Again, DFS and the Pension Audits.

Today the temporary head and the press officer of the NYS DFS suddenly resigned. This is after Lawsky left in June.

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

DFS is an agency in free fall.

My Wife Resigned from NYCERS in May of this Year

In May of this year my wife resigned from NYCERS about two years shy of the date she would have been able to retire. She started working at NYCERS in the fall of 1998. In December of 2003, she was promoted to Deputy Director of Administration by Milt Aron, the Deputy Executive Director.

Prior to that, starting in 1980, she worked at the Mayor’s Office, the Sheriff’s Office, and the Department of Homeless Services.

In June, 2005 she was demoted by Aron with the explicit approval of Martha Stark, Chair of the NYCERS Board of Trustees and the Finance Commissioner. She was demoted because of her relationship with me. She was forced back to her permanent civil service position and her salary was reduced by $14,000, the amount that she had been given when she was promoted.

From June of 2005 to May of 2015 my wife was given no work. She was told many times that there were strict orders from the executive staff that she was not to be given any work. Many times over the ten years she explicitly asked for work.

On a few rare occasions she was given some significant work but the minute the executive staff became aware of it, the work was stopped. Kin Mak could always be counted on to pass the word along to Karen Mazza about the work assignment.

In 2013 my wife was hospitalized for 12 days with acute ulcerative colitis.

In 2014, while driving to church on Palm Sunday, she had a major heart attack. She almost died on the side of the road. It was incredibly fortunate that she was at a stop sign and that her 16 year old daughter was with her in the car. The EMT’s were there in minutes and were able revive her with a defibrillator. She spent 18 days in the hospital. She was on reduced body temperature protocol for possible brain damage. She had double bypass surgery and another procedure for a defibrillator implant.

Both of these illnesses were directly caused by stress.

After both of these hospital events she returned to work. Both times she asked for work and both times NYCERS executive staff refused to assign her any work.

In the spring of 2015 the stress of being totally marginalized at NYCERS finally became too much of a threat to her health. She reluctantly resigned. At that point her salary was $104,000.

For many years now, I have been writing about the wretched way that NYCERS, and I mean D'Allesandro, Mazza, and Baksh/Ramsami, have treated members, retirees and NYCERS employees. I speak from personal experience.

You can understand why people lie, cheat, and steal for their own personal gain but to be just plain nasty for no good reason is despicable. The only thing I can come up with is that they are so incompetent they think they have to kick every one under them to hide their own failures. Maybe City Hall and the new NYCERS Chair will get tired of them like the previous mayor did with Martha Stark.

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.