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November 29, 1996

RE: Fourth Draft of the Management of Public Employee Pension Funds Act (MPEPFA or Act)

A new draft of the MPEPFA has just been released by the committee of the National Conference of Commissioners on Uniform State Laws that is responsible for drafting it. This is the fourth draft. The Act is intended to provide a uniform or model structure of governance for state and local retirement systems.

The key changes in this latest draft are the streamlining of the reporting process and the delivery of documents, which are summarized below. The center piece of MPEPFA -- independence of retirement systems from state or local government -- remains unchanged. Several issues still need attention, including the purchase of service credit provision and the liability standard for trustees. NCTR passed a resolution at its convention last month calling on the Act's drafters to address these concerns (attached). The resolution also raised reporting issues, which this latest draft addresses.

The next meeting of the drafting committee is November 22 through 24. I will be attending as an observer on behalf of NCTR. You have been very helpful in providing me with feedback on previous drafts and I'd like to ask you again to review this latest draft (attached) and give me your comments by November 20 by phone or fax. Also, several NCTR members have written to the Uniform Law Commissioners who represent their states to express their concerns about the Act. If you have not done so but would like to, let me know and I will provide you with their names and addresses.

Problems resolved in 4th draft

Streamlining of Reporting Requirements (pages 50 - 56)

Problem addressed. Until this latest draft, MPEPFA would have put NCTR members in the possible position of filing one set of reports to satisfy the Act's requirements and a second set to satisfy the Governmental Accounting Standards Board (GASB) and other entities that specify reporting requirements. The latest draft eliminates this possibility.

Previous drafts. Under the previous drafts, MPEPFA had included detailed requirements about how the following reports had to be completed: a financial statement, an opinion on the financial statement, an actuarial statement for defined benefit plans, and an opinion on the actuarial statement for defined benefit plans. These reports would be part of an "Annual Disclosure of Financial and Actuarial Status."

Current draft. The detailed requirements have been deleted. Retirement systems would still have to file an "Annual Disclosure of Financial and Actuarial Status" report, but the reporting requirements would follow industry standards. In other words, reporting requirements would not be set out in the Act (with exception of a few items listed below). The new requirements follow:

1) The financial statements and notes to the financial statements would have to be disclosed in conformity with generally accepted accounting principles and an opinion on the financial statements by a qualified public accountant would have to be made in conformity with generally accepted auditing standards. According to the notes accompanying the draft, the principal current articulation of these principles is GASB Statement No. 25. The notes also refer to Guidelines for the Preparation of a Public Employee Retirement System Comprehensive Annual Financial Report by the Government Finance Officers Association.

2) The actuarial schedules and notes to the actuarial schedules in the case of a defined benefit plan would have to be disclosed in conformity with generally accepted actuarial principles and practices for measuring pension obligations and an opinion by a qualified actuary would have to be made that the actuarial schedules are complete and accurate to the best of the actuary's knowledge, that each assumption and method used in preparing the schedules is reasonable and that the assumptions and methods in the aggregate are reasonable, and that the assumptions and methods in combination offer the actuary's best estimate of anticipated experience. The notes point out that the principal current articulations of these principles and practices are GASB Statement No. 25 and the Measuring Pension Obligations, Actuarial Standard of Practice No. 4.

Other reporting requirements. Despite the streamlining, retirement systems would have to disclose information not currently required by GASB. They are:

• a description of agreements and transactions during the fiscal year with any public employer participating in the system and any employee organization representing employees covered by the system;
  
  
• a description of any material interest held by any trustee, administrator, or employee who is a fiduciary with respect to the investment and management of assets of the system, or by a related person, in any material transaction with the system within the last three years or proposed to be effected;
  
  
• a schedule of rates of return, net of total investment expense, on assets of the system overall and on assets aggregated by category over the most recent one-year, three-year, five-year, and 10-year periods, to the extent available, and the rates of return on appropriate benchmarks for assets of the system overall and for each category over each period;
  
  
• a schedule of the sum of total investment expense and total general administrative expense for the fiscal year expressed as a percentage of the fair value of assets of the system on the last day of the fiscal year, and an equivalent percentage for the preceding five fiscal years; and
  
  
• a schedule of all assets held for investment purposes on the last day of the fiscal year aggregated and identified by issuer, borrower, lessor, or similar party to the transaction and stating, if relevant, the asset's maturity date, rate of interest, par or maturity value, number of shares, cost, and fair value; and identifying any asset that is in default or classified as uncollectible.

Difference between the "Annual Disclosure of Financial and Actuarial Status" and the "Annual Report". The "Annual Disclosure of Financial and Actuarial Status" requires the disclosure of a great deal of information, but its distribution list is extremely limited. Also required by MPEPFA is an "Annual Report" that is intended to provide participants and beneficiaries with sufficient information to inform them clearly and adequately about the status of the retirement system, without excessive detail. The "Annual Report" serves to summarize to some extent the voluminous amount of information provided in the "Annual Disclosure of Financial and Actuarial Status." As discussed below, the latest draft allows less costly ways of meeting the "Annual Report" distribution requirements.

Reporting requirements that did not change. The latest draft did not change retirement systems' obligations to furnish to each participant and beneficiary a summary plan description and related materials, as well as an annual statement of his/her benefits.

Delivery of Documents (definition of "furnish," pages 6-7,11; delivery of annual report, pages 54-56)

Problem addressed. The previous drafts had several shortcomings in the way retirement systems had to deliver documents to participants and beneficiaries. The latest draft broadens the delivery methods, thus adding flexibility and reducing costs.

Previous drafts. First, with respect to the definition of "furnishing" documents to participants and beneficiaries, the draft did not make clear whether modern technologies could be used. Second, with respect to the delivery of the annual report, the Act appeared to require retirement systems to send it out in a separate mailing even if they had a less expensive means of doing so.

Current draft. Retirement systems can now furnish documents by modern technologies such as fax and e-mail, as long as they have reasonable grounds to believe that the information will reach the intended recipient. This expansion is in addition to the current ways of furnishing documents, including having the intended recipient's employer distribute them. With respect to the delivery of the annual report, the latest draft makes clear that retirement systems could use their newsletter to convey this information to their participants and beneficiaries. (Some retirement systems already do this.)

Unresolved issues

Standard of Liability for Trustees (pages 39-42)

As we've pointed out in previous drafts, members of retirement system boards, as well as others enumerated in the Act, would be subject to personal liability for breaches of duty under the Act. In an early draft, the drafting committee considered a narrower standard that would impose personal liability for knowing and willful acts only. Those who favor the "knowing and willful" standard argue that public scrutiny and legislative oversight ensure the prudent conduct of board members. They also believe that individuals might be reluctant to serve on the board, for which no compensation is generally paid, if they know they will be personally liable for even negligent or unintentional acts or omissions.

The notes of the latest draft present two arguments for the broader standard. First, it provides protection for the retirement system against losses resulting from fiduciary violations. Second, the possibility of liability tends to focus the attention of trustees and fiduciaries on their fiduciary responsibilities. As noted above, NCTR members approved a resolution expressing concern about the broad standard of liability in the Act.

Purchase of Service Credit (pages 60-66)

This is the other major unresolved issue. This provision would allow an individual to purchase service credit for any years of employment in both the public and private sector for which he/she is not entitled to a pension benefit. NCTR members have a number of concerns. First, why is purchase of service credit, which is a benefits issues, included in an Act that purports to cover governance issues only? Having an unrelated provision complicates the possibility of enactment of the Act by state legislators. Second, the policy allowing private sector employment to be purchasable, in addition to public sector work, is objectionable. Third, the provision is far more restrictive than many states' laws. For example, participants can only buy in full year increments; the provision appears to prevent any subsidy in the cost of the service; and interest is charged if the participant delays paying full amount.

Other issues

COLAs (pages 13-15)

The scope of MPEPFA excludes a certain type of COLAs. Specifically, a "supplemental retirement income arrangement," i.e., a COLA, is exempted if the public employer is not obligated to make the payments pursuant to the basic retirement program and the payments are made out of general revenues, a separate trust fund, or a special appropriation. Other types of COLAs would be under MPEPFA. This text appeared in previous drafts, but I wanted to make sure you had a chance to consider this language again.

Attorney's Fees (pages 56-59)

Like previous drafts, this draft would allow (but not require) a court to award reasonable attorney's fees and costs of action to either party. The notes to this latest draft provide some addition explanation about the intent of this provision. In essence, they say that courts applying ERISA's attorney's fees provisions (on which the MPEPFA provision is modeled) have generally looked favorably on claims for attorney's fees from prevailing plaintiffs, but skeptically at claims for fees from prevailing defendants. In compelling circumstances, however, attorney's fees can be denied to prevailing plaintiffs or awarded to prevailing defendants.