Municipal Public Safety Pension Reforms. What Your Municipality Needs to Know About the New Law

Transcription

1 Municipal Public Safety Pension Reforms What Your Municipality Needs to Know About the New Law October 2008

2 LARRY FRANG - Executive Director Dear Municipal Official, This Summer, the IML pension reform legislation was enacted into law as P.A The Public Act has an immediate effective date of August 29, 2008 and is now law. The purpose of this packet is to help our members implement the changes in this new law. The reforms within the new law make several changes to the statutes that govern the downstate and suburban municipal police and firefighter pension funds. These changes were sought as part of an effort to proactively address the stability of the municipal public safety pension funds. The fiscal challenges facing these pension funds were first noted in a comprehensive study published by the Illinois Municipal League entitled, Fiscal Analysis of the Downstate and Suburban Police, Fire and IMRF Pension Funds (February 2007). This study can be obtained either directly from the IML or on our website at The new law contains several key reform provisions. Some of these provisions apply to the services and information provided by State agencies and commissions. Other provisions within the new law, however, will directly impact your municipality and your police and fire pension boards. These provisions require your attention and implementation. Within this packet, you will find essential information about the recent statutory changes. You will also find suggestions as to what your municipality and your police and firefighter pension boards should do to comply with the statutory changes. For most of the provisions, your municipality should take responsibility for ensuring that your police and fire pension board is aware of, and in compliance with, the statutory changes. We hope that this information will empower your municipality and police and firefighter pension boards to meet the new obligations and responsibilities resulting from the new law. For additional assistance or further explanation, please contact Joe McCoy at jmccoy@iml.org. Respectfully, Larry Frang Executive Director Illinois Municipal League Educate. Advocate. Empower. 500 East Capitol Avenue; PO Box 5180, Springfield, IL Phone (217) Fax (217)

3 TABLE OF CONTENTS I. Complete Index of P.A II. Understanding and Making Public the Annual Pension Fund Report...8 III. Contract Requirements for Professional Services...11 IV. Fiduciary Conflicts of Interest...13 V. Gift-Ban...15 VI. Role of Municipal Treasurer in Calculating Article 3 (Police) Benefits...17 VII. Sharing IDFPR Compliance Audit With Mayor/Village President

4 I. Complete Index of P.A KEY PUBLIC SAFETY PENSION REFORM PROVISIONS Fund Sweep Prohibition (State Responsibility) Pension Impact Notes (State Responsibility) Fiduciary Conflict-of-Interest (Municipal Responsibility) Requirements for Consultants Seeking Contracts (Municipal Responsibility) Required Contract Disclosures (Municipal Responsibility) Gift-Ban (Municipal Responsibility) Public Pension Division Services/Audits (State Responsibility) Article 3 Benefit Calculation Verification (Municipal Responsibility) Article 3 Public Notice of Fund Information (Municipal Responsibility) Article 3 Anti-Fraud Disability Protection (State Responsibility) Article 4 Public Notice of Fund Information (Municipal Responsibility) Article 4 Anti-Fraud Disability Protection (State Responsibility) ICFGA Biennial Pension Study (State Responsibility) State Mandates Act Exemption SUMMARY AND ANALYSIS OF PUBLIC SAFETY PENSION REFORM PROVISIONS IN P.A (The text of the Public Act is available at 20 ILCS 2105/ Pages 1-4 & Page ILCS 55/3 Pages ILCS 5/1-110 Pages Fund Sweep Prohibition Amends the Department of Professional Regulation Law of the Civil Administrative Code to include an exception from fund sweeps out of the Public Pension Regulation Fund. (1-4) Amends the State Finance Act to strike language permitting transfers of money from the Public Pension Regulation Fund to the Professions Indirect Cost Fund. (5-6) Pension Impact Notes Grants discretion to the Illinois Commission on Governmental Forecasting and Accountability to produce fiscal notes analyzing the cost impact on multiple select municipalities for legislation determined by the Commission as increasing benefits or costs. Fiduciary Conflict-of-Interest Amends the section within Article 1 of the Illinois Pension Code on Prohibited Transactions to state that a fiduciary contracted with by pension fund established under 3

5 Article 3 or Article 4 shall not knowingly cause or advise the pension fund to engage in an investment transaction when the fiduciary (i) has any direct interest in the income, gains, or profits of the investment advisor through which the investment transaction is made or (ii) has a business relationship with that investment advisor that would result in a pecuniary benefit to the fiduciary as a result of the investment transaction. Violation a Class 4 felony. This section is discussed beginning on page 13 of this packet. 40 ILCS 5/ Pages ILCS 5/ Pages Requirements for Consultants Seeking Contracts Amends the section within Article 1 of the Illinois Pension Code on Investment Advisors and Investment Services to state that persons or entities providing consulting services to pension funds with respect to selection of fiduciaries may not be awarded a contract for such services that exceeds 5 years. Said persons or entities may still compete for a contract. All offers for the provision of such services shall include disclosure of the name and address of the following: 1) the offeror; 2) parent entity or entity with controlling interest in the offeror; 3) entity that is a subsidiary of, or in which a controlling interest is owned by the offeror. Persons other than a trustee or employee of a pension fund or retirement system may not act as a consultant unless registered as at least one of the following: 1) investment advisor under the federal Investment Advisors Act of 1940; 2) investment advisor under the Illinois Securities Law of 1953; 3) a bank as defined in the Investment Advisors Act of 1940; or 4) an insurance company authorized to transact business in Illinois. All investment advice and services provided by a consultant shall be rendered pursuant to a written contract between the investment advisor and the board. This section is discussed beginning on page 11 of this packet. Required Contract Disclosures Further amends the section within Article 1 of the Illinois Pension Code on Investment Advisors and Investment Services to specify that contracts with consultants shall include: 1) full disclosure of direct and indirect fees, commissions, penalties, and other compensation, including reimbursement for expenses, that may be paid by or on behalf of the investment advisor or consultant; and 2) a requirement that the investment advisor or consultant update the disclosure promptly after a modification of those payments or an additional payment. Initial disclosure must occur within 30 days after effective date of this Act. Services provided by a person other than an investment advisor as defined by this section shall also require the disclosures outlined within this section. These persons are outlined within Section (a). This section is discussed beginning on page 11 of this packet. 4

6 40 ILCS 5/1-125 Pages ILCS 5/1A- 104 Pages ILCS 5/ Page ILCS 5/3-143 Pages Gift-Ban - Amends Article 1 of the Illinois Pension Code to introduce language from State Gift-Ban Act to define what constitutes a gift and what would be a prohibited source in relation to Article 3 and Article 4 pension funds. Prohibited Source defined as person i) seeking official action by board or board member; ii) does business or seeks business with board or board member; iii) has interests that may be substantially affected by performance or non-performance of the official duties of board member; and iv) is a registered lobbyist. No board member of an Article 3 or Article 4 pension fund shall solicit or accept any gift from a prohibited source or from an officer, agent, or employee of a prohibited source. Prohibited sources and their officers, agents or employees are prohibited from offering gifts to board members or employees. Exempts from the gift-ban provisions educational materials, missions and travel expenses for meetings to discuss business. (It should be noted that disagreement exists over the proper interpretation of the gift-ban language.) This section is discussed beginning on page 15 of this packet. Public Pension Division Services/Audits Amends Article 1A of the Illinois Pension Code under the section pertaining to Examinations and Investigations to require that the IDFPR Public Pension Division shall examine or investigate each fund at least once every three years. Public Pension Division would make determinations as to accuracy of fund calculations for benefit payments. Public Pension Division to send report to chief executive officer of municipality. Requires determination by Public Pension Division of whether pension fund calculations for annuity and benefit payments are accurate. The IDFPR report under this section shall also be sent to the chief executive officer of the municipality. The sharing of the IDFPR compliance audit is discussed on page 18 of this packet. Article 3 Benefit Calculation Verification Amends a section entitled, Annual Report by Treasurer within Article 3 of the Illinois Pension Code. States that information used to calculate benefit awards by a police pension board shall be forwarded to the municipal treasurer for review. If the treasurer finds an error, he or she shall notify the board, which would in turn review the findings of the municipal treasurer and re-determine the annuity if the board concurs an error exists. This section is discussed on page 17 of this packet. Article 3 Public Notice of Fund Information Amends a section entitled, Report by the Board within Article 3 of the Illinois Pension Code to state that the municipal board of trustees or city 5

7 council may publish a financial report on the pension funds within a newspaper of general circulation or on the municipality s website. The municipality would receive the financial information in a report from the pension boards. Information in each annual report would include the following: 1) total participants including exact number of actives, retirees, disabled participants and survivors/children; 2) total benefit payout amounts; 3) unfunded liability; 4) assets; 5) funded ratio; 6) actual and assumed investment return; 7) delineation of investment restrictions. This section is discussed beginning on page 8 of this packet. 40 ILCS 5/ Page ILCS 5/4-134 Pages ILCS 5/ Page ILCS 5/ Pages Article 3 Anti-Fraud Disability Protection Amends Article 3 of the Illinois Pension Code to add a new section containing the same anti-fraud language found within Sec. 5/ of the Illinois Teachers Retirement System. False statements knowingly made as well as falsification of records in an attempt to defraud the system would subject falsifier to a Class A misdemeanor. Article 4 Public Notice of Fund Information Amends a section entitled, Report for tax levy within Article 4 of the Illinois Pension Code to state that the municipal board of trustees or city council may publish a financial report on the pension funds within a newspaper of general circulation or on the municipality s website. The municipality would receive the financial information in a report from the pension boards. Information in each annual report would include the following: 1) total participants including exact number of actives, retirees, disabled participants and survivors/children; 2) total benefit payout amounts; 3) unfunded liability; 4) assets; 5) funded ratio; 6) actual and assumed investment return; 7) delineation of investment restrictions. This section is discussed beginning on page 8 of this packet. Article 4 Anti-Fraud Disability Protection Amends Article 4 of the Illinois Pension Code to add a new section containing the same anti-fraud language found within Sec. 5/ of the Illinois Teachers Retirement System. False statements knowingly made as well as falsification of records in an attempt to defraud the system would subject falsifier to a Class A misdemeanor. ICGFA Biennial Pension Study Amends Article 22 of the Illinois Pension Code to add a new section to the Division entitled, Reporting to the General Assembly on the State-Administered Retirement Systems. The new section provides that, in odd numbered years, the ICGFA shall publish a detailed study analyzing the Article 3 and Article 4 pension funds. Study shall be similar to reports required under Section Study shall look 6

8 at aggregate data and data on selected individual municipalities in each system. Study will also include an analysis of the variables that drive pension debt, which include salary increases, investment returns, employer contributions, benefit increases, assumption changes, the difference between employer contributions and the normal cost plus interest, and any other applicable factors, including assumed investment returns compared to actual investment returns over the preceding ten fiscal years. 30 ILCS 805/8.32 Page 67 State Mandates Act Exemption -- No reimbursement required for any mandate created by amendatory Act. 7

9 II. Understanding and Making Public the Annual Pension Fund Report Purpose of Statutory Change: To ensure that municipal management and the public are provided critical information on the fiscal health of the pension funds on an annual basis. Current law requires that a pension board provide to the municipal corporate authorities an annual report on the financial condition of the pension fund. This report must be delivered prior to the meeting held by the corporate authorities for purposes of levying taxes. Current law also requires that, before the pension board issues its report, the municipality must have the assets of each pension fund, along with their current market values, verified by an independent certified public accountant chosen by the municipality. P.A expands upon this existing reporting requirement by adding several items of critical information to the pension board s report. In addition, the statute now encourages municipalities to publish this information, in its entirety, in a newspaper of general circulation in the municipality or on the municipality s website. The table below sets forth each item of information that the pension board s report must contain, along with a description of the meaning or use of the information. Boldface type indicates new information that must be reported to the municipality: REQUIRED INFORMATION EXPLANATION/USAGE OF INFORMATION 1. Total fund assets This is a total listing of assets held by a pension fund at the end of a fiscal year. 2. Current market value of assets The total value of the assets that includes unrealized gains and losses immediately within the current year. Subject to significant volatility and can therefore be misleading. 3. Estimated receipts from next fiscal year from employee contributions 4. Estimated money needed during next fiscal year to cover: a) pension payments; b) employer contributions; and c) debt reserves Projection of employee contribution amounts for the next fiscal year This estimate will provide an idea of how much money will be necessary to cover the next year s expenses. 8

10 5. Total net income from investment of assets 6. Total assumed investment return for most recently completed fiscal year 7. Actual investment return from most recently completed fiscal year 8. Total net income from the preceding fiscal year 9. Total assumed investment return from the preceding fiscal year 10. Actual investment return from the preceding fiscal year 11. Total number of active employees making contributions to the fund 12. Total amount of money disbursed in benefits during the most recently completed fiscal year 13. Total number of annuitants receiving a retirement pension 14. Total number of annuitants receiving a disability pension 15. Total number of survivors and This is the amount of money earned on investments from the most recently completed fiscal year Should be compared with line 7. This is important because it will demonstrate whether or not the pension board is achieving the targeted return assumption. The assumed rate of return will impact the tax levy/employer contribution. If the pension board is underperforming the assumed rate of return, the municipality will be responsible for contributing more money the following year. Should be compared to line 5. Should be compared to line 6. Should be compared to line 7. This number is useful because it can be divided into the total unfunded liability amount from line 17 to show how much debt the fund is carrying per active employee. This is a total dollar amount that includes several groups. Subgroup of line 12. Subgroup of line 12. Subgroup of line 12. children receiving benefits 16. Funded ratio of pension fund This number is expressed as a ratio of assets to liabilities and provides an idea of fund financial health. 17. Total unfunded liability and actuarial explanation of unfunded liability 18. Investment policy of the pension board as defined by State statute This number represents those liabilities, current and prospective, not covered by actuarial assets. An actuarial definition of unfunded liability must be included. Investment restrictions are established based upon asset valuation. Permissible investments by asset amounts can be found within 40 ILCS 5/ ; 5/ ; and 5/

11 SUGGESTED ACTIONS Invite and expect the attendance of the entire pension board to the designated meeting of the corporate authorities to review the pension board s report. This report should be thoroughly discussed during the meeting. The IML strongly encourages that you publish this important information in a newspaper of general circulation within the municipality or on your municipal website. If you do decide to publish the report, the new law stipulates that each piece of required information be published in its entirety. 10

12 III. Contract Requirements for Professional Service Providers Purpose of Statutory Changes: To protect pension fund trustees from entering into contracts with hidden costs. To encourage competition for investment services. To ensure that only qualified consultants can win contracts. CONTRACT DISCLOSURES FOR ALL PROFESSIONAL SERVICES P.A requires that certain disclosures be contained in each contract with a consultant, investment company or a person doing business with a pension fund. These new disclosure requirements are as follows: Full disclosure of direct and indirect fees, commissions, penalties, and other compensation, including reimbursements for expenses associated with services provided to the pension fund. These disclosures must be updated after any modification of any fee, commission, penalty, or other compensation, including reimbursements for expenses associated with services provided to the pension fund. All investment advisors and consultants were required by law to make these newly-required disclosures before September 30, 2008 (30 days after the enactment of P.A ). All newly-required disclosures must be in writing and must include the date and amount of each payment along with the name and address of each payment recipient. DURATION OF CONTRACTS FOR CONSULTANTS WHO ADVISE PENSION FUNDS ABOUT HIRING FOR INVESTMENT SERVICES Under P.A , any contract awarded to a consultant who advises a pension board on the hiring of investment advisors is limited to five years in duration. At the conclusion of the five-year period, the consultant is eligible to compete for another contract. If a consultant seeks to make recommendations regarding which investment advisors the pension board should hire, then the consultant must disclose the following information: The name of the consulting service; 11

13 Any entity that is a parent of, or owns a controlling interest in the consulting service; and Any entity that is a subsidiary of, or in which a controlling interest is owned by the consulting service. REGISTRATION REQUIREMENTS FOR CONSULTANTS P.A establishes several registration requirements that consultants must meet beginning on July 1, Consultants seeking to do business with a pension board must be registered with or as at least one of the following: An investment advisor under the federal Investment Advisors Act of 1940; An investment advisor under the Illinois Securities Law of 1953; A bank, as defined in the Investment Advisors Act of 1940; or An insurance company authorized to transact business in Illinois. A person who is a trustee or employee of a pension fund is not required to meet these registration requirements. SUGGESTED ACTIONS Consult with your municipal attorney and send a memorandum addressed to each pension fund trustee outlining the new disclosure, duration and registration requirements. Invite the pension fund trustees to a regular meeting of the corporate authorities to discuss the changes. Request a copy of any contracts entered into between the pension fund and a professional-service provider. 12

14 IV. Fiduciary Conflicts-of-Interest Purpose of Statutory Change: To ensure that business relationships are entered into based upon objective evaluations of what is in the best interest of the pension fund -- as opposed to what person or companies may profit from the relationships. DEFINITION OF FIDUCIARY Public Act makes it illegal for a fiduciary of a pension fund to have a conflict-ofinterest. A fiduciary is defined within the Illinois Pension Code (40 ILCS 5/ ) as any person who: Exercises any discretionary authority or discretionary control respecting management of the pension fund or retirement system, or exercises any authority or control respecting management or disposition of its assets; Renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the pension fund or retirement system, or has any authority or responsibility to do so; or Has any discretionary authority or discretionary responsibility in the administration of the pension fund or retirement system. ILLEGAL FIDUCIARY BUSINESS RELATIONSHIPS Public Act prevents any party who is involved in managing or advising the pension fund from making any contractual-service decision that will personally profit the party making the decision. The language prohibits a fiduciary (pension fund trustee, consultant, investment advisor, etc.) from knowingly causing or advising the fund to engage in an investment transaction if the fiduciary has one of the following: A direct interest in the income, gains, or profits of the investment advisor through which the investment transaction is made; or A business relationship with that investment advisor that would result in a pecuniary (financial) benefit to the fiduciary as a result of the investment transaction. 13

15 SUGGESTED ACTIONS Consult with your municipal attorney and send a memorandum addressed to each pension fund trustee outlining the new conflict-of-interest provision. Invite the pension fund trustees to a regular meeting of the corporate authorities to discuss the changes. 14

16 V. Gift-Ban Purpose of Statutory Change: To ensure that pension fund trustees are not influenced to make business decisions on any criteria other than what is in the best interest of the pension fund. P.A applies the gift-ban provisions of the State Officials and Employees Ethics Act (5 ILCS 430) to pension board trustees. PROHIBITED SOURCES Under the gift-ban provision, it is illegal for pension board trustees to accept gifts from a prohibited source. A prohibited source is specifically defined within P.A to include individuals or entities who: GIFTS Are seeking official action by either the full pension board or an individual pension board member; Are doing business, or seeking to do business with the pension board; Have personal or business interests that can be affected by the official duties of a pension board member; or Are required to be registered as lobbyists with the Secretary of State s Office. Gifts are defined within 5 ILCS 430/1-5 as follows: Gift means any gratuity, discount, entertainment, hospitality, loan, forbearance, or other tangible or intangible item having monetary value including, but not limited to, cash, food and drink, and honoraria for speaking engagements related to or attributable to government employment or the official position of the employee, member, or officer. Acceptable Gifts* P.A allows pension fund trustees to accept the following gifts from a prohibited source: 1. Educational Materials; and 2. Travel expenses for a meeting to discuss pension fund business. 15

17 MUNICIPAL ORDINANCE AUTHORITY Under P.A , municipalities may approve a gift-ban ordinance that is more restrictive than the prohibitions within the Public Act. In other words, municipalities can eliminate any of the exceptions provided to police and fire pension fund trustees by the new law. SUGGESTED ACTIONS Consult with your municipal attorney to determine if an existing gift-ban ordinance needs modification to include pension board trustees. Invite the pension fund trustees to a regular meeting of the corporate authorities to discuss the gift-ban provisions. *It should be noted that two views have emerged regarding the proper interpretation of the language that establishes what is or is not considered a permissible gift. One view interprets the gift ban language as being more restrictive. Under this interpretation, which is the interpretation offered within this compliance packet, pension fund trustees can only receive educational materials and certain travel expenses from a prohibited source. This more restrictive view is also consistent with the official interpretation rendered by the Illinois Department of Financial and Professional Regulation. An alternative view interprets the gift ban language as being less restrictive. Under this interpretation, pension fund trustees are permitted to accept all gifts for which there is an exemption under 5 ILCS 430/10-15 of the State Officials and Employees Gift Ban Act except for travel and missions. 16

18 VI. Role of Municipal Treasurer in Calculating Article 3 (Police) Benefits Purpose of Statutory Change: To reduce incorrect benefit awards. P.A requires that police pension boards provide to the municipal treasurer, in writing and before an annuity is officially awarded, the total amount of the annuity for a member and all information used to calculate the annuity.* The municipal treasurer should review the data and verify whether the calculation was done correctly. If the treasurer believes there to be an error, he or she must immediately notify the pension board. If the board agrees that an error has been made, the board shall re-calculate the annuity in accordance with the Illinois Pension Code. SUGGESTED ACTIONS Consult with your municipal treasurer or finance officer to make sure they are aware of this new calculation-verification obligation for police pension annuities. * A similar provision was not added for fire pension annuity calculations because the municipal treasurer often serves as a member of the firefighter pension board. 17

19 VII. Sharing IDFPR Compliance Audit with Mayor/Village President Purpose of Statutory Change: To ensure that the mayor/village president is made aware of instances where a pension fund may be out of compliance with State law. P.A provides for more frequent State compliance audits of police and fire pension funds. Before the new law, the state did not have to perform a compliance audit on any particular schedule. In practice, police and fire pension funds were subject to a compliance audit only once every ten years. Under the new law, the Illinois Department of Financial and Professional Regulation must perform a compliance audit of each pension fund once every three years. Compliance audits are not financial audits. The purpose of a compliance audit is to make sure that a pension fund is following State law. P.A requires that, after a compliance audit is conducted, the Department must submit a copy of the compliance audit to the mayor or village president. SUGGESTED ACTIONS Discuss the compliance audit findings at a regular meeting of the corporate authorities. Consider providing a copy of the compliance audit to the local media. 18