July, 2000Stephen H. Cypen, Esq., Editor
1. NEW INVESTMENT GUIDELINE REQUIREMENTS FOR PUBLIC PLANS: When Governor Bush approved Committee Substitute for Senate Bill 372 on June 14, 2000, Chapter 2000-264 became law. Effective October 1, 2000, Section 112.625, Florida Statutes, is amended and Section 112.661, Florida Statutes, is created. The former adds to the definition of "statement value" that assets for which a fair market value is not provided shall be excluded from the assets used in determination of annual cost; provides that the terms "named fiduciary," "board" and "board of trustees" are synonymous; and defines "plan sponsor" as the local governmental entity that has established or that may establish a local retirement system or plan. The creation of Section 112.661, Florida Statutes, is a major change in investment policy requirements for a public pension board. Generally, of course, investment of the assets of any local retirement system or plan must be consistent with a written investment policy adopted by the board. Further, such policies shall be structured to maximize the financial return to the retirement system or plan consistent with the risks incumbent in each investment and shall be structured to establish and maintain an appropriate diversification of the retirement system or plan's assets. The investment policy must address seventeen specific elements:
- SCOPE: The investment policy shall apply to funds under control of the Board.
- INVESTMENT OBJECTIVES: The investment policy shall describe the investment objectives of the Board.
- PERFORMANCE MEASUREMENT: The investment policy shall specify performance measures as are appropriate for the nature and size of the assets within the Board's custody.
- INVESTMENT AND FIDUCIARY STANDARDS: The investment policy shall describe the level of prudence and ethical standards to be followed by the Board in carrying out its investment activities with respect to funds described in this section. The Board in performing its investment duties shall comply with the fiduciary standards set forth in ERISA (by its own terms not applicable to public plans). In case of conflict with other provisions of law authorizing investments, the investment and fiduciary standards set forth in this section shall prevail.
- AUTHORIZED INVESTMENTS: (a) The investment policy shall list investments authorized by the Board. Investments not so listed are prohibited. Unless otherwise authorized by law or ordinance investments of the assets of any local retirement system or plan shall be subject to the limitations and conditions set forth in certain subsections of Section 215.47, Florida Statutes, the provisions applicable to the State Board of Administration for investment of assets of the Florida Retirement System. (Presumably, every plan has an ordinance setting forth its particular authorized investments, and fire and police funds also have the provisions of Chapters 175 and 185, Florida Statutes.); (b) If on October 1, 2000 investments exceed the applicable limit or do not satisfy the applicable investment standard, such excess or noncompliant investment may be continued until it is economically feasible to dispose of such investment, but no additional investment may be made unless authorized by law or ordinance. (The last provisions formalizes advice we have been giving to trustees for many years.)
- MATURITY AND LIQUIDITY REQUIREMENTS: The investment policy shall require that the investment portfolio be structured in such manner as to provide sufficient liquidity to pay obligations as they come due. To that end, the investment policy should direct that, to the extent possible, an attempt will be made to match investment maturities with known cash needs and anticipated cash-flow requirements.
- PORTFOLIO COMPOSITION: The investment policy shall establish guidelines for investments and limits on security issues, issuers and maturities. Such guidelines shall be commensurate with the nature and size of the funds within the custody of the board.
- RISK AND DIVERSIFICATION: The investment policy shall provide for appropriate diversification of the portfolio. Investments should be diversified to the extent practicable to control the risk of loss resulting from over concentration in a specific maturity, issuer, instrument, dealer or bank through which financial instruments are bought and sold.
- EXPECTED ANNUAL RATE OF RETURN: The investment policy shall require that, for each actuarial evaluation, the Board determine the total expected annual rate of return for the current year, for each of the next several years and for the long term thereafter. This determination must be filed promptly with the Department of Management Services and with the plan sponsor and consulting actuary -- seemingly superfluous in light of subsection (16) requiring that the entire investment policy be so filed. The Department is supposed to use the determination only to notify the Board, plan sponsor and consulting actuary of material differences between the total expected annual rate of return and the actuarial assumed rate of return -- a fact that would seem obvious to all of those parties, especially the actuary, who would be the source. The subsection raises some issues: What is meant by "several" years? By "long term?" What happens if there are material differences? Finally, there is some intimation that the Department's specifically limited use of this information exempts it from disclosure under Chapter 119, Florida Statutes, the Public Records Law. Don't count on it.
- THIRD-PARTY CUSTODIAL AGREEMENTS: The investment policy shall provide appropriate arrangements for the holding of assets of the Board by a third party. Securities transactions between a broker-dealer (almost always the case) and the custodian involving purchase or sale of securities by transfer of money or securities must be made on a "delivery vs. payment" basis to insure that the custodian will have the security or money in hand at conclusion of the transaction. Our custodian agreements already provide that no money is paid or no security is delivered except on a "DVP" basis.
- MASTER REPURCHASE AGREEMENT: The investment policy shall require all approved institutions and dealers transacting repurchase agreements to execute and perform as stated in the Master Repurchase Agreement. All repurchase agreement transactions shall adhere to requirements of the Master Repurchase Agreement. This provision does not restrict or limit the terms of any such Master Repurchase Agreement.
- BID REQUIREMENT: The investment policy shall provide that the Board determine the approximate maturity date based on cash-flow needs and market conditions, analyze and select one or more optimal types of investment and competitively bid the security in question when feasible and appropriate. Except as otherwise required by law, the most economically advantageous bid must be selected. The first part seems duplicative of subsection (6). As to the competitive bid requirement, the Senate Staff Analysis found "it is not clear whether this refers to other general law or to the specific provisions which may be contained in special legislative acts or local ordinances which establish municipal police and firefighter pension plans." Hopefully, the bid requirement will not be an impediment, as we understand that most security transactions -- at least as to bonds -- involve some form of bid, even if informal.
- INTERNAL CONTROLS: The investment policy shall provide for a written system of internal controls and operational procedures, which shall be reviewed by independent certified public accountants as part of any financial audit periodically required of the Board's unit of local government. Inasmuch as most boards do not use the same independent certified public accountants as their plan sponsor, we would interpret this provision as meaning the Board's certified public accountants review as part of the Board's audit. The internal controls should be designed to prevent losses of funds which might arise from fraud, error, misrepresentation by third parties or imprudent actions by the Board or employees of the plan sponsor. While the provision is well-meaning, most people know that financial audits generally are not designed to detect losses resulting from fraud or misrepresentation.
- CONTINUING EDUCATION: The investment policy shall provide for the continuing education of the Board members in matters relating to investments and the Board's responsibilities. Bravo! If any trustee still needs "ammunition" in order to be allowed to attend educational conferences, here it is.
- REPORTING: The investment policy shall provide for appropriate annual or more frequent reporting of investment activities and shall prepare periodic reports for submission to the plan sponsor. Such report shall be "available to the public." Duh!
- FILING OF INVESTMENT POLICY: Upon adoption by the Board, the investment policy shall be promptly filed with the Department of Management Services, plan sponsor and consulting actuary. The effective date of the investment policy and any amendment thereto shall be the 31st calendar day following the filing date with the plan sponsor -- what micro-manager insisted on this detail?
- VALUATION OF ILLIQUID INVESTMENTS: The investment policy shall provide for valuation of illiquid investments for which a generally recognized market is not available or for which there is no consistent or generally accepted pricing mechanism. If these investments are utilized, the investment policy must include the criteria set forth in Section 215.47(6), Florida Statutes, the SBA/FRS methodology for valuation.
In summary, trustees have much work to accomplish by October 1st of this year. For most, reformatting existing policies to comply with the new law will suffice. For others, wholesale changes may be in order. And just as Chapter 99-1 may have been the "Actuaries' Relief Act," this one may be the "Consultants' Relief Act."
"Any given program costs more and takes longer."
2. POLICE TRUSTEE APPOINTED CHIEF MAY CONTINUE TO SERVE: A police officer who was elected by his peers to serve as a member of the Board of Trustees of the City's police pension plan created pursuant to Chapter 185, Florida Statutes, may continue to serve as a member of the Board after being appointed to the position of police chief. Generally, Article II, Section 5(a), Florida Constitution, prohibits a person from simultaneously serving in more than one state, county or municipal office -- whether elected or appointed. However, the Florida Attorney General opined that the ex officio exception to the constitutional provision applies to a police officer serving as an elected member of the municipal police pension board, including the police chief. The ex officio exception exists when enabling legislation authorizing creation of the board in question designates a public officer to serve as a member of the board and thereby imposes additional or ex officio duties upon that officer. As most of our readers know, Section 185.05, Florida Statutes, requires that two police officers serve as members of the board of trustees. And since the statutory definition of police officer includes all certified supervisory and command personnel, the ex officio exception to the constitutional dual office holding prohibition clearly applies. AGO 2000-38 (June 27, 2000)
3. CITY OF MIAMI WAITED TOO LONG TO ASSERT ALLEGED CONFLICT: In 1983 retired city employees filed a class action against the City of Miami and three city pension plan trustees. They claimed that the city illegally reduced their pension benefits after retirement. In 1992 the city attorney, who represented both the city and the individual trustees, consented to counsel's representation of the retirees. However, in 1999, the city filed a motion to disqualify counsel on grounds of conflict of interest. (Apparently, retirees' counsel had been an assistant city attorney in Miami.) In quashing the trial court's order of disqualification, the Third District Court of Appeal held that the city waived any right it may have had to disqualify the retirees' counsel because of its delays, and that disqualification at such late date would work a serious injustice upon the retirees. According to the opinion, a jury trial is presently scheduled for September, 2000. Case v. City of Miami, 25 Fla. L. Weekly D1068 (Fla. 3d DCA, May 3, 2000).
4. CHOOSE TO SAVE PROVIDES 100 ONLINE FINANCIAL CALCULATORS: The Choose to Save Education Program, established by the American Savings Education Council and the Employee Benefit Research Institute, has just added over 100 online financial calculators to help you with a wide array of financial planning issues, including credit, home mortgage and budgeting. The program was established to help people plan for tomorrow. Some interesting information from the home page, located at http://www.choosetosave.org: only 49% of workers have any idea how much they need for retirement; the average Social Security benefit for the year 2000 is $804.00 per month; and medical advances could keep you alive until age 100.
5. FLORIDA RETIREMENT SYSTEM ADDS 401(k)-TYPE PENSION PLAN: On June 1, 2000 the Governor signed into law House Bill 2393, creating Chapter 2000-169. The new law directs the Trustees of the State Board of Administration to establish as of May 1, 2002 an optional defined contribution retirement program for members of the Florida Retirement System, under which retirement benefits will be provided for eligible employees who elect to participate in the program. The benefits in such optional program are to be provided through employee-directed investments, in accordance with IRC §401(a). Dubbed the "Public Employee Optional Retirement Program," the program allows eligible employees to establish one or more individual participant accounts and to transfer to the optional program a sum representing the present value of the employee's accumulated benefit obligation under the FRS defined benefit retirement program. Participation in the optional program is in lieu of participation in the defined benefit program. Although an eligible member who elects to participate in the optional program retains all retirement service credit earned under the defined benefit program and shall be entitled to the deferred benefit upon termination, upon transfer of the present value of the accumulated benefit, all service credit previously earned under the defined benefit program shall be nullified for purposes of entitlement to a future benefit under the defined benefit program. The new law also raises the special risk member "multiplier" to 3% for creditable years of service after September 30, 1978 for special risk members retiring after July 1, 2000. (Previously, the multiplier for that period of time ranged from 2% to 2.8%.) Finally, as of January 1, 2001, the definition of special risk member is expanded to include community-based correctional probation officers and 24 classes of employees (such as psychologists and nurses) who must spend at least 75% of their time performing duties that involve contact with patients or inmates in a correctional or forensic facility or institution.
"This is as bad as it gets, but don't count on it."
6. ANDREW McMULLIAN RETIRES: In a story seemingly-unrelated to the previous one, State Retirement Director Andrew J. McMullian III has retired. A recent editorial in the Daytona Beach News-Journal entitled "Bad Gamble to Roll Dice With State Pension Funds," says it better than we could: "For 40 years, those who wanted to get their fingers into the Florida State Pension Fund had to go through Andrew McMullian. The feisty director of the Florida Retirement System has been a fierce advocate on behalf of the State's 600,000 employees and 200,000 retirees, safeguarding an estimated $100 Billion in assets against political sallies and market fluctuations. McMullian is devoted to the notion that Florida's employees deserve the best and most secure pensions the State can afford. Clearly, McMullian had to go. The problem with the State's pension fund is simple: No one's making any money off it except the retirees. The money just sits there, happily accruing interest and growing to the point of a $9 Billion surplus. And none of the State's huge financial corporations see a penny of it. They would see pennies aplenty under a plan being pushed by Gov. Jeb Bush, whose senior staff orchestrated McMullian's ouster. ... [L]ook at what else Bush's plan accomplishes. First, it shifts the risk of retirement investment from the government to the employee. Second, it provides lots of tasty business opportunities for those big investment firms that make such generous campaign contributions. ... Those same vendors are obviously behind Gov. George W. Bush's proposal to turn Social Security accounts into private investments. If both plans go through, it's conceivable that workers could hit retirement age with no income at all. If that happens, we all bear the costs. ... It's too bad Bush didn't see the wisdom in the plan floated by McMullian and Senate leaders, who wanted to use the extra money to improve benefits for teachers, police officers and other workers instead of sending it to line the pockets of mega-corporations. ... But there's strong reason to believe Bush won't stop with this raid on the pension fund. If not, why did McMullian get fired for even questioning the move? McMullian's right to be suspicious, and State employees are right to be wary. There is little assurance that this plan will benefit anyone except the investment firms." We'll miss you, Andy.
"The rat race is over and the rats won."
7. MORE GREENSPEAK: We add the following quotes and interpretations from Federal Reserve Board Chairman Alan Greenspan (see C&C Newsletter for May, 2000, Item 5 ). "The result of this significantly higher capacity for job dismissal has been, counterintuitively, a dramatic decline in the U.S. unemployment rate in recent years." Interpretation: We're more willing to fire people -- but they keep finding other jobs. "These pressures are likely to remain intense, even though they may wax and wane, because I see nothing to suggest that the trends toward a greater conceptual content of our nation's output and thus, toward increased demand for conceptual skills in our workforce, will end." Interpretation: It's what you know, not what you know how to do, that matters. Just a little bit more "plain talk" from the Fed Head.
8. AARP SUPPORTS MANDATORY SOCIAL SECURITY COVERAGE: The nation's most influential Seniors advocacy group is urging voters to elect candidates who support mandatory Social Security coverage for newly hired public employees and their employers. The thirty million-strong American Association for Retired Persons has issued a voter guide that specifically supports mandatory coverage as a way of ensuring the solvency of the Social Security program. AARP believes that the Social Security trust fund will only be able to provide full benefits through 2040. After that, the fund will only have enough assets to cover 75% of eligible beneficiaries. Now AARP wants Congress to take the "last step" toward a universal Social Security system. The voter guide also advocates investing a limited portion of Social Security reserves in non-Treasury bonds as a way to diversify assets and increase the trust fund's rate of return. Current law requires all Social Security trust funds to be invested in U.S. bonds, which are safe but average lower rates of return than many private investments. AARP also supports creation and expansion of supplemental individual retirement savings accounts as an addition to, and not a replacement for, some or all of the guaranteed benefits now provided by Social Security.
9. BOARD MEMBER NOT ENTITLED TO REIMBURSEMENT OF TRAVEL EXPENSES TO RETURN FROM VACATION FOR MEETING: The purpose of Section 112.061, Florida Statutes, is to establish uniform maximum rates and limitations, with certain justifiable exceptions, applicable to all public officers, employees and authorized persons whose travel expenses are paid by a public agency. Section 112.061(1)(b), Florida Statutes, provides that to preserve the standardization and uniformity established by the law (1) its provisions shall prevail over any conflicting provisions in a general law, present or future, to the extent of the conflict; but if any such general law contains a specific exemption, including a specific reference to this section, such general law shall prevail, but only to the extent of the exemption and (2) the provisions of any special or local law, present or future, shall prevail over any conflicting provisions, but only to the extent of the conflict. The law that created the Florida Inland Navigation District contains the following provision: Members of the district shall serve without compensation, but shall be reimbursed for travel expenses incidental to attendance at board meetings, or the performance of other official duties as a member of the board, as provided by Section 112.061, Florida Statutes. Because the chairman had planned to be vacationing in Canada during an important upcoming board meeting, the Florida Attorney General was asked whether or not the board could reimburse the chairman for his expenses incidental to attendance at the board meeting. (Several presentations scheduled were to include visual aids, such that attendance by speaker phone would not provide the same information available as attending in person.) Concluding that common sense would dictate that the legislature sought to authorize reimbursement of expenses normally incurred by board members in traveling to and from their residences or offices to board meetings, the Florida Attorney General opined that the district was not authorized to reimburse the chairman for travel expenses to return home for a meeting. AGO 2000-40 (July 6, 2000).
"If at first you don't succeed, destroy all evidence that you tried."
Market Average Capitalization The average market (equity) capitalization of an aggregate portfolio of equity securities weighted by the proportion of each security to the total portfolio.
Market Timing A practice whereby a manager shifts between asset classes depending on the expected performance of each class. Can include timing between stocks and cash or an unlimited number of asset classes.
Maturity The date on which the principal or stated value of a bond becomes due and payable in full to the bondholder.
Maturity Structure The distribution of bonds in a portfolio across the maturity spectrum.
Maturity Structure-Actively Managed A portfolio's distribution of bonds by maturity will vary over time in order to benefit from temporary valuation differences among maturity ranges or expected shifts in the yield curve.
Maturity Structure-Laddered Bonds held in a portfolio are evenly distributed across the maturity spectrum.
Maturity Structure-Neutral The distribution of Bonds by maturity in a portfolio is similar to the benchmark.
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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.