Who's Helping Who?

September 26, 2011 - NY Times:

Amalgamated Bank (the nation's only union-owned bank) announced on Sunday that WL Ross & Company (Wilbur L. Ross) and the Yucaipa Companies (Ronald W. Burkle) would each invest $50M in the bank. The two firms will each receive 20% of the bank's common shares. Previously the FDIC ordered the bank to raise its capital ratio to 7% which had slipped to 6.2%.

NYCERS has $3.9B invested in an S&P 500 index fund managed by the Amalgamated Bank. It also has reportedly $163.02M invested in three private equity partnerships run by the Yucaipa Companies. It is not clear exactly how much NYCERS has in the Yucaipa partnerships because no one knows for sure how much NYCERS has invested in any of its private equity partnerships.

Word of Warning

This is a sober warning of pension fund indictments and the types of dangers that threaten public pension plans. The warning was written by Edward "Ted" Siedle, a former S.E.C. attorney and a contributor to Forbes.

I wonder what happened to the perjury investigation at NYCERS?

A Small Touch of Lunacy

This is an old posting from 2009. Someone recently asked me a question about this issue. I realized I had withdrawn this posting. The content is still relevant today except for the change in the interest rate from 8% to 7% as of July 1, 2011 and that we now know that any decision Martha Stark was involved with must be viewed with skepticism. Also in an unsettling way this subsidy has grown. In FY-2012 NYCERS paid the Comptroller's Office $1.98M.

In 2004, Martha Stark and the other NYCERS trustees decided to start paying the NYC Comptroller’s Office for investment functions which the city had previously funded through the regular city budget process. See NYCERS resolution R#1 adopted on April 27, 2004.

These payments to the Comptroller show up in his city budget as non-governmental grant revenues. It appears that other city pension funds have also adopted this payment scheme. As a reference, this “grant” money to the Comptroller's Office was $4,167,779 in FY-2010 and $4,169,799 in FY-2011.

The city, however, must by statute reimburse NYCERS two years later for these payments to the Comptroller along with 8% interest per annum.

Correction: These payments to the Comptroller are being considered investment expenses under Setion 13-705.b of the NYC Admin. Code. See quote below. The impact of this interpretation is that these payments are blended into the city's annual pension cost and spread out over long periods of time. After eleven years of these payments, however, the annual charge is getting close to full replacement in the following year.

b. Notwithstanding any other provision of law to the contrary, such expenses as may necessarily be incurred by a retirement system in acquiring, managing and protecting investments of its funds may be paid from any income, interest or dividends derived from deposits or investments of such funds.

If this all sounds confusing to you, that is because it is confusing.

It is also deceptive. When the City Council sees a non-governmental grant in an agency’s revenue budget, the Council correctly concludes that the tax payers of the City of New York are not funding that revenue stream. In this case, however, the taxpayers are in fact not only funding this revenue stream but also incurring a debt which becomes due in future years with an 8% or 7%(net of fees) annual interest rate.

Why would the mayor’s representative on the NYCERS Board agree to this distorted budget scheme, saddle the city with an 8% debt, and create this deception in the city budget. Why not just let OMB allocate the necessary funds to the Comptroller’s expense budget to cover the statutory investment work?

Maybe OMB thought that the Comptroller already had sufficient funds to do the work. Maybe OMB didn’t know that NYC Admin. Code mandates that the city repay the “grant”, with interest, to NYCERS. Maybe the “grant” funding allows the Comptroller to escape some types of oversight, like salary limitations. Maybe city hall, in fact, didn’t know about this payment scheme at all. Maybe, maybe, maybe…

Of course, once the NYCERS trustees decided to start paying for these investment services, shouldn’t the board have sought open bids or issued an RFP for these investment services? The trustees could also have hired internal NYCERS staff to perform the investment functions. Both of these approaches are covered by state statue and would not have distorted the city budget.

There is, however, no statutory way for NYCERS to enter into a contract with the Comptroller who is a also a NYCERS trustee. There is, also, a blatant conflict of interest in the fact that the Comptroller is the legal auditor of all NYCERS expenditures including these payments to the Comptroller (NYC-AC Section 13-103.g).

Listed below are actual payments from NYCERS to the Comptroller’s Office for the period from April, 2008 to March 31, 2010.

Period	Total	PS	Fringe	Fringe Adj.	OTPS
April-June, 2008	$405,967	$235,981	$91,985	$44,202	$33,798
Post June, 2008	$33,814	$20,541	$8,007	$0	$5,266
July-Sept, 2008	$294,917	$208,957	$81,452	$0	$4,508
Oct-Dec, 2008	$302,206	$210,237	$81,951	$0	$10,018
Jan-March, 2009	$390,613	$253,171	$109,674	$17,921	$9,848
April-June, 2009	$351,700	$240,901	$104,358	$0	$6,440
Post June, 2009	$17,976	$236	$102	$0	$17,638
July-Sept, 2009	$331,533	$232,050	$90,453	$0	$9,030
Oct-Dec, 2009	$307,236	$217,659	$8,843	$0	$4,734
Jan-March, 2010	$343,716	$243,217	$102,686	-$4,730	$2,543

These figures are a detailed accounting of what money NYCERS is giving to the Comptroller's Office. There is, however, no detail of how the Comptroller is actually spending the money.

For example, which of the Comptroller's employees are being billed to NYCERS, what are their salaries, what are their duties, how many hours a week are they doing NYCERS work, what are their qualifications, what is their work product and how is that work product evaluated. This all would have required the preparation of a detailed scope of services and this was never done.

Finally the Actuary Gets 7% "Net of Expenses"

On January 30, 2013, the governor signed the law changing the assumed interest rate for the five city pension funds from 8% gross of expenses to 7% net of expenses. This new rate is effective as of July 1, 2011. The rate should have gone into effect on July 1, 2009 when the five year term of the old 8% rate ended. That is two years of underfunding for all of the city pension funds. That does not mean that the new rate is an appropriate rate, just better.

I love Bob's little twist on the new rate, "net of expenses". In plain English this means the new rate is actually higher than 7% when compared to the old 8%.

The expenses in FY-2012 were $486.7M($370.3M investments and ($116.4M administrative). The assets as of June 30, 2011 were $111B. A 7% return is $7.777B, add on the $486M and you have $8.263B. That is a 7.4% rate needed to cover the 7% "net of expenses". The bottom line is that the target rate for 2012 was 7.4% gross of expenses.

Unfortunately, for FY-2012 the five city pension funds fell short of their target by $5.963B. Over the last 13 years the shortfall is $38.375B. Either the trustees are going to have to ramp up their investment skills or the taxpayers are going to have to continue to cover their losses.

Teachers Retirement System - Why is it $4.4B short

I recently became aware that the NYC Teachers Retirement System (TRS) has had a regular and significant negative cash flow as far back as 2000 and maybe further. The total negative cash flow for the 13 years is $8.8B . In plain English a negative cash flow for a city pension fund means that the employee and employer contributions, interest payments, and dividends are less than expenses and pension payments. That leads to liquidating assets to cover the shortfall and creates a permanent handicap when it comes to investment returns.

This raises a question about the actuary's funding strategy for TRS.

None of the other four city pension funds have had consistent negative cash flows over the same time period. As of June, 2012 these four funds have reached or surpassed their pre-crash 2007 values. From the table below you can see that TRS is $4.4B short of its 2007 asset value.

TRS has a serious investment problem. Of course, in FY-2012 the other four funds didn't do so well with their positive cash flows. The five funds managed to turn $1.45B into $306.5M in a market that was was up 3.4% for the year.

The New York State Department of Financial Services (DFS) has not done a statutory examination report on any of the five city pension funds since at least 2003. This is in spite of the fact that the pension funds have paid DFS for the associated audits.

Asset Values and Cash Flows for the Five City Pension Funds: (2007 - 2012)

Pension Fund	2007	2009	2012	2012	2012
	Closing Balance	Closing Balance	Closing Blanace	Asset Change	Net Cash Flow
NYCERS	$42,514.3M	$31,903.4M	$42,655.3M	$246.3M	$728.0M
TRS	$37,142.8M	$23,077.5M	$32,774.8M	-$826.7M	-$472.3M
BERS	$2,179.5M	$1,536.6M	$2,310.6M	-$13.0M	-$46.4M
Police Fund	$21,905.5M	$17,424.1M	$25,479.9M	$731.0M	$944.0M
Fire Fund	$7,202.7M	$5,576.8M	$8,124.7M	$169.0M	$268.0M
Total	$110,944.7M	$79,518.3M	$111,345.3M	$306.5M	$1,452.4M

So what does Susan Sanders actually do?

A few weeks back I commented on NYCERS's serious difficulty with the English language. Since then I have not received any clarification from NYCERS on the agency's official definition of "legal services".

I guess this is an error that NYCERS doesn't feel it has to correct. Maybe the Workers Compensation fiasco could be handled the same way.

One thing we can be relatively certain of is that Susan Sanders occasionally appears at NYCERS and in return NYCERS pays her over $100,000 a year.

Liu, the Pension Trustees, Transparency, and the NYS Freedom of Information Law

Recently the NY Post made a request of the NYC Comptroller, John Liu, for copies of the contracts, invoices, and payment authorizations for the 10 highest paid investment managers for real estate, private equity and hedge funds working for the five city pension funds.

Liu has tried to build a reputation for pushing transparency in city finances.

However, in response to the request Liu refused to disclose these documents. His reason was as follows:

“such records are exempt from disclosure under New York State Public Officers Law Section 87(2)(d) as trade secrets or are submitted to an agency by a commercial enterprise or derived from information obtained from a commercial enterprise, which if disclosed would cause substantial injury to the competitive position of the subject enterprise”.

Liu did not specify whether he was invoking the trade secret or competitive injury exclusion.

This position is absurd on its face. What organization would put a trade secret or information that was competitively damaging into a commercial contract, a document that in the future could possibly be at the heart of a nasty court fight? There is nothing in these contracts that qualify as a trade secret or would injure the competitive position of the investment managers.

The idea that this specious excuse would apply to invoices and payment vouchers is delusional.

There is of course the real possibility that the public disclosure of these contracts, invoices and payment vouchers might be politically embarrassing. That is assuming that they actually exist.

In addition, Liu threw in the truly inane excuse that “such disclosure would breach the confidentiality provisions in our contracts with the funds, be contrary to industry practice and standards and potentially cause the flight of top performing funds who want to guard their confidential information”.

I do suspect that there are confidentiality provisions in the contracts. These provisions, however, are in violation of the above referenced NYS Freedom of Information Law (NYS Public Officers Law Section 87(2)). This makes them null and void.

The idea of adhering to this industry’s practice and standards is laughable.

The possibility of top preforming funds fleeing a potential customer is not credible. First of all, what makes Liu think that the pension funds have hired the top performing funds. Second, no one walks away from “2 and 20” fees. Third, the pension funds should be so lucky to escape these piranhas.

As per the city’s FY-2012 financial statement, the five city pension funds incurred $340M worth of investment expenses in 2012.

The bottom line is that if the NY Post doesn’t drag Liu into court and get a judge to force him disclose the these documents, he can continue to hide behind this garbage. While Liu is the point man here, the trustees of the five city pension funds are all equally culpable for this deception.