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Home My WebLink About08.a.2) Update on CCCERA4 Central Contra Costa Sanitary District June 9, 2011 TO: HONORABLE BOARD OF DIRECTORS VIA: JAMES M. KELLY, GENERAL MANAGER FROM: RANDALL M. MUSGRAVES, DIRECTOR OF ADMINISTRATION PA SUBJECT: CONTRA COSTA COUNTY EMPLOYEES' RETIREMENT ASSOCIATION (CCCERA) 6/1/2011 BOARD MEETING Attached is a copy of the June 1, 2011 CCCERA Board meeting agenda and the agenda material for agenda items #6 and #7. Both items have no impact to the District. A total compensation study was performed and presented by Fox Lawson, item #4. It is a lengthy report and is available upon request. #4 Presentation from Fox Lawson regarding results of the total compensation study for non - represented CCCERA employees. The Fox Lawson company provided a review of the total compensation report. The CCCERA received the report and directed the study to come back at a later date. No date was determined at the meeting. Any increase in compensation would affect all members contributions covering administrative costs to manage the retirement system. #6 Consider and take possible action on staff recommendation to approve request from Fidelity to enter into a sub - advisory agreement with Long Wharf Real Estate Partners, LLC. In summary, several key employees left Fidelity and went to Long Wharf Real Estate Partners, LLC. Due to their past performance in the real estate market for investments, CCCERA wants to continue their investment oversight and is proposing to do so through a sub - advisory agreement. #7 Consider and take possible action on request from City of Pittsburg to amend employer termination agreement. The City of Pittsburg wants to modify the methodology for calculating their UAAL and employer contribution. "...the actuarial valuation determines the current or "measured" cost, but it does not determine the ultimate cost of the plan. The assumptions and funding policies /methods used only affect the timing of payments." There is no impact to the District from CCCERA allowing more time. The City of Pittsburg is reducing their current payments but increasing the amount of time it will take to pay. This will increase their total cost. Likely, the reason for the request is due to budget problems. Staff will be available to answer any questions the Board may have. Emplo ion 1355 willow way suite 221 concord ca 94520 925.52 RETIREMENT BOARD MEETING SECOND MONTHLY MEETING 9:00 a.m. June 1, 2011 1.3960 fax 925.646.5747 Retirement Board Conference Room The Willows Office Park 1355 Willow Way Suite 221 Concord, California Page 1 of 2 THE RETIREMENT BOARD MAY DISCUSS AND TAKE ACTION ON THE FOLLOWING: Pledge of Allegiance. 2. Accept comments from the public. 3. ApprgKp.-rnjnutes from the May_ . 2011 rneetin 4. Presentation from _Fox Lawson re results of l e total npe]is atIgn_ to fg_r_ ��ar -rem resented CCCERA_err &3,,ees. Review of total portfolio performance including: a. Consideration of any managers already under review or to be placed under review. b. Consideration of any changes in allocations to managers. Consider and lakes_. op sibte action on staff recommen ation to appray e request bra Fidelity to enter- into a sub. -aciv s€ agree e t with I cs €tg Wharf Real Estate Part ers, LLC., Consider and take _p jssible actiogl equ on_rest._fres n-j City of Pittshargio ame d eraTloyer termination a rea e-M. CLOSED SESSION ** 8. The Board will go into closed session under Gov. Code Section 54957 to consider recommendations from the Medical Advisor and /or staff regarding the following disability retirement applications: Member Type Sought Recommendation a. James Remick Service Connected Service Connected b. Kirk Haskell Service Connected Service Connected OPEN SESSION http: / /cccera.org/ agendas/ agendas %202011 /agenda %206.1.11.htm 6/7/2011 Page 2 of 2 9. Consider authorizing the attendance of Board and /or staff: a. Advanced Investments Management, The Wharton School, September 12 — 15, 2011, Philadelphia, PA. 10. Miscellaneous a. Staff Report b. Outside Professionals' Report c. Trustees' comments http: / /cccera.org /agendas /agendas%202011 /agenda%206.1.1 l.htm 6/7/2011 Memorandum, Date: May 25, 2011 To: CCCERA Board of Retirement MEETING GATE From: Cary Hally, Retirement CIO; Chih -chi Chu, Investment Analyst JUN 6-12011 ITEM Subject: Fidelity/Long Wharf Sub- advisory Agreements for Fidelity Real Estate Growth Fund lI & III Recommendation We recommend approval of the request from Fidelity ( Pyramis) to enter into sub - advisory arrangement with Long Wharf Real Estate Partners, LLC to manage Fidelity Real Estate Growth Fund II & III, subject to satisfactory legal review. CCCERA's Investments In 2004, CCCERA made a $50 million commitment in Fidelity Real Estate Growth Fund II (FREG II). The fund is now fully invested and has 21 assets remaining to be liquidated. In 2007, CCCERA made a $75 million commitment in Fidelity Real Estate Growth Fund III (FREG III). The fund is currently 70% invested and has 19 assets. Key Terms of the Proposal Under the proposed sub - advisory arrangement, Fidelity will remain General Partner (GP) of both FREG II & III. It will enter into sub - advisory arrangement with Long Wharf Real Estate Partners, LLC (Long Wharf), a newly formed entity owned and controlled by key employees of the funds: Michael Elizondo, Jeff Gandel, Jeff Tapley, John Barrie, and others. Long Wharf will be capitalized with at least $2,000,000 of initial equity from its management team. Going forward, Fidelity will remit 100% of the management fees for FREG II & III to Long Wharf, and reimburse Long Wharf for related operating costs related to managing the funds. Remaining as GP, Fidelity is entitled to receive carried interest, if any, related to FREG II & III. Fidelity will also retain its existing capital interest and commitment to FREG III (FREG Il's capital is fully called). Pyramis will remain as investment manager and have oversight of Long Wharf, but will delegate all the investment and operating responsibilities to Long Wharf. Overview The sub - advisory proposal is consistent with the thoughts presented to the board from the fund management team back in 2008. With Fidelity remaining as GP, the proposal will not relinquish Fidelity's obligations to funds' Limited Partners. The sub - advisory arrangement will officially delegate all the management duties of both funds to the existing key employees of the funds. Within Fidelity, the real estate group has been operating as an independent group since 2008. The whole process of the sub - advisory arrangement was lengthened due to the necessary steps to obtain consent from certain lenders involved in the real estate transactions which had change of control clauses in the loan documents. The last consent from the lenders was gathered in late March this year. Page 1 Memorandum Date: May 24, 2011 To: From: Subject: Board of Retirement Marilyn Leedom, Chief Executive Officer Karen Levy, General Counsel MEETING DATE JUN 01.2011 AGENDA ITEM Request From City of Pittsburg to Modify Its. Termination Agreement with CCCERA Recommendations • Direct staff to request the City of Pittsburg to provide information demonstrating its financial ability to meet its increased total obligations to CCCERA under the requested modification • Direct staff to prepare a contractual amendment with the requested modification to the contract for consideration by the Retirement Board, Background In 2001, the City of Pittsburg withdrew from the Contra Costa County Employees' Retirement Association. The City of Pittsburg and CCCERA entered into a Termination Agreement dated July 1, 2011. In accordance with the County Employees Retirement Law of 1937 ( "CERL "), the agreement set forth the City's continuing obligation to pay its future liability to CCCERA. In March of 2011, the City requested that CCCERA modify the calculation method used to determine the City's obligation from the current "market value of assets" method to a proposed "valuation value of assets." The City also requests to create an 18 month "lag" between the valuation and the date on which the contributions are due. The City's request is attached. The Segal Company has analyzed the proposed changes. Segal's analysis dated May 16, 2011 is attached. Segal concludes that: "it is reasonable to use an asset value that reflects smoothing of investment gains and losses and to incorporate an 18 -month delay between the valuation date and the date that the City's contributions are due." Segal further concludes that the proposed changes "will not impair the actuarial soundness of the funding of the plan's vested benefits." Fiduciary counsel Harvey Leiderman of Reed Smith has reviewed the proposal and opined that it would be within the sound exercise of the Retirement Board's discretion to agree to the proposed changes, as set forth in the attached Reed Smith analysis dated May 18, 2011. The CERL provides: "In dealing with a withdrawing district, the board of retirement shall take whatever action needed to ensure the actuarial soundness of the retirement system." (G.C. § 31564.2(d)). The CERL further provides that "no contracting agency shall fail or refuse to pay CONTRA COSTA COUNTY 7F 1 EMPLOYEES' RETIREMENT ASSOCIATION ` 1355 Willow Way, Suite 221, Concord, CA 94520 -5728 Telephone: (925) 521 -3964, Fax: (925) 646-5747 the employer's contribution required by this chapter or to pay the employer's contribution required by the chapter within the applicable time limitations." Lastly, the CERL provides that a withdrawing district's liability "shall be paid in accordance with a schedule determined by the retirement board over a period no longer than the period over which the plan's remaining unfunded actuarial liability is being amortized." (G.C. § 31564.2(c)). The proposed revisions are therefore within the Retirement Board's authority. However, the revisions would increase the ultimate cost for the City over the long term, while decreasing the City's cost in the short term. (Segal Ltr., at page 3.) As Mr. Leiderm.an notes, it would be prudent for the Retirement Board to evaluate the City's financial ability to meet its increased total obligations to CCCERA prior to approving the requested changes. <; . r- r �•. F CONTRA COSTA COUNTY EMPLOYEES' RETIREMENT ASSOCIATION 1355 Willow Way, Suite 221, Concord, CA 94524 -5728 Telephone: (925) 521 -3960, Fax: (925) 646 -5747 City of Pittsburg finance Daparkre W • 65 Civic Avenue • Fbbutg, Caiftomia 94565 -3314 Telephone: (925) 252 -4946 a Fax; (925) 252 -5969 • ai.p €Usburp.ea.us March 31, 2011 Ms. Marilyn Leedom Chief Executive Officer Contra Costa County Employees Retirement Association (CCCERA) 1355 Willow Way, Suite 21 Concord, CA 94520 MEETING DATE - � APR 112011 Subject. City of Pittsburg Request to Amend the Termination Agreement with CCCERA Dear Ms. Leedom; In response to CCCERA's recently calculated triennial update of the City of Pittsburg's ( "the City") withdrawal liability, the City contracted with Bartel Associates to review the calculation to ensure it was accurate as well as provide the City with options to reduce its unfunded obligation. Bartel Associates confirmed that the triennial update of the City's withdrawal liability was accurately calculated. However, as described in the attached letter from Mr. John Bartel of Bartel Associates, Mr. Barter is recommending that the City and CCCERA amend the City's Termination Agreement to (1) allow the calculation be prepared on an Actuarial rather than Market value of assets basis, and (2) create an 18 -month lag between the valuation date and the date the contribution is -due, Mr, Bartel estimated-that making these changes to the City's Termination Agreement with CCCERA would result in lowering the 12/31/2009 unfunded obligation from $15.9 million to $9.9 million and therefore lowering the City's annual payment on July 1, 2011 from $2 million to $1.3 million. Given this reduced unfunded obligation and annual payments to CCCERA, we respectfully request to amend the City of Pittsburg's Termination Agreement with CCCERA as suggested by Mr. Bartel. ITEM Ms. Marilyn Leedom CEO, CCCERA City of Pittsburg Request to Amend Termination Agreement with CCCERA March 31, 2011 Page 2 of 2 Thank you in advance for considering our request for these amendments. if you have any questions, please contact me at (925) 252 -4848 or toison(a-),ci.olttsburg.ca.us. Sincreiy .ra /f-?� Tina Olson Director of Finance Cc: Marc Grisham, City Manager Marc Fox, Assistant City Manager R/ RT E L j1OCIA TES, LLC HOMED March-2g,2011 MAR 2 9 20 11 Tina Olson FINANCE WT, Director of Finance City of Pittsburg 65 Civic Drive Pittsburg, CA 94565 Re: City of Pittsburg — Review of CCC RA December 31, 2009 Witbdrmwa l Liability Triennial Update Dear Ms. bison, Bartel Associates has reviewed the December 17, 2610 CCCERA updated (Withdrawal Liability calculation, Our comments and recommendations are; 1. We matched the Segal actuarial liabil ity calculations very closely. This means, absent changes in the agreement, we do not disagree with the amounts in Rick Kohlees December 17, 2010 letter. 2, We suggest the City request the agreement be modified for the following reasons: a. A lack of "lag" between the valuation date and the date any contribution is due creates an insurmountable budget issue. b, Using the market value of assets in the calculations creates unanticipated volatility. 3. We recommend the City discuss with CCCi RA the following agreement changes: a. Allow the calculation to be prepared on an Actuarial rather than a Market value of assets basis. b. Create a 18 month lag between valuation date and date contribution is due. For example the June 30, 2009 valuation would determine the City's 2011/12 fiscal year contribution., We estimate the impact of our recommendations as: ■ (3a) results in a lower 12131/09 unfunded obligation of $9.9 million rather than $15.9 million. ■ (3b) using Market value of assets results in a 7 /1111 payment of $2.043 million rather a I /l /10 payment of $1.827 million. , 11 Combining (3a) and (3b) results in a 7/1/11. payment of $1.271 million, Please note: rt 5% Corridor: 9 Currently if the market value of assets are less than 105% or more than 95% of the Actuarial Accrued Liability no contribution is due. IfCCCERA agrees to (3a) & (3b) above they will almost oertainly want to eliminate the 5% corridor around the liability, • We do not believe expanding the corridor will help much in mitigating future volatility. >� Amortization /payment period: s We do not suggest an increase in the payment period (currently 15 years), • ' Doing so would: Q lower short term payment amounts and D significantly increase the interest the City will pay. However, for budget reasons the City may want to make such a request. 411 Sorai Avenue, Suite 101 + San Mateo, CA 94402 main, Fi YW477.I Ann 4 frTY` RrA.Rd K_RM7 • wah- ,.nano F. -4-1 tires...:,+ -, . Tina Olson March 28, 2011 Page 2 Please feel free to call me at (650)377 -1601 if you have any questions about this letter, Sincerely, John E. Bartel President c, Marc Fox, City of Pittsburg, Blanca Lin, Bartel Associates, LLC a lciientAcity of pIMburgtcacerAl2 -31.09 vat apdozc ba 11-01-28 pittsbarpi == 12 -31.09 rcvimdoa 411 Sorel Avenue, Suite 101 • Sari Mateo, CA 94402 main: EIM- 377 -1fin0 c far £,Sri- 44ri -Rng7 0 WPh- %Awaw iiartn { «arcnriatnc rinm 7IV rEL THE SEGAL COMPANY 100 Montgomery Street, Suite 500 San Francisco, CA 94104 -4308 T 415.263.9200 F 415.283.8250 www.segaico.com May 16, 2011 Ms. Marilyn Leedom Chief Executive Officer Contra Costa County Employees' Retirement Association 1355 Willow Way, Suite 221 Concord, CA 94520 Re: Contra Costa County Employees' Retirement Association City of Pittsburg Request to Amend July 1, 2001 Termination Agreement Dear Marilyn: As requested, we are responding to the March 28, 2411 letter that was forwarded to you by the City of Pittsburg ( "City "). This letter was written by Bartel Associates, LLC and contains confirmation that they were able match our update of the City's funding obligation as of December 31, 2009 very closely. 'fhe letter also includes some recommended modifications to the City's termination agreement Frith CCCERA. We have been asked by you to respond to those recommended modifications from an actuarial perspective. Summary A more detailed discussion of the modifications to the City's termination agreement that are being recommended by Bartel Associates, LLC is provided in the body of this letter. In summary, we believe that it is reasonable to use an asset value that reflects smoothing of investment gains and losses and to incorporate an 18 -month delay between the valuation date and the date that the City's contributions are due. We also believe that those changes will not impair the actuarial soundness of the funding of the plan's vested benefits. Background The City of Pittsburg was a contracting employer with the Contra Costa County Employees' Retirement Association (CCCERA) before it terminated on July 1, 2001 to provide CaIPERS retirement benefits for its then- current and future employees. CCCERA retained the obligation to provide future benefits to the City's retirees and vested terminated members. Benefits, Compensation and HR Consulting Offices throughout the United States and Canada *Iwo Founding Member of the Multinafionai Group of Actuaries and Consu}tants, a giobaf afjilation of independent firms Ms. Marilyn Leedom May 16, 2011 Page 2 For purposes of determining its funding obligation, the City chose the "Second Alternative Approach" in the "Contra Costa County Employees' Retirement Association Extension of Termination Policy to Reflect Market Valuation of Assets and Continued Reassessment of Benefit Liability." This resulted in an initial funding obligation of $31,464,761 as of June 30, 2001. This amount of assets was set aside in a bookkeeping account to provide future benefits for the City's retirees and vested terminated members. The balance of the City's allocated assets were transferred to Ca1PERS. Section 4(a) of the Termination agreement requires an update of the City's bookkeeping account as of December 31 of each year. Section 4(b) of the Termination Agreement requires an update of the City's funding obligation every three years as CCCERA's triennial experience studies are completed. If the ratio of the balance of the City's bookkeeping account to its updated termination liability is below 95% or exceeds 105 %, then the resulting total unfunded obligation or surplus will be amortized as a level dollar amount over 15 years. The latest update of the City's funding obligation as of December 31, 2009 showed that the City had an unfunded obligation of about $15.9 million. This translated into a funding ratio of 67.2% and the 15 -year amortization payments amount to $1.8 million due annually assuming payment at the end of each calendar year commencing December 31, 2010. Recommended Modifications to Termination Agreement The March 28, 2011 letter from Bartel Associates, LLC recommends the following changes to the City's termination agreement with CCCERA: a. Allow the calculation to be prepared on an actuarial rather than a market value of assets basis. b. Create an 18 -month lag between the valuation date and date contribution is due. For example, the December 31, 2009 update of the funding obligation would determine the City's July 1, 2011 through June 30, 2012 fiscal year contribution. Bartel Associates, LLC also notes that if CCCERA agrees to both items a. and b. above, then they will almost certainly want to eliminate the 5% corridor around the liability. We concur with that observation since the corridor functioned as a way to manage contribution volatility. That purpose would now be achieved by using the actuarial ( "smoothed) value of assets instead of market value under the recommendations from Bartel Associates, LLC. Bartel Associates, LLC estimated the impact of their recommendations as follows: > Item a. above results in a lower December 31, 2009 unfunded obligation of $9.9 million rather than the $159 million shown earlier. > Items a. and b. combined results in an amortization payment of $ 1 271 million that would be due on July 1, 2011, rather than the $1.8 million payment that would otherwise be due on December 31, 2010. 5133461v1105337.013 Ms. Marilyn Leedom May 16, 2011 Page 3 We believe we understand how those impact amounts were calculated and note the following: > We would recommend that the valuation value of assets be used instead of the actuarial value of assets. Both are on a "smoothed" basis, but the valuation value excludes any non - valuation reserves (such as the post retirement death benefit) that are not part of the benefits valued in the determination of the funding obligation for the City. > We believe that Bartel and Associates included an extra year of interest on the $1.271 million amortization payment shown in their letter. If the intent is to have the payment due on July 1, 2011, then the payment would actually be lower by one year of interest. If the City and CCCERA want to move forward with modifying the termination agreement, then we would determine the contribution amount based on the terms of the modified agreement. Actuarial Perspective on Recommended Modifications to Termination Agreement In general, we are responding to the effect of the recommended modifications on the contributions needed to fund the vested benefits and more generally on the "actuarial soundness" of the funding of those benefits. We note that "actuarial soundness" is difficult to define, especially for actuaries. Generally, one could say it means that there is a reasonable confidence that the projected contributions together with current assets and future investment returns will be sufficient to pay all future benefits and expenses. We are generally relying upon this definition for purposes of our discussion in this letter. It helps to go back to the basics and refer to the many previous presentations we have made to the Board that contain the basic equation "C + I = B + E" (Contributions plus Investment Income equals Benefit Payments plus Expenses). As the Board knows, the actuarial valuation determines the current or "measured" cost, but it does not determine the ultimate cost of the plan. The assumptions and funding policies /methods used only affect the timing of costs. In this case, that means that, if all else is equal and the current contributions are lowered (as under the combined recommendation), then there will be an increase in later contributions. We sometimes describe this as the time value of money based "No Free Lunch" rule for pension plans. The combined recommendation described by Bartel Associates, LLC increases the ultimate cost for the City. Over the long -term, this increase in cost reflects' the short term decrease, dollar for dollar plus interest, based on the time value of money. 5133461 v1 /05337.013 Ms. Marilyn Leedom May 16, 2011 Page 4 Note that the recommendations are generally consistent with the determination of the contribution rates for employers currently participating in the retirement plan. Those contribution rates are based on the actuarial or valuation value of assets and include an 18- month delay between the valuation date and the date the contributions are implemented. Taking all of the above into account, we believe that the changes to the termination policy that Bartel Associates, LLC are recommending will not impair the actuarial soundness of the funding of the vested benefits. Please let us know if you have any questions. Sincerely, Paul Angelo, FSA, MAAA., FCA, EA Senior Vice President and Actuary JZM/kek cc: Rick Koehler 51334610/05337.013 Jo Monroe, ASA, MAAA, EA Vice President and Associate Actuary ReedSmith Harvey L. L,eiderman Direct Phone: 415.659.5914 Email: HLeiderman @reedsmith.com May 18, 2011 Marilyn Leedom, CEO Contra Costa County Employees' Retirement Ass'n. 1355 Willow Way, Suite 221 Concord, CA 94520 Heed Smith LLP 101 Second Street Suite 1600 San Francisco, CA 94105 415.543.8700 Fax 415.391.8269 Re: City of Pittsburg Request to Amend July 1, 2001,Termination Agreement Dear Marilyn: You have-asked us to advise CCCERA on the request by the City of Pittsburg ( "City ") , dated March 31, 2011, to amend its July 1, 2001 Termination Agreement ( "Agreeoent ") with CCCERA. The request seeks to modify the method by which assets held by CCCERA towards payment of benefits for former City employees are calculated, and to create an 18 month "lag" between the valuation date used to determine whether additional contributions may be due and the date on which those contributions are due. In connection with our analysis, we have reviewed CCCERA's Termination Policy to Reflect Market Valuation of Assets and Continued Reassessment of Benefit Liability, as amended November 7, 2000; the Agreement; the letter of March 28, 2011 from Bartel Associates to the City; the City's letter to CCCERA dated March 31, 2011; and the letter of The Segal Company ( "Segal ") to CCCERA, dated May 16, 2011. From a legal and fiduciary viewpoint, and based particularly on Segal's conclusion that the - requested amendments `will not impair the actuarial soundness of the funding of the vested benefits" of City retirees, we believe that it would be within the sound exercise of its discretion for the Board of Retirement to agree to the following amendments to the Agreement: ➢ Commencing with the December 31, 2009 actuarial valuation, calculate the value of the City's assets on the basis of valuation value rather than market value of assets. (Although not mentioned in any of the foregoing documents, we assume the City's liabilities wilt be calculated on the same basis.) ➢ Eliminate the 950/o/105% "corridor" on the ratio of assets to liabilities in calculating necessary firture contribution rate increases or decreases. ➢ Commencing with the December 31, 2009 actuarial valuation, establish that changes in contributions based on, the actuarial valuation will be implemented with the fiscal year NEW YORK 4, LONDON * LOS ANGELES ♦ PARIS * SAN FRANCISCO ♦ WASHINGTON, A.C. * PHILADELPHIA * PMMSURGH t OAKLAND MUNICH * PRINCETON * NORTHERN VIRGINIA ♦ VYILMINGTON * BIRMINGHAM t CENTURY CITY * RICHMOND raedsmith.com May 18 20e1dlam, CEO ReedSmith Page 2 commencing 18 months following the actuarial valuation date that is concurrent with the triennial experience study. This would make the first new contribution date July 1, 2011. The consequence of moving from market value to valuation value of assets, and delaying implementation of new contribution rates, will be to defer into the future the full funding of the City's liabilities. As with many California municipalities; concerns have been raised publicly about the City's future fiscal health. We believe it would be prudent for the Board to ask the City to demonstrate its financial ability to meet its obligations 'to CCCERA under the proposed revisions, before approving them. Notwithstanding the "Security" provisions of the Agreement, the risk of any cash-flow deficiencies, or defaults in future payments, could increase the unfunded liability of the system as a whole, potentially affecting all other participating employers. We would be pleased to prepare the appropriate amended Agreement for consideration by the Board and the City, at your direction. In this regard, please note that there are other "clean -up" changes to the document that might be appropriate at this time (e.g., eliminating recitations of how the original unfunded liability was determined.) We also recommend a legal and actuarial review of the current Termination Policy, to determine whether any changes are appropriate under the circumstances, particularly in light of the Board's "depooling" actions taken previously. submitted, L. Lei