Scott Evans, chief investment officer for the $163 billion New York City Pension Funds, pounded home to pension trustees the urgency of overhauling the city comptroller's Bureau of Asset Management.
Consultant Funston Advisory Services LLC had done just that in a scathing 398-page report that Comptroller Scott Stringer had commissioned.
"We published it on the Internet in all its gory detail," Evans, also the city's deputy comptroller for asset management, said at the pension funds' common investment meeting March 16 at the David N. Dinkins Municipal Building in lower Manhattan. "It said we have a lot of work to do. Basically they said get busy now."
Evans, a former executive vice president at fund manager TIAA-Cref, said 12 of 14 Funston priority recommendations are in a strategic plan hinged on changes to the bureau's investment process, a new controls environment and a new support infrastructure.
He estimated the roadmap initiatives could cost $1.4 million from the pension funds in personnel services and $2.2 million for travel, training, Internet technology systems and the like.
Bloomfield Hills, Mich.-based Funston in mid-December essentially called out BAM as a Scotch-tape-and-baling-wire operation that unless fortified, could lead to serious failures. Only "heroic efforts" by staff, extensive use of investment consultants and the support of the pension systems and a succession of city comptrollers have held the bureau together, said Funston. The consultant referenced dependency on too few key people, lack of documentation, excessive operational use of consultants, processes with "idiosyncratic workarounds," insufficient staff training and no formal succession planning.
Manually intensive data entry resulted in BAM's investment control group maintaining more than 900 spreadsheets, the report added.
"Oh my lord, that was just terrifying, right?" Cara Schnaper, the bureau's new executive director for strategic initiatives and point person for implementing the Funston recommendations, told the trustees.
"We've got to get out of that kind of environment. It's not something that's very easy to manage. It's just fraught with risk. It's fraught with overhead. We've got to be able to stop operating in that kind of environment."
Pension-plan governance is increasingly under the national microscope.
According to the Manhattan Institute for Policy Research,
A Moody's Investors Service sample, meanwhile, said reported net pension liabilities increased by about 17% in fiscal 2015, driven largely by lower returns, with more public pension debt expected this year. And the Center for Retirement Research at Boston College estimated other post-employment benefit, or OPEB, liabilities at $862 billion, with two-thirds of that at the local level.
Stringer, speaking on a Bond Buyer podcast, called the Funston report a wakeup call.
"It's hard-hitting. It peels the onion back," he said. "There's clearly a lot we have to do to make this pension system the envy of the nation, but that's my job and my goal as comptroller."
Stringer is fiduciary to the five pension plans, which serve 700,000 retirees. They are the New York City Employees' Retirement System; the Teachers' Retirement System of the City of New York; the New York City Police Pension Fund Subchapter 2; New York City Fire Department Pension Fund Subchapter Two; and the New York City Board of Education Retirement System.
About 100 employees, or 15% of Stringer's staff, work at the asset management bureau.
Evans, hired in May 2014, said a new investment process, "soup to nuts" was in order.
"Funston was amazed that we were able to do it with the sort of tortured process that we had," he said. "It was a mess when I came in here. It worked, but every asset class had a different way. There was tremendous informality in the process.
"We need a new controls environment," he said. That includes investing in up-to-date technology.
One major component, he added, was standardizing due diligence. BAM teams now use a common framework and manager recommendations need approval at a weekly investment meeting using a standard memo. All private asset managers must submit detailed data on expenses.
Another focus is more intense oversight of external managers.
"It was obvious. You need to get out on the road," said Evans. "You can't sit in your offices on the eighth floor on 1 Centre Street and listen to the marketing men that come in and give us pitches about the managers. You've seen these guys who show up for the board presentations. They're slicker than slick.
"You don't take the word of the CEO or the CFO. You go to the companies' headquarters. You visit the plants. You ask the employees, you ask the middle managers to know whether the managers are the real deal or not."
Evans even cited "embarrassing, abominable working conditions" at dreary 1 Centre St., adjacent to City Hall and just renamed after former Mayor David Dinkins. "They were worse than my dorm room on the worst Saturday morning," he said.
Stringer sees the common investment meeting among the five pension funds' trustees itself is a signature efficiency.
"The Bureau of Asset Management and Scott Evans would go to these five meetings making the same presentations within a month, talking about the same exact thing over and over again," he said. "We realized that it would be better to reduce the number of meetings to allow the Bureau of Asset Management to spend more time on the investment side.
"We have now reduced meetings from 54 per year to six."
Other key hires within BAM include chief risk officer Miles Draycott, a former Merrill Lynch and Deutsche Bank operative; Shachi Bhatt as chief compliance officer; and Khanim Babayeva as internal auditor.
"I don't have to re-invent the wheel. I got the wheel handed to me," said Schnaper, a former executive vice president of technology and operations at TIAA-Cref.
Schnaper said her group is working with the comptroller's Bureau of Accountancy to streamline the fund accounting process. "It's clunky, to say the least."
Other priorities include an electronic cash-flow management system; restructuring BAM into clear front, middle and back-office groups; assessing technology needs and creating key performance metrics.
"I'm one of those people who some people don't like, but I am one of those people who truly believes that if I can't measure an operational process in an operational organization, I can't tell where the problems are and I certainly can't improve it," she said.
