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The Pension Review Board met on June 14 to discuss actuarial reviews of several pension systems across the state, retirement plan design, recent legislative action, and the upcoming LAR. The full agenda and agenda item tabs can be found here. The report below follows the structure of the meeting, which proceeded according to the tabs in the agenda.

This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. This report is not a verbatim transcript of the hearing; it is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

 

Item 3:

  • TAB 1 Approved March 1, 2018 Board meeting minutes
  • Excused Robert May from March 1 meeting
  • Recognized the retirement of Robert May
  • Introduced Marcia Dush as the new board member
  • Goes through the Committee Assignment

 

Item 4: Actuarial Committee

Kenny Herbold, Texas Pension Review Board

  • Intensive Actuarial Reviews
    • Tab 2A- Irving Firemen’s Relief & Retirement Fund (review postponement)
      • Irving will be reviewed in the Fall
    • TAB 2B- Beaumont Firemen’s Relief & Retirement Fund
      • Specifically, looked at their Post-Retirement option plan
      • If you receive a lump sum you can put it back into the plan and earn a guaranteed rate of return that is equal to 2% less than the assumed rate of return
      • Earning a guaranteed 6% in a savings account
      • Their prop accounts make up 30% of their assets
      • Changed language in the report to focus on the issue of short term liabilities backed by long term assets
    • TAB 2C- Marshall Firemen’s Relief & Retirement Fund
      • Performed an intensive review and are a small TLFFRA plan
      • They have consistently underperformed, and the contributions are significantly less
      • Offered them technical assistance, but have not requested help
    • McGee- What is the nature of that ongoing help?
      • We were asked to communicate with the city to address the concerns, but not asked for any other assistance
    • McGee- And the city was responsive?
      • We have not sent the letter yet
    • B. TAB 3- Orange Firemen’s Relief & Retirement Fund and Longview Firemen’s Relief & Retirement Fund
      • Points out metrics spread sheet
      • Longview Fire and Longview Fire are also included
    • C. TAB 4- Actuarial Valuation Report
      • Point out that this includes 11 new valuations since March
      • Funded ratio has ticked up slightly
      • Unfunded accrued liability and dollar amount has gone up by $2.5 billion; expected the dollar amounts to rise
      • This will move as TRS moves
      • McGee- If I have done the math right, the increase in unfunded liabilities is a 4.5% growth rate from our prior effective rate. Total unfunded liability total is growing faster than inflation and our state and local budgets. The headline number drives the cost.
      • Brainard- Makes comments on the TRS funds.
      • McGee- I anticipate TRS will lower the assumed rate of return and it would be helpful for you to explain the implications.
      • McGee- We are seeing positive action on funding policy from the plans which means more money into the plans which means more certainty.
    • D. Update on Houston Firefighter’s Relief & Retirement Fund Experience Study
      • SB 2190 requires an experience study to be completed no later than September 2020
      • McGee- Encourage the representatives of Houston Fire to run an experience study as soon as possible.
      • Addresses questions raised on COLA- Houston fire’s COLA is equal to a 5-year average minus 4.75% and a minimum of 0 and maximum of 4%
      • Addresses question on what the Blue-collar adjustment to a mortality table meant
        • Tables perform surveys of pension plans
        • Corporate pension plans are most common
      • Brainard- Who sponsored that study?
        • The society of actuaries
      • Brainard- So, a plan that features the blue-collar mortality table would be less expensive because its members would die sooner?
        • Yes
      • Brainard- Is it the city or the plan that is using the blue-collar mortality table?
        • Yes, both public service plans are using a blue-collar adjustment
      • McGee- How old is the study that set the blue-collar adjustment?
        • The study was conducted from 2003-2009
        • The Original was published in 2014
      • E. TAB 5 Staff update on Funding Soundness Restoration Plan for Fort Worth Employees Retirement Fund
        • Explains the timeline of actions under TAB 5
        • If they cannot make the changes before the legislative session they will be bringing them to the legislature
        • They are taking the FSRP into consideration
        • Brainard- Invites Mrs. Leavy to speak.
        • Leavy- The council passed a resolution to present an ordinance; according to the timeline the election that is scheduled for November is a contribution increase election
        • Leavy- The proposed solvency is dependent on the contribution increases
        • McGee- it would be helpful to know the information on Governance here. Can you walk me through the plan?
          • Leavy- The benefit levels are not defined in the statute and gives the plan’s sponsor to change benefit levels and change its own contribution level
          • Employees will have to vote to change the contribution level and pass it by a majority
        • McGee- Are there increased city contributions to the plan as well?
          • Leavy- Yes
        • McGee- So, the deal is increase city contributions, reduce benefits, increase employee contributions then the city is going to act in an ordinance that is contingent on a vote in November, and if that does not work there will have be legislative action?
          • Leavy- yes
        • Brainard- Just to clarify, did I hear you just say that the city council controls the benefit levels and the city employees determine the contribution rates?
          • Leavy- that is correct; there are member groups that can negotiate
        • F. TAB 6 Update on Actuarial Standards of Practice
          • Shows the list of the applicable standards
          • A new standard was adopted that will be effective for evaluations after this year; Referred to the Risk ASOP
          • Defines the Risk ASOP and recent changes on page 108 in the packet
          • I do not expect there to be many changes in the reports we receive because plans already include 90% of the information
          • Points out the primary ASOPS 4, 27, and 35 that guide what we do
          • Pension task force made recommendations on changes on ASOP 4,27, and 35
          • This is just a first draft and once the comments are received the ASOP will go through more changes, so it should be a couple of years before they are adopted
        • G. TAB 7 Online pension dashboard preliminary design and structure
          • We are building a website and the dashboard will be complete by the end of the year

 

Reece Freeman, Pension Review Board

  • H. Public retirement system reporting and compliance
    • TAB 8A- Update on FSRP requirement
      • Marshall Fire FSRP increases, but new contribution rate has not been approved
      • We recommend marshal fire discuss corrective actions to this plan as soon as possible
      • Systems at risk of an FSRP requirements on page 144
      • Brainard- Is it possible for University Park and Harlingen firemen that adjustments could be made to stall for applying an FSRP?
        • Reese- How do you mean?
        • Brainard- is it possible those structure can make changes either in contribution structures or benefits in order to avoid the FSRP process?
        • Reese- I believe they can.
      • McGee- Have they already triggered the state law requiring the FSRP?
        • That would technically be an FSRP
      • McGee- Seeing multiple rounds of FSRPs with these plans that are not putting them below 40
        • The goal year for the under 40 stands regardless of how many FSRPs they submit
      • McGee- What is the goal year?
        • 10-year goal year
      • McGee- Are there any consequences?
        • No
      • McGee- We should probably track their provisions
    • TAB 8B- Noncompliant retirement systems under Sections 801.209 of the Texas Government Code
      • Brainard- If they ever go back above 40 they are on the list?
        • Yes
      • McGee- It would be useful to track descriptive stats on how this FSRP law is working.
      • 6 new plans were submitted
      • In more than 60 days there has been a $half-billion increase
      • Brainard-What is the next step after not hearing from them?
        • Girl- First step we send a letter to their sponsor and after that we would need to consider putting them on the agenda for a future meeting
      • Goes through the letters to the non-compliant plans; Nacogdoches has been added
      • What is the next step after not hearing from them?
        • Send a letter to their sponsor then consider putting them on the agenda for a future board meeting
      • Kranes-Motion to put Northeast Medical Center on the agenda for the next meeting
      • Motion passed

 

Item 5: Advisory Committee on Principles of Retirement Plan Design

Keith Brainard, Texas Pension Review Board

  • TAB 9A Comments received on the draft Principles
    • TAB 9A has older comments
  • TAB 9B Draft of the Principles of Retirement Plan Design
    • Under TAB 9B are the latest comments on the plan

 

David Stacey, Midland Retirement & Relief Fund

  • Item number 4-Retirement plan vesting should occur over a short period, preferably five years or less.
  • My plan has 10-year vesting and is consistent with other plans that report to this agency
  • If your 5-year recommendation were to become a law, it would negatively impact many of the plans in the TLFFRA program
  • I recommend you do not assign a number to a retirement plan; local plans should be determined by the community
  • Brainard- We are trying to accommodate many plans; Our concern is for people who leave their job after 7-8 years and do not receive retirement plans.
  • Brainard- This is not a one size fits all; I would not support a one-size fits all law, these are just guidelines.
  • Most plans return employee contributions before the vesting period
  • Reiterate the contributions are returned to the employees
  • McGee- Important to note that the plans are supposed to be for retirement security and long vesting period leave people without retirement security.
  • Brainard- Suggest revising Principle 8- (Retirement benefits should be protected against the erosion of the benefit’s value due to inflation, and such benefits should be linked to actual inflation and funded in accordance with the Pension Review Board’s Pension Funding Guidelines.)
  • Brainard- Offer a motion to change the principle to: “Retirement benefits should be protected against the erosion of the benefit’s value due to inflation, and not exceed actual inflation and funded in accordance with the Pension Review Board’s Pension Funding Guidelines.”
  • McGee- The principles are only meant to inform plans and the decisions are still local.
  • Dush- The normal cost percentage would increase and actuarily liability would increase.
  • Brainard- Mentions the North Carolina plan to increase the vesting period from 5 to 10 years. The ability of the state to attract employees declined because the large number scared off employers.
  • The amendment on principle 8 passed unanimously

 

Item 6: Education and Research Committee

Michelle Kranes and Joey Evans

  • TAB 10A Accredited sponsor course evaluation summary
    • Brainard- “Max”, do you have any observations?
      • “Max”- We made a change in the structure some time back and moved toward professionals which made a big difference in the students
      • “Max”- Set guidelines and monitor the teachers closely; Paid attention to how they taught
    • TAB 10B MET compliance reporting
      • There is one non-compliant plan still filing

 

Item 7: Legislative Committee

  • Update on Senate State Affairs and House Pensions Committee interim hearings
  • TAB 11 Update on Interim study topics

Marc Chytil and Kenny Herbold, Texas Pension Review Board

  • We’ve grouped investment groups into smaller quartiles, we’ve found that on average that other sectors outpace the first quartile
  • Quartile 1s are paying 1-2x investment fees and
  • We’ve found that this is viable, if Texas plans would pool their assets they would be able to achieve better outcomes
  • No concrete recommendations now, plan would be to retain control with he various plans, but would just transfer investment
  • Brainard – Do you recall what the size of the largest investment was in quartile 1?
    • $14 million
  • Brainard – So about 1/3 of the plans have about $14 million or less?
    • Correct
  • Brainard – Aggregating all funds would add up to what?
    • $154 million for quartile 1
  • Dush- – Do these funds generally have an investment consultant
    • Some funds do, some do not; if they do not then everything rests with the investment manager
  • Dush – Have we looked to see if investments are in compliance with the policy?
    • We do review investment policies and statements, everyone is generally in compliance
  • Dush – Seems that there is a model recommendation policy, could check investment policy statements against best practices
  • McGee – Surprised be the scale of the differences, especially on the fees; Would be interested in looking at differences in asset allocation between quartiles
  • McGee – Might also be interesting to do quintiles, to compare to average/middle
  • Dush – Might also look at plans with and without investment consultants
  • Brainard- Do you recall what the quartile 1 plans are paying in investment expenses?
    • As an average 94 basis points for quartile 1 and quartile 3 is 42
    • Also, looked at it from a 5-year period and falls to 80 basis points
  • Dush – Big focus on defined contribution is expenses
    • A lot of pension plans are using active management, paying more and need to consider whether returns are worth the cost
  • Dush – A decent investment consultant could provide you with that data
  • Will produces a report, asking Board to work with Actuarial Committee and continue the work
  • Brainard– Do we collect data on returns for individual asset classes?
    • On the aggregate we would be missing this information
  • PRB Member – Wonders if it is possible to incorporate management experience in the study
    • Most of these would have experienced management teams
  • Brainard– Would be interested to see value of funds if they received quartile 3 returns during the time frame
    • We did prepare info on projected value/how to monetize the implications
  • Liebe – Are there any downfalls or risks? Value of quartile 1 plans are never going to be able to achieve the returns of quartile 3; will need quartile 3 and 4 to participate
    • Not suggesting that only small plans would be able to participate, at this point we are examining data and not really looking at nuts & bolts
    • On average, there are benefits; Theoretically would not need to reach quartile 3 to see benefits
  • McGee – Would also be useful to highlight specific examples where there is pooled management
  • May – Where are we going with this? Are we going to create a pool?
    • McGee – I think the idea was to create a study for the legislature, what happens after will depend on legislature decision
  • Have one additional interim topic we are working on, but no updates; asking Board to continue actuarial research
  • Motion to ask committee to continue interim research and present findings to full board at next board meeting
  • Passes
  • Liebe – Is there a legislative committee meeting in the interim, does this need to go there as well?
  • McGee – Might be, unless they ask for an update
  • Motion to approve attendance of interested board members
    • Passes

 

Item 8: Discuss and consider 2020-2021 Legislative Appropriations Request

  • Kranes – We plan to request additional funding for staff salaries to maintain critical/technical positions, $60k/FY to continue addressing turnover and retention
  • May also look at smaller requests, e.g. load from switching to new statewide accounting system
  • Asking Board to task staff to work with Chair and Vice Chair to finalize decisions
  • Motion to approve salary increase for executive director from $112k to $125k
    • McGee – Acceptable to me, have fallen well behind other agencies on this and need to ensure we can maintain talent; also supports salary increase to help retention
    • Will be $24k for the biennium
    • Kranes – Total request would $75k/FY and $150k for the biennium
    • McGee – This puts us kind of in the middle of the range SAO recommends, not sure how much more we want to go for
    • Liebe – How about for the rest of the staff?
      • Crane – We always try to keep our requests modest, our $40k request last biennium was practically canceled out by the 4% decrease across the board
      • McGee – Our staff are behind to comparable agencies, need to rectify
    • Motion to direct staff to work with Chair and Vice Chair to finalize 2020-2021 LAR, incl. ED salary
      • Passes

 

Item 9: Review and discuss report from staff on the following matters

  • TAB 12A 2018 Customer Service Survey
    • Survey was conducted from April to may to designed benefit plans
    • Also sent to governmental contacts and stakeholders
  • TAB 12B 2019 – 2023 Strategic Plan
    • Each required action item is ongoing
    • Plan was submitted on Friday
  • TAB 12C Updated Fiscal Year 2018 Operating Budget
    • No action item for the Board
    • Staff is making good progress and should be finalizing as the year ends

 

Item 10: Call for future PRB agenda items

  • Next meeting in October
  • No additions to next PRB Board Meeting

 

Item 11: Date and location of next PRB meeting – October 4, 2018

 

Item 12: Invitation for public comment

Mr. Keller, Houston Fire Department

  • Discussed use of mortality adjustment on the mortality table in reference to the City of Houston’s use of funds rate versus the mortality rate in the Survey