited from the long bull market and the pension benefit reforms under Tier 3 & 4. The sharp drop, however, in the 2000 employer contributions was due to the market restart.

Benefit Enhancements Put in Place in 2000

This is a very comprehensive breakdown of the pension benefit improvements from 2000 to 2008. See pages 18 & 19. This is the most intriguing part of the report. It attempts to quantify the effects of the benefit enhancements. It catalogues and presents purported annual costs for individual benefit enhancements. It puts the benefits in a cost framework. I am, however, skeptical of the accuracy of the cost figures. Assuming that they are accurate, it provides a guideline for corrective action with respect to the benefit structure.

I do, however, particularly question the estimated cost for the city of the state wide COLA benefit enacted in 2000. Liu claims that this benefit costs the city $1.373B in FY-2010. I doubt that the cost is that high.

For this benefit, the city has an exposure to about 180,000 pensioners.

1. NYCERS: 72,000
2. TRS: 79,000
3. BERS: 10,000
4. Police: 8,000
5. Fire: 11,000

Generally at age 62, the annual COLA on average starts at $300 and grows by $300 per year per pensioner for his/her remaining lifetime. This benefit conservatively has a life cycle on average of 18 years.

This translates into an average annual cost of a $2,250 per pensioner or a $486M ($300 * 18 / 2 * 180,000) total annual cost on a pay as you go basis. This benefit does not grow after it reaches a steady state.

This means that the $1.373B cost for FY-2010 seems to be way off track, even considering an effort for future funding.

This type of discrepency means that the benefit costs have to be more carefully researched with extensive documentation supporting the estimated costs. .

Actuarial Losses and Revisions

Actuarial profits and losses occur when the actuary makes mistakes in his assumptions. If he/she is too conservative, then you have a profit. If he/she is too aggressive, then you have a loss. I don't think this is really a cause of increased pension costs but reflects a bias on the actuary's part to reduce pension costs.

Benefit Enhancements Put in Place After 2000

What is interesting about this point is why has the current mayor agreed to give any benefit improvements during this period. He has also given significant salary increases during his nine years in office in spite of the huge pension overhang that has existed since 2002. In particular, the two 4% increases given to DC-37 in the fall of 2008, concurrent with the fall of Lehman, are disturbing at best.

Higher Than Expected Investment and Administrative Fees

This is a valid area of concern which Liu is presenting using the two year lag.

On an accrual basis, the five systems incurred investment costs of $101.9M for FY-2002. The FY-2010 cost was $462.8M, a 454% increase. I did not start with FY-2000 because prior year’s investment costs were bundled along with securities lending costs and were not broken out in the CAFR reports.I have previously commented on the insanity gripping the trustees concerning investment fees.

Two of the systems, NYCERS and TRS, incurred administrative costs of $52.9M for FY-2000. The FY-2010 figure is $115.7M. NYPPF started incurring costs in FY-2002($8M) and BERS($4M) in FY-2003. Liu, quite correctly, allows for 3% per annum increase which would have produced a FY-2010 cost of $86M. The actual cost of $115.7M reflects a 6.3% average annual increase for the 10 years, way above the rate of inflation.

Both of these costs must repaid by the employers two years later with a 8% annual interest charge. For example the $115.7M admin charge for FY-2010 must be paid in FY-2012 with interest totaling $134.9M. The $462.8M charge must paid back in FY-2012 at $539.8M. These costs are directly under the control of the trustees. Why are trustees letting them costs run wild?

Liu attempts to compare these cost to other public pension funds. That is a waste of time. If everyone is jumping of the cliff, are you going to jump off the cliff too?

Closing

There is an excellent closing to the report on page 12. It calls for increasing investment income while reducing volatility. It, however, fails to own up to the failings of the trustees with respect to past investment decisions and to the exploding investment and administrative costs that the trustees have immediate control over.

There is a grudging consensus that the pension benefit structure needs to be cut back at the city, at least to the Tier 5 level at the state. Most of the benefit reform is already in place. Newly hired city police officers and firefighters are under Tier3 and newly hired teachers are under Tier 5. Newly hired general city workers will have to moved to Tier 5 in the same manner as general state workers.

But this benefit reform must be coupled with a strategey that adopts a more prudent, conservative and effective investment plan and outlaws all campaign contributions to any pension fund trustee from any contractor who is work for funds.