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I_PensionRevewSubComm_2019A 09/03/2019 09:02:46 AM Committee Summary

Date 09/03/2019
Gary Arnold X
Jack Blumenthal X
Michael Johnson X
Jim Mantele X
Carole Partin X
Trey Rogers X
Joshua Sharf X
Lang Sias X
Amy Slothower X
Tate X
Ben Valore-Caplan X
Van Winkle *
Ginal *
Bird X
X = Present, E = Excused, A = Absent, * = Present after roll call
Time 09:02:46 AM to 03:16:39 PM
Place HCR 0112
This Meeting was called to order by Representative Bird
This Report was prepared by Vanessa Reilly
Hearing Items Action Taken
PERA Board Governance Audit Committee Discussion Only
PERA on Board Governance Committee Discussion Only
Considerations in the Use of Pension Bonds Committee Discussion Only
Contributions to PERA in the State Budget Committee Discussion Only
PERA Board Governance Audit - Consideration Committee Discussion Only
PERA on Economic Assumptions and Asset Liability Study Committee Discussion Only
PERA on Demographic Assumptions Committee Discussion Only
Q&A with PERA Staff and Trustees Committee Discussion Only
Recommendations to the Pension Review Commission Committee Discussion Only

PERA Board Governance Audit - Committee Discussion Only

09:03:32 AM  

Ms. Dianne Ray, State Auditor, presented a handout (Attachment A) and discussed the possibility of the Office of the State Auditor (OSA) performing a governance audit of the Public Employees' Retirement Association (PERA).

09:04:39 AM  

Mr. Sias went over what the proposed audit of PERA included and noted that the subject of board membership was not included. He wondered whether the separate independent review, for which the OSA is preparing a Request for Proposals, could include governance issues in its scope. Ms. Ray stated that it could not because these issues were outside of the limited statutory scope of that review.

09:08:19 AM  

Mr. Valore-Caplan and Mr. Blumenthal discussed the topic of who is ultimately responsible for PERA's solvency and whether that inquiry would fit into the scope of the audit. Ms. Ray requested that Mr. Valore-Caplan frame those questions around investment and economic assumptions, and Mr. Valore-Caplan offered to provide such language.

09:26:40 AM  

Discussion ensued regarding issues of pension fund governance. Nicole Myers, Office of Legislative Legal Services, came to the table to respond to questions related to the subcommittee's scope. Mr. Rogers moved to accept and move forward with the Governance Audit of PERA. Representative Bird asked whether the committee would like to discuss the consensus and scope. Ms. Ray responded to clarifying questions from the committee.

09:32:16 AM  

Representative Bird stated that the subcommittee would return to the discussion of Mr. Valore-Caplan's proposed language regarding the inclusion of governance in the auditor's scope and vote on whether or not to move forward with the audit after the lunch break.

09:33:53 AM  

The committee recessed.

09:38:12 AM  

The committee reconvened.

09:40:02 AM  

Representative Bird asked Mr. Rogers to reframe his motion as a recommendation. Mr. Rogers withdrew his motion and made a recommendation that the subcommitee proceed with the proposed audit. Representative Bird reiterated that the committee would vote on that recommendation after lunch.

PERA on Board Governance - Committee Discussion Only

09:41:40 AM  

Mr. Ron Baker, Executive Director of PERA, presented to the subcommittee on the topic of PERA's board governance, and distributed a handout (Attachment B). He stated that there are two main bodies that oversee PERA: the General Assembly sets the benefits, contribution rates, and other pieces of the plan requirements, while the PERA board acts as the fiduciaries who oversee the investment plan. The board hires actuaries and economists to advise them on investment assumptions, and adopts assumptions using that expertise. He discussed board reimbursements, training, workload, and its committees and their responsibilities. He stated that PERA has a very thorough and robust governance system that lays out the parameters of everyone who is involved and has won accolades for their board governance manual.

09:47:00 AM  

Mr. Baker responded to committee members' questions, dialoguing with Mr. Sharf about the role of PERA staff and the PERA board in investments and the recent history of insolvency. Mr. Arnold asked about the history of consultants and whether the board generally followed the consultants' advice.  Mr. Baker responded that PERA reevaluates its consultants every three to five years and that in some cases the board takes a more conservative approach. Mr. Valore-Caplan discussed his experience on the PERA board and noted common misconceptions about the PERA board's oversight role versus its role in the investment process. Mr. Baker discussed the Aon asset-liability study and the board's role in that process.

Considerations in the Use of Pension Bonds - Committee Discussion Only

10:23:23 AM  

Mr. David Paul, representing Fiscal Strategies Group, presented to the committee and distributed a handout (Attachment C).

10:25:32 AM  

Mr. Paul discussed how actuarial assumptions affect the state of a pension. In response to a prior subcommittee discussion, he noted that the obligation to pay state pensioners ultimately lies with the state. He highlighted the history of pension investment assumptions and the complicated governance of public pensions. He explained pension bonds, and how they are a leveraged investment. He discussed the nuances of the investment and the overarching goals of pension bonds.

10:39:42 AM  

Mr. Paul continued his presentation with arguments in favor of and against pension bonds. He discussed prior legislative attempts in Colorado to securitize pension bonds (House Bill 15-1388), and his recollections of why the bill failed. He provided some case studies on pension bond successes and failures, and how the 30-year period makes it difficult to draw absolute conclusions. He concluded his presentation with a discussion of opportune bond rates; the importance of understanding and articulating the financial, political, and public policy goals of pension bonding; and the importance of thinking about how the future will be different than the present. Mr. Paul responded to questions from the committee. Senator Tate asked about tax implications. Representative Van Winkle discussed his recollections of House Bill 15-1388. Mr. Sharf asked a question about measuring bond payments based on the discount rate and the rate of return.  Mr. Valore-Caplan asked a question about covenants specific to bond issuances.

Contributions to PERA in the State Budget - Committee Discussion Only

11:14:05 AM  

Mr. Alfredo Kemm, Joint Budget Committee (JBC), distributed a handout (Attachment D) and presented to the committee regarding contributions to PERA in the state budget through the Amortization Equalization Disbursement (AED) and the Supplemental Amortization Equaliation Disbursement (SAED) contributions. He noted that as JBC staff he looks at these contributions through his work analyzing the statewide compensation plan for the JBC. He noted that AED and SAED were created to pay down the unfunded liability, but are complicated because the calculation is based on individual employee payroll. He also noted that by putting these payments in the common policies, these contributions are paid with cash funds and federal funds in addition to General Fund. He discussed the concept of the SAED and how it was set up as an employee contribution from foregone wage increases. He discussed the normal cost of the PERA benefit and how contributions currently outsize an employee's normal cost, which is the cost to cover their individual retirement. Finally he discussed the dynamics of a leaner benefit and a higher contribution rate.

11:16:21 AM  

Mr. Kemm responded to committee members questions. Mr. Johnson asked about the timing of AED and SAED contributions and beneficiaries. Mr. Valore-Caplan asked about policy objectives underlying the AED and SAED contributions.

11:43:44 AM  

The committee recessed for lunch.

PERA Board Governance Audit - Consideration - Committee Discussion Only

12:40:50 PM  

Dianne Ray, State Auditor, returned to the table for a discussion of the scope of a potential audit.

12:41:23 PM  

Mr. Valore-Caplan discussed his proposed language (Attachment E).

12:43:20 PM  

Ms. Ray distributed a handout (Attachment F) of her office's edits to Mr. Valore-Caplan's proposal in order that it may clearly be audited and held up against best practices. Mr. Valore-Caplan responded that the amended language matched the spirit of the inquiry.

12:43:42 PM  

Senator Tate discussed the goals of the subcommittee which was created in his bill, Senate Bill 18-200. He noted that the intent was to put the experts on the subcommittee so that they could, with the support of Legislative Council Staff, come to conclusions about governance and other issues using their own expertise.

12:57:24 PM  

Ms. Nicole Myers returned to the table along with Ms. Erin Reynolds, Legislative Council Staff, responded to committee members' questions regarding the scope of staff support and the requirement for an independent audit of PERA in statute.

12:58:33 PM  

The committee members continued to discuss the independent audit and the potential OSA study.

01:26:35 PM  

Ms. Ray and Ms. Reynolds continued to respond to committee discussion. The committee discussed foregoing a formal governance audit and instead asked Legislative Council Staff to research governance practices in other state pension systems, to be defined more clearly with the input of Representative Bird and Representative Van Winkle and discussed at a future meeting.

01:39:21 PM
Motion Motion for the Subcommittee to request Legislative Council Staff to perform a research project under the authority of Representatives Bird and Van Winkle as project managers.
Moved Lang Sias
Seconded Ginal
Gary Arnold Yes
Jack Blumenthal Yes
Michael Johnson Yes
Jim Mantele Yes
Carole Partin Yes
Trey Rogers Excused
Joshua Sharf Yes
Lang Sias Yes
Amy Slothower Yes
Tate Yes
Ben Valore-Caplan Yes
Van Winkle Yes
Ginal Yes
Bird Yes
YES: 13   NO: 0   EXC: 1   ABS:  0   FINAL ACTION:  PASS

PERA on Economic Assumptions and Asset Liability Study - Committee Discussion Only

01:39:54 PM  

Mr. Ron Baker returned to the table with Ms. Amy McGarrity, PERA Chief Investment Officer, to discuss PERA's asset-liability study (included in Attachment B).

01:40:58 PM  

Ms. McGarrity explained the asset-liability study currently underway and performed by Aon Hewitt Investment Consulting, Inc.  She discussed PERA's asset classes, strategic asset allocation, how capital market assumptions drive expectations, and PERA's current long-term strategic portfolio.

01:55:15 PM  

Ms. McGarrity responded to committee members' questions regarding the long-term rate of return assumption.

PERA on Demographic Assumptions - Committee Discussion Only

02:23:57 PM  

Brad Ramirez, representing Segal Consulting, distributed a handout (Attachment G) and gave a presentation on demographic assumptions that comprise PERA's actuarial valuation.

Q&A with PERA Staff and Trustees - Committee Discussion Only

02:47:04 PM  

Mr. Ron Baker remained at the table with Mr. Timothy O'Brien, PERA Board Chair, Ms. Susan Murphy, PERA Board Member, and Mr. Eric Rothaus, representing the State Treasurer's office.  Representative Bird asked the panelists to discuss issues they believed to be pertinent to the subcommittee. Mr. Baker discussed how governance varies across the county and offered some examples. He described his pride in the organization and the work of the board, and thanked the subcommittee for their kind comments over the course of the meeting. Mr. O'Brien stated that the board is constantly looking at assumptions. He advised that the Legislative Council Staff research project include plan design in its comparison of state pension governance structures, and offered examples of where the plan design changes the governance. Ms. Murphy thanked the committee for their work and acknowledged that many of the questions asked today are very familiar to her. She discussed the rate of return process and explained the in-depth effort the board makes to bring in a variety of perspectives and inputs to their processes. She invited the subcommittee to visit the board. Mr. Rothaus expressed Treasurer Young's regrets of not being there personally and echoed the comments of other board members.

Recommendations to the Pension Review Commission - Committee Discussion Only

03:00:58 PM  

Representative Bird explained the subcommittee's role in relating its recommendations to the Pension Review Commission. Senator Ginal suggested another meeting before January to review Legislative Council's research. Representative Bird said that a meeting might be possible, depending on the interim calendar.

03:02:16 PM  

Representative Bird asked if any subcommittee members had recommendations for the Pension Review Commission.  Representative Van Winkle explained that he believed the subcommittee's work was beginning and that he did not have any recommendations at this time.  Mr. Rogers echoed that sentiment.

03:08:41 PM  

Subcommittee members made final comments regarding concerns with securitizing the pension.

03:16:39 PM   The committee adjourned.