New York’s 'rogue little messed up' pension fund

This story was originally published in Crain’s New York Business.

Natalie Green Giles was an ethics consultant at Arthur Andersen when the accounting firm helped cover up fraud at Enron. She rebuilt her career as an education consultant and hoped to never encounter such venality again. And she didn’t, she says, until she was appointed by Mayor Bill de Blasio as one of 27 trustees to the Board of Education Retirement System.

BERS is the pension plan for nearly 60,000 public-school workers in New York, including substitute teachers, cafeteria workers, crossing guards and janitors. Almost three-quarters of members are women earning an average wage of $46,000, according to plan documents. It’s the smallest of the city’s pension funds, with $9 billion in member assets, but Green Giles discovered BERS’ administrative costs — $35 million a year — were $10 million higher than at the police pension fund, which is more than five times as large.

That was the first red flag.

“This is the pension fund for people with the least,” Green Giles, who left the board when de Blasio’s term ended in 2021, told Crain’s New York Business. “What I saw was senior leadership that was extractive and exploitative and knew how to take advantage of a board that didn’t know what they were doing because they hadn’t signed up for this assignment.”

The dubious situation at BERS isn’t unusual among the city’s pension funds, a collection of five separate fiefs with hundreds of employees that administer retirement benefits for 750,000 city workers and control more than $250 billion in assets. Last fiscal year, the funds shelled out $1.7 billion in fees to Wall Street asset managers, a 10% year-over-year increase, even as overall plan assets grew by 6%. Administrative costs across the five plans reached nearly $280 million last year.

Paying for New York’s pension system, where overlap and waste are endemic, ranks as one of the city’s biggest expenses. Pensions chew up 10% of the city budget and 10 times more than spent on libraries and parks combined. Taxpayers contributed nearly $10 billion to the pension plans last fiscal year, a sum that has quintupled over the last two decades. Last month Mayor Eric Adams proposed to reduce the city’s police force, trash pickups, and library services as part of a $4 billion budget cut. With revenues under pressure, pensions risk crowding out his other priorities because benefits are not only guaranteed but rise with the cost of living.

All the big money flying around has a way of luring bad actors, and the annals of mischievous behavior are long and sometimes reach criminal levels. In 2018, for instance, the executive director of the Fire Pension Fund, Stephen Cassidy, pleaded guilty to driving under the influence after steering his city-paid Toyota Prius onto a Manhattan sidewalk drunk and with cocaine in his wallet. In 2006 BERS’ top lawyer, Todd Rubinstein, was forced out after investigators learned he helped place a phony job ad to try to get a green card for an employee from India.

At BERS, the fund serving public-school workers, payroll expenses have doubled since 2017, to $20 million a year for 166 fund employees, according to data released under the state’s Freedom of Information Law. In a statement to Crain’s, BERS attributed the increase to infrastructure investments to better serve its members, such as a new call center with 15 staffers in the Financial District.

Green Giles contends that’s only part of the story. She alerted the pension plan’s inspector general in 2018 after BERS Deputy Executive Director Daniel Miller asked for a $28,000 raise to $255,000 — more than the mayor’s salary at the time. If he didn’t get it, Miller threatened to accept a job offer from an Ohio teachers pension fund. BERS Executive Director Sanford Rich approved the hefty raise and then, according to the inspector general report, sought his own so he would be paid more than Miller.

In fact, Miller hadn’t ever been offered another job and provided “false information” under oath to investigators, according to a confidential report delivered in August 2022 by the inspector general for BERS. Rich was accused in the report of “egregious misconduct.” The inspector general recommended the trustees of BERS dismiss Rich and Miller and referred the matter to the Manhattan district attorney’s office.

“Rich simply took Miller’s word as gospel, with no due diligence, essentially an act of negligence,” the report said. “Rich then used this unverified information to justify a request to enrich himself.”

But the board of BERS declined to take any action. Rich and Miller still have their jobs today. The D.A. hasn’t filed charges because the pay-raise episode doesn’t violate any laws, a former legal director at a different pension fund said.

Neither Rich nor Miller would talk to Crain’s, but in response to written questions BERS’ general counsel said Rich asked the board for more money “because he believed that his performance justified such a request.”

Inept regulation

The story of BERS isn’t just one of bad oversight or bad management. It is also a story of regulatory ineptitude.

The agency responsible for overseeing BERS, the New York State Department of Financial Services, hasn’t completed an audit of the pension fund and made recommendations since 2014, even though state law calls for an audit every five years to be shared with city officials. This sort of sloth isn’t unusual. DFS’ last audit of the largest city pension plan, the New York City Employees Retirement System, was published in 2009 for a period ending in 2003.

DFS “failed to adhere to pension audit reporting schedules,” spokeswoman Ciara Marangas acknowledged. Under Superintendent Adrienne Harris, who ascended to her position in 2021, the agency has “engaged in a wholesale review of all audit processes and has now also begun posting reports as mandated by law.”

The shenanigans at BERS were detailed by City Comptroller Brad Lander in a letter to Harris earlier this year. In her reply, obtained by Crain’s, Harris said she shared the comptroller’s concern for “the welfare” of BERS members and, even though her agency has fined global banks hundreds of millions for financing terrorist activities, its powers of enforcement over BERS are “fairly limited” and it has “no authority” to sanction or remove board members.

BERS’s mess was years in the making but new to the comptroller, the city’s chief oversight officer. That’s because although the comptroller’s office has served on the city’s other pension boards for decades, it was excluded from the BERS board until last year.

“It’s a rogue little messed up fund,” Comptroller Lander told Crain’s over the summer. A few weeks ago, he added: “BERS represents 3% of the New York City pension funds total assets under management and 100% of the headaches. I do not trust the leadership.”

BERS declined to comment on Lander’s assessment.

Where accountability goes to die

BERS manages retirement savings for people like Millie Santos, a parent coordinator who has worked for 22 years at P.S. 178, an elementary school in Upper Manhattan named for Juan Bosch, the first democratically elected president of the Dominican Republic. A fifth of students are English-language learners but 94% pass sixth-grade English, math, science and social studies because teachers know how to prepare them for middle school. Santos declined to disclose her salary, but the average wage for female workers with her length of service is $57,000, according to BERS documents. Santos helps 250 families fill out kindergarten applications, serves as liaison to the principal, and works nights and weekends as necessary.

“I have a hand in everything,” said Santos, who plans to retire in five years and start collecting her pension. The average BERS retiree gets a monthly benefit of $1,300.

New York has offered city workers pensions since the 19th century, and for nearly that long, budget watchdogs have warned the city’s commitments will be costly to sustain. A decade ago the city pension system had only about 60% of assets needed to meet future obligations, but over the past 20 years mayors have raised taxpayer contributions from less than $2 billion a year to nearly $10 billion, according to the Independent Budget Office. Today the city pension system is in much sounder financial shape, holding more than 80% of assets necessary to meet obligations to retirees — ahead of the 73% average for city and county pension plans, according to a Wilshire Advisors estimate.

It will be challenging for Mayor Adams to maintain pension funding in light of the city’s difficult revenue outlook. He can’t count on accommodating markets, which last fiscal year lifted the pension system’s investment return to 8%, including an 8.6% gain at BERS, higher than the 7% long-term average targeted by the funds. One thing he could do is squeeze costs out of the pension system.

New York’s five different pension plans are the legacy of labor agreements reached generations ago. Teachers have a separate plan from substitute teachers. Police and firefighters have their own plans; clerks, sanitation workers and prison guards are housed in another. Each pension fund hires its own staff, rents its own space and has its own board composed of union leaders and city officials who represent management.

John Murphy, former executive director of the New York City Employees Retirement System, said the pension system can be understood as five different fiefs each controlling billions of dollars: “Everyone is protecting their turf,” Murphy said. “The city pension system is where accountability goes to die.”

Bad behavior flourishes at this intersection of politics and big money. In 2018, state pension official Navnoor Kang was sentenced to 21 months in prison for taking bribes in exchange for steering trades to select brokers. In 2016, a former CEO of the California Public Employees Retirement System, Fred Buenrostro, was sentenced to 54 months in prison for corruption and fraud involving a New York private equity firm. Former New York State Comptroller Alan Hevesi in 2010 pleaded guilty to pocketing millions in bribes from “placement agents” representing asset managers that invested the state pension plan’s money. In 2005 Murphy, the former NYCERS chief, was pushed out after investigators found he promoted his mistress to a $96,000 supervisory job.

The last attempt at an overhaul came in 2011, when Mayor Michael Bloomberg and City Comptroller John Liu tried to consolidate investment decisions into the city’s Bureau of Asset Management while maintaining the five separate pension boards. Liu said the plan would cut at least $1 billion annually in investment costs — more than half last year’s sum and serious savings considering a 2015 study found that most investment gains at city pension funds were wiped out by fees paid to money managers. But unions and their allies in Albany didn’t want to cede control over the pension funds, and Liu said Bloomberg wouldn’t fight.

“He never used any political capital to build support,” said Liu, now a state senator.

Bloomberg declined to comment. But his former press secretary, Marc La Vorgna, said it was Liu who yielded to pressure from unions whose support he needed for his unsuccessful mayoral campaign in 2013.

“Hopefully the idea can be resurrected,” La Vorgna said. “It was a good idea then, and it would still be a good idea today.”

One reform that Bloomberg did succeed in getting led directly to the mess Green Giles found at BERS.

In 2002, Bloomberg persuaded state lawmakers to give him mayoral control of the city’s 1 million-student school system. The New York City Board of Education was replaced with a less powerful body controlled by the mayor called the Panel for Educational Policy.

“PEP was relegated mostly to setting policy rather than operations,” said David Bloomfield, a professor of education leadership, law and policy at Brooklyn College.

But PEP did inherit one important power from the Board of Education: Control of BERS. PEP holds 23 of 27 BERS board seats. Because it’s considered a management representative, it has the votes to approve budgets over the objections of other trustees, so long as one union representative goes along. On other city pension boards, power is more balanced between management and labor interests. BERS co-Chairman Donald Nesbit is a former cook at a Brooklyn high school and the other co-Chair, Thomas Sheppard, serves on a Community Education Council in the Bronx, a parent-led group that advises schools on policy matters. The more than 20 other trustees are volunteers, including PTA leaders, retired principals and a block association president.

“They’re public education advocates, not fiduciaries expected to be making billions of dollars worth of investment decisions,” Green Giles said.

Another quirk: Under the original legislation giving Bloomberg control of schools, the PEP didn’t include the city comptroller’s office, which serves on all the other pension boards. Lander told Crain’s this decision was “an oversight” but the former top lawyer of another city pension plan disagreed.

“Nothing is ever an oversight when it comes to the pension funds,” the official said.

Everyone doesn’t believe that

When Mayor de Blasio appointed her to the PEP, Green Giles didn’t know she’d also been installed on the BERS board.

“I was like, ‘Huh, did I somehow join a pension board?’” she said, and missed her first two meetings.

The board’s job was supervising BERS Executive Director Rich, who, before running the fund starting in 2016, was chief negotiator at the federal agency overseeing pension plans of failed businesses and, previously, a junk-bond salesman at Merrill Lynch. In a statement, Rich said in his seven-year tenure he’s made “significant improvements in the operations and culture at BERS,” including installing a leadership team, improving technology and back-office functions and leasing 51,000 square feet of Lower Manhattan office space at a monthly rent of just $3.25 per square foot.

After granting the raise making his deputy better-paid than the mayor, Rich’s request for his own pay increase was denied by the board. Although Rich was snubbed, he stayed on the job, which pays $236,000 a year, because “he remains committed to this agency and its mission, and is convinced that he still has more to contribute to BERS and its membership,” BERS said. The board cut Deputy Executive Director Miller’s pay to $200,000 last March for reasons BERS wouldn’t explain.

In addition to his duties at BERS, Rich has simultaneously been a director for nearly 12 years at Aspen Group, the Midtown-based owner of Aspen University, a for-profit school that trains nurses. Since 2014 Rich has been awarded more than $300,000, mainly in shares and stock options, for serving on the Aspen board’s executive, regulatory and audit committees. Aspen’s stock reached more than $12 a share in 2020 but now trades for just 17 cents a share; the school was booted off Nasdaq this year after the Arizona State Board of Nursing said Aspen failed to meet “basic standards of educational practice,” according to a securities filing. It didn’t proctor exams adequately, the nursing board alleged, and counted clinical hours for students when they weren’t in facilities. Aspen consented to heightened oversight, the filing said. Rich referred questions to Aspen.

BERS trustees continue to protect their executive director — and their turf.

In October 2022, the board considered a motion to terminate Rich for his role in the pay-raise matter and to demote Miller. The matter came up four months after the comptroller’s office was finally given a board seat last year as part of the legislation reauthorizing control of schools for Mayor Adams.

In executive session so the matter could be discussed privately, Comptroller Lander’s representative asked about additional investigations concerning Rich, Miller and other senior leaders. Other trustees wouldn’t let General Counsel Alexander Kazasis answer the question, according to the comptroller’s letter to DFS. Back in public session, with the cameras on, trustees talked about instead removing the comptroller from the board.

“To kick the comptroller off this board is a disservice to the beneficiaries of BERS and to the New York City taxpayers,” said his representative, Alison Hirsh. “It is at best short-sighted and at worst a purposeful attempt to prevent accountability and oversight.”

BERS co-chairman Nesbit, an executive vice president at the city’s largest public employee union, DC 37, told Hirsh her comment was “unfair” and his proposal was “not an official document.”

“Your position is the comptroller should be on there. Everyone doesn’t believe that,” said Nesbit, who didn’t reply to Crain’s request for comment. “The comptroller was not a member of this system for over 100 years.”

The board took no action.

Green Giles hopes the legislature will further reform the BERS boardroom next spring, when mayoral control is due for another reauthorization. Service on PEP must be separated from service on BERS, she said, and, although the fund’s investment returns are solid, the board should have more members with financial experience. BERS declined to comment on Green Giles’s remarks.

“Pensions are such a critical benefit for city workers,” she said. “BERS members deserve the same level of care and consideration as everyone else.”