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HomeMy WebLinkAbout05.a.1) 9-29-10 CCCERA Bd. agenda1 11 if Central C ontra • sta Sanitary D istrict • • • -, :•� -r • - Mrs - GENE RAL TIA: JAMES M. KELLY, _ - FROM: RANDALL M. MUSGRAVES, DIRECTOR OF ADMINISTRATION i SUBJECT: CONTRA COSTA COUNTY EMPLOYEES' RETIREMENT ASSOCIATION (CCCERA) 9/29/2010 BOARD MEETING Attached is a copy of the September 29, 2010 CCCERA Board meeting agenda. Items #1 through #3 are administrative. Items #4 and #5 are related to interviewing and selecting the financial investor that will manage CCCERA's high conviction investments of $100 million. Tradewinds Global Investors was selected. Item #6 dealt with the CCCERA year end budget. Their budget was under by 18 %, as reported. Item #7 was a review by the CCCERA Board of the CCCERA fiduciary counsel's role and activities regarding his involvement with AB 1987 legislation. The Board wanted to make it clear that the CCCERA Board never took a position on AB 1987. Attached is the written response to the CCCERA. Board regarding the questions they raised at their previous Board meeting. In summary, Mr, Leiderman reported that his activities were to provide those who contacted him education, not advocacy, regarding the retirement bills. Item #9 handout is attached for the Board's information. The CCCERA staff recently reviewed, with the CCCERA fiduciary counsel, all pay codes to ensure proper reporting and calculations. This was the follow -up to the Contra Costa County Grand Jury's recommendation. A verbal report was provided by the CCCERA fiduciary counsel who stated that all pay codes were properly reported and used. However, Mr. Leiderman raised concern regarding reported standby and callback payments. The Board requested the matter be placed on their next agenda for further discussion. Also, item #9 dealt with the District's need to meet with Mr. John Bartel and receive his report and recommendations at the November 4, 2010 Board meeting, before the CCCERA Board takes action on future rates, impacted by de- pooling. Staff had spoken with Mr. John Bartel on Monday, September 27, 2010 regarding his ability to obtain the needed data and the preparation of a report identifying his findings and recommendations. Mr. Bartel has received all requested data in a timely manner. However, on September 24 (Friday) he realized that more data was needed to complete his work. On September 27 (Monday) he received the requested data. Mr. Bartel informed District staff that the report could not be prepared until the second or third week of October. This placed his presentation to the Board on the November 4 th CCCSD Board agenda. Ms. Marilyn Leedom, CCCERA Chief Executive Officer, informed the CCCERA Board of our schedule and reminded them that they committed to allowing the employers time to audit Segal's report and work. No action regarding future rates will be taken until after the Board's review on November 4 As of now, the future rates impacted by de- pooling will be placed on the November 3 rd CCCERA Board meeting for receipt of report and on November 17, 2010 for CCCERA Board action. SPECIAL MEETING 9:00 , c. September 29, 2010 Retirement Board Conference Room The Willows Office Park 1355 Willow Way Suite 221 Concord, California THE RETIREMENT BOARD MAY DISCUSS AND TAKE ACTION ON THE FOLLOWING: 1. Pledge of Allegiance 2. Accept comments from the public. 3. Approve minutes from the September 1, and September 8, 2010 meetings. 4. Global High Conviction Equity Investment Manager Presentations: 9:00 a.m. — 9:10 a.m. Introduction and Overview by Milliman 9:10 a.m. — 9:50 a.m. Tradewinds Global Investors 9 :55 a.m. — 10:35 a.m. Aberdeen Asset Management 10:35 a.m. —10:50 a.m. Break 10:50 a.m. —11:30 a.m. Epoch Investment Partners 5. Consider and take possible action on Global High Conviction Equity Investment Managers). 6. Consider and take possible action on Budget vs. Actual through June 30, 2010. 7. Consider and take possible action to work with fiduciary counsel for opinion on AB 1987. 8. Consider authorizing the attendance of Board and/or staff: a. Trustees' Roundtable, CALAPRS, October 15, 2010, San Diego, CA 9. Miscellaneous a. Staff Report b. Outside Professionals' Report c. Trustees' comments The Retirement Board will provide reasonable accommodations for persons with disabilities planning to attend Board meetings who contact the Retirement Office at least 24 hours before a meeting Harvey L. Leiderman Direct Phone: +1 415 659 5914 Email: HLeiderman @reedsmith.com September 2, 2010 Marilyn Leedom Chief Executive Officer (b 0 `N � SEP 03 2010 Contra Costa County Employees' Retirement Assn. 1355 Willow Way, Suite 221 Concord, CA 94520 Assembly Bill 1987 Dear Marilyn: MEETING DATE 09/29/10 AGENDA ITEM # -1 Reed Smith LLP 101 Second Street Suite 1800 San Francisco, CA 94105 -3659 +1 415 543 8700 Fax +1 415 391 8269 reedsmith.com I understand that after I left the CCCERA Board meeting yesterday one or more Board members expressed an interest in learning about my personal communications with State Senator Mark DeSaulnier, one of the co- authors of Assembly Bill 1987 in this year's legislative session. You indicated that they would like to discuss this with me at the Board meeting scheduled for September 29, 2010. I am happy to respond to the Board's questions. Because I will be out of town thelnext several days, I thought it would be good for me to provide some information that you can;circulate now, rather than wait another month, and then the Board can decide if it wishes to discuss this further at that time. AB 1987 came to my attention when it was introduced in February this year. I Was asked by a number of clients to analyze the bill and its potential impact on county retirement (CERL) systems, and I was asked to speak publicly on the bill at the May, 2010 SACRS Conference. At the end of April, shortly before the Conference, the bill was amended substantially and I revised my SACRS presentation accordingly. At the conference, I described many of the elements of the bill and certain issues it raised for the administration of our CERL retirement systems. Accompanying this letter by electronic mail is a copy of my SACRS' written presentation. Following my public presentation at SACRS, I was asked by a number of people, including members of the SACRS Legislative Committee (which had taken a direct interest in the drafting of the bill), the Contra Costa Times, and pension trustees and legal counsel from around the state to provide copies of my presentation to them to assist them in better understanding the proposed legislation. About the same time, another bill affecting CERL systems, AB 1743 (re: placement agents registering as lobbyists) was under consideration by the SACRS Legislative Committee. Bob Helliesen of Milliman, CCCERA's investment consultant who sits on that Committee, asked if I would particulate in an educational session with some of the bill's authors to help them understand the impact on CERL systems of that proposed legislation. Educating bill sponsors appeared to be regarded in our community as a valuable service to SACRS' member systems, including CCCERA. NEW YORK + LONDON ♦ HONG KONG ♦ CHICAGO o WASHINGTON, D.C. ♦ BEIJING ♦ PARIS+ LOS ANGELES + SAN FRANCISCO o PHILADELPHIA + PITTSBURGH OAKLAND + MUNICH' ABU DHABI + PRINCETON + NORTHERN VIRGINIA + WILMINGTON + SILICON VALLEY + DUBAI + CENTURY CITY + RICHMOND + GREECE US Marilyn Leedom September 2, 2010 Page 2 1 ' In June, I was asked to testify before the State's Little Hoover Commission, as an expert on California public employee pension law. Also accompanying this letter by electronic mail is a copy of my public written correspondence to the Commission. Some of the members of the Commission are members of the State Legislature, and were present for my discussion on June 23rd. Shortly thereafter, the office of State Sen. Mark DeSaulnier (D- Contra Costa), contacted me and asked if I could provide the Senator with some background on public employee pension law and the impact of AB 1987 on CERL systems. DeSaulnier was a co- author of the bill and I believe had heard of my testimony before the Little Hoover Commission. I agreed to brief him on the subject and respond to his questions. We've had a few conversations over the last two months, as the bill progressed through the Legislature. I've also responded by phone to a few questions from his staff. Meanwhile, I have continued to be contacted by other parties interested in AB 1987 as well, including staff of the Little Hoover Commission, other CERL legal counsel and pension fund trustees, members of the SACRS' Legislative Committee, Jim Bickert, President of the Contra Costa County Deputy Sheriffs' Association, and others. All of these communications have been in my capacity as a private citizen (please note, for example, the bolded language at the bottom of my letter to the Little Hoover Commission.) At no time did I represent CCCERA or any other client in these discussions, nor did I charge any client for any of my personal time. At no time did I ever "advocate" a position contrary to CCCERA's interests. My interest has always been to serve as a resource to help educate affected individuals and institutions on the complexities of public employee pension law, and the impact and implications of pending legislation (including AB 1743, SB 1425 and SB 609.) At all times I conducted myself consistently with my role as Fiduciary Counsel to CCCERA. I trust that this is responsive to the questions posed by certain Board members, and I would be happy to address any other questions they may have at the September 29, 2010 meeting. This letter and the accompanying materials are not confidential and should be considered public records. I would appreciate it if you would circulate them to the Board and make them part .of the agenda backup for the September 29 meeting. To avoid any Brown Act concerns, please advise the Board members not to discuss this letter amongst themselves in advance of the public meeting. Thank you for all of your courtesies. Harvey L. Leiderman Direct Phone: +1415 659 5914 Email, HLeiderman @reedsmith.com June 8, 2010 State of California Little Hoover Commission 925 L Street, Suite 805 Sacramento, Ca 95814 California Public Employees' Pensions Honorable Commissioners: Reed Smith LLw 101 Second Street Suite 1800 San Francisco, CA 94105 -3659 +1 415 543 8700 Fax +1415 391 8269 reedsmith.com Thank you for inviting me to contribute to the work of the Commission as it examines the State's public employees' pensions. You are providing a timely and critical service to the People of California and I welcome the opportunity to assist you in that endeavor. By way of brief introduction: I have practiced law in San Francisco for 38 years. I am a partner with the firm of Reed Smith LLP and head of the firm's Fiduciary Practices Group in California. For the past sixteen years, I have served the boards of multiple public employee pension funds in the State, as their fiduciary, litigation and investment counsel. These funds include CalPERS, Ca1STRS, over a dozen county systems governed by the County Employees' Retirement Law of 1937, and charter city retirement systems including those for general and safety employees of the City of I.os Angeles. My practice over the years also has included representing financial institutions, corporations and investors in litigation, commercial, banking, antitrust and securities law. I have over twenty years' experience in bankruptcy and insolvency law, representing creditors and investors in corporate reorganizations and in municipal bankruptcies. I was counsel to the Orange County Employees' Retirement System during that county's Chapter 9 case. My firm represents the largest bondholder trustee in the City of Vallejo case. My bankruptcy experience affords me a unique perspective on the current financial pressures facing our municipal plan sponsors as they struggle to meet the pension promises they have made to their employees. I understand that the Commission seeks to focus at its June 23, 2010 meeting on the legal constraints and avenues for modifying pension benefits for retirees, current employees and future workers — the "legal landscape for pension reform" described in the Executive Director's letter of May 20, 2010. In summary fashion, I respectfully offer the following observations to help guide our discussions. I will be prepared to address these points in greater detail on the 23rd. Please note that the following written comments and any written or oral statements that I may make in the future are entirely my own personal, professional statements and are not reflective of or to be attributed to my law firm or any of our clients. NEW YORK s LONDON o HONG KONG ♦ CHICAGO + WASHINGTON, D.C. + BEIJING + PARIS + LOS ANGELES + SAN FRANCISCO s PHILADELPHIA + PITTSBURGH OAKLAND • MUNICH + ABU DHABI + PRINCETON + NORTHERN VIRGINIA + WILMINGTON + SILICON VALLEY + DUBAI + CENTURY CITY s RICHMOND a GREECE Little Hoover Commission June 8, 2010 Page 2 \` 1'' 1. Generally speaking, public employees who are members of defined benefit pension plans in California have three contractual rights that are protected from impairment by the "contracts clauses" of the U.S. and California Constitutions: a. The right to the payment of promised benefits b. The obligation of the employer to make contributions to fund the benefits c. The obligation of the employer to provide an actuarially sound retirement fund 2. Not all members' expectations, however, are vested pension rights. Whether and to what extent they are is a complex question that must be addressed on a case -by -case, individual -by- individual basis. 3. The rights of retired, current and prospective new members of public employee pension funds can vary widely, and need to be analyzed separately. 4. California courts have a robust record of sustaining vested public employee pension rights over proposed legislative changes, absent a showing that the changes are (1) reasonable, (2) bear a material relationship to the theory of the pension system and (3) any resulting disadvantages to individual employees are accompanied by comparable new advantages. Saving a public employer money does bear a material relation to the theory of a pension system, but is insufficient alone to justify adversely affecting pension benefits. Further, a "comparable new advantage" does not include simply exchanging one of the three rights identified in #1 above for another one (e.g., improving the funded status of a plan by cutting benefits.) 5. California courts have recognized in theory that a public employer's fiscal emergency might justify vitiating vested pension rights, under the exercise of the State's broad police powers, but the courts have not actually found that any such declared "emergency" itself was sufficient grounds for reducing or deferring the payment of retirement benefits. 6. California's strong public policy favoring collective bargaining may conflict with the policy of protecting vested pension rights, which the courts describe as individual, not group, rights. The Commission should explore whether and to what extent collective bargaining over pensions may permissibly compromise the expected pension rights of individual, represented employees. 7. Following the 1997 California Supreme Court ruling in the Ventura case, many county retirement systems and their stakeholders entered into court- approved settlement agreements, enhancing retirement benefits for both active and retired members. Many of these settlement agreements recite that the benefit enhancements granted therein may not be affected by subsequent changes in statutory or case law. Any analysis of permissible changes to employees' vested pension rights should consider the extent to which these settlement agreements also may have created vested rights. 8. Instances of unlawfW "pension spiking" continue to make headlines; however, these abuses appear to be more sporadic than systemic. While California law now provides pension trustees with adequate tools to curb such abuses, creative interpretations designed to produce fortuitous windfalls continue to challenge our boards. I encourage the Commission to consider - recommending further legislation to clarify the existing state of the law and close unintended loopholes that result in costly and time-consuming litigation, and public mistrust. 9. Although to my knowledge, no bankruptcy court has ever permitted a municipal debtor to reject its vested pension obligations, there are gaps in federal bankruptcy and California law that might allow a court to consider permitting a debtor to restructure its unfinided actuarial accrued liability ("UAAL") in a Chapter 9 Plan of Adjustment. The extent to which federal bankruptcy law might permit alternative treatment of California pension obligations under a Plan has yet to be fully explored. (Please note that the State of California may not be a debtor under Chapter 9.) In conclusion, under California law, while there are "strict limitations on the conditions which may modify the pension system in effect during employment" (Allen v. City ofLong Beach (1955) 45 Cal.2d 128), those limitations are not absolute. I look forward to assisting the Commission in navigating the legal, economic and political waters as it seeks to improve the health and sustainability of pensions for our State's public employees. Resoectfully submitted, YI ey JL. eiderman r \: I Ni I 14-4 0 coy � • a.a W cn p vn U Cd b -J .�i • � � U cis ° U U d p 0 U d u J U ed U� Uo i-� o ` +' d U -70 0 --4S ��'� C� 0 ; --4 p • . ;,..b o acU: ;dd� O 4-1 u d c � .� � q) •� � U ® -� cn U) U - a3 QI roo u b� a� U 4�:j Q-4 biD 4-4 0 �r O CW � U O _TJ W 0 4 J P - j G � � � o t4 °� 0 �W v Q P (4U J +, o ° �0 o p 0 o U' ON U U c-4 cti U ��U a� a� o 00 o P I-� qo rd � cs] o u O �-A� ixk if s, i I 0 U a� Q) To: Marilyn Leedom, Chief Executive Officer Karen Levy, General Counsel Contra Costa County Employees' Retirement Association Date: September 16, 2010 Subject: Analysis of Employer Pay Codes On March 10, 2010, the Board of Retirement took action to amend its Policy for "Dete Which Pay Items are `Compensation" for Retirement Purposes ( "Policy. ") The amendment added an "Addendum" to the Policy affecting new members of CCCERA effective January 1, 2011. Subsequently, the Board directed staff and counsel to evaluate all of the County and participating districts' pay code reporting to CCCERA to verify that the pay items being reported to CCCERA were, in fact, "pensionable" under the Policy. Also this year, the County Grand Jury recommended in their Report #1010 that " CCCERA and its employer members shall review the list of current pay elements to determine which elements are required to be included by law, which are optional and which by law are to be excluded." Recommendation 3. Over the past several months, staff and counsel have been gathering and reviewing pay code data from the County and the districts, and seeking clarification where necessary, to determine the nature of compensation being reported to CCCERA as "pensionable." We have now been able to determine that, with minor exceptions for further review and action, the items of compensation being reported to CCCERA as "pensionable satisfy the Board's Policy as it affects current active employees. Of course, for new hires after January 1, 2011, certain items of compensation (particularly cash -outs of vacation, sick, administrative and other leave time) will have to treated and reported differently in light of the Addendum to the Policy adopted on March 10, 2010 (although the likelihood of these items showing up in pension calculations soon is negligible.) Because the County's and districts' pay code spreadsheets, MOUs and supplemental information on pay practices are unique to each, staff is in the process of developing a standardized report for later presentation to the Board. The report will allow the Board to compare and contrast the pay items and practices of all plan sponsors in a uniform format. Following are a few pay items that are receiving specific attention: County Pay Item "EAN" -- Differential Executive Advance Notice The County uses this pay code to record the 2% of pay granted to certain County executives for notifying the County of their impending retirements. We understand that the County has now abandoned this pay item and that its application is now limited to a few individuals. We further understand that this payment may not be received during service, but only at retirement. Memorandum to M. Leedom, K. Levy September 16, 2010 The Board has previously reviewed this pay code and has determined to treat it as pensionable in the same manner as "terminal pay" under the Policy. County Pay Item "M43" -- In Lieu of Deferred Compensation We understand that the County uses this pay code to record cash paid to an employee as an alternative to an employer payment into the employee's deferred compensation plan. Generally, cash remuneration paid to an employee during service, unless excluded overtime, is "compensation earnable," and the County rightly reports this pay code as pensionable. The fact that in prior years non - pensionable payments into the deferred compensation plan were made is of no consequence. We do note, however, that the Salus case and others warn against final year "conversions" of non -cash advantages to cash for the purpose of enhancing a member's final compensation for calculating his retirement allowance. Because the Board's Policy is silent on this subject, the Board may wish to consider amending its Policy to address it. Standby Pay (aka Call -Back Pa)s Many County and district employers, such as East Contra Costa Fire Management, Consolidated Fire and the Sanitation District, use pay codes to designate additional pay made to employees who are on "standby" ( "call- back") after their regular work schedule, for recall to duty in the event of an extraordinary need. Under the widely accepted interpretation of CERL section 31461 ( "'Compensation earnable' by a member means the average compensation ... upon the basis of the average number of days ordinarily worked by persons in the same grade or class of positions during the period, and the same rate of pay. ") as affirmed by the Supreme Court in the Ventura case, if such service is required of all employees in the same grade or classification and all such employees receive such pay, it may be treated as pensionable; if not, it is considered "overtime" and excluded from "compensation earnable." A review of the applicable MOUs indicates that this type of standby pay is, in fact, received by all affected employees in the same grade or class. We are continuing to attempt to determine if all such employees are required to be available for standby service, or whether it is voluntary. If required, it should be pensionable; if voluntary, it should not be, because it would then be considered true overtime and excluded under Ventura. The difficult assessment will be in situations where an employee may volunteer to substitute for another employee to cover the latter's required standby service. In that instance, standby pay received for the voluntary coverage should not be included in `compensation earnable." We may need to have the employers establish separate pay codes distinguishing between standby time that is required and time that is voluntary, so CCCERA staff can distinguish between the two when calculating retirement allowances. County Pay Code "RSF" -- Pay for working the County Fair on days off The County is reporting pay granted to employees for working at the County Fair on their days off as pensionable. If this extra work is voluntary on the part of the employee, it should be treated as true overtime and not be pensionable. 1) Memorandum to M. Leedom, K. Levy September 16, 2010 San Ramon Valli Fire Prevention District "Retiree Allotment". This pay code reflects cash payments to certain firefighter members to cover their employee contributions to the retirement system. The cash is paid directly to the member, and is taxable income to the member. Accordingly, it is correctly reported as "pensionable." If the payment were the classic "pick-up" of the employee contribution and paid by the District directly to CCCERA, it would be excluded from "compensation eamable" (Central Sanitation's Pay. Code 13 is an example of this non- pensionable "pick-up" of the employee contribution to CCCERA.) Based on staff and counsel's review, we are confident that the vast majority of County and district pay codes being reported to CCCERA as pensionable are being reported correctly. It is staff's task to assure that all pensionable compensation (and only pensionable compensation) is included in the calculation of retirement allowances for each retiring member. As the County and districts generate new or revised pay codes in the future, it will be important for staff and counsel to review the changes to assist the Board in determining whether they are pensionable or not.