The Independent Budget Office found the city’s pension costs – already the fastest growing expenditure in the entire $45-billion city budget – are expected to grow at a 29% annual clip through 2007. At that rate, the city’s pension costs will total $4.3 billion, 12.4% of the total budget, in 2007 – up from $2.5 billion this fiscal year and just $1.1 billion in 2001, according to a New York Daily News report.
A treacherous trifecta of large equity investment losses, negotiated salary increases and benefit enhancements were found to be the culprit by the report. While the investment tide may turn for the better in the near term, the increases in benefits will continue to the hit the city’s pension costs for years down the road.
“In the future, the city faces not only growing but also permanently higher pension contributions,” the report concluded.
This is just the latest pension problem the city has to deal with and City Comptroller William Thompson Jr, who is also acting chief financial officer of the $67-billion quintet of city pension funds, does not believe the situation will get any better before it gets worse. In fact, Thompson even described New York City’s pension plan costs to PLANSPONSOR.com as “out of control right now,” due in part to the investment loss and an 8% assumption rate the City is tied to.
Adding to the problems is the still yet unresolved $80-million securities lending imbroglio the City’s pension funds are in the midst of. When asked about the situation, Thompson said there are a “number of discussions going on right now to make the city whole.” However, probed as to a possible outcome of those talks, he said, “I do not anticipate the city taking that hit.”
The loss is related to investments in the now defunct National Century Financial Enterprises and occurred through investments in the city’s collateral reinvestment program. When securities are lent, they are usually collateralized with cash and those funds are invested in securities, generally short-term fixed income securities that are detailed in guidelines agreed to by both the lender (the City fund) and the agent (in this case, Citibank). The whole situation was revealed to PLANSPONSOR.com in March (See Controversy Swirls Around NYC Pension Fund ).
Acting as the detonator appears to be investments made in National Century, an Ohio health care finance firm that collapsed late last year amidst a federal fraud investigation (See Hard Hit Health Financing Agency Schedules Shutdown ). The National Century implosion has already damaged a number of state funds – various Arizona city and county agencies, for example, investing in that state’s Local Government Investment Pool, reportedly lost in excess of $131 million. With the release of information about who will be responsible for the $80 million investment in the company will be the answer to the pivotal question: was the investment made within the guidelines of the program?
All of this equals more black eyes for the City Comptroller and the pension fund he ultimately is responsible for. Earlier, the Bureau of Asset Management (BAM) lost the services of short-term chief investment officer Desmond MacIntyre, who unceremoniously left his post after only four weeks on the job.
The spin at the fund is that a personality conflict between MacIntyre and deputy comptroller for pensions Horatio Sparkes was the root cause of his departure. MacIntyre, reached at his home in Westport, Connecticut earlier this year, said his departure was friendly and that he had offered his ongoing assistance to the BAM, but declined any further comment. BAM itself is uncommunicative on the issue. But there is clearly more here than meets the eye.
One theory surrounds the city’s interest in considering outsourcing its investment decision-making process, a radical idea for a large public pension fund to consider. A March 7 release by Thompson noted the fund was looking at options that “may include the use of consultants for the implementation and design of investment strategy, where they can deliver improved service with lower cost and risk.” This would essentially outsource some of the functions that now belong to staff officials and was a step that MacIntyre was insisting on if he was to stay at the fund, according to one source. The fund already has a number of consultants – including Rocaton and Callan Associates – but these are traditional consulting relationships that function largely as a sounding board for the various trustees of the fund.
Further, the release said the Comptroller’s initiative comes after reviewing the results of a preliminary, independent, third-party review of BAM operations, which Thompson commissioned last June. This review was just finalized by Independent Fiduciary Services, a Washington DC-based investment advisory firm, and sources who have seen that audit say it contains substantial criticism as to some of the procedures and governance at the fund.
Some of these problems may have been a function of lack of oversight; Donna Gilding, the last chief investment officer, quit 18 months ago to join San Francisco-based Progress Investment Management. Since then John Burns, a veteran BAM employee, has been acting as interim CIO, a position that is removed from the Comptroller’s position by a reporting stop to First Deputy Comptroller Adam Blumenthal.