Please retain this packet for Tuesday June 28 Council Session
GO Item 2
June 27, 2011
Worksession
MEMORANDUM
June 23, 2011
TO:
FR OM:
SUBJECT:
Government Operations and Fiscal Policy Committee
Robert
H.
Drummer, Senior Legislative Attorney
W
Worksession: Expedited Bill 17-11, Personnel- Other Post Employment
Benefits Trust County - funded Agency
Expedited Bill 17-11, Personnel - Other Post Employment Benefits Trust County­
funded Agency, sponsored by Council President Ervin, Councilmembers Navarro, Floreen,
Andrews, Riemer, Rice, Leventhal, EIrich, and Council Vice President Berliner was introduced
on May 26,2011. A public hearing was held on June 14.
Bill 17-11 would amend the Retiree Health Benefits Trust (RHB) to provide a funding
mechanism to pay for other post employment benefits (OPEB) for employees of Montgomery
County Public Schools (MCPS) and Montgomery College (College). The Council President
described the purpose of the Bill at ©16-17.
Background
The RHB was established by Bill 28-07, enacted on April I, 2008, to secure funding for
all or a portion of certain County benefit plans providing retiree health and life insurance
benefits. The RHB resulted from the implementation of Government Accounting Standards
Board (GASB) Statement 45,
Accounting and Financial Reporting by Employers for Post­
employment Benefits Other than Pensions.
Prior to the issuance of Statement No. 45 by GASB
(GASB 45), government financial statements reported the effect of these other retiree benefits
when they were paid. Since these retiree benefits are consideration for employee services
rendered, GASB 45 directs state and local governments to recognize the cost of these benefits
when the related employee services are received instead of when they are paid. GASB 45
became effective for jurisdictions with more than $100 million in revenue in FY08.
GASB 45 does not require funding the accrued expense, but credit rating agencies expect
state and local governments to do so. The Council adopted Resolution 16-87 on April 10,2007,
committing to fund the difference between the Other Post Employment Benefits (OPEB) pay-as­
you-go contributions and the annual required contribution on an amortized even basis over a
five-year period beginning in FY08. The Council appropriated $31.9 million in FY08 for the
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RHB. However, due to growing fiscal pressures in FY09, the Council changed the phase-in
schedule to eight years. In FYIO, the only tax supported OPEB appropriation was $12 million
for MCPS.l In FYII, there was no tax supported contribution for any agency. The RHB fund is
managed by the Board of Investment Trustees (BIT) in the same manner as the Board manages
investments for the County retirement plans. The BIT has broad authority to manage the
investments of the RHB trust fund through the use of investment managers consistent with the
Uniform Management of Public Employee Retirement Systems Act (UMPERSA). The funds
placed into the trust fund are held for the exclusive benefit of the participants in the County
retiree benefit plans.
Both MCPS and the College created their own separate OPEB Trusts, but funding is
subject to Council appropriation. The Bill would expand the RHB to enable funding for retiree
benefit plans operated by MCPS and the College. This consolidated approach to pre-funding
retiree benefit plans to achieve economies in administration and investment of funds has been
adopted in other jurisdictions, including Baltimore, Frederick, and Howard Counties. The Bill
would permit the Council to appropriate OPEB funding to the RHB on behalf of MCPS and the
College for the exclusive use of their retirees. The County Government Approved FY12
Operating Budget appropriated, in non-departmental accounts (NDA), $20 million for MCPS
OPEB funds and $1 million for College OPEB funds. These funds would be placed into the
consolidated RHB fund if the Bill is enacted.
The Bill would create a new Board of Trustees to manage the consolidated RHB
consisting of the existing 13 member BIT and 1 representative nominated by MCPS and 1
nominated by the College. The 2 additional trustees would be appointed by the Executive
subject to Council confirmation.
Public Hearing
All 3 witnesses represented an organization associated with MCPS. Christopher Barclay,
President of the Board of Education (©2I-22), Dr. Stephen Raucher, Vice President of the
MCPS Retirees Association (©23-24), and Doug Prouty, MCEA President (©2S-27), each
argued that the Bill was a solution to a problem that does not exist, that a consolidated OPEB
Trust Fund would increase administrative costs, and that MCPS should have a greater
representation on the Board of Trustees. Montgomery College did not testify.
Issues
1.
What is the fiscal impact of the Bill?
The OMB Fiscal Impact Statement (©IS-20) states that the Bill would have no
significant fiscal or economic impact. As OMB points out, the consolidation of the MCPS and
College OPEB funds with the County OPEB fund will ultimately reduce administrative and
investment fees, but this reduction is not expected to have a significant effect on the County's
fiscal resources. MCPS argued in their testimony that the MCPS OPEB fund has no
administrative fees and that the Bill would increase their fees. However, the $37 million in the
MCPS fund is currently managed by investing in index mutual funds. The County fund is
I
MCPS diverted the $12 million appropriated for OPEB to fund a savings plan in FY I
o.
2
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actively managed. An outline of the RHB fund management process and policies is attached at
©20. As the amount in the fund grows, active management is appropriate.
It
is our
understanding that the costs incurred by the current MCPS OPEB fund are not charged to the
OPEB trust but are charged instead to other MCPS departments. Administrative costs for the
County OPEB fund are charged to the trust. The charges totaled $31,000 in FYIO and are
projected at $38,000 in FYI
1.
2. Does the consolidated trust comply with GASB reporting rules for OPEB liabilities?
MCPS argues that, under GASB 45 reporting rules, the requirement in the Bill for a
Council appropriation resolution to pay for MCPS retiree health benefits from the fund may
prevent MCPS from showing this fund on its financial statements as available to pay for retiree
benefit plans. MCPS argues that they must have control over the funds in order to show these
funds as an asset on its Comprehensive Annual Financial Report (CAFR). MCPS financial staff
indicated to Council staff that this is currently an unanswered question. However, the answer is
unimportant. The MCPS CAFR will either show this fund as an asset or as a footnote to the
CAFR explaining that this money is in the Consolidated Retiree Health Benefits Trust and must
be used to pay for MCPS retiree health benefits.
GASB 45 does not require pre-funding of OPEB expenses. Pre-funding these future
expenses is important to demonstrate financial stability to the credit rating agencies. The County
issues bonds for MCPS capital expenses, not MCPS.
It
is the County's credit that is rated for
these bonds. Pre-funding OPEB expenses is only critical to the County's credit rating.
3. Will the Bill reduce MCPS retiree health benefits?
MCPS, MCEA, and MCPS Retirees Association all argued at the public hearing that the
Bill would reduce MCPS retiree health benefits. Council staff disagrees. Under current State
law, the Council does not have line item appropriation authority. The Council appropriates funds
for MCPS in broad statutory categories. Retiree health expenses are part of Category 12, Fixed
Charges, which is defined as "Costs not readily allocable to other categories."
It
includes
primarily health insurance and benefits for active and retired employees, loan interest, tuition
reimbursement for staff, and salary and other costs for employees directly related to benefit plan
administration. MCPS can move funds between these line items within Category 12 without
Council approval.
In
FY10, the Council included $12 million in the Category 12 appropriation
for the MCPS OPEB trust, but MCPS used the funds for its savings plan. The Bill would permit
the Council to ensure that OPEB funds are in fact placed in the OPEB trust. All funds placed by
the Council in the Consolidated RHB must be used for MCPS retiree benefit plans.
MCPS, MCEA, and MCPS Retirees Association also object to the language in the Bill
stating that the creation of the trust does not create an obligation of the County to provide retiree
benefit plans. This provision is only intended to prevent an argument that the Bill creates a
County contractual duty to fund MCPS retiree benefit plans. This statement does not increase or
decrease any contractual rights MCPS employees or retirees may have for these benefits.
4. Does the Board need to adopt different investment strategies for different groups of
employees?
3
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MCPS also argued that the consolidated trust would need to adopt different investment
strategies for different groups of employees. Again, Council staff disagrees. MCPS points out
that the MCPS benefit plan is different from the County plans. While this may be true, the
investment strategy for any retiree benefit plan would be similar. The RHB currently invests
funds for several participating agencies with different retiree benefit plans, including the County
Revenue Authority, Strathmore Hall Foundation, Montgomery County Employees Credit Union,
Department of Assessments and Taxation, Housing Opportunities Commission, Washington
Suburban Transit Commission, and the Village of Friendship Heights. In addition, the County
Retirement fund manages investments for different County employee groups with vastly
different retirement plans. The different retiree benefit plans would not change the benchmark
rate of return for the fund - currently 7.5%. The fund actuary considers the different retiree
benefit plan components when calculating the required annual contribution.
5.
Should MCPS and the College have greater representation on the Board of Trustees?
MCPS, MCEA, and MCPS Retirees Association all argue that MCPS should have greater
representation on the Board of Trustees. The Bill would create a Board that includes the current
13 members of the Board of Investment Trustees and one additional member from MCPS and
one additional member from the College. While this is not proportional to the percent of assets
in the trust designated for each County-funded agency, all of the funds in the trust are
appropriated by the Council. As described above, pre-funding of OPEB benefits is most
important to the County's credit rating. In addition, expanding the Board beyond 15 members
could make the Board's operation unwieldy. Council staff recommendation: do not expand
the Board to add more members representing MCPS and the College.
6. Should the
Bill
expressly include prescription drug plans?
OHR representatives noted that the definition of retiree benefit plan does not expressly
include a prescription drug plan. Although some health plans include prescription drug benefits,
some do not. The County provides separate prescription drug plans to supplement the health
plans that do not include these benefits. OHR recommended that the Bill be amended to
expressly add "prescription drug plan" on line 23 of the Bill Council staff recommendation:
amend line 23 to expressly include "prescription drug plan."
7. Should the Executive be permitted to appoint a representative for a County funded
agency even if the agency does not nominate a candidate?
The Bill would require the Executive to appoint a member nominated by MCPS and a
member nominated by the College. The Bill does not contain a default mechanism for an
appointment of a County-funded agency representative if the agency fails to nominate a
candidate. Although unlikely, this could prevent the Executive from appointing anyone.
Council staff recommendation: amend the Bill to make the nomination by a County-funded
agency pennissive, but not mandatory. The following amendment would accomplish this:
Amend lines
87-95
as/ollows:
ill
The County Executive must appoint, subject to County Council
confinnation, 1 voting member who may be nominated
Qy
the
4
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Montgomery County Board of Education, who must serve indefinitely
while remaining the designee of the Montgomery County Board of
Education.
ill
The County Executive must appoint, subject to County Council
confinnation,
1
voting member who may be nominated
J2y
the Board of
Trustees of Montgomery College, who must serve indefinitely while
remaining the designee of Montgomery College.
8. Should the Council adopt the Bill?
MCPS, MCEA, and MCPS Retirees Association all vigorously oppose the Bill. The
College has not taken a position. The major arguments expressed by the opponents have been
described above. The Bill would create a consolidated trust to include OPEB pre-funding for all
County-funded agencies. This is the only method under current State law for the Council to
ensure that all funds appropriated for OPEB pre-funding are used for this purpose. Despite the
protests from MCPS, the Bill would enhance funding for MCPS retiree benefit plans. The
current $38,000 annual administrative cost to operate the RHB should not increase due to the
additional funds designated for the County-funded agencies.
Council staff recommendation:
enact the Bill with the amendments proposed above.
This packet contains:
Expedited Bill 17-11
Legislative Request Report
Council President Memo
Fiscal Impact Statement
Testimony
Christopher Barclay
Dr. Stephen Raucher
Doug Prouty
Retiree Health Benefits Trust Overview
Circle
#
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16
18
21
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Exped ited Bill No. _--,1 --,1,-,-1:-:-_=-_
.....
7
Concerning: Personnel - Other Post
Employment
Benefits Trust
County-funded Agency
Revised: 5 -23 -11 Draft No . .><.. 8_ _
Introduced:
May 26,2011
Expires:
November 26,2012
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date:
...!.N.!..!:o~n~e
_ _ _ _ __
Ch. _ _, Laws of Mont. Co. _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President Ervin, Councilmembers Navarro, Floreen, Andrews, Riemer, Rice,
Leventhal, EIrich, and Council Vice President Berliner
AN EXPEDITED ACT
to:
(1)
amend the Retiree Health Benefits Trust to provide a funding mechanism to pay
for other post employment benefits for employees of certain County-funded
agencies; and
(2)
generally amend the law governing post employment benefits.
By amending
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-158, 33-159,33-160,33-161,33-162,33-165,33-166, and 33-168
By adding
Montgomery County Code
Chapter 33, Personnel and Human Resources
Section 33-169
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double
boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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Expedited Bill No. 17-11
1
Sec.
1.
Sections 33-158, 33-159,33-160,33-161,33-162,33-165,33-166,
and 33-168 are amended and Section 33-169 is added as follows:
33-158.
Definitions.
2
3
4
In this Article, the following words and phrases have the following
meamngs:
[(a)]
Board:
The Consolidated Retiree Health Benefits Trust
Bo~d
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6
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[of
Investment Trustees] established under [Article III] Section 33-160.
[(b)]
Contribution:
payment made to the Trust Fund by the County to
~
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benefits for County retiree benefit plans or !! County-funded agency retiree
benefit plan.
County:
Montgomery County Government.
County-funded agency:
Montgomery College and Montgomery County
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12
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Public Schools.
[(c)]
Custodian:
The County Director of Finance.
[(d)]
Investment manager:
a person or entity who exercises discretion to
manage all or part of the assets of an institutional investor.
[(
e)]
15
16
17
18
19
20
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Participating Agency:
an agency eligible to participate
III
County
benefit plans under Section 20-37(b) which elects to participate in any
County retiree benefit plan.
[(f)]
Retiree benefit plan:
any retiree medical plan, dental plan, vision plan,
or life insurance plan maintained .Qy the County and administered by the
Chief Administrative Officer. Depending on the context,
retiree benefit plan
may also refer to !! retiree medical plan, dental plan, vision plan, or life
insurance plan established and maintained.Qy!! County-funded agency_
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23
24
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Expedited BiI1 No. 17-11
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[(g)]
Trust Fund:
the Consolidated Retiree Health Benefits (RHB) Trust
Fund established to pay all or part of the benefits provided under any retiree
benefit plan.,. including
f!
County-funded agency retiree benefit plan.
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33-159.
(a)
Establishment of Trust.
County Retiree Benefit Plans.
The Chief Administrative Officer must
include the tenns of any County retiree benefit plan, including
eligibility and benefits,
including those benefits
collectively
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32
bargained, in a plan document. All benefits must meet any applicable
Federal or State requirement.
Subject to the County's obligations
33
34
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under collective bargaining agreements and the collective bargaining
laws, to the extent applicable, the Chief Administrative Officer may
amend a plan document at any time.
Subject to the County's
obligations under collective bargaining agreements and the collective
bargaining laws, to the extent applicable, any retiree benefit plan may
be tenninated at any time for any reason.
No retiree benefit is
39
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guaranteed, except as expressly provided by a contract entered into by
the County.
(b)
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43
44
Establishment of Trust.
An Other Post Employment Benefits Trust,
known as the Consolidated Retiree Health Benefits (RHB) Trust,
[effective July 1,
2007,)
is established to fund all or a portion of
benefits provided under the County retiree benefit plans or
f!
County­
funded agency retiree benefit plan. The Trust is intended solely as a
funding mechanism to pay for County or County-funded agency
retiree benefits provided under the tenns of any applicable retiree
benefit plan, and does not create any obligation by the County to
provide any benefit listed in any County or County-funded agency
retiree benefit plan. Any participant in a retiree benefit plan, any
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(j)
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Expedited Bill No. 17-11
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current or former County or
~
County-funded agency employee, or
any current or former participating agency employee, has no right to
any asset in the Trust fund.
The Trust Fund may be, but is not
required to be, the sole source of funding for any County or County­
funded agency retiree benefit plan.
(c)
57
58
59
Type ofTrust.
The County intends that the Trust Fund:
(1)
be used to perform its essential government function of
providing benefits, including health and life insurance benefits,
to participants and eligible dependents; and
(2)
qualify as a tax exempt trust under Internal Revenue Code
Section 115.
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(d)
Assets of Trust Fund.
All contributions and all earnings and other
additions, less payments, constitute the assets of the Trust Fund.
ill
County-funded agency Participation.
A County-funded agency may
participate in the Trust Fund as
benefit plans.
~
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funding mechanism for its retiree
A participant in any County-funded agency retiree
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benefit plan, or any current or former employee of
~
County-funded
agency, has no right to the assets in the Trust Fund. The County is not
responsible for establishing, maintaining, or providing any benefit for
any County-funded agency retiree benefit plan.
[(e)]
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Exclusive Benefit.
The Trust Fund must be held for the
exclusive benefit of participants in retiree benefit plans and eligible
dependents, and used only to provide benefits and defray reasonable
expenses of administering retiree benefit plans.
Trust Fund assets
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Expedited Bill No. 17-11
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must not revert to the County or
~
County-funded agency unless the
County or the County-funded agency terminates all retiree benefit
plans. Some funds may partially revert to the County if at least one
benefit plan is terminated under Section 33-166.
33-160.
Board of Trustees.
ill!
Establishment.
The Consolidated Retiree Health Trust Board of
The Board has
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Trustees is established to manage the Trust.
members.
12
.chl
Membership.
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Each member of the Board of Investment Trustees established
under Section 33-59 is also
~
member of the Board.
The County Executive must appoint, subject to County Council
confirmation,
1
voting member nominated
.Qy
the Montgomery
County Board of Education, who must serve indefinitely while
remaining the. designee of the Montgomery County Board of
Education.
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ill
The County Executive must appoint, subject to County Council
confirmation,
1
voting member nominated
.Qy
the Board of
Trustees of Montgomery College, who must serve indefinitely
while remaining the designee of Montgomery College.
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Vacancies.
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A trustee who is absent from more than 25 percent of the
scheduled meetings of the Board during any 12-month period
has resigned from the Board. Scheduled meetings mean
meetings held at least
1
days after notice of the meeting.
ill
A vacancy on the Board must be filled for the unexpired term in
the same manner as the previous trustee was appointed.
(0
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III
@
Compensation.
The trustees must serve without compensation from
any source for service rendered to the Board, except that an active
employee trustee may receive administrative leave to serve on the
Board. The Board must reimburse
!!
trustee for any expense approved
Qy
the Board. A trustee must not receive reimbursement for expenses
from any other source.
(£}
Written policies.
The Board must establish written policies to
administer and invest the funds created
Qy
this Article and to transact
the business of the Trust Fund.
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ill
Officers.
The Board must select
!!
chair, vice chair, and secretary
from the Board's members.
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116
ill
The chair must preside at meetings of the Board and may take
administrative action, including executing an instrument, on
behalf of the Board. A person may rely in good faith on an act
of the chair as legally valid.
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ill
The vice chair must perform the duties and exercise the powers
of the chair when the chair is absent from the County or
disabled, or the Board determines
perform the duties of the chair.
IS
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otherwise unable to
ill
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The secretm must record the proceedings and actions of the
Board and may certify
!!
document or action of the Board. A
person may rely in good faith on the secretary's certification as
proof of the document or action.
(g)
Meetings and actions.
127
128
ill
The Board must meet at least once during each calendar
quarter. The chair, or
li
members of the Board, may call
!!
meeting of the Board, in the manner and at times and places
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Expedited Bill No. 17-11
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provided under the policies of the Board. The Board is
£1
public
body under the State Open Meetings Act.
ill
A.
B.
Eight trustees constitute
f!
quorum.
Each trustee has one vote.
Eight trustees must agree for the Board to act.
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143
C.
ill
The Board may act without
£1
meeting. All of the trustees must
concur in writing for the Board to approve any action the Board
takes without
f!
meeting.
ill
ill
The Board may adopt procedures consistent with this Section.
The Board may authorize
f!
trustee to execute instruments on
behalf of the Board. The authority must be in writing and
specifically describe the instrument and how the trustee must
execute the instrument.
(b}
Records.
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145
ill
The Board must keep investment accounts and records
necessary to calculate the value of each retiree health benefit
trust fund and evaluate the experience and performance of the
Trust Fund.
146
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ill
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The Board may designate
f!
person to maintain the records.
Accounts and records are subject to State law on public records.
With the Council's approval, the County
Removal
Q[
trustee.
151
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153
Executive may remove
£1
trustee for violating this Article or other
good cause.
ill
(k}
Legal adviser.
The County Attorney is the legal adviser to the Board.
Management.
[The Board of Investment Trustees established under
154
155
Section 33-59 is responsible for managing the Trust Fund.]
The
156
Board must hold legal title to all assets of the Trust Fund, but may
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transfer some incidents of ownership to the Board's agents as
provided in this Article. The powers and duties of the Board under
this Article are not effective until the Board members have accepted
the Trust Fund in writing. Within 10 days after the Council confirms
a Board member, the member must certify in writing to the Chief
Administrative Officer that the member accepts the Trust Fund and
will administer its affairs with care, skill, prudence, and diligence.
33-161.
Contributions and payments.
(a)
County Contributions.
The County may contribute to the Trust Fund
those amounts that the Council appropriates.
The County is not
required to make any contribution to the Trust Fund unless a written
contract with one or more beneficiaries so requires.
(b)
County-funded Agency Contributions.
The County may contribute to
the Trust Fund, on behalf of
~
County-funded agency, those amounts
that the County Council appropriates. A County-funded agency may
also make contributions to the Trust Fund in its discretion.
Notwithstanding the preceding sentence, the County must make any
contribution necessary to
~ ~
County-funded agency's pro rata cost
of the expenses of the Trust Fund. Contributions to the Trust Fund
made on behalf of
~
County-funded agency or
Qy
~
County-funded
agency must be attributed to the County-funded agency for actuarial
valuation and financial reporting.
[(b)]
(ill
Acceptance of Contributions.
The Board must accept all
contributions deposited in the Trust Fund and held by the custodian as
Trust Fund property. The Board is not responsible for calculating or
collecting any contribution, but is only responsible for contributions
deposited to the Trust Fund and amounts held in the Trust Fund. The
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Board must separately account for any contribution made on behalf of
~
County-funded agency and earnings and expenses attributable to
that contribution.
[(c)]
@
Payments.
Payments for County Retiree Benefit Plans.
Payments may be
made from the Trust Fund attributable to the County in those
amounts directed by the Chief Administrative Officer only to
pay for all or part of the benefits provided by any County retiree
benefit plan, administrative expenses relating to a retiree benefit
plan.1 and expenses of the Trust Fund. The Board is not liable
for any payment directed by the Chief Administrative Officer
and is not required to confirm compliance with any retiree
benefit plan.
ill
ill
Payments for
f!:.
'County-funded Agency Retiree Benefit Plan.
The Chief Administrative Officer may direct that payments be
made from the Trust Fund attributable to
agency as authorized
hy
~
~
County-funded
County Council appropriation
~
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203
resolution. Payments from the Trust Fund must be used to
for all or part of the benefits provided
hy
~
County-funded
agency retiree benefit plan and expenses of any County-funded
agency retiree benefit plan. The Board is not liable for any
payment made under the direction of the Chief Administrative
Officer and has no responsibility to confirm compliance with
any retiree benefit plan.
[(d)]
~
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Expenses.
The Board must be reimbursed for expenses solely
incurred in the administration of the Trust Fund and must pay from
the Trust Fund expenses reasonably incurred by the Chief
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Expedited Bill No. 17-11
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Administrative Officer to administer any County retiree benefit plan
to the extent that those expenses have not been paid by the County.
The Board may pay expenses incurred under Section 33-162(h)(11)
without direction of the Chief Administrative Officer.
The Chief
Administrative Officer may direct the Board to
lli!Y
expenses
reasonably incurred
Qy
retiree benefit plans.
33-162.
Trust Fund management.
~
County-funded agency to administer its
*
(i)
*
*
Prohibited Transactions.
The Board must not engage In any
transaction between the Trust and the County or any entity controlled
by the County, including
~
County-funded agency, or a participating
agency in which the Board:
(1)
lends any part of its Income or corpus without reCeIVIng
adequate security and a reasonable rate of interest;
(2)
pays any compensation more than a reasonable allowance for
salaries or other compensation or services actually rendered;
(3)
(4)
makes any service available on a preferential basis;
makes any substantial purchase of securities or other property
for more than adequate consideration;
(5)
sells any substantial part of its securities or other property for
less than adequate consideration; or
(6)
engages in any transaction which results In a substantial
diversion of its income or corpus.
0)
To comply with Section 315 of the County Charter, a firm of certified
public accountants, under contract with the Council, must complete an
annual independent audit of the Trust Fund. The complete audit must
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Expedited Bill No. 17-11
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be filed with the Council and each County-funded agency, and copies
made available for public inspection.
33-165.
Indemnification of Board Members.
*
(h)
*
*
County Attorney.
(I)
The County Attorney must determine whether a Board member
is eligible for indemnification with respect to any matter and
the reasonableness of any fee, expense, or settlement.
(2)
Unless the County Attorney approves the settlement, a Board
member cannot settle a claim against another Board member
usmg:
(A)
(B)
(Q
County funds;
funds of a participating agency;
County-funded agency funds;
[(C)]
[Q)
funds provided by a self-insurance program of the
County; or
[(D)]
®
funds provided under a policy the County has with an
msurance company.
33-166.
Amendment and Termination.
(a)
Termination.
Except on termination, no part of the Trust Fund may
revert to the County or a participating agency or be used for any
purpose other than the exclusive benefit of participants of a retiree
benefit plan. If all County retiree benefit plans are terminated and all
benefit claims and expenses are paid, any remaining assets in the
Trust Fund relating to contributions made by the County and
participating agencies must revert to the County and the participating
agenCIes. The Trust Fund must terminate in its [entirely] entirety on
®
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the earlier of the termination of all County retiree benefit plans or the
depletion of the Trust Fund. Funds may partially revert to the County
or participating agencies if one or more retiree benefit plans is
terminated.
When a County or
~
County-funded agency retiree
benefit plan is terminated, the assets in the Trust Fund attributable to
that plan after expenses and benefits have been paid must revert to the
County and the participating agencies as provided in the adoption
agreement. If the County terminates all of its retiree benefit plans and
~
County-funded agency continues to maintain at least one retiree
benefit plan, the assets attributable to each County-funded agency
retiree benefit plan must be transferred to
~
trust which meets the
requirements of Internal Revenue Code Section 115.
(b)
Amendments.
Any provision of this Article may be amended at any
time. No amendment may:
(1)
authorize any part of the Trust Fund to be used for any purpose
other than the exclusive benefit of participants of retiree benefit
plans and eligible dependents; or
(2)
cause or allow any part of the Trust Fund to revert to or become
the property of the County or
~
County-funded agency, except
33-167~
as provided in Sections
33-166(a)~
[or]
or 33-169.
*
33-168.
Protection from Creditors.
*
*
Any asset held by the Trust Fund is not subject to any creditor of the County
or a County-funded agency and is exempt from execution, attachment, prior
assignment, or any other judicial relief or order for the benefit of any creditor or
third person.
33-169.
County-funded Ag:ency Participation.
@
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Expedited Bill No. 17-11
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301
302
303
304
305
306
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308
309
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311
312
313
(ill
County Liability.
Except for any obligation to refund or transfer
assets under subsection
(Q}
or
!£1
no legal liability for benefits must
accrue to the County
Qy
including
Trust Fund.
~
County-funded agency in the
®
Termination gf Participation
f2x
{l
County-funded Agency.
Any Trust
Fund assets must not revert to
~
County-funded agency. Assets may
partially revert to the County if
~
County-funded agency terminates at
least one retiree benefit plan.
Only funds attributable to the
terminated retiree benefit plan, after benefits and expenses have been
paid, may revert to the County.
(ill
Transfer gf Trust Fund:
If the County decides to terminate
~
County­
funded agency's participation in the Trust Fund, the County must
notify the County-funded agency in writing. If the County-funded
agency continues to maintain
transferred to
~
~
retiree benefit plan, assets must be
trust which meets the requirements of Internal
Revenue Code Section 115. Any transfer of assets from the Trust
Fund resulting from the termination of participation in the Trust Fund
must comply with the Internal Revenue Code.
Sec. 2.
Transition.
The Consolidated Health Benefits Trust Fund mentioned in County Code
§33-159, as amended by Section 1 of this Act, does not create a new trust. The
Trust Fund is the same legal entity first created in County Code §33-159 and
inserted by Chapter 3, Laws of Montgomery County 2008. Any reference to the
Retiree Health Benefits Trust in any document produced before the effective date
of this Act must be treated as referring to the Consolidated Retiree Health Benefit
Trust referenced in County Code §33-159, as amended by Section 1 of this Act.
314
315
316
317
318
Sec. 3.
Expedited Effective Date.
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OPES
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Expedited Bill No. 17-11
319
320
The Council declares that this legislation is necessary for the immediate
protection of the public interest. This Act takes effect on July 1, 2011.
Approved:
321
322
323
Valerie Ervin, President, County Council
324
Date
Approved:
325
Isiah Leggett, County Executive
326
Date
This is a correct copy ofCouncil action.
327
Linda M. Lauer, Clerk of the Council
Date
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LEGISLATIVE REQUEST REPORT
Expedited Bill 17-11
Personnel- OPEB Trust County-funded Agency
DESCRIPTION:
Amend the Retiree Health Benefits Trust to provide a funding
mechanism to pay for other post employment benefits for employees
of the Montgomery County Public Schools and Montgomery College.
Small OPEB Trust funds created by each County-funded agency
require a duplication of effort to manage. Each separate OPEB Trust
is funded by Council appropriation.
To consolidate the separate OPEB Trusts created by the County,
MCPS and the College to achieve economies in administration and
management.
Finance, County Attorney, OMB, OHR
To be requested.
To be requested.
To be requested.
Baltimore, Frederick, and Howard Counties created
consolidated OPEB Trusts.
Robert H. Drummer, Senior Legislative Attorney
Not applicable.
similar
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIPALITIES:
PENALTIES:
Not appJicable.
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MONTGOMERY COUNTY COUNCil
ROCKVILLE,
MARYLAND
OFFICE OF
THE COUNCIL PRESIDENT
MEMORANDUM
May 16,2011
TO:
FROM:
SUBJECT:
County Council
Valene
Ervin~~cil
President
Pre-funding Retiree Health Benefits
Starting in 2003, the Council has focused on the importance of pre-funding retiree health
benefits, or OPEB (Other Post Employment Benefits). Actuarial advisers for the four County tax
supported agencies have estimated the total liability associated with providing these benefits for
current and future 'retirees at $3.6 billion. As
both
health care costs and the numbt-r of retirees
continue to rise sharply, the agencies will not be able to cover the annual expense on a pay-as­
you-go basis, as they have done to date.
To meet the Annual Required Contribution (ARC) needed to meet future obligations, pre­
funding through a trust vehicle is essential. The agencies have all established retiree health
benefits trusts, but the severe fiscal pressures of the past several years have sharply restricted
funding for the trusts. For PY08 the Council set a five-year schedule for the agencies to phase in
their pre-funding and budgeted $31.9 million for the first year. For FY09, in view of"growing
fiscal pressures, the Council extended the phase-in schedule to eight years. For FYIO the only
ta'\. supported OPEB appropriation was $12 million for MCPS. For FYI1, an extTemely difficult
year, there was no tax supported contribution for any agency.
I
For FYI2 the Executive proposed to resume tax supported funding at a total level of
$49.8 million: $26.1 million for County Government, $20.0 million for MCPS, $1.0 million for
Montgomery College, and $2.7 million for M-NCPPC. This funding would represent a start
toward returning to a clear phase-in schedule for all agencies.
If the County had followed the five-year phase-in schedule that was approved four years ago, the total FY 11 tax
supported contribution for all four agencies would have been
$149
million. Non-tax supported cor.tributions from
proprietary funds and participating outside agencies, however, have consistently been made. On
May
9 the Council
supported $12.1 million in FY12 funding for this purpose.
1
2AOITi7-7'i100
TTY 240/777'7914 • FA;< 240/777·7589
WWW,MONTGOM",,,YCOVNTYMD,GOY
g
P"'''TEO ON RECVCLEO PAPER
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Based on the Council's recent discussions of this issue, I suggest two steps:
First, to provide a more coherent and consistent approach to pre-funding retiree health
benefits starting in FY12, I will introduce legislation to enable MCPS and Montgomery College
to participate in a consolidated County retiree health benefits trust? Many jurisdictions,
including Baltimore, Frederick, and Howard County, have adopted a consolidated approach to
achieve economies in administration and investment of funds, including lower fees and access to
investment managers with minimum asset requirements. Such an approach will also make the
Council's annual OPEB funding decisions clearer and more transparent. This will benefit both
the agencies and their retirees.
Second, I suggest that we place the proposed FY12 OPEB contributions for MCPS ($20.0
million) and the College ($1.0 million) in separate County Government Non-Departmental
Accounts, one on behalf of each agency, for transfer to the consolidated trust after the bill has
been enacted.
I believe that these steps
will
help all agencies meet their commitments to their retirees in
a fiscally responsible way.
The legislation would provide representation on the consolidated trust's governing board and would base each
agency's share of trust assets on its contributions and on earnings on the contributions. The existing trusts of both
agencies would continue to be a source of future funding of retiree health benefits. Since M-NCPCC is a bi-county
agency, its participation would require collaboration with Prince George's County.
2
2
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OFFICE OF MANAGEMENT AND BUDGET
Isiah Leggett
County Executive
Joseph
F.
Beach
Director
MEMORANDUM
June 10, 2011
TO:
FROM:
SUBJECT:
Valerie Ervin, President,
~~
Joseph F. Beach. Director
p
Other Post Employment Benefits Trust County­
Expedited Bill 17-11, Personnel
funded Agency
The purpose ofthis memorandum is to transmit a fiscal and economic impact statement
to the Council on the subject legislation.
LEGISLATION SUMMARY
The proposed legislation amends the ROOree Health Benefits Trust to provide a funding
mechanism to pay for other post employment benefits for employees ofthe Montgomery County Public
Schools and Montgomery Col1ege. The legislation also changes the composition ofthe Trust's governing
board by adding two representatives, one representative nominated by the Montgome.ry County Board of
Education and one nominated by the Board ofTrnstees ofMontgomery College, in addition to the
.
existing 13 members ofthe County's Board ofInvestment Trustees, which currently oversee the
investment ofthe Trust assets. These two additional members would be appointed by the County
Executive subject to Council conficmation. The name ofthe Trust, as well as the governing board, will
change to the Consolidated Retiree Health Benefits Trust
Funding ofthe Trust is subject to Council's appropriation and each agency's share of
Trust assets is allocated based on their contributions and earnings, less applicable expenses. In addition,
the existing
trusts
of both the Montgomery County Board ofEducation and Montgomery CoJlege would
continue to be a source of future funding of their retiree health benefits.
FISCAL AND ECONOMIC SUMMARY
Neither the establishment of the consolidated
trust
nor the larger size of the Consolidated
Retiree Health Trust Board of Trustees is expected to have a significant fiscal impact on the County.
Increased Trust Fund assets
will
provide economies of scale resulting
in
the Board gaining exposure to
investment managers
that
have minimum asset size requirements and should result in lower investment
fees due to the larger size of the asset pool. The current
8-year
retiree health henefit'J funding schedule is
attached.
of the Director
101 Momoe Street, 14th Floor· Rockville, Maryland 20850 • 240-777-2800
www.lllontgomerycountymd.gov
®
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Valerie Ervin, President, County Council
June 10,2011
Page
2
The legislation has no significant economic impact; any reduction
in
fee payments or
administrative cost savings would be small relative to the Montgomery County economy as a whole.
The following contributed to and concurred with tbis analysis: Linda Herman, Board of
Investment Trustees, Michael Coveyou, Department ofFinance, and
Lori
O'Brien, Office of Management
and Budget.
JFB:lob
c: Kathleen Boucher, Assistant Chief Administrative Officer
Lisa Austin, Offices of the County Executive
Karen Hawkins, Acting Director, Department ofFinance
Linda Herman, Director. Board of Investment Trustees
Michael Coveyou, Department ofFinance
Lori O'Brien, Office ofManagement and Budget
John Cuff, Office of Management and Budget
Amy Wilson, Office ofManagement and Budget
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Fiscal
Update:
OPES Valuation
June 30,
2010
Actuarial Valuation
As
of June
311,
201 II
(2)
Actuarial
Accrued
Uability
(AAl.)
Annual
Required
Contribution
!ARC)
Eight -Year Phase In (3!
Actual
Budgeted
Projected
FY2008
$14,020.000
16,060,000
606,400
1,210,500
~1,896,900
FY2OO9
FY2010
$ 3,308,070
12,000,000
FY2011
$7,288,290
FY2012
$38,173,430·
20,000.000
1.000,000
2.559,850
FY21113
$ 69,480,000
78,296.000
2,368.000
6.286,000
$156.430.000
FY2014
$ 73.119.000
90,589,000
2,738,000
7,074,400
FY2015 (4)
FY201G
FY2017
County
Public Schools
College
M-NCPPC(1)
TotalTax-Supported
$1,737,436,000
1,360,980,000
69,049.415
128,681.685
$3.g~147.1
00
$147,582,000
131,690,000
5.696.322
11.779,785
$296.748.107
$19,700,000
18,300,000
700,000
1,900.000
$40.600.000
$ 69.262.000
101.363,000
3.054,000
7,704,800
$ 68,382.000
98,009,000
2.894,000
7.226.500
$
68,068,000
94.183,000
2,685,000
6,779,200
$15,308,070
$7.£88.290
$61.
733.2~~0.
$1'73,52Q.400· $181.3133.800
$176,511.501) $111.715,200
(1)
Montgomery County portlon
is
45%
of
total
plan.
(2)
Represents amounls projectetl
as of
July
1, 2010 (FY11).
(3) Additional
prefundlng amounts,
above anti beyond pay-as-you-go,
to
fully fund
the ARC
by
FY2015.
(4) First year
of
full prefunding of the ARC.
®
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)
Testimony of Montgomery County Board of Education
before the County Council
Expedited Bill 17-11, Personnel-Other Post Employment Benefits Trust­
County-Funded Agencies
June
14,
2011
Good afternoon. I am Christopher S. Barclay, president of the Montgomery County Board of
Education. I am here to provide testimony regarding Bill 17-11 to "amend the Retiree Health
Benefits Trust to provide a funding mechanism to pay for other post employment benefits for
employees of certain County-funded agencies."
The memorandum from Council President Ervin to the Council states that the purpose of the
proposed bill is to "achieve economies in administration and investment of funds, including
lower fees and access to investment managers with minimum asset requirements." There is no
evidence, however, that this legislation can achieve that laudable goal or that
it
is even needed.
The guiding question should be this: What problem are you trying to solve with this legislation?
The proposed legislation is lacking in detail. There have been no inquiries regarding the costs of
the various agencies to manage funds or if there are opportunities regarding access to managers
at lower fees. In the case of Montgomery County Public Schools (MCPS), our investment
officer is already managing a $1 billion pension fund and the previous contributions to the Other
Post-Employment Benefits Plan (OPEB Trust). We already have low cost management fees and
access to investment managers. I would remind Council members that our trust was set up in
collaboration with all other county agencies, at the request of the Council, in order to have a
prudent, consistent approach to the funding of these liabilities.
There are serious legal issues that must be carefully considered and addressed. The OPEB Trust
created by MCPS four years ago, at the request of the Council, is the subject of a private letter
ruling by the IRS. The private letter ruling approves the OPEB trust as meeting the IRS
requirements for such a plan. It is our understanding that the rules and regulations governing
OPEB Trusts
require
the trust to fund!! plan. We believe that there are serious questions about
whether an OPEB trust for payment of benefits to satisfy the plan of a different governmental
entity satisfies tax requirements. In the public interest and in the interest of 22,000 MCPS
employees and more than 7,400 MCPS retirees, we urge the Council to take the time to assure
us, MCPS employees and retirees, and the public that the entity created by this bill meets all
legal requirements for all employees and retirees who are relying on it to fund their futme
benefits.
Phone 301-279-3617
~
Fax 301-279-3860 ., boe@mcpsmd.ol-g
~
www.montgomeryschoolsmd.org
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The funding of an OPEB Trust is govemed by the particular employee benefit plan. The Board
of Education is required by State law to negotiate employee benefits with each of our unions.
The benefits are negotiated in the context of the mutual responsibilities and benefits that MCPS
and its employees undertake in these agreements. We believe we have handled our legal
responsibilities in this area in a reasonable and prudent fashion. The bottom line, however, is
that our employee benefit plan is different from the County's. Therefore, there are different
liabilities based on plan designs and populations with different experience and growth rates.
These differences require a trustee to employ different investment strategies to match the
liabilities they are to fund. Even if permitted by the IRS, having funds in trust run under one
unified management entity will complicate required actuarial studies and increase costs.
In
addition, and again assuming that this proposal meets all legal requirements, the trust will
likely incur additional expenses to maintain very detailed accounting to accurately attribute both
income. and expenses to each agency and the different features of each plan, especially as
agencies begin to draw down the funds at different rates. This must happen as public safety
employees retire at significantly younger ages than teachers, especially given the recent changes
to the pension plans offered to MCPS employees. The FY 12 county OPEB trust budget will
increase costs over MCPS' current costs. Also, through March 2011, the MCPS trust has
experienced better investment retums as well.
The bill proposes a trust that is overseen by a Board with only one MCPS representative out of
15 members, even though approximately forty percent (40%) of the funds will be held for the
benefit of MCPS retirees. Proportionately, MCPS should have at least six members on the Board,
not one.
The bill as drafted does not mandate the chief administrative officer to make payments for
beneficiaries as requested by county-funded agencies. This could complicate the prompt payment
of required benefits. Additionally,
it
sets up additional hurdles for reimbursement of MCPS for
OPEB expenses such as the actuarial study costs. The bill also implies that the chief
administrator officer has the authority to unilaterally change or cancel the health benefits of
MCPS retirees. This is completely unacceptable and incongruent with the Board of Education's
requirement to negotiate with our employee associations.
I am unaware of any study or assessment of the cost impact of this proposal substantiating that it
accomplishes the goal of reducing administrative costs-a goal we both share. I am unaware of
any study showing that the performance of the MCPS OPEB trust is deficient in any way or
would benefit from this proposal. I am unaware of any ruling or opinion confirming that the
changes proposed in this bill will meet all legal requirements-an obligation we both have to the
public and to our employees.
The Council has been diligent in attempting to address the issue of structural budget deficits by
directing the Office of Legislative Oversight (OLO) to study such important issues. The
proposal offered by this bill should be treated no differently and should receive the same prudent
study from the OLO. As you consider such an important structural change, let's deal with facts;
let's deal with data; let's not rush into such a complex issue without more information.
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Montgomery County Public Schools Retirees
Association, Inc.
Post Office Box 4367
Rockville, Maryland 20849-4367
Testimony on Expedited Council Bill
17-11-
Personnel- OPEB
Dr. Stephen M. Raucher, Vice President
Montgomery County Public Schools Retirees Association
Madame President and Members of the County Council, I'm Dr. Stephen Raucher, representing the
Montgomery County Public Schools Retirees Association. Our Association has about 2,700 members.
In
addition to providing travel, news, and social opportunities for our members, we have raised over $200,000
during the last eight years for our Books and Toolkits Project for Title I children enrolled in summer school.
And, again this year, we were pleased to present $1,000 scholarships to 15 active MCPS employees to help
them pay for further education or skill training. But our main purpose is to monitor and protect our pension and
health benefits, the most important current assets for any retiree. Ladies and gentlemen of the Council, we urge
you to rethink this bill. It is a solution in search of a problem
In
the early 2,000's we worked for three years With staff to correct inconsistencies in the MCPS retiree health
plan. To implement these changes, we increased our contribution to plan costs from 30% to 36%--a higher
percentage than retirees in other agencies contributed.
We supported the creation of the current MCPS OPEB Trust in 2007. Its investments are supervised by the
MCPS Retirement and Pension System Board of Investment Trustees, on which there is a retiree member. Over
the past four years, contributions of $34,280,000 mvested in various low-cost index funds have increased to
nearly $40 million as of May 31. With one board managing both Trusts, a single investment manager, and
investing in low-cost index funds, the OPEB Trust is already efficiently and professionally managed.
What are our concerns about this bill?
• The Memorandum from the Council's senior legislative attorney says this bill achieves economies in
administration and investment of funds and cites several other Maryland counties who have created
combined OPEB trusts. But those jurisdictions didn't already have a local retirement board-they
use the State Retirement and Pension systems. Therefore, this bill adds costs by duplicating services
already provided.
• The bill provides for only one MCPS appointee to a IS-member investment board. Even though the
majority of assets [95% in FY 12 alone] would be invested for MCPS retirees, we will have little or no
say in investment policies or decisions. At a minimum, membership on an OPEB Board should be
proportional to the relative number of retirees to be covered by each agency.
• Beginning on line 36 of the bill, it speaks to the County's obligations under collective bargaining
agreements . . . and states that any retiree benefit plan may be terminated at any time for any
reason. That's not very reassuring. MCPS retirees have no collective bargaining rights with the Board
of Education, so our future health benefits appear to be entirely in the hands of the County's Chief
Administrative Officer.
• Beginning on line 69, "The County is not responsible for establishing, maintaining, or providing any
benefit for any County-funded agency retiree benefit plan." There we go again; our benefits can
evaporate in a moment. We thought long-term funding was the purpose of an OPEB Trust.
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• Beginning on line 144, "The Board must keep investment accounts and records necessary to calculate
the value of each retiree health benefit trust fund ..."
With the current separate funds, none of that
administrative and accounting work is required. This increases administrative costs when the
purpose should be cost reduction!
Ladies and gentlemen of the Council, we urge you rethink this bilL Again, it is
a solution in search of a
problem.
It
is based on solutions to problems in other counties that we have already solved. We already have
OPEB Trusts. For MCPS, its Board already existed.
It
takes only a few hours each year for the Board to
manage the Trust so costs are absolutely minimaL With a retiree member on the current OPEB Board, we feel
well-informed and involved in the funding of our retiree health benefits. There is nothing in this bill that will
result in any cost-savings. To the contrary; this bill is unnecessary because the County Council will always
control the appropriations to all publicly-funded OPEB Trusts
in
Montgomery County.
Thank
you for considering our thoughts.
June 14,2011
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3
Montgomery County Council
Public Hearing on Expedited
Bill 17-11
Other Post-Employment Benefits Trust
June 14, 2011
Testimony of
Doug Prouty, MCEA President
Good afternoon, Council President Ervin and members of the County Council. I am Doug
Prouty, president of the Montgomery County Education Association. I am here today on behalf
of the 12,000 members of the Montgomery County Education Association. We have a number of
fundamental questions and concerns relative to Bill 17-11 and its intent to merge the MCPS
OPEB Trust Fund into a single, multi-agency trust fund.
1.
What is the problem that this bill is designed to address?
To the best of our knowledge, no one has adequately explained what the problem is that this bill
is designed to fix. Several years ago, the county government, the school system and the college
all set up OPEB Trust Funds to meet the new Government Accounting and Standards Board
requirements relative to accounting for post-retirement health benefits. We have heard that
consolidation will save administrative expenses, but we have seen no analysis to support that
claim.
We have heard that the County Council doesn't "trust" the Board of Education to fund the Trust
Fund. This claim rings particularly hollow, since for Fiscal Year 2011, the Board of Education's
approved budget (after final Council budget action) included $31 million in funding for the
OPEB Trust Fund while the County Government provided no funding for its OPEB Trust Fund.
Additionally, more than 15 years ago, the Board of Education had, on its own volition, created
and funded for many years a Retiree Health Insurance Trust Fund. This was before there was any
GASB requirement While current Council members may not remember this; it is the County
Council itself that required the Board of Education to terminate and spend down its Retiree
Health Insurance Trust Fund.
What we draw from that history is that the Board of Education has been quite responsible and
trustworthy in attempting to set aside resources to fund its commitments for retiree health care.
We would like the Council to explain why they believe it is now necessary to consolidate the
OPEB Trust Funds. Without a legitimate explanation, this change cannot be justified.
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2. How do we know the funds will be used for MCPS retiree health care?
In our view, the commitment by our employer to help fund the cost of health insurance during
retirement amounts to deferred compensation. In the alternative, our members would rightly
expect higher compensation now, so that they could save individually for the costs of retiree
health care.
We are seriously troubled by the proposed consolidation of the OPEB Trust Funds because we
see no language in the Bill that guarantees that the assets of the Trust Fund will actually be
spent to help offset the costs of our members' health care in retirement. The Bill grants sole and
unilateral control over expenditures from the Trust Fund to the County's Chief Administrative
Officer (CAO). There are no provisions specifying when or how payments from the Trust Fund
will be made. In future years there will be hundreds of millions of dollars locked up in this Trust
Fund. When will those Funds be used?
How can our members be assured that the funds ostensibly set aside for their retiree health
insurance costs will be used for them, and not for the employees of other agencies? Does our
employer not have any role in deciding how those set-aside assets will be used? What is to
prevent a situation in the future where the CAO allows use of the Fund's assets for health
insurance costs for county government retirees but refuses to allow the assets to be used at the
same time or at the same rate for school system employees?
The lack of specificity in the proposed Bill is an invitation for conflict between future county
executives and boards of education. Unless the proposal is amended to provide for specific
guarantees that our employer is able to control use of the assets,
it
is not in the interests of
school system employees.
3. Why is there such limited MCPS representation on the Board?
Were the Trust Funds to be consolidated, it would be holding assets in trust for approximately
22,000 MCPS, 8,000 county government employees, and fewer than 2,000 College employees.
Yet, as proposed, the 15 Board of Trustees for the Fund includes only one (1) representative
from the school system. How can that possibly be justified? School system employees would
constitute 69% of the Trust Fund's beneficiaries, but school system representatives would
constitute less than 7% of the Board members responsible for the Fund.
We are equally troubled by the apparent fact that there would be no MCPS employee
representative on the Board of Trustees. This too seems inappropriate given the legitimate
interest that the 22,000 employees ofMCPS have in the proper administration of hundreds of
millions of dollars being set aside, ostensibly in their name, to help offset the costs of health
insurance in retirement.
4. Why control with no responsibility?
Finally, we are at a loss to understand how the county government can assert control over the
assets being set aside to help pay for the cost of health insurance for MCPS retirees, yet at the
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same time disavow any responsibility for
"maintaining or providing any benefit for any (MCPS)
retiree benefit plan"
(p. 4 lines70-71 of the Bill).
It
seems to us, and we believe to any reasonable observer, that if you are assuming responsibility
for the assets being set aside to pay for our benefits, you are by definition also assuming
responsibility for providing for those benefits.
If the County Council wants to assume full responsibility for providing retiree health insurance
for MCPS retirees, then we should have that conversation. Since the Council provides more
generous health insurance benefits to county retirees than the Board of Education does for school
system employees, we would welcome the opportunity to have parity with the benefits you
provide.
However, it seems both illogical and inappropriate for the county government to assert control
over the assets being set aside to help pay for the cost of health insurance for MCPS retirees, yet
at the same time disavow any responsibility for providing those benefits. Quite frankly, we are at
a loss to explain that distinction to our members - or to the public. And we would ask the
Council to provide a satisfactory explanation.
Conclusion
Given these concerns, we believe it is premature to rush to judgment on this question. There are
far too many outstanding questions that must be answered before a reasoned conclusion can be
reached. Therefore we would encourage the Council to defer any action on this proposed
consolidation in order to provide time to answer the many unanswered questions, and to provide
time for the parties involved to discuss all the potential implications.
Let's not forget that this decision will affect hundreds of millions of dollars in funds in the
coming years. The Council would be doing our county a disservice to take rushed action on such
a significant issue, given the long-term interests of the county and its employees who devote
their careers to public service.
Thank you.
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Retiree Health Benefits Trust
Overview - May 31, 2011
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Background
The County Council approved legislation in April 2008 to establish the Retiree Health Benefits
Trust (RHBT) and granted the Board the authority to invest the assets of the Trust. The Board
developed an initial asset allocation and selected BGI (BlackRock) to provide passive investment
exposure. The Board also hired Northern Trust as the custodian.
In addition, the Board approved the following policies and processes for the governance and
investment of Trust assets including:
o
o
o
o
o
o
o
o
o
o
o
Investment Policy
(attachment 1)
Investment Policy - Commingled/Mutual Funds
(attachment 2)
Investment Policy - International
(attachment 3)
Derivatives - Statement of Investment Program
(attachment 4)
Fund Overlay Rebalancing Program
(attachment 5)
Board Bylaws
(attachment 6)
Service Provider Procurement Policy
(attachment 7)
Due.Diligence & Continuing Education Policy
(attachment 8)
Standards of Professional
&
Ethical Conduct
(attachment 9)
Fiduciary Acknowledgement
(attachment 10)
Annual Trust Declaration
(attachment 11)
The RHBT is comprised of the following participating agencies:
Montgomery County Govt, Revenue
Authority, Strathmore Hall Foundation, Credit Union, Dept of Assessments
&
Tax, HOC, WSTC, Village of
Friendship Heights
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Asset Allocation Considerations
The RHBT has a long-term funding requirement for benefits which may not be payable for many years. Therefore,
prudent and reasonable risk can be taken with the objective of increasing long-term investment returns. Due to
liabilities being linked to high healthcare inflation costs, the asset allocation also contains a significant inflation-linked
bond allocation. and the real estate securities exposure serves as a diversified source of return.
Return
-
Reduced actuarial rate of return assumption on investments from 8.0% to 7.5% in November 2010.
Beta Risk
-
The risk in a portfolio that arises from passively holding asset classes (market risk).
Alpha Risk
-
The risk taken by active managers above and beyond their passive, benchmark-replicating positions (manager
risk).
Risk Budget
-
A target level of tracking error taking the appropriate amount of risk.
An
appropriate and reasonable level will
be determined based on current market conditions. The current risk level is approximately 11
%.
Asset size relative to liability
-
of May 31 2011, the RHBT had assets of $53,289,944 versus an Actuarial Accrued Liability
(AAL) liability of
$IAbn.
There is such a mismatch in terms of assets and liabilities that we considered assets in isolation (Le.
ignore the liability from an asset allocation modeling perspective). Thus the efficient frontier asset mix does not take liabilities
into consideration but does target a beta return of 7.0%
Beta/market exposures constraints
-
With a small asset base, we are limited to investments that are liquid, such as domestic and
international equities, core and high yield fixed income and inflation-linked bonds. Private Equity, Private Real Estate, and
other illiquid asset classes are inappropriate for the RHBT at this time. Since initial funding in 2008 we have broadened our
asset allocation to include emerging market equities and high yield fixed income.
Alpha/active management constraints
-
We are also limited in our ability to pursue alpha due to our small asset base. Though
some active managers are willing to accept smaller mandates, those mandates tend to have higher fees, which must be weighed
against a manager's ability to generate excess return. The current allocation utilizes passive mandates and one active manager -
Loomis Sayles to manage the high yield asset class.
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2008 Efficient Frontier
Efficient Frontier
&0.
OPED Policy Mix
Return: 7.33%
Risk: 10.83%
...
.
6!!C­
,,,
'"
6.0,
OPEB Policy Mix:
Asset Gass
US
Equity
Inti
Equity
Core Fixed Income
High
Yield
TIPS
Private
Equity
*
Private Real Estate*
REITS
Allocation
0/0
40
25
0
0
25
N/A
N/A
j
d!
6OQ~
$.110':
4.60 .
4.80<
The efficient frontier shows the highest
expected return portfolio for a given
level of risk. The efficient frontier to
the left was generated by utilizing our
consultant's
(Wilshire),
2008
risk/return assumptions. Given the
growth objective, a major asset class
breakdown of 75% Equity (including
REITs) and 25% Fixed Income was
decided. This efficient portfolio was
expected to return 7.33
%
with a
10.83% risk level.
4.40
4.20
3.60,
lAO,
10
,00
000
"CoFJl)ovn<t Anllual Rl!tlurr>
4,00
!l,00
Iloa
700
*
Illiquid Asset Classes
:too
Risk
900
Wilshire 2008 Capital Market
Risk/Return Assumptions
~Oass
Return
Risk
Correlation
8.25
16.00
100
0.00
0.75
0.29
0.48
0..35
-0.0.5
0
8.25
17.00
1125
26.00
5.00
5.00
7.00
10.00
5.75
15.00
4.00
6.00
3.00
1.00
100
0..65
0.05
0.35
0..25
0.0.5
-O.G9
1.00
0..32
0..34
0..35
0.01
0
1.00
0..28
0..15
0..20
0..2
100
0..30
O.oI
0.
100
0..15
0.
1.00
0..15
4
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2010 Updated Efficient Frontier
In January
2010~
Staff prepared
an
updated asset allocation using
Wilshire~s
2010 risk/return assumptions with a
broadened asset mix to include high yield bonds and emerging market equities. Our 2010 constraints and
Wilshire
~
s assumptions are shown in the Appendix for reference.
Efficient Frontier
Cuneut
Allocation
Ass('t Class
Allocation
%
R3000
30
EAFE
::!-I­
E1'.1
6
TIPS
20
10
IHYBouds
GlobalREITS
10
6.9
7
lRetul1l
10.79
Risk
SharpeRntio
Points of note:
8.0
7.8
7.6
7.4
Wilshire 2010 return assumptions are
considerably lower than the 2008 return
assumptions.
The 2010 efficient frontier includes
emerging market equities and high yield
bonds that were not included in the 2008
efficient frontier.
The current efficient frontier is
significantly flatter than the original
efficient frontier indicating that
increasing risk does not increase return
as much as in the past.
By broadening our asset mix selection to
include assets with lower correlations,
we increased return expectations and
simultaneously reduced our risk level.
Current major asset allocation is 70%
equities and 30% fixed income with an
expected return of 6.97% and a risk level
of 10.79%.
-
~
~
+'
(I)
7.2
E
7.0
::I
a:::
6.8
O.~.
~
~
~
6.6
6.4
6.2
6.0
8.0
,;
/
/
9.0
/
2008 Allocation'
r
'\
Asset
Class
Allocation
%
-1-0
1R3000
25
~
\CAFE
20
trIPS
GlobalREITS
10
f ­
6.85
lRetum
10.9
t-­
lKisk
Sharp e Ratio
0.63
10.0
Risk
(%)
11.0
12.0
13.0
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Current Allocation
&
Performance - 5/31/11
Rates of Return
By
Manager
Ending Market
Value
Montgomery County Ret. HB Trust
RHBT Policy Benchmark
Target
%Wt
100.0
Wt
100.0
One
Month
-0.94
-1.06
Three
Months
2.97
Fiscal
YTD
26.87
Calendar
YTD
7.09
One
Year
23.82
53,227,178
2.64
2.28
26.41
34.88
6.63
8.35
8.30
23.54
27.19
27.04
BlackRock Russell 3000 Fund
Russell 3000
15,855,482
29.8
30.00
-1.13
-1.14
12,471,603
23.4
24.00
-2.88
2.26
0.66
0.54
34.79
32.20
32.01
BlackRock EAFE Fund
MSCIEAFENO
6.46
30.64
30.69
-2.95
3,299,181
6.2
6.00
-2.64
6.31
2.43
BlackRock Emerging Markets Fund
MSCI Emerging Markets NO
6.26
6.30
29.66
30.02
-2.62
10,715,964
20.1
20.00
0.32
0.31
29.79
6.97
2.45
5.02
28.84
8.50
8.40
BlackRock U.S. TIPS Fund
BC U.S.
TIPS
3.90
3.87
4.08
6.88
20.58
4.97
7.71
6.00
Loomis Sayles High Yield
MelTill Lynch High Yield
/I
Constrained
5,382,113
10.1
10.00
0.35
0.49
19.59
16.03
2.44
6.37
16.48
39.33
BlackRock REIT
MCHBT Real Estate
5,498,000
10.3
10.00
1.52
10.97
10.72
36.25
36.04
1.53
4,836
0.0
0.00
0.01
6.26
0.26
0.02
38.83
0.30
0.13
Cash
900ay T-Bill
0.26
0.05
0.31
0.14
6
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Pro-Rata Portion of Allocation by Participating Agency
The allocation to each agency is based on their prior month balance plus any new contributions made during the
current month. Gains, losses and expenses are allocated based on each agency's pro-rata share in the Trust.
A2encv
Dollar Amount
50,327,860
484,109
26,807
171,033
8,574
2,200,386
23,415
47~760
Percentage
94.44%
0.91%
0.05%
0.32%
0.020/0
4.13%
0.04%
0.09%
100.00%
Montgomery County Govt
$
MontCo Revenue Authority
$
Strathmore Hall Foundation
$
Credit Union
$
Dept of Assessments
&
Tax
$
HOC
$
WSTC
$
Village of Friendship Heights
$
Total
$
53,289,944
7
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Current Efforts
Staff is reviewing the current asset allocation to analyze the addition of other asset
classes and active strategies due to the proposed legislation resulting in a substantial
increase in assets, including:
Asset Classes
Currencies
Fixed Income
r:J
r:J
r:J
Active Management
Global Inflation Linked Bonds
Global REITS
Public Equities
r:J
r:J
r:J
Long Duration
International
Emerging Market
Domestic
International
Emerging Market
®
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Board Staff
The Staffs time is split between overseeing the investment programs for the County's three
retirement plans, $3b defined benefit, $200 defined contribution, and $300m deferred
compensation plan, along with the assets of the RHBT. Staffhas on average 18 years of
investment experience.
Linda
A.
Herlllan
Executive Director
1VIarc Esen,
CI~L-\
Portfolio
Afanager
Public Equities and
COlllmodities
Bnld
Stelze.., CFA
SeniorPorlfolio
:.\ianager
Private Real Assets
and Private Equity
Stuart Potter,
CFA
John Feketekuty,
Senior Portfolio
i\ianager
Fixed Income and
Currellcles
CFA
h
M!sfl/U'11f
Al
Jalyst
Akiko Kawashima
COlllplimt('eA]t(I~rst
9
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Appendix
RiskIReturn Assumptions
us
Equity
Return
Risk
Yield
Corr
US Equity
MSCI • EAFE Index ($Nel)
MSCI - Emerging Markets Index ($ Net)
MSCI - AC World Ex-US Index ($Nel)
Barclays Capital - Aggregate Bond Index
Barclays Capital- GovtlCredit Long-Term Index
Barclays Capital - U.S. Tips Index
Barclays Capital - High Yield Index
Wilshire - REIT Index
Wilshire - Global ex US REIT Index
Dow Jones - UBS Commodity Index (Total Return)
EAFE
Emerging ACWI ex US
Bond
UT Bond US TIPS High Yield US REIT
Mkts
Aggregate
Non·US
REIT
Commoditiesl
7.50
16.00
2.75
1.00
0.80
0.70
0.83
0.29
0.30
-0.05
0.48
0.35
0.50
0.00
7.50
17.00
3.50
7.50
24.00
3.25
7.50
17.25
3.45
4.25
5.00
4.25
5.25
10.00
5.50
3.50
6.00
3.50
6.00
10.00
6.75
7.25
15.00
5.95
7.25
13.00
5.95
450
13.00
2.25
1.00
0.68
0.98
0.05
0.09
0.05
0.35
0.25
0.65
0.20
1.00
0.80
0.00
0.Q1
0.00
0.35
0.30
0.60
0.24
1.00
0.04
0.08
0.Q4
0.37
0.28
0.68
0.22
1.00
0.95
0.20
0.28
0.15
0.10
0.00
1.00
0.15
0.30
0.15
0.10
0.00
1.00
0.01
0.15
0.15
0.20
1.00
0.30
0.40
0.08
1.00
0.50
0.20
1.00
0.25
1.00
Constraints
Asset Class
Wilshire - 5000 Composite Index
MSCI - EAFE Index ($Net)
MSCI - Emerging Markets Index ($ Net)
MSCI - AC World Ex-US Index ($Net)
Barclays Capital- Aggregate Bond Index
Barclays Capital- GovtlCredit Long-Term Index
Barclays Capital - U.S. Tips Index
Barclays Capital - High Yield Index
Wilshire - REIT Index
Wilshire - Global ex US REIT Index
Dow Jones - UBS Commodity Index (Total Return)
Weights
Min
Max
20
50
20
50
0
50
0
0
0
0
0
0
10
50
0
10
0
5
0
5
0
0
Additional Constraints
I
Considerations:
,
US and Non-US Equities set to be equal weighted
Within Non-US Equities, the mix between EAFE and Emerging
markets was set to 80% / 20% respectively
High Yield capped at 10%
Long -Term Bonds capped at zero out of preference for
maintaining higher exposure to TIPS, due to link between RHBT
obligations and CPI / Inflation
BGI has no Global REIT product available. Therefore equal­
weight applied to US / Non-US REITs.
~