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The
Lenape tribe got a better deal on the sale of Manhattan island than New
York City’s pension funds have been getting from Wall Street, according
to a new analysis by the city comptroller’s office.
The
analysis concluded that, over the past 10 years, the five pension funds
have paid more than $2 billion in fees to money managers and have
received virtually nothing in return, Comptroller Scott M. Stringer said
in an interview on Wednesday.
“We
asked a simple question: Are we getting value for the fees we’re paying
to Wall Street?” Mr. Stringer said. “The answer, based on this 10-year
analysis, is no.”
Until
now, Mr. Stringer said, the pension funds have reported the performance
of many of their investments before taking the fees paid to money
managers into account. After factoring in those fees, his staff found
that they had dragged the overall returns $2.5 billion below
expectations over the last 10 years.
“When
you do the math on what we pay Wall Street to actively manage our
funds, it’s shocking to realize that fees have not only wiped out any
benefit to the funds, but have in fact cost taxpayers billions of
dollars in lost returns,” Mr. Stringer said.
Why the trustees of the funds — Mr. Stringer included — would not have performed those calculations in the past is not clear.
Mr.
Stringer, who was a trustee of one of the funds when he was Manhattan
borough president before being elected comptroller, said the returns on
investments in publicly traded assets, mostly stocks and bonds, have
traditionally been reported without taking fees into account. The fees
have been disclosed only in footnotes to the funds’ quarterly
statements, he said.
The
stakes in this arena are huge. The city’s pension system is the fourth
largest in the country, with total assets of nearly $160 billion. It
holds retirement funds for about 715,000 city employees, including
teachers, police officers and firefighters.
Most
of the funds’ money — more than 80 percent — is invested in plain
vanilla assets like domestic and foreign stocks and bonds. The managers
of those “public asset classes” are usually paid based on the amount of
money they manage, not the returns they achieve.
Over
the last 10 years, the return on those “public asset classes” has
surpassed expectations by more than $2 billion, according to the
comptroller’s analysis. But nearly all of that extra gain — about 97
percent — has been eaten up by management fees, leaving just $40 million
for the retirees, it found.
Figuring out just how big a drag the fees were on the expected returns of the funds overall was not easy, Mr. Stringer said.
Scott
Evans, the comptroller’s chief investment officer, had to work backward
from the footnotes in the reports to estimate just how much had been
paid each year to a long list of Wall Street firms that managed
investments in the public markets. He then calculated that those fees,
combined with the significant underperformance of the investments in
private assets like real estate, amount to a whopping negative — a drag
of more than $2.5 billion — since the end of 2004.
Leaders of unions whose members have stakes in the funds said they expected the analysis to lead to changes.
“The
fees are exorbitant and we’re not getting a good return on our money,”
said Henry Garrido, executive director of District Council 37 and a
trustee of the New York City Employees’ Retirement System. “That’s an
insane process to keep doing the same thing over and over.”
Mr.
Garrido said he saw Mr. Stringer’s emphasis on the high fees as a
continuation of the efforts of his predecessor, John C. Liu, to improve
controls over the managers of the pension funds.
Michael
Mulgrew, the president of the United Federation of Teachers, said he
was happy that his union’s pension fund, the Teachers’ Retirement System
of the City of New York, had been performing well. But he said the fees
paid to some managers were “ridiculous” and should be renegotiated if
those managers are retained.
“Education’s
always being put under reform; maybe some of these financial practices
should be put under reform as well,” Mr. Mulgrew said. He praised Mr.
Stringer for taking aim at a line of business that has been very
lucrative for Wall Street.
“You
are talking about messing with a practice that they don’t want messed
with,” Mr. Mulgrew said. “I give the comptroller credit. He’s jumping
feet first into this one.”
Correction: April 10, 2015
An article in some editions on Thursday about Wall Street fees that have wiped out $2.5 billion in New York City pension fund gains misidentified the types of investments in the city’s pension funds for which management fees are not traditionally reported. They are investments in publicly traded assets, like stocks and bonds — not privately traded assets, like real estate.
An article in some editions on Thursday about Wall Street fees that have wiped out $2.5 billion in New York City pension fund gains misidentified the types of investments in the city’s pension funds for which management fees are not traditionally reported. They are investments in publicly traded assets, like stocks and bonds — not privately traded assets, like real estate.
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