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Excessive Risk At NYCERS

To the Editor:

In the last two years, the value of the New York City Employees’ Retirement System portfolio has dropped by $11.3 billion, a 27-percent loss. As gruesome as these figures are, the real danger is the combination of miserable investment returns and increasing benefit payouts.

In 2001, NYCERS was 122-percent funded with assets worth $42.5 billion. This year NYCERS is less than 80-percent funded with assets worth only $30.9 billion. The annual benefit payments during these years, however, have gone up by 33 percent, from $2.4 billion to $3.2 billion.

I suppose the trustees will claim that they have minimized these losses with their prudent investment decisions. My opinion is that the trustees took excessive risks to allow the city to make lower pension contributions during this period. Now the pension fund has suffered increased losses and the city is required to make even higher contributions.

The trustees’ job is to pay benefits and not to pretend to be Goldman Sachs. When a pension fund has a large annual benefit obligation, its investment strategy should have a tight control on risk, even if it means accepting a lower expected rate of return. In the end, this may actually produce a higher actual rate of return.

Each June, the NYCERS trustees renew their statutory option to delegate their investment authority to the Comptroller. Since they continue to do this, they are obviously satisfied with his performance.

Each June, the trustees also adopt a resolution to allow the Comptroller to negotiate contracts for investment services and to directly pay the resulting expenses. As opposed to the delegation of their investment authority, the trustees have no statutory authority to delegate their contract or payment authority.

Since the Comptroller is the statutory auditor of all NYCERS expenses, this creates a fundamental flaw in the financial controls at NYCERS. In addition to this conflict, the trustees are unaware of the terms of the investment contracts. The trustees also never receive a comprehensive reconciled report of NYCERS’s investment expenses from the Comptroller.

These expenses are significant and place a burden on the city’s budget. The city and participating employers will be reimbursing NYCERS $134.5 million this year for investment expenses incurred by NYCERS two years ago. Those expenses were originally $115.3 million. The increase is the result of an annual 8-percent interest charge.

NYCERS has budgeted $160 million for this year’s investment expenses. This will create an expense for the city of $187 million in two years. That is a lot of layoffs.

JOHN MURPHY Editor’s note: Mr. Murphy is a former Executive Director of NYCERS.