Parting Gift from the Old NYCERS Actuary

Last year I wrote short note on the history of the investment fees paid by the five pension fund sponsored by New York City.

On January 30, 2013 the Governor signed Chapter 3 of the Laws of 2013 changing the assumed interest rate for the five pension funds from 8% gross of fees to 7% net of fees. the legislation was drafted the NYCERS actuary, Robert North. It did a lot of other things but that was the big item. One of those minor things, however, deals with how city repays to the five pension funds the investment expenses incurred by the pension funds in the previous fiscal year (see below: S.13-705, NYC Admin Code). These expenses include the subsidy that the pension funds pay to the Comptroller for his regular operating budget that is part of the total city budget adopted by the City Council.

Beginning in FY-1999 the original legislation required the city to pay in FY-2000 with 8% interest all investment expenses incurred in FY- 199. This meant that these expenses were treated as operating expenses and not long term capital expenses. This is a very sound accounting practice. This legislation was also drafted by the NYCERS actuary.

You can further see that that starting with FY-2005 the law was changed to allow the city to repay expenses two years later rather than one year, so that FY-2005 was paid back in FY-2007 rather that in FY-2006. Again with 8% interest. This amending legislation was also drafted by the actuary.

You can also see that the law was again changed starting with FY-2010. And again it was drafted by the actuary. This change allows the city to treat the repayment of investment expenses as a long term capital expense rather than an operating expense. The new change also dropped the interest rate charge, in effect making this a interest free loan. Needless to say this is not a sound accounting practice. It gave the current city administration a payment holiday now and dropped the costs on a future city administration. This is how a pension crisis is born.

The new statute is listed below. It is the last item at the end of thirty two sections amending the NYC Admin Code. The new language is underlined as is standard.

§ 32. Subdivision d of section 13-705 of the administrative code of the city of New York, as amended by chapter 152 of the laws of 2006, is amended to read as follows:

d. In each city fiscal year, beginning with investment expenses paid during the nineteen hundred ninety-eight--nineteen hundred ninety-nine fiscal year, whenever the income, interest or dividends derived from deposits or investments of the funds of a retirement system are used pursuant to subdivision b of this section to pay the expenses incurred by such retirement system in acquiring, managing or protecting invest- ments of its funds, the monies so paid shall be made a charge to be paid by each participating employer otherwise required to make contributions to such retirement system no later than the end of the fiscal year next succeeding the fiscal year during which such monies were drawn upon, provided,

however, that where such charge is for such investment expenses paid during fiscal year two thousand four--two thousand five or during any subsequent fiscal year, such charge shall be paid by each such participating employer no later than the end of the second fiscal year succeeding the fiscal year during which such monies were drawn upon

, provided further that the provisions of this subdivision shall not apply to investment expenses paid during the two thousand nine--two thousand ten fiscal year or during any subsequent fiscal year.

In the event that such retirement system has more than one participating employer, the actuary shall calculate and allocate to each such partic- ipating employer its share of such charge.

All charges to be paid pursu- ant to this subdivision shall be paid at the regular rate of interest utilized by the actuary in determining employer contributions to the retirement system pursuant to the provisions of paragraph two of subdi- vision b of section 13-638.2 of this title.

The New NYCERS Actuary

I just came across the announcement of the new NYCERS actuary (see quote below). It is from the NYC web site dated back in May. I had been looking for it for awhile but I only found it when a friend sent me a link to the city web site. The reason I had not seen it before was that the announcement does not actually say that NYCERS had appointed a new actuary. The former NYCERS actuary, Bob North, resigned in the Fall of 2014.

May 29, 2015 NEW YORK—Mayor Bill de Blasio today announced Sherry Chan as the City’s new Chief Actuary. In this role, Chan will serve the City’s retirement funds and oversee actuarial calculations for post-employments benefits for City employees.

Legally the City does not have a Chief Actuary. NYCERS and TRS have actuaries (see quote below from NYC Admin Code). The two retirement funds usually appoint the same person as their actuary. That appears to be a very practical policy but in reality it is not financially sound. They are two very different pension funds with different liabilities. As background, by statute the NYCERS actuary is also the actuary for the Police and Fire pension funds and the TRS actuary is also the actuary for BERS (Board of Ed. Retirement System).

Ms. Chan is a ASA of the Society of Actuaries, not a FSA. I guess that is not a big deal unless it was because NYCERS could not attract a full Fellow of the Society of Actuaries. Once upon a time actuaries needed to be highly skilled mathematical technicians. Now they need to fearless messengers of painfully news.

The assumed interest rate is the key component of the annual pension costs that the city and the other participating employers must pay to the pension funds each year. It will be interesting to see where Ms. Chan stands on the 7% net of fees rate. She will be required to make a recommendation this winter for a new five year rate effective July, 1, 2016 and Albany will have to enact enabling legislation by June 30, 2016.

I suspect she will punt and ask for a one year extension of the old rate. North did this all the time. It is a bad fiscal policy and contributes to the under-funding of the pension funds.

Her most recent job was the actuary for the Ohio State PERS which began in January, 2014 and ran through May, 2015. It was interesting to watch the NYCERS chair introduce Ms. Chan to the Board of Trustees at the June Board of Trustees meeting. I guess they had never met her before that.

§ 13-121 Retirement system; adoption of tables and certification of rates.

The actuary appointed by the board shall be the technical advisor on all matters regarding the operation of the funds provided for by this chapter and shall perform such other duties as are required of him or her.

The actuary shall keep in convenient form such data as shall be necessary for the actuarial valuation of such funds.

Every five years, he or she shall make an actuarial investigation into the mortality, service and compensation experience of the members and beneficiaries as defined by this chapter and he or she shall make a valuation, as of June thirtieth of each year, of the assets and liabilities of the various funds provided for by this chapter.

Upon the basis of such investigation such board shall: 1. Adopt for the retirement system such mortality, service and other tables as shall be deemed necessary; and 2. Certify the rates of deduction from compensation computed to be necessary to pay the annuities authorized under the provisions of this chapter.

As part of the May 29th announcement, the mayor's office described Ms. Chan's work load as follows:

As Chief Actuary, Chan will work for the five major actuarially-funded New York City Retirement Systems, including the New York City Employees’ Retirement System (NYCERS), the Teachers’ Retirement System (TRS), the Board of Education Retirement System (BERS), the New York City Police Pension Fund, and the New York Fire Department Pension Fund.

The Chief Actuary also serves as the legally-designated technical advisor to the Board of Trustees of the New York City Retirement Systems (NYCRS).

The Office of the Actuary is responsible for determining employer contributions and funded status for NYCRS, preparing employer contributions for use in the development of budget and financial plans, certifying benefits for retiring employees, and preparing financial reports and accounting information on the New York City Health Benefits Program.

When You Buy a Ferrari and You Really Need a Pickup Truck

What happens when you buy a Ferrari, when you need a pickup truck?

You pay 10 times too much for what you need, you don't get what you need, and you pay a lot for mechanics. What you do get is a fast car.

It's too bad that the NYCERs doesn't even get a fast car when they make the wrong investment decisions.

Here's the the bill for the mechanics. And once again NYCERS is not even getting Ferrari mechanics.

As of August 2, 2015 the Comptroller increased the salaries of his investment staff. The story is that the five city pension funds were convinced to pay for the increases through their mindless subsidy to the Comptroller's budget. Of course, that is an illusion. It is the NYC taxpayers and the NYC employees who are paying for these increases. In fact, the employees pay twice, once as a taxpayer and a second time through their pension payroll deductions.

All the lucky people listed below are provisional employees. I wonder how permanent civil servants feel about that?

This is in addition to the five investment consultants that NYCERS paid $3.2M in FY-2014. Consultants are not the managers who do the actual investing but "experts" who advise the trustees on how oversee the managers.

Salary Increases at the Comptroller's Office

Count	Name	Civil Service Title	Assignment	% Increase	New Salary	Old salary	New Hire
1	Scott Evans	Pension Investment Advisor	CIO	56%	$350,000	$224,359
2	Michael Garland	Admin Staff Analyst	Corporate Governance	56%	$265,000	$169,872
3	John Merseburg	Admin Staff Analyst	Public Equities	93%	$250,000	$129,650	yes
4	Niel Messing	Admin Manager	Hedge Funds	67%	$250,000	$149,701
5	Alexis Done	Admin Staff Analyst	Private Equity	75%	$280,000	$160,000
6	Martin Gantz	Admin Staff Analyst	Fixed Income	62%	$280,000	$172,840
7	Yvonne Nelson	Admin Staff Analyst	Real Estate	69%	$265,000	$156,805
8	Petya Nikolova	Admin Staff Analyst	Infrastructure	59%	$250,000	$157,233
9	Miles Draycott	Admin Staff Analyst			$265,000
10	Evan Nahnsen	Admin Manager			$180,000
11	Noraina Pares	Admin Staff Analyst			$130,000
12	Tatiana Pohotsky	Admin Manager			$160,000
13	Wesley Pulisic	Admin Manager			$180,000
14	Steven Veloric	Admin Accountant			$160,000
15	Scott Zdrazil	Admin Manager			$170,000
16	Marc Gross	Admin Staff Analyst			$110,000	$70,833	yes
17	Vistoria Hui	Admin Staff Analyst			$120,000	$85,000	yes
18	Janet Londond-Valle	Admin Staff Analyst			$130,000
19	Karen Barclay	Admin Manager			$160,000
20	Shachi Bhatt	Admin Staff Analyst			$160,000
21	Yi Feng	Admin Manager			$180,000
22	Millicen Budhai-Robinson	Admin Staff Analyst			$110,000
23	Eneasz Kadziela	Admin Manager			$130,000
24	Lakhir Kaur	Admin Manager			$110,000	$70,000	yes
25	Louis Lent	Admin Accountant			$110,000
26	Barbara Nersten	Admin Accountant			$120,000	$70,789	yes
				Total =	$4,875,000

Private Equity Insanity at NYCERS – Another $500M Down the Rat Hole

On January 1, 2006 Scott Stringer took office as the Manhattan Borough President. As such he became a trustee (1/5th vote) of the NYCERS Board of Trustees. He continued in these two positions for the next eight years.

As of January 1, 2006 NYCERS had investment contracts with 38 private equity managers and 5 real estate limited partnerships.

By December 31, 2013, eight years later, the number of private equity contracts had risen to 136 and the number of real estate contracts had risen to 43.

Then on January 1, 2014 Stringer took office as the NYC Comptroller. As such he continued to be a trustee (full vote) of the NYCERS Board and for better or worse he became the designated investment manager for NYCERS.

As of March 31, 2015 the number of private equity contracts had continued to increase to 143 and real estate contracts to 48.

For over nine years Stringer has approved or actually signed the contracts with these managers.

On July 21, 2015 Stringer along with 12 other state treasurers sent a letter to Mary Jo White at the SEC complaining about the billing and reporting practices of private equity firms. See quote below.

Among the four types of private equity firm expenses—management fees, fund expenses, allocated incentive fees, and portfolio-company charges, a portion of which serve as offsets or contra-expenses to limited partners—only directly billed management fees are easily segregable and therefore regularly disclosed. Though private equity firms generally disclose information on all types of fees, it is often reported deep in annual financial statements and is not reported directly to limited partners on a quarterly basis. This lack of clear and frequent reporting has resulted in an uneven approach to fee disclosure from private equity general partners to limited partners.

One tangible example of inadequate expense reporting relates to portfolio company monitoring fees. Limited partners, such as state pension portfolios, are typically eligible for an allocation of fees that private equity managers collect from their portfolio companies. However, this limited partner share is usually not transferred to the limited partner, and instead it is maintained by the manager and used as an offset against payment of management fees. The calculation behind this offset is often opaque to the limited partner, making consistent disclosure of private equity expenses to the public extremely challenging.

. . .

We welcome the opportunity to continue dialogue on this very important issue, and stand ready and willing to assist the SEC in the consideration of this concept.

Nowhere in the letter does Stringer mention that over the last nine years he is partially responsible for putting place the secret and defective contracts that allow general partners to avoid publicly and properly reporting their billing costs to NYCERS. Don’t expect the SEC to do anything about this problem.

It is obviously not Stringer’s total fault that NYCERS is saddled with these secret and outrageous contracts. It is, however, crystal clear that NYCERS should be aggressively extracting its assets from all of these limited partnerships. Some small percentage of them may be valuable but the vast majority of them are losing propositions. Under no circumstances should NYCERS be entering into any new private equity contracts.

On top of these expense reporting problems there is currently no public accounting of the performance of these investments at NYCERS. No one knows what the loss or profit position is with respect to any of the NYCERS private equity and real estate partnerships, whether terminated or currently active.

So what does Stringer do next? On August 4, 2015 Stringer announces that the five city pension will be investing $500M additional funds in private equity deals. He wants to give minority and women owned firms the same chance to extract money from the five city pension funds as the old white guy firms have been doing for years. See quote below:

(New York, NY) — On Tuesday, New York City Comptroller Scott M. Stringer and New York City Pension Fund Trustees announced a $500 million expansion of the City Pension Funds’ Private Equity Emerging Manager program, which brings the total amount invested or committed with Emerging Managers to more than $14 billion — including over $11 billion invested or committed to Minority and Women-Owned Businesses Enterprises (M/WBEs). The expansion of the program also includes a formal graduation policy for private equity Emerging Managers to facilitate the City Pension Funds’ ability to continue to invest with the best-in-class private equity emerging managers after they have out-grown the Emerging Manager program.

I could write a whole series of postings about M/WBE investment programs for public pension plans. Bottom line, they are just like the “old white guy” programs, garbage except they cost more money and are supercharged with political influence.

Follow Up on the IT Budget Boondoggle at NYCERS

On March 12, 2015 the NYCERS Trustees approved a $2.25M budget allocation to be squandered on a mindless IT conversion project.

On May 10, 2015, two months later, I released a sharp criticism, of the project.

On May 12, 2015, two days later, the NYCERS executive director, Diane D'Alessandro, released an unsigned memo notifying the NYCERS staff of the fabulous five year IT conversion project.

So after two months D'Alessandro finally decides to let the troops know what she is doing, exactly two days after I point out the insanity of her project. She starts as follows:

As you may know, NYCERS is embarking on a major information technology (IT) and business system project to replace our now 35-year-old legacy pension administration system - PROD, the core of all NYCERS business functions. The project, known as the Legacy Replacement Project (LRP), will affect almost every aspect of our work at NYCERS, taking at least five years to complete.

She carefully describes the vote by the trustees as follows:

At its March 2015 meeting, the NYCERS Board of Trustees conceptually approved the LRP and adopted a budget that funds early project phases.

She also announces an internal PR campaign:

This is major NYCERS project. As a first step, we have begun a series of meetings to brief everyone on the project and to get your input regarding the initial phase of planning.

Without doubt D'Alessanro will be looking to drag in a ton of consultants for this project. She does, however, want to ensure the staff that she supports them totally:

I want you all to know that NYCERS is committed to providing our staff with the resources and support necessary to ensure success at all stages of this project. We will continue to keep you informed and seek your input as we progress.

You can't make this stuff up.

Just for Laughs

As part of the $2.25M, D'Alessandro got $500,000 for a sole source contract with Gartner. Of that amount, $310,000, is supposed to cover the cost of producing a RFP for the vague conversion project. There is nothing vague about its $132M price tag.

So what does Gartner do? They go looking for a recognized public pension expert who has substantial IT background. That probably is a good idea, since they don't particularly know much about public pension systems. Needless to say, neither does NYCERS.

In turn, Gartner contracts with a IT staffing firm to find such an expert.

On May 14, 2015, this firm reaches out to such an expert with the idea of hiring him and assigning him to the the Gartner contract.

On May 18, 2015 the firm calls the expert and describes the assignment. It becomes quickly clear to the expert that this assignment is part of the NYCERS IT conversion fiasco.

I will let you all guess who the expert was.

The expert was kind enough to let the firm know that, in spite of his intense interest in the project, D'Alessandro would never allow him to work on the project.

Lawsky - What Happened to the Public Pension Audits?

Lawsky is leaving NYS - DFS.

What happened to the audits of the seven state and city pension funds?

Budget Insanity at NYCERS

On March 12, 2015 the NYCERS Trustees approved the NYCERS FY-2016 administrative budget. It was Diane D'Alessandro's tenth annual adiministrative budget proposal as executive director.

The key numbers are listed in the table below. For comparison purposes I added FY-2006, my last budget as executive director, and FY-1996, NYCERS's last budget under the city's budget structure. The 1996 budget was draconian to say the least. You can see from the table that the NYCERS's budget has increased by 43% over the last ten years or 4.1%/year.

NYCERS: Admin. Budget Over the Years

	FY-2016	FY-2006	FY-1996
FT Positions	401	342	155
PT Positions	35	13	0
PS	$30.2M	$20.0M	$6.2M
OTPS	$19.4M	$14.7M	$2.6M
Sub-total	$49.6M	$34.7M	$8.8M
Fringe	$8.2M	$4.1M	$0
Total	$57.8M	$38.8M	$8.8M

What is extraordinary about this budget is that it is the beginning of a delusional spending spree on IT upgrades. It is being called the "Legacy Replacement Project". It proposes to spend $132M over a five year period, staring with $500,000 to be paid to Gartner, Inc. and $1.75M to other consultants to be named later. At the meeting D'Alessandro indicated that she was going to pay $310,000 to an outside firm to write a RFP for this "grand" project. Listed below is the five year spending bonanza.

• 2016 - $ 2.25M
• 2017 - $ 9.91M
• 2018 - $27.86M
• 2019 - $46.00M
• 2020 - $46.24M

To OMB's credit they complained about the $310,000 RFP. The trustees, however, approved this budget in spite of making noise about the long term cost of the project.

You would think, considering how well funded that the NYCERS budget is, that the NYCERS staff would be able to write their own RFP. But D'Alessandro got that part right, her staff can't do the job.

Of course, without the results of the RFP where did the $132M amount come from.

In fact over the last ten years D'Alessandro should have been standardizing NYCERS applications on a current client/server platform using a relational database system. This process was underway in 2005 when she first appointed. But thankfully the old CICS/VSAM systems were so well made that they have survived long after the point when they should have been retired. Thank God for small favors.

D'Alessandro, unfortunately, was appointed to her current job in 2005 without any prior relevant experience by Martha Stark and a bunch of compromised trustees. D'Alessandro had never managed anyone. She is not a lawyer, nor an accountant, nor an actuary. She had never worked for a pension system and she had absolutely no IT experience. What she was and still is, is grossly incompetent.

To make the situation worse, the current IT director was working as the NYCERS call center manager when D'Alessandro moved her to the agency's IT division in 2007. At that point she had no IT experience either. Six months later D'Alessandro makes her the director of the IT division. It reminds of when Rudy put a key punch salesman in charge of DoITT. She is as incompetent as D'Alessandro.

D'Alessandro submitted a five page justifying her budget proposal. It is a classic example of using a lot of words to create a fog, lots of hand waving and saying nothing except give me $132M. I actually don't think D'Alessandro wrote the summary. Five pages is far too much work for D'Alessandro. It looks like a cut and paste job from some marketing crap.

This is the justification for $132M.

MAJOR PROJECTS

In a continued effort to provide greater operational efficiency, enhanced customer service and improved quality and production, NYCERS is proposing to undertake a major information technology (IT) and business system replacement project that will streamline and consolidate all applications and functions into a single data repository for common use throughout the agency.

The project which will be known as the Legacy Replacement Project (LRP) will be conducted in three stages over a minimum of five years. The LRP will require a commitment of resources to be phased in over that time.

In order to ensure the success of the LRP, NYCERS is proposing two associated projects including a communications project designed to accommodate expanded electronic interaction with clients and a change management project to address staff training, coaching, and leadership development needs.

You can always spot a IT disaster from the start. It has a long time frame and they don't tell you what they are going to do in the first week of the project, the second week of the project, third week of the project,... You get the picture. Oh yeah, it will also cost a lot of money. I will guarantee you that this project will fail.

When I left NYCERS in 2005, NYCERS had one of the best IT departments in the city. The agency had:

1. between 60 and 65 IT professionals on staff
2. an integrated mainframe (VSE) and a network system (Windows Server 2003)
3. all major work operations automated running under CICS using VSAM and DB2
4. an advanced web site which allowed members and retirees to view their own specific data.
5. an imaging/workflow system covering all paper based applications for all members and pensioners.
6. a dedicated document scanning division
7. a tested computer disaster recovery plan (we were researching a full business recovery plan and site)
8. a standardized accounting package running on the network supporting both pension and administrative operations
9. a nightly backup process of all files including the Exchange Server
10. a project to upgrade major applications to DB2.
11. an advanced Avaya based call center with its own backup PBX.
12. a modern customer service center with its own integrated queuing system
13. an on-site fully equipped training center.
14. a proximity card system for both time keeping and security.
15. a separate network system for the security and a full camera subsystem.

Returning to the executive summary, it is not only short on details about the project but it also has a great deal of deceptive information. The following are a few quotes out of D'Alessandro's write-up along with some clarifying comments.

RECENT HISTORY

Over the past nine years, NYCERS has made significant infrastructure improvements.

Document Management

NYCERS continues to ensure the preservation and security of all vital records and to promote an environmentally sound approach to document management. This effort includes the incorporation of all incoming documents into the NYCEWORK system in an electronic format and the ongoing digitization of historical paper documents.

In 2014, NYCERS prepared, scanned and indexed over 200,000 incoming documents and converted over 1 million historical records into digital images. Since the inception of the document management project, over 38 million paper records have been imaged, saving approximately $600,000 in document storage fees.

From this quote you would think that document management was introduced during the last few years. In fact, it was there when D'Alessandro walked in the door. The system in place at that time used a software package called Staffware. It was working well but it was being stressed by the volume of documents that NYCERS was dealing with. It actually continued to function up until 2014 when a new software package, Filenet/NYCEWORK, was finally put into production. I wonder where the $600,000 in saved storage fees came from?

Unfortunately, while Staffware needed to be either upgraded or replaced, Filenet runs significantly slower than Staffware did. That in turn has created incremental delays at every step of every process in the agency. It has created havoc with the production levels for all major functions in the agency.

This is an example of a mismanaged project being put into production so that management doesn't have to say it made a mistake. We saw this problem with the CityTime project.

While we are talking about mistakes, there have been two major IT disasters at NYCERS in the last nine years costing millions of dollars. One was the DB2 project and the other is the infamous Long Island City disaster recovery site. At least when the DB2 project was cancelled, the bleeding stopped. The LIC-DR project is a never ending cancer.

When I left NYCERS in 2005, the IT department with the help of two consultants was slowly converting over our major VSAM files to a DB2 relational database platform. We had already had two significant systems running under DB2 but there was a long term need to shift all major files over to the relational model. Two months after I left the project was cancelled. Subsequently NYCERS entered into a contract with IBM/Blue-Phoenix to do the DB2 conversion. That project dragged on for years, cost millions, and eventually failed. NYCERS even tried to sue IBM but with very little relief.

Business Continuity

The Long Island City business recovery site enables NYCERS to restore business operations and critical applications in the event of a disaster. This ensures the sustainability of operations and reduces the potential for data loss. Business recovery time is within four hours and the data recovery point is within 30 minutes.

From this quote you would conclude LIC-DR is a success. That is not true in any sense.

The lease on the LIC-DR project was signed in 2006 and NYCERS still does not have a Certificate of Occupancy for the site. I have previously written about this mess. It is not clear what is the legal status of having employees on that site.

For the record, the rent at LIC-DR is $530,000 for FY-2016 plus another $400,000 for other ancillary lease charges. The site has serious water leakage, asbestos, and plumbing problem. The lease comes up for renewal in the spring of 2016. Let's see what the decision will be then.

And in this season of delusion, NYCERS is planning a tertiary disaster recovery site. They even started buying hardware ($250,000 in FY-2015) for this mythical site. Some people just don't get it.

Business Process Automation

NYCERS continues to streamline business processes and leverage infrastructure investments to improve service delivery. As a result, NYCERS has achieved efficiencies in areas including loans and survivor benefits. On-line loan processing time has been reduced from 10 business days to five business days.

In this quote D'Alessandro appears to claim to have automated loans and survivor benefits in the last nine years and that the turnaround time on loans has been dropped from 10 to 5 days. Actually in 2005 both loans and survivor benefits were fully automated. The loans were the first applications automated in the early 1980's and also the first application to be integrated into the imaging/workflow system in 2002. In 2005, if you filed a loan application by Tuesday, NYCERS mailed a loan check to you that Friday. You would wonder why D'Alessandro would have made the above statement.

While all this craziness was going on with the great IT upgrade, D'Alessandro also threw in a request for 12 new employees with salaries of $720,000. No explanation was given. This was on top of 6 new employees in FY-2015, again with no explanation. Since 2013 the full time staff has gone from 372 to 401 and part time staff from 12 to 35. Why are there back logs with production work? Can you imagine what A.C.S. could do with that kind personnel increase.