COMMONWEALTH OF PENNSYLVANIA May 16, 2013

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1 COMMONWEALTH OF PENNSYLVANIA May 16, 2013 PUBLIC EMPLOYEE RETIREMENT COMMISSION ACTUARIAL NOTE TRANSMITTAL Bill ID: Senate Bill Number 742, Printer s Number 772 System: Subject: All Municipal Pension Systems Act 205 Professional Services Contracts SYNOPSIS Senate Bill Number 742, Printer s Number 772, would amend the Municipal Pension Plan Funding Standard and Recovery Act (Act 205 of 1984) by altering the definition of professional services contract to exclude municipal pension systems with fewer than 100 active members from being required to develop and implement bidding procedures for entering into professional services contracts for investment services, legal services, real estate services, and other consulting services with respect to the municipal pension system. DISCUSSION The Municipal Pension Plan Funding Standard and Recovery Act (Act 205 of 1984) affects every borough, city, incorporated town, township, municipal authority, and council of governments in the Commonwealth. The Act requires actuarial reporting by municipal retirement systems, establishes a minimum funding standard for every municipal pension plan, provides for the allocation of General Municipal Pension System State Aid, and establishes a recovery program for financially distressed municipal retirement systems. Under Act 205, the Commission has three responsibilities. The first is to administer the actuarial valuation reporting program for municipal retirement systems that entails monitoring and enforcing compliance with the legislatively mandated actuarial funding standard and the biennial publication of municipal pension plan data for over 3,200 systems. The second is to annually certify municipal pension cost data used in allocating General Municipal Pension System State Aid (over $232 million in 2012). The last is to administer the Financially Distressed Municipal Pension System Recovery Program established by the Act. Act 44 of 2009 was signed into law September 18, 2009, making numerous and significant changes to Act 205. Act 44 made available a number of actuarial tools intended to provide short-term fiscal relief to local governments operating public pension plans. The Act also regulated the establishment and operation of Deferred Retirement Option Plans (DROPs), and added a section (section 7) that established certain conduct and disclosure standards for professional service contracts applicable to municipal pension systems.

2 ACTUARIAL NOTE TRANSMITTAL Senate Bill No. 742, P. N. 772 DISCUSSION (CONT D) Taken as a whole, the 3,228 local government pension plans now operating in the Commonwealth are the equivalent of a fairly large public employee retirement system, with a total active membership of approximately 74,000 and total assets of $13.5 billion. However, a review of the Commission s records reveals that the vast majority (3,066 or 98%) of these plans are small, having fewer than 100 active members, and with 68 percent (2,123 plans) having fewer than ten active members. The Commission s data has also consistently shown that the smaller the plan size, the greater the administrative costs of the plan. In 2011, the permember administrative costs for plans with fewer than 10 active members averaged $1, For plans having from 11 to 100 active members, the per-member administrative cost averaged $1, Surveys of public employee pension plans frequently use a threshold of 100 active members to categorize pension plans as either small or large, and the Commission has traditionally employed the 100 member threshold in its reporting. Prior to the passage of Act 44, small local governments most often engaged local businesses to provide actuarial, financial and other professional services for their pension plans without employing a formal bidding process. With the passage of Act 44, Section 702-A now requires all municipal pension plans subject to Act 205, regardless of size, to engage in a formal bidding process when contracting for services. The procedures include advertising to potential service providers, creation of applications and disclosure forms to be used for purposes of submitting proposals, and the manner in which such submitted proposals will be reviewed in order to select the most qualified person to enter into a professional services contract with the municipal pension system. This process can be time-consuming and expensive and is particularly onerous for small municipal pension plans, which make up the vast majority of municipal plans in the Commonwealth. The bill would limit the applicability of the Section 702-A contracting requirements to larger municipal plans having an active membership of 100 or more. In this way, the bill would have the beneficial effect of freeing small municipal plans from a time-consuming, costly, and unfunded state mandate. SUMMARY OF ACTUARIAL COST IMPACT The Commission s consulting actuary has reviewed the bill and determined that enactment of the bill would result in a reduction in the administrative costs associated with selecting individuals to enter into professional service contracts for most municipal pension systems subject to the requirements of Act 205. Since the bill does not affect the benefits provided under municipal pension systems subject to Act 205, there would be no actuarial cost impact resulting from enactment of the bill. -2-

3 ACTUARIAL NOTE TRANSMITTAL Senate Bill No. 742, P. N. 772 POLICY CONSIDERATIONS In reviewing the bill, the Commission identified the following policy considerations: Reduction in Administrative Cost to Municipalities. (+) The bill would serve to ease administrative complexity and reduce administrative costs in the affected local governments, and would prove particularly beneficial in those communities already facing significant fiscal challenges. Elimination of Unfunded State Mandate. (+) Section 702-A imposes an additional, state-mandated, administrative burden upon local governments, but provides no additional state funding to implement that mandate. The bill would serve to eliminate a costly and unfunded state mandate now imposed on many local governments. COMMISSION RECOMMENDATION The Commission voted to attach the actuarial note to the bill, recommending that the General Assembly and the Governor consider the policy issue identified above. ATTACHMENTS Actuarial Note provided by David H. Killick of Conrad Siegel Actuaries. Senate Bill Number 742, Printer s Number

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5 ConradSiegef.com May 9, 2013 Mr. James L. McAneny Executive Director Public Employee Retirement Commission P.O.Box 1429 Harrisburg, PA Re: Senate Bill No. 742, Printer's No. 772 Act Professional Services Contract Dear Jim: Pursuant to engagement, I have reviewed Senate Bill No. 742 and am hereby providing an actuarial note on such bill. The bill would amend the Municipal Pension Plan Funding Standard and Recovery Act (Act 205 of 1984) to change the definition of "professional services contract" by excluding municipal pension systems with less than 100 active members from the requirement to develop procedures for entering into a professional services contract for investment services, legal services, real estate services, and other consulting services with respect to the municipal pension system. Under Act 205, each municipal pension system shall develop procedures to select the most qualified person to enter into a professional services contract. The procedures include advertising to potential service providers, creation of applications and disclosure forms to be used for purposes of submitting proposals, and the manner in which such submitted proposals will be reviewed in order to select the most qualified person to enter into a professional services contract with the municipal pension system. This can be a very time-consuming process without any guarantee that the procedures will result in the most qualified person being chosen to enter into a professional services contract with the municipal pension system. If Senate Bill No. 742 is passed, municipal pension systems with less than 100 active members will no longer be required to develop such procedures and can choose the individuals to enter into professional services contracts with the municipal pension systems in an easier, less costly manner. In the most recent "Status Report on Local Government Pension Plans" issued by the Commission in December 2012 analyzing data from the 2011 actuarial valuation reports filed pursuant to Act 205 by municipal pension systems, it is noted that more than 98% of the pension plans being reported have less than 100 members. Therefore, passage of Senate Bill No. 742 will result in a reduction in the administrative costs associated with selecting individuals to enter into professional services contracts for most municipal pension systems subject to the requirements of Act 205.

6 Mr. James L. McAneny May 9, 2013 Page 2 Since Senate Bill No. 742 does not affect the benefits provided under municipal pension systems subject to Act 205, there is no actuarial cost associated with the passage of Senate Bill No With best regards, Yours sincerely, DHKismf David H. Killick, F.S.A. Consulting Actuary

7 PRINTER'S NO. 772 THE GENERAL ASSEMBLY OF PENNSYLVANIA SENATE BILL No. 742 Session of 2013 INTRODUCED BY LEACH, SCHWANK AND FONTANA, MARCH 26, 2013 REFERRED TO FINANCE, MARCH 26, 2013 AN ACT Amending the act of December 18, 1984 (P.L.1005, No.205), entitled, as amended, "An act mandating actuarial funding standards for all municipal pension systems; establishing a recovery program for municipal pension systems determined to be financially distressed; providing for the distribution of the tax on the premiums of foreign fire insurance companies; and making repeals," further providing for definitions and for procurement of professional services contracts. The General Assembly of the Commonwealth of Pennsylvania hereby enacts as follows: Section 1. The definition of "professional service contract" in section 701-A of the act of December 18, 1984 (P.L.1005, No.205), known as the Municipal Pension Plan Funding Standard and Recovery Act, added September 18, 2009 (P.L.396, No.44), is amended to read: Section 701-A. Definitions. The following words and phrases when used in this chapter shall have the meanings given to them in this section unless the context clearly indicates otherwise: * * * "Professional services contract." A contract to which [the]

8 a municipal pension system having 100 or more active members is a party that is: (1) for the purchase or provision of professional services, including investment services, legal services, real estate services and other consulting services; and (2) not subject to a requirement that the lowest bid be accepted. Section 2. Section 702-A(a) of the act, added September 18, 2009 (P.L.396, No.44), is amended to read: Section 702-A. Procurement for professional services contracts. (a) Procedures.--Each municipal pension system having 100 or more active members, including the Pennsylvania Municipal Retirement System, shall develop procedures to select the most qualified person to enter into a professional services contract. The procedures shall ensure that the availability of a professional services contract is advertised to potential participants in a timely and efficient manner. Procedures shall include applications and disclosure forms to be used to submit a proposal for review and to receive the award of a professional services contract. * * * Section 3. This act shall take effect in 60 days SB0742PN