NYC Pension Manager Firings Belie No-Secrecy Pledge

New York City Comptroller John Liu
John Liu, New York City comptroller, arrives for a television interview in New York. Photographer: Jonathan Fickies/Bloomberg

New York City Comptroller John Liu, who campaigned last year promising “full accountability and transparency” as chief financial watchdog in the most populous U.S. city, has refused to disclose the identities of money managers fired by the city’s $103 billion pension funds.

In an April speech to business leaders, the comptroller said he dismissed six managers for “poor performance.” He refused to identify them all, even after Bloomberg News sought their names under the state’s Freedom of Information Law. Liu, a Taiwan-born Democrat who became the first Asian-American elected to citywide office in November, didn’t want to embarrass them, said his spokeswoman, Sharon Lee.

“The intent was not to say X, Y and Z are awful and incompetent,” Liu, 43, said in a July 15 interview. “The intent was that we are reviewing the portfolio to identify poor performance and we are taking action. Does that mean we should go out and start excoriating individual fund managers?”

While Liu said in the interview that he would comply with the request to release the names, he didn’t say when they’d be made available.

“We haven’t decided not to disclose,” he said. “The operative term is that you haven’t gotten it yet.”

In an e-mail sent today, Lee said the office intends to answer the freedom-of-information request by Sept. 15. “We intend to fully honor the comptroller’s commitment,” she wrote.

One in Five

One of five tax dollars collected by New York City, about $7.6 billion, will go into the pension funds this year. That’s more than 10 percent of the city’s $63 billion budget and more than it costs to operate the police or fire departments.

City officials project the cost to the municipal budget of pensions covering more than 581,000 current and former police officers, firefighters, teachers, civilian employees and school administrators to increase about six-fold, to $7.8 billion, in 2012, from $1.3 billion in 2002.

All five pension funds had liabilities exceeding assets as of June 30, 2007, the most recent actuarial valuation in last year’s annual report. The fire department had the worst ratio, with its funds covering only 55 percent of future liabilities.

“These are some of the biggest pension funds in the U.S.,” said E.J. McMahon, senior fellow for tax policy at the Manhattan Institute, a research group advocating lower taxes and reduced government spending. “If their funds blew up and lost 80 percent tomorrow, the taxpayers still have to make good on it. They should be more transparent.”

Barring the Public

Liu’s stewardship of the funds has included barring the public from pension-board deliberations on investment policy. That compares with funds for police and firefighters in Los Angeles and teachers in Chicago, which both hold open gatherings.

The California Public Employees’ Retirement System, the largest U.S. public pension fund, which reported a market value of $204.5 billion as of July 16, posts monthly updates of investment returns, quarterly reports on manager performance and investment transactions. New York City’s pension websites don’t provide up-to-date investment returns or lists of managers.

Restricting the public’s access to investment-committee meetings and delaying disclosure of the names of terminated managers is sometimes necessary “to protect the assets,” Liu said. “It’s not a question of not giving the information.”

Although the city charter designates him custodian of city funds, Liu said he may not have power to disclose board policy on his own.

“I wish I had unilateral authority to decide, ‘Hey, let’s put everything online,’” Liu said in the interview. “I’m one of several trustees on several boards. I don’t own the information.”

‘Open Government’

Liu promised “open government” and “intrinsic accountability” as recently as July 1, when he unveiled a website he said would provide public access to city spending decisions.

Taxpayers searching for information on current performance of New York City’s pension funds won’t find it either on the comptroller’s or most funds’ websites. Only one fund, for teachers, posts returns from 2010. The most recent data on the other four are from financial reports dated June 30, 2009. They don’t include data on individual managers’ returns.

In Los Angeles, where all meetings of the police and fire pension board are open, “system members and the public know how we invest fund assets, who manages the assets, how much we pay them, what their performance is, who is on watch,” said Michael Perez, general manager of the more than $12 billion fund that covers both police and firefighters.

Return Comparison

The Los Angeles pension returned 14 percent for the year ending June 30. New York’s police fund returned an estimated 13 percent during the 12 months, a period in which the Standard & Poor’s 500 Index gained 12 percent.

Liu first publicly revealed his dismissal of the six New York pension managers during an April 8 Manhattan breakfast sponsored by Crain’s New York Business magazine.

“Should the funds underperform, the shortfalls will have to be shouldered by our taxpayers,” Liu said. “As such, we’ve already terminated a number of investment managers due to poor performance. Their allocations were redirected to other asset classes and investment managers where the expected return on investment is higher. And, in several cases, we’ve renegotiated the management fees for more favorable terms on behalf of our pension funds.”

No ‘Embarrassment’

In a press conference after the speech, Liu declined to answer a question from a Bloomberg News reporter who asked him to identify the six asset managers, how much city money they had been given, or how much the pension funds had paid the fired managers in fees.

“We want to have good relations with the investment community,” Lee, his spokeswoman, said at the time. “We want to avoid causing any embarrassment.”

The refusal led Bloomberg News to make a request under the state’s Freedom of Information Law on April 11 seeking the identities of the firms Liu said he fired, the reasons for the terminations, the managers’ performance data and the amount of the fees they had received. The office said it would respond by June 11.

On that date, Allen Fitzer, the comptroller’s records- access officer, e-mailed a letter to Bloomberg News identifying two of the six terminated firms: Emerald Infrastructure Development Fund LP, based in New York and Belfast, Northern Ireland; and RiverSource Investments LLC, a subsidiary of Minneapolis-based Ameriprise Financial Inc.

Names Withheld

The assets of four other managers “have not been completely, liquidated, transferred and presented to the appropriate funds as ‘finalized’,” he wrote in withholding the names of the others.

Fitzer said he would identify the other four as “soon as the transitions are complete.” The letter didn’t disclose how much the city had paid the companies in fees, or the size of the investments.

In response to another Bloomberg News request, Liu’s office e-mailed an internal June 11 memo that said Emerald had been given $75 million from four pension funds and was fired in February after it made no investments. The city paid it management fees of $2.9 million from 2008 to 2010, the memo said.

Tom Vogel, an outside spokesman for Emerald in New York with Sitrick & Co., confirmed that four city pension funds gave Emerald $75 million in 2008 for investments to finance construction of revenue-generating projects in Northern Ireland.

‘Right Investments’

“Our goal from the start was to find the right investments that would provide an acceptable risk-adjusted return for our investors,” Vogel said in an e-mail. “Initial investment-period market conditions were such that we were not able to do so, and we understand that was the pension fund’s reason to dissolve.”

The police pension fund ended its $56 million investment deal with RiverSource in February, according to the city’s June 11 memo. The money was originally placed with J. & W. Seligman & Co. in 2002. RiverSource bought the firm in 2008 and “immediately replaced investment staff with a staff with no previous track record,” the memo said.

The pension paid management fees of $1.9 million and the fund had a 7.9 percent rate of return, according to the memo.

Ryan Lund, a RiverSource spokesman, declined to discuss the transaction.

Fund Overseers

Independent boards govern New York City’s pension funds for civil employees, teachers, police officers, firefighters and school administrators. The boards include unpaid representatives of the unions, mayor and the comptroller, who oversees the funds’ asset management.

The pension boards meet once a month to discuss investment policy and performance. After a brief review of performance, the boards usually go into an executive session closed to the public.

New York State’s Open Meetings Law permits closed sessions for eight reasons, including discussions that might imperil public safety or about the purchase or sale of securities or property if publicity would “substantially” affect their value.

During the public portion of the April 27 meeting of the New York City Employees’ Retirement Fund, Martin Gantz, representing Liu, declined to answer a Teamsters union representative’s question about convertible bond returns.

“We will actually be talking about that in executive session,” Gantz said. The open meeting took less than 30 minutes; the closed session lasted more than five hours.

Public Excluded

Mayor Michael Bloomberg, majority owner of Bloomberg News parent Bloomberg LP, a financial information company with clients who advise pension funds, has removed himself from pension investment decisions since assuming office in 2002. Attorneys in his administration’s Law Department defended the decision to exclude the public from the April 27 meeting, or any other meeting.

“Anything discussed with regard to these massive investments and strategy concerning them could potentially have harmful ramifications,” said Paul Rephen, who oversees the New York City Law Department’s pension division.

The city had no legal right to discuss the convertible bonds in closed session, Robert Freeman, executive director of the state Committee on Open Government, a public agency that oversees compliance with New York’s freedom-of-information laws, said in an interview.

“We’re not talking about publicity having an impact on any particular security,” Freeman said. In addition, the identities of fired money managers “are clearly public,” Freeman said. “There would be no valid basis, in my opinion, for denying access or delaying disclosure.”

Lagging Indexes

City pensions employ 319 asset managers, according to the comptroller’s office. In the 12 months ended March 31, the pensions returned 35 percent, 9 percentage points less than the S&P 500 gained over the same period. The five funds lagged behind their benchmark indexes by 1.3 percentage points to as much as 6.8 percentage points.

Liu and his predecessor, William Thompson, pledged to protect the pension funds’ integrity last year after a kickback scandal ensnared a number of politically connected placement agents, or marketers, hired by investment firms to get business from the state pension fund.

Thompson recommended firing Aldus Equity Partners as a manager of city pension funds after state Attorney General Andrew Cuomo alleged that the firm and its managing partner, Saul Meyer, had paid Hank Morris, a political consultant to former state comptroller Alan Hevesi, to get business.

$100 Million

City pension funds also gave at least $100 million to Catterton Partners, a Greenwich, Connecticut-based private equity firm that used Praetorian Securities as its marketing firm. Hevesi’s son, Daniel, a Praetorian employee, reaped agent fees in the deal, Thompson’s office said last year.

The New York securities firm withdrew its securities registration in 2008, according to a filing with the Financial Industry Regulatory Authority Inc.

“Given the attention that government pension funds have received, public confidence has to be restored,” said Dick Dadey, executive director of the Citizens Union, a New York City-based nonpartisan watchdog group. “If significant changes have been made to pension fund management, the public should be fully aware of it, particularly if the comptroller is saying he’s achieved it.”

Middlemen Banned

Liu has maintained a ban on middlemen instituted by Thompson, and implemented disclosure requirements for money managers, including that they must report all contacts with employees of the comptroller’s office. He also refused to take campaign contributions from investment managers and their agents seeking to do business with the funds.

Thompson confirmed in a July 6 interview that Emerald won the business in 2009 on the recommendation of William Howell, a placement agent who had donated $13,900 to Thompson campaigns for comptroller and mayor, according to city campaign finance records.

The former comptroller said he had no role in selecting Emerald. The choice was made by “professionals who had no idea who contributed to my campaign,” Thompson said. Howell didn’t return a message left on his telephone answering machine at his home in Rockville Centre, New York.

Pension board meetings excluded the public during his eight years as comptroller because disclosure could affect the price of an investment, Thompson said.

‘Competitive World’

“It’s a very competitive world and you don’t want to create a situation where your investment decision becomes public,” he said.

The comptroller’s office has not yet complied with the Bloomberg News request for the identities of four of the six terminated companies, an up-to-date accounting of how much money they managed, what they billed in fees and the reasons for their dismissals.

“I’m not defending the system as it is,” Liu said in the July 15 interview in his office across from City Hall. “The system has been in place for a long time.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE