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Sources close to the Mayor —confirmed by a Mayoral spokesman, albeit with slightly more reservation—claim that the five funds that form the New York City pension system have too many managers, too much manager turnover, and a piecemeal approach to risk management and asset allocation. A closer look at the annual reports published by each fund reveals that Bloomberg may have a point.
Assets are as of December 2010; one-year returns are as of June 30, 2010; funding ratios are expressed via the MVA/PBO method.
Fund Name: Teachers’ Retirement System of the City of New
York
Inception: 1917
Assets: $40.306 Billion
One-Year Returns: 14.45%
Funding Ratio: 51%
Managers require oversight, and more managers mean more oversight—all of which must be done in New York City by a small pension staff and consultants. Bloomberg wants to whittle down the number of managers the city’s pension uses—and rightly so. The Teachers’ fund alone uses nearly 200 different managers to look after its $40 billion. CalPERS, the nation’s largest fund at $230 billion, six times the size of the Teachers’ fund, has 206.
Fund Name: New York City Employees’ Retirement System
Inception: 1920
Assets: $39.667 Billion
One-Year Returns: 14.09%
Funding Ratio: 66%
Mayor Bloomberg wants a more holistic approach to asset allocation across all funds. According to at least one consultant, any change toward a more balanced portfolio would be positive. “It’s a broad asset allocation consistent with their long-term liabilities—but if we were to advocate anything, it would be for a more global portfolio, with more international equities,” says LCG Associates’ Michael Lubin. A closer look confirms this; 74% of the Teachers’ equity assets are in the U.S. stock market, which only represents approximately 35% of global equities.
Fund Name: New York City Police Pension Fund
Inception: 1940
Assets: $23.178 Billion
One-Year Returns: 13.74%
Funding Ratio: 60%
Related to the issue of too many managers is the issue of manager turnover. While statistics for this are hard to come by, anecdotal evidence—represented by reports that, following a Blackrock executive’s bashing of public employee benefits, the firm might lose business with the New York City police fund, according to trustee Joseph Alejandro—suggests that manager hiring and firing, at the very least, is used as a threat by some involved in the pension system.
Fund Name: New York City Fire Department Pension Fund
Inception: 1941
Assets: $7.50 Billion
One-Year Returns: 14.76%
Funding Ratio: 44%
An externality of having too many managers is often said to be that smaller allocations equal less bargaining power with external managers—with the result being higher management fees. While the Firefighters’ fund does not release fee payments, this fragmented system—with different boards approving different allocations and often hiring different managers—implies that New York City taxpayers are not getting an optimal deal on the money they inject into their public employees’ retirement system.
Fund Name: New York City
Board of Education Retirement System
Inception: 1921
Assets: $2.750 Billion
One-Year Returns: 15.04%
Funding Ration: 58%
If investment risk is defined as not just volatility, but as asset or solvency drawdown, Mayor Bloomberg can be seen as correct with regard to needing a more robust risk management process. The funds, on average, saw a drawdown of 18.3% in the fiscal year covering the financial crisis —26% for the Board of Education Retirement System—that, while in line with other public pension systems, belies any claim to effective risk management.
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