Chapter 514 - Laws of 2011 - Police & Fire Retirement at Dismissal

Chapter 514 was signed into law on 9/23/2011. It deems a Tier 1 & 2 member of the NYPPF and the FDNYPF with 20 or more years of police or fire service to be retired as of the date he/she is dismissed Failure by the member to give the full 30 day filing notice due to termination will not impair the member’s retirement benefit. This law does not affect new members hired after 6/30/2009 since they are covered by Tier 3.

There is one negative aspect of this new law. There appears to be a pension forfeiture provision for a felony conviction, if a police or fire member avails himself of this exception to the 30 day filing requirement for retirement.

The provision states that a member (this word creates some uncertainty as to whether it applies to a pensioner) with 20 years of service will forfeit his/her retirement benefit if he/she is convicted of a felony in NYS, or an offense either in another state or under federal law that would be a felony in NYS.

Current Tier 1 & 2 police & fire members are generally not subject to this forfeiture since they have grandfather rights prior to 9/23/2011. I suspect, however, the only time the forfeiture issue would arise is when a member used the 30 day exception with his/her deemed retirement at termination.

I am not sure what the pension funds’ will do with respect to future felony convictions for dismissed retirees.

Not Ready for Prime Time - Proposal for Central Investment Board for City Pension Funds

The Proposal

On October 27, 2011 the mayor and the comptroller issued a joint press release. The release announced an agreement in principal to reform investment governance and management of the five city pension funds. Any joint policy initiative by two political rivals is usually a significant event. Six union trustees joined in the announcement.

In the past I have commented on the lunacy and high risk investment decisions which specifically the NYCERS trustees have engaged in since 2000. NYCERS is the largest of the five city pension funds. The NYCERS trustees are established by statute and include the mayor’s representative and the comptroller, the public advocate, the five borough presidents, and three major city unions. There are definitely changes that the pension funds need to make. This proposal, however, misses the mark completely. The tools are already there but no one wants to use them.

As a rationale, the mayor's press release stated:

The proposal is intended to insulate management of pension assets from any political office, further professionalize it and make it more consistent with industry best practices. The proposal aims to increase investment returns, lower the City’s pension costs, protect and strengthen pensions for current and future retirees, enhance accountability and guard against the possibility of fraud and corruption.

Current Investment Authority

The mayor seems to be unaware that the city pension trustees already have the authority and resources to depoliticize the investment process, professionalize the investment staff, and implement "best practices". For the last ten years the mayor has not used that authority. It is significant that he chose Martha Stark be his representative at the pension boards for his first seven years in office.

The five city pension systems currently delegate, on a annual basis, their investment authority to the comptroller (Section 13-702 of the NYC Admin Code). This creates a centralized investment system managed by the comptroller. The comptroller usually hires a CIO who reports to him. The comptroller also has a permanent investment staff within his Bureau of Asset Management (BAM). The five pension systems subsidize the comptroller's operating budget to cover the costs of running these investment operations.

Section 13-702 also permits the trustees of any of the city pension funds to rescind their delegation of the comptroller at anytime. If the trustees are unhappy with interference of political forces in the investment process or the lack of investment performance, they can assume direct responsibility of their own investment process. They can hire necessary support staff. In addition, each of the five city pension already has its own outside investment consultant which the trustees have hired. These consultants could easily provide the expertise needed by the trustees to operate their own investment function.

Loss of Power for the Comptroller

The proposed investment board would clearly accomplish one thing. It will reduce the status of the comptroller in the investment process and impact his ability to raise campaign contributions. From a purely political point of view, political actors never willingly surrender power. There is a funny smell in the air here. It may not be a coincidence that federal authorities are investigating the comptroller's campaign fund raising activities.

Performance

With regards to investment performance no one with any certainty can say that the new investment board will be able to improve performance by 1% or more over the current arrangement. It is just as likely that the new board would produce a 1% drop in performance. This is the standard type of delusional comments you find in marketing propaganda.

Structure of New Board

Who will sit on the new board? It will be particularly difficult determining who will be members of the new board and what the voting structure will be. I can not imagine any trustee not wanting to be on the investment board. So much for a more simple and effective board. It is clear that the Public Advocate and the five borough presidents will want to remain involved. I am sure that the same will be true for all unions currently involved.

There will also be pressure from unions currently not on the boards. I know for a fact the Correction Force and Sanitation Force unions would love to have a seat at the table.

As seen in subsequent news articles, the mayor failed to check with at least seven of the NYCERS trustees, a majority of the NYCERS board. These trustees have made it clear that they have serious questions about the proposal.

Each of the five city pension funds has a distinct financial profile which impacts investment decisions . For example, as of June 30, 2010, the FDNY pension fund was 56% funded and NYCERS was 80% funded, a significant difference. They have different cash flow demands. The funds will continue to be separate accounting entities and trusts. The trustees of each fund are the prime legal fiduciaries of the funds. It will not be possible to remove their responsibility for the investment process of their associated fund assets.

The NYCERS fund, specifically, has other significant participating employers besides the city. In the past OTB was a major participant. There are some really complex issues embedded in these pension systems.

There is no mention in the proposal how this new investment board will be funded. There was no mention of the current civil service of the the existing staff at BAM. Who would approve the investment board's annual operating budget and the fees paid to outside managers? Assets of any of the pension funds can only be disbursed upon the public approval of the associated board of trustees.

Staff for the New Board

There is always a presumption that the compensation for investment staff should be free of government compensation limits. This opinion is tied into what type of investing you want to do. I have expressed my opinion that public pension funds should follow a lower risk/lower cost strategy. This strategy would allow the pension board effectively manage their assets with staff paid within the city pay structure. The 2008 financial crisis taught us all how irresponsible and incompetent highly paid investment professionals can be.

The mayor wants the pension funds to emulate Harvard and Yale. Pension funds are very different from endowment funds in that pension funds must make mandatory annual payouts no matter what the pension fund earns on it investments. Without mandatory payouts, endowments can tolerate higher risk profiles than pension funds. This is where higher compensation might become an issue. But then again, higher risk is not a guarantee of higher return.

The Chief Investment Officer

The proposal envisions a permanent CIO described below:

A Chief Investment Officer will lead the new investment management entity. The Chief Investment Officer will report to the new pension investment board – not to any individual elected official – and will be appointed to a fixed term that will not coincide with citywide election cycles

It will be no easier for the investment board to hire a new CIO than it is for the comptroller . The CIO will clearly be an at-will employee. There will definitely be a certain level of politics associated with the investment board. An truly independent CIO is not logical when the trustees are the fiduciaries of the five pension funds.

The Comptroller's Duties as Custodian and Disbursement Agent

By statute the comptroller is the custodian and the cash disbursement agent for the five pension funds. While the custodian function has been contracted out for many years, the disbursement function means that the comptroller is responsible for the cash management operations for the five pension funds. This separation of control is a very sound arrangement. It is a good accounting practice and guards against fraud. It should not be changed. It should, however, be reinforced. The accounting control of investment management fees is a disaster.

Recap

The more I think about this proposal, the more I am convinced that it is a public relations effort with no connection to reality.

NYC Department of Investigation – Can You Trust DOI?

In the spring of 2009, two and half years ago, I reported to both the Department of Investigation (DOI) and the NYCERS trustees an act of perjury (deliberately giving a false statement under oath) by Felita Baksh (aka Ramsami) during a sworn DOI interview.

In response to my notice, one of the trustees, the former Public Advocate, asked that DOI investigate the matter and report back to the Public Advocate and to me. The Public Advocate was the only party to take any action or acknowledge my allegation. In response, DOI notified the Public Advocate that it was forwarding the matter to the Department of Finance IG for review. DOI did not notify me of this action but the Public Advocate did.

I provided all parties with a copy of the verbatim testimony of the DOI interview of Baksh from July, 2004. The interview was given under oath. In a very careful manner, the DOI interviewers gave Baksh a second chance to correct her original false testimony after warning her that she was under oath. She did not change her testimony. The false testimony related to the help Baksh received from Karen Mazza, a staff attorney at NYCERS, in regards to Baksh’s fraudulent appointment as HR director at NYCERS in 2004.

You might be wondering how DOI managed to miss this almost certain act of perjury during one of its own interviews. In 2004, DOI chose not to make a verbatim transcript from the audio tape of the interview. DOI chose, instead, to allow the lead investigator, Carol DeFreitas, to make a summary from the audio recording of the interview. DeFreitas was not one of the DOI investigators who interviewed Baksh. DOI had put her in charge of the investigation even though she was only a temporary employee recently on loan from Martha Stark. DeFreitas was actually a Department of Finance employee receiving a pay check from Finance and not DOI.

Subsequently, DeFreitas became involved with Mazza in an effort to hide the extent of the help that Mazza gave to Baksh. In addition, Mazza pulled another NYCERS employee, Kin Mak, into the cover up. Mak, an IT staffer, enabled Mazza to hide incriminating emails but not before Mak made copies of all the emails that pertained to the events surrounding the investigation.

Those copies are safely tucked away at Mak’s home in Pennsylvania. Those emails, I suspect, cast a wide net and have crippled the investigation into the Baksh perjury charge because of the people implicated by the emails.

I previously reported all of this in a series of postings: perjury, DOI, and sleeping trustees.

Recently, in response to a FOIL request for DOI’s closing memo for the investigation of the perjury charge, DOI refused to release any information. DOI claims that the information is exempt under FOIL because it would be an “unwarranted invasion of personal privacy” and it was “compiled for law enforcement purposes and would identify a confidential source or reveal confidential information relating to a criminal investigation”.

It is clear that the perjury charge against Baksh is public record. There is no personal privacy to protect in this case. If DOI finds that this public charge is untrue, it should at least clear Baksh’s name. But I am very certain that DOI found the charge to be true. It appears that DOI does not want to deal with the charge and the web of corruption that goes along with it.

The majority of DOI’s work is allegedly for law enforcement purposes. DOI is claiming the closing memo would identify a confidential source. That can’t be it. I publicly supplied them with all the information they need to reach a conclusion on the charge. In addition, after two and half years, I don’t think that there is any criminal investigation going on. It is completely reasonable to conclude that DOI is protecting one or more people.

Unfortunately, DOI has not given a report on the investigation to the Public Advocate or to me.

Even more unfortunately, the current Public Advocate has made no effort to obtain the closing memo from DOI even after being questioned about the investigation.

In closing, the perjury allegation is almost certainly true and therefore, almost certainly the NYCERS trustees are allowing three criminals to continue to work at NYCERS. This raises suspicions about the judgement and integrity of the trustees.

Does Private Equity Make Sense for NYCERS? No.

Recently the Comptroller as part of his effort to increase transparency has started posting the full agendas of investment meetings held by the NYCERS Board of Trustees. NYCERS has ten of these meetings every year in addition to the ten regular meeting where administrative and disability issues are handled.

Prior to these postings NYCERS had refused my FOIL requests for these full agendas. NYCERS reason for the denial was that some of the material was discussed in executive session. Of course that is not a valid reason for denial but I didn’t have the financial resources to file a court challenge. It will be interesting to see if the Comptroller continues to make these items and future items available on his web site

What I was looking for in particular in the full agendas were the reports on private equity and real estate performance produce by the two consulting firms monitoring the partnerships.

The reports have some interesting data which allowed me to approximate the actually performance of the partnerships. The data includes the total cash-in, the total cash-out, an estimate of the “market” value of NYCERS portion of the partnership, and an estimate of the internal rate of return (IRR) for each partnership. I used quotes around the word market because there is no open market for the buying and selling of limited partnerships.

To perform an exact internal rate of return (IRR) for these partnerships you would require a full date specific history of each cash transaction between NYCERS and the partnership including all fees and the partnership would have to be dissolved with a final closing cash-out to NYCERS. I know that NYCERS is not currently maintaining the transaction data and therefore is not able to confirm the IRR of any of its partnerships. I don’t know what method the consultants are using to produce their IRR’s.

In order, however, to do some cross checking on the consultant’s estimated IRR’s I used the data from the report and the history of the estimated market values of the partnerships. This allowed me to estimate an IRR that I have more confidence in.

For example, NYCERS oldest private equity partnership, VS&A Communications Partners III, first shows up in FY-1999. As of March 31, 2011 it had a reported value of $14.56M. The consultants quoted an IRR of 6.2% for VS&A for the period from 12/15/1998 to 10/30/2010.

Not very impressive but, I suspect, overly optimistic.

The cash-in amount for the 13 years was $50.23M and the cash-out amount was $53.43M. Assuming a final cash-out payment on 6/30/2011 of $14.56M("value" as of 3/31/2011), my estimate of their IRR is a 4.3% annual rate of return.

In addition, NYCERS has paid $5.9M in fees to VS&A from FY-1999 trough FY-2011.

As a comparison, NYCERS government bond managers have an annual rate of return over the last 15 years of 7.13%. The fees in FY-2010 for NYCERS government bond portfolio with an asset value of $994.66M were $255,000. These assets are total liquid and have minimum risk.

VS&A is a typical private equity manager. With the explosion of the number of private equity partnerships in business to service the public pension arena, the rates of return will become locked into average market returns at best and more likely will average worse than the S&P 500 index but with obscenely higher fees. NYCERS has 140 private equity contracts, 4 of which have closed down without any public report by NYCERS.

I have professional opinions on what is happening here but I will let the numbers speak for themselves.

Out of Control Investment Fees

Every June the NYCERS actuary presents to the trustees his estimate of what the pension costs will be for the next year. The total bill for FY-2012 is $2.587B. The city's share of that cost is $1.403B. The rest is charged to other participating employers.

As part of the $2.587B amount, there are two non-benefit items. They are investment expenses and administrative expenses. The charge for investment expenses is $204M and for administrative expenses, it is $55M.

The $204M figure grabbed my attention when I saw it. I have previously complained about obscene growth in investment fees but there is a real kick to the actuary's $204M charge.

I have listed below the investment fee charges since 2000. I can not believe that the trustees think these increases are rationale.

1. $27.2 (2000)
2. $38.5 (2001)
3. $40.0 (2002)
4. $40.6 (2003)
5. $31.6 (2004)
6. $46.4 (2005)
7. $00.0 (2006)
8. $53.8 (2007)
9. $80.9 (2008)
10. $114.5 (2009)
11. $134.5 (2010)
12. $161.1 (2011)
13. $204.4 (2012)

In 2006, the city had the law changed so that expenses were paid two years after the fact rather than one year, thus producing a payment holiday.

On a smaller scale administrative expenses have gone up 40% since 2005, from $35.3M to $55.1M. Does anyone think that service at NYCERS has increased 40% over that time period. It sure wasn't the completion of the disaster recovery site.

Let Sleeping Dogs Lie.

I just received my quarterly pension PR letter from Comptroller Liu. Liu couldn't resist the temptation to claim credit along with the trustees for the pension funds' good investment performance during FY-2011 (June 30, 2011).

Number one, this is like taking credit for the sunshine. The S&P 500 index went from 1030 (6/30/2010) to 1320 (6/30/2011) during FY-2011, a 28% increase.

Number two, this also means the trustees and the Comptroller are responsible for losses when they occur, like the $3.5B that NYCERS lost in the last 3 months.

The best we can hope for from the trustees is not to screw things up too much. They are the last people in the world that anyone would willing trust money to. Of course, Bloomberg has managed to raise his own personal net worth to $19.5B from $4.5B since coming to office.

Accounting Problems with Investment Fees at NYCERS

In May, 2010, in response to a FOIL request I received a copy of NYCERS internal accounting charts of investment expenses for FY-2008 and FY-2009.

This year NYCERS has chosen to deny my FOIL requests for the accounting charts for FY-2009, FY-2010, and FY-2011.

Each year, on December 31st, NYCERS files a Comprehensive Annual Financial Report (CAFR) for the previous fiscal year ending on June 30th. This report includes a detailed listing of all investment vendors under contract to NYCERS and the fees paid to the vendors. This reporting is on an accrual basis. In plain English, that means if you don’t have the billing data when you are closing the books, you make a best guess at the amount, enter that amount, and make offsetting entries in the next year report when the data comes in. You don’t leave the entry blank.

As I have mentioned in the past NYCERS does not control the payment process for the investment vendors. The Comptroller does. NYCERS is dependent on the Comptroller for the billing and payment data needed for the accounting function. It is very clear why you normally don’t run a business like this. You have no way of vouching for the correctness of your accounting statements.

In this defective arrangement, when NYCERS receives billing and payment notices from the Comptroller’s Office, it records that information in its internal spreadsheets. This should be the basis of what appears in the CAFR statement. That is not what is happening. While the CAFR amounts are incomplete, the internal charts at NYCERS are even more incomplete.

Here is what is happening at NYCERS.

NYCERS currently has 92 managers of registered securities, 141 private equity managers, and 39 real estate managers. On its face, having this many managers is a red flag of a system out of control.

The FY-2009 CAFR statement quoted investment expenses at $138.1M. The corresponding internal NYCERS accounting chart amount is $97.4M, a $40M shortage.

The FY-2010 CAFR amount was $175.2M. NYCERS is now refusing to disclose what amount is recorded in its internal accounting chart.

The FY-2009 CAFR listing was missing entries for

• 2 managers of registered securities
• 27 private equity partnerships
• 8 real estate partnerships.

The FY-2009 internal chart was missing

• 8 managers of registered securities
• 28 private equity partnerships
• 7 real estate partnerships.

The FY-2010 CAFR listing was missing entries for

• 2 managers of registered securities
• 31 private equity partnerships
• 6 real estate partnerships.

Again NYCERS will not disclose the internal accounting chart for FY-2010 and therefore we don’t know the number of missing managers for FY-2010 in this chart.

The bottom line is that NYCERS accounting for investment fees is out of control as seen from defects in both the CAFR and the internal accounting reports. Aggravating this lack of control is the enormous amounts of money at play in these fees. The fees for FY-2011 are on track to reach $220M.

The following is another sign of a system adrift. In a September 7, 2011 Bloomberg article, the Comptroller refused to disclose the recipients of $32M in fees that NYCERS paid in FY-2010 under the cover of organization fees for private equity and real estate partnerships.

The Comptroller claimed an exemption from the state Freedom of Information Law. The actual response was that the payments “are derived from information from the private equity companies and real estate partnerships which if disclosed would cause substantial injury to the competitive position” of the firms. This is the same reason NYCERS gave me for refusing my FOIL request this year for NYCERS internal accounting charts for Investment fees.

I can not imagine how disclosing what NYCERS paid a vendor would hurt the vendor’s competitive position. Independent of the state FOIL law, all NYCERS distributions are public record since they have to be approved by a resolution of the Board of Trustees. Such resolutions must be voted on in public session of a board meeting. This is all designed to protect against fraud and corruption.

As a point of reference, the NYC Teachers Retirement System does not report paying any organization fees.

All of this is a clear sign of an unacceptable risk to the integrity of the assets of the system.

The NYS Insurance Department just finished its multi-year examination of NYCERS. I will be curious if they comment on this glaring failure of financial control. The last report, unfortunately, covered only FY-2000 to FY-2002 and was only released in June, 2009.