Securities Lending Loss Not NYC's To Take, Comptroller Says

April 2, 2003 ( - New York City is not anticipating taking the hit of an $80 million securities lending imbroglio the City's pension funds finds itself in the midst of.

William Thompson Jr, who has held the position of City Comptroller for the past 15 months and is acting chief financial officer of the $67 billion quintet of pension funds, told that no resolution has been reached. He said that 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.”

In a speech at a meeting arranged by law firm Nixon Peabody, Thompson also described New York’s pension expenses as ‘out of control.’

Un-Healthy Implosion

The loss is related to investments in the now defunct National Century Financial Enterprises. Citibank, the custodian and securities lending agent of the plans, declined to comment on Thompson’s remarks.

T he loss 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) and was revealed to in March (See  Controversy Swirls Around NYC Pension Fund ).

Acting as the detonator appears to be investments made in the aforementionedNational Century, an Ohio healthcare 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?

Expenses ‘Out of Control’

Further compounding the problem are the ever-expanding expenses the City is facing with its pension fund, which are currently the fastest growing expense in New York’s $45 billion dollar budget.   Thompson does not believe the situation will get any better before it gets worse, describing New York City’s pension plan costs as “out of control right now,” due in part to large equity investment positions and an 8% assumption rate the City is tied to.

All of this equals more black eyes for the City Comptroller and the pension fund he ultimately is responsible for.   Recently 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 $67 billion 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, 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.