GO Item 2
October
8,
2012
Worksession
MEMORANDUM
October 4, 2012
TO:
FROM:
tte
Government Operations and Fiscal Policy commRJ'
Robert H. Drummer, Senior Legislative Attorney
~Michael
Faden, Senior Legislative Attorney
~.
1ft
SUBJECT:
Worksession:
Bill 24·12, Board of Investment Trustees - Consolidated Retiree
Health Trust Board of Trustees - Delegation - Attendance
Expected attendees:
Jeff Sharpe, BIT Chair
Linda Herman, Executive Director, BIT
Bill 24-12, Board of Investment Trustees Consolidated Retiree Health Trust Board of
Trustees - Delegation - Attendance, sponsored by the Council President at the request of the
County Executive, was introduced on July 31, 2012. A public hearing was held on September
18.
Background
Bill 24·12 would amend the County's retirement law to permit the Board of Investment
Trustees (BIT), which oversees the investment programs for the County's Employee Retirement
Plans, including the Employees' Retirement System, Retirement Savings Plan and the Deferred
Compensation Plan, to delegate certain duties as it deems appropriate and consistent with its
fiduciary duties and its written policies and procedures. The Bill would authorize the Board to
delegate certain duties, but would not require a delegation of any duties.
The Bill would also amend the current law governing automatic removal of a member of
either the Board of Investment Trustees or the Consolidated Retiree Health Trust Board of
Trustees for missing meetings. Bill 24-12 would make the automatic removal laws for these
Boards consistent with the law governing all other County boards and commissions.
Public Hearing
The lone speaker at the September 18 public hearing, Jeff Sharpe, Chair of the Board of
Investment Trustees, supported the Bill on behalf of the Board. See ©13.
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Issues
1.
How does the Board currently operate?
County Code §33-59 established the BIT as a I3-member Board with the following
members:
a.
b.
c.
d.
e.
f.
g.
h.
1.
J.
k.
the Director of Management and Budget;
the Director of Finance;
the Director of Human Resources;
the Staff Director of the County Council;
a representative nominated by the union representing employees in the OPT and
SLT bargaining units (MCGEO);
a representative nominated by the union representing fire and rescue employees
(IAFF);
a representative nominated by the union representing police employees (FOP);
an active employee who is not a member of a bargaining unit;
a retired County employee;
2 members of the public recommended by the Council who are knowledgeable in
pensions, investments, or financial matters; and
2 members of the public recommended by a citizens group in the County who are
knowledgeable in pensions, investments, or financial matters.
The Board is supported by a professional staff that includes an executive director and 2
senior portfolio managers, 1 portfolio manager, 2 investment analysts, and 1 compliance analyst.
Each of these staff members (with the exception of the compliance analyst) are chartered
financial analysts. See the organization chart for the County Retirement Plans at ©I4. The
Board also retains various independent consultants for investment advice and receives legal
advice from the County Attorney's Office and outside counsel. The Board has adopted written
policies governing investments and the procurement of other service providers. The Board
currently oversees the investment of approximately $3.5 billion.
The current division of responsibilities for governance between the Board, the staff, and
independent consultants is described at ©24-25. The current division of responsibilities for
investment decisions is described at ©22-23. Investment decisions begin with the Board's
adoption of general investment policies and strategies for asset allocation. Implementing the
asset allocation requires the selection of investment managers. The largest impact the Board has
on the investment program is through setting the asset allocation. The Board estimates that
approximately 93% of returns over the last 10 years were due to asset allocation rather than
investment manager selection. See ©20.
Investment of retirement assets has grown more complicated in recent years as additional
asset classes have been added to the portfolio. In 2006, the Board had investments across 4
different asset classes. In 2011, the list of asset classes and strategies used by the Board had
grown to 11. See © 19. As the number of asset classes and investment strategies has grown, the
amount of expertise needed to make investment choices has grown. The Board has responded by
delegating certain tasks to the professional staff while still retaining the final approval of new
investment managers. In 2007, the Board delegated authority to the professional staff to select a
2
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new investment manager for final Board approval. A brief history of the Board's delegation of
authority is at ©21.
2. What type of authority would the Board consider delegating if the BiII is enacted?
The Bill is an enabling act that would permit, but not require, the Board to delegate duties
it deems prudent, consistent with its fiduciary duty. If the Bill is enacted, the final decision on
what types of decisions should be delegated to professional staff would be made by the Board
and documented in a written policy. The Board is currently evaluating types of decisions it may
delegate to its professional staff, including execution of contracts and the decision to hire and fire
individual investment managers. This would be consistent with some of the larger pension
systems, such as the Maryland State Retirement and Pension System, and many corporate,
endowment, and Taft Hartley plans. The Board of Trustees for the Maryland State System has
delegated the decision to hire and fire individual investment managers to the Chief Investment
Officer.
I
Each trustee has a fiduciary duty to "act with the care, skill, prudence, and diligence
under the circumstances that a prudent person acting in a similar capacity and familiar with the
same matters would use to conduct a similar enterprise with similar purposes." See Code §33­
61 C(c). This duty of prudence may require a fiduciary to delegate certain duties to a person with
specialized expertise, retaining oversight, if the fiduciary lacks the expertise to make an informed
decision. The growing complexity of the investment universe may be placing unreasonable
requirements on a BIT member who is not an investment professional absent the authority to
delegate certain decisions. The method used by the Board to select a new investment manager is
described at ©29-30. The Board recognized the complexity of this decision in 2007 when it
authorized the professional staff to select a new manager for final approval by the Board rather
than interviewing a short list of finalists selected by the professional staff. Bill 24-12 would
authorize the Board to take the final step to delegate this decision to the professional staff.
Council staff recommendation:
enact the
Bill
as introduced.
This packet contains:
Bil124-12
Legislative Request Report
Transmittal Memo from County Executive
Fiscal and Economic Impact Statement
Testimony of Jeff Sharpe
Organization Chart County Retirement Plans
BIT Governance PowerPoint
Stafflnvestment Committee Process
Circle
#
1
5
7
8
13
14
15
29
F:\LAW\B ILLS\ 1224 Delegation Legislation-BIT - CHRBT\GO Memo. Doc
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Bill No. _ _
,,_--=-'--'-=--_ _ _ __
Concerning:
Board of Investment
Trustees - Consolidated Retiree
Health Trust Board of Trustees ­
Delegation - Attendance
Revised: July 16, 2012 Draft No.
Introduced:
July 31, 2012
Expires:
January 31,2014
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date:
...!..!.!<..!..!.><._ _ _ _ __
Ch. _ _, Laws of Mont. Co. _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President at the Request of the County Executive
AN
ACT to:
(1)
(2)
(3)
(4)
(5)
authorize the Board of Investment Trustees to adopt written policies and
procedures to delegate certain duties;
modify the laws concerning excused absences for a member of the Board of
Investment Trustees;
modify the laws concerning excused absences for a member of the Consolidated
Retiree Health Trust Board of Trustees;
generally amend the law regarding the Employees' Retirement System,
Retirement Savings Plan and Deferred Compensation Plan; and
generally amend the law regarding the Consolidated Retiree Health Benefits Trust
Fund.
By amending
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-59, 33-60, 33-125, 33-145, and 33-160
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 lv/ontgomery County, Maryland approves the following Act:
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Bill No. 24-12
Sec. 1. Sections 33-59, 33-60, 33-125, 33-145, and 33-160 are amended
2
3
4
as follows:
33-59.
(c)
Board of investment trustees.
*
Vacancies.
(1)
*
*
5
6
7
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 7 days after notice of the meeting.] may
be automatically removed for missing meetings as described in
Section 2-148(b).
8
9
10
11
12
13
14
*
(f)
*
*
Written policies.
(1)
The Board must establish written policies to administer and
invest the funds created by this Article and to transact the
business of the trust and the retirement system.
(2)
The Board must apply the policies to all members and
beneficiaries of the retirement system and must not discriminate
in favor of or against any member or beneficiary of the
retirement system.
15
16
17
18
19
20
21
ill
Any delegation of duties
Qy
the Board under Sections 33-60,
33-125 or 33-145 must be specified in written policies and
procedures.
22
23
24
25
(g)
Officers.
The Board must select a chair, vice chair, and secretary
from the Board's members.
(1)
The chair must preside at meetings of the Board and may take
administrative action [, including executing an instrument,] on
~LA
W\B ILLS\ 1224 Delegation Legislation-BIT - CHRBT\Bill I. Doc
26
27
o
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Bill No. 24-12
28
behalf of the Board. [A person may rely in good faith on an act
of the chair as legally valid.]
(2)
The vice chair must perform the duties and exercise the powers
of the chair when the chair is [absent from the County or
disabled] unavailable, or the Board determines is otherwise
unable to perform the duties of the chair.
(3)
The secretary must record the proceedings and actions of the
Board and may certify a 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.
(h)
29
30
31
32
33
34
35
36
37
38
Meetings and actions.
39
*
[(5)
*
*
40
41
42
43
44
45
46
47
48
The Board may authorize a 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.]
*
33-60.
*
*
~
*
*
The board of investment trustees-Powers and duties.
*
ill
Delegation
gf
duties.
Executive Director or
The Board may delegate its duties to the
similarly situated County employee as it
~
49
50
51
52
53
54
deems appropriate and consistent with its fiduciary duties in
written
policy and procedure. If the Board has prudently delegated its duties
and monitored the delegation, the trustees must not be liable for an act
or omission made
Qy
its delegate.
33-125.
Powers and duties of the Board.
*
*
*
Q\LAW\BILLS\1224 Delegation Legislation-BIT· CHRBT\Bili I.Doc
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Bill No. 24-12
55
56
57
ill
Delegation
g.f
duties.
The Board may delegate its duties to the
Executive Director or
£
similarly situated County employee as
h
deems appropriate and consistent with its fiduciary duties in
£
written
policy and procedure. If the Board has prudently delegated its duties
and monitored the delegation, the trustees must not be liable for an act
or omission made
Qy
delegate.
58
59
60
61
62
33-145.
Powers and duties of the board.
*
*
*
63
64
65
ill
Delegation
g.f
duties.
The Board may delegate its duties to the
Executive Director or
£
similarly situated County employee as it
deems appropriate and consistent with its fiduciary duties in
£
written
policy and procedure. If the Board has prudently delegated its duties
and monitored the delegation, the trustees must not be liable for an act
or omission made
Qy
its delegate.
66
67
68
69
70
71
33-160.
Board of Trustees
*
(c)
*
*
Vacancies.
(1)
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
72
73
74
75
76
77
meetings held at least 7 days after notice of the meeting.] may
be automatically removed for missing meetings as described in
Section 2-148(b).
78
79
*
*
*
Q
Y\LAw\BILLS\1224 Delegation Legislation-BIT - CHRBT\Bill LDoc
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LEGISLATIVE REQUEST REPORT
Expedited Bill 24 -12
Board ofInvestment Trustees
-
Consolidated Retiree Health Trust Board ofTrustees
­
Delegation
-
Attendance
DESCRIPTION:
The Bill amends the County's retirement law to allow the Board of
Investment Trustees, which oversees the investment programs for
the County's Employee Retirement Plans, including the
Employees' Retirement System, Retirement Savings Plan and the
Deferred Compensation Plan, to delegate certain duties as it deems
appropriate and consistent with its fiduciary duties and its written
policies and procedures.
The Bill also amends the attendance provisions of the Board of
Investment Trustees, and the Board of Trustees overseeing the
Consolidated Retiree Health Benefits Trust, to make them
consistent with those that currently apply under County Code
Section 2-148 to all other Boards, Commissions and Committees
and bases attendance on the number of missed meetings.
PROBLEM:
The Bill would permit the Board of Investment Trustees to delegate
certain duties, such as the execution of contracts, if it deems it
appropriate and consistent with its fiduciary duties, resulting in a
better alignment of the roles and responsibilities of the Board and its
Staff in the oversight of the investment programs and to further
enhance the efficiency of the operation of the programs.
Section 33-59 (which governs the Board of Investment Trustees)
and Section 33-160 (which governs the Board of Trustees for the
Consolidated Retiree Health Trust provides that a trustee has
resigned for missing more than 25% of scheduled meetings in a 12
month period. While the County Code only requires that the
Boards meet four times a year, both Boards currently meet six
times a year. The Boards would like to amend the attendance
requirements to the provision in County Code Section 2-148 which
bases removal on the number of missed meetings.
GOALS AND
OBJECTIVES:
The goal of the Bill is to provide the Boards with the necessary
authority to meet its fiduciary duties in overseeing the investment
programs for the County's retirement plans, and the Consolidated
Retiree Health Benefits Trust, in the appropriate manner.
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COORDINATION:
The Board of Investment Trustees, the Board of Trustees, and the
County Attorney's Office have reviewed this Bill.
FISCAL IMPACT:
Office of Management and Budget
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
Office of Management and Budget
N/A
Numerous other retirement plans, including the Maryland State
Retirement and Pension System,
currently provide for the Boards,
overseeing the investment of retirement trust fund assets, to delegate
certain functions to the Executive Director, or other staff, if such
delegation is established in policies and procedures. The County's
Chief Administrative Officer, in his role as Plan Administrator,
currently has the authority within the Code to delegate his duties.
SOURCE OF
INFORMATION:
Linda Herman, Board of Investment Trustees, Board of Trustees
Amy Moskowitz, Office of the County Attorney
Morgan Lewis, outside legal counsel for the Board of Investment
Trustees
APPLICATION
WITHIN
MUNICIP ALITIES:NIA
PENALTIES:
N/A
F:\LA w\BILLS\ 1224 Delegation Legislation-BIT. CHRBT\LRR.Doc
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rnF
cc
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pi)
OFFICE OF THE COUNTY EXECUTIVE
ROCKVILLE, MARYLAND 20850
Isiah Leggett
County Executive
July 5, 2012
069243
TO:
Roger Berliner, President
County Council
FROM:
~~:~e~;:Uti~~
.
i~g
-r
I
SUBJECT:
Expedited Legislation - Board of Investment Trustees and Board
ofr~~s
for
the Consolidated Retiree Health Trust
2
0
V1
ry.
I am attaching for the Council's consideration a bill that would amend the County't:;
I
retirement law to allow the Board of Investment Trustees, which oversees the investment programs for the
County's Employee Retirement Plans, including the Employees' Retirement System, Retirement Savings
Plan and the Deferred Compensation Plan, to delegate certain duties as it deems appropriate and
consistent with its fiduciary duties and its written policies and procedures.
The County Code establishes the Board of Investment Trustees in Section 33-59 and
provides the Board the power to invest the assets of the retirement system, authority to direct the payment
of benefits, and describes other actions to be taken in Sections 33-60 and 33-61. The Board has been
advised by its legal counsel that the delegation of its duties is permitted under common law. However,
the Board's legal counsel has advised it th<i\t the delegation authority should be provided in its governing
document, the County Code. Numerous retirement plans, including the Maryland State Retirement and
Pension System, currently provide for the Boards overseeing the investment of retirement trust fund
assets to delegate certain functions to staff. This bill would allow for a similar delegation of duties as the
Board deems appropriate and consistent with its fiduciary duties and its written policies and procedures.
The bill also changes the attendance requirements for both the Board of Investment
Trustees and the Board of Trustees which oversees the assets of the Consolidated Retiree Health Benefits
Trust to make them consistent with those that currently apply under County Code Section 2-148 to all
other County Boards, Commissions and Committees.
Section 33-59 (which governs the Board of Investment Trustees) and Section 33-160
(which governs the Board of Trustees) provide that a trustee has automatically resigned when the trustee
misses more than 25% of the scheduled meetings. While the County Code only requires that the Boards
meet four times a year, each Board currently meets six times a year. The Boards would like to amend the
attendance requirements to mirror the provision in County Code Section 2-148 which applies to all other
County Boards, Commissions and Committees and bases attendance on the number of missed meetings.
Thank you for your prompt consideration of this bill.
Attachments
montgomerycountymd.gov/311
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ROCKVILLE, MARYLAND
06.9869
MEMORANDUM
August 20,2012
~
D
TO:
FROM:
Roger Berliner, President, County Council
Jennifer A. Hughes, Director, Office of Management and Buoget
Joseph F. Beach, Director, Department of Finance
Council BiIl24-12 - Board of Investment Trustees
Board of Trustees - Delegation
Consolidateq Retiree Health Trust
~f.C;V"
SUBJECT:
Attached please find the fiscal and economic impact statements for the above-referenced
legislation.
JAH:nm
c: . Kathleen Boucher, Assistant Chief Administrative Officer
Lisa Austin, Offices of the County Executive
Joy Nurmi, Special Assistant to the County Executive
Patrick Lacefield, Director, Public Information Office
Alex Espinosa, Office of Management and Budget
Linda Herman, Board of Investment Trustees
Blaise DeFazio, Office of Management and Budget
Naeem Mia, Office of Management and Budget
David Platt, Department of Finance
\..n .
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Fiscal Impact Statement
Council Bill 24-l2 - Board ofInvestment Trustees
Consolidated Retiree Health Trust Board of Trustees Delegation
1.
Legislative Summary
The proposed bill amends the County's retirement law to allow the Board of Investment
Trustees, which oversees the investment programs for the County's Employee Retirement
Plans, including the Employees' Retirement System, Retirement Savings Plan and the
Deferred Compensation Plan, to delegate certain duties as it deems appropriate and
consistent with its fiduciary duties and its written policies and procedures.
The bill also amends the attendance provisions of the Board of Investment Trustees, and
the Board of Trustees overseeing the Consolidated Retiree Health Benefits Trust, to make
them consistent with those that currently apply under County Code Section 2-148 to all
other Boards, Commissions and Committees and bases attendance on the number of
missed meetings.
2. An estimate of changes in County revenues and expenditures regardless
of whether
the revenues or expenditures are assumed in the recommended or approved budget.
Includes source of information, assumptions, and methodologies used.
There is no impact on revenues and expenditures.
There is no impact on revenues and expenditures.
,
3. Revenue and expenditure estimates covering at least the next 6 fIscal years.
4. An actuarial analysis through the entire amortization period for each bill that would
affect retiree pension or group insurance costs.
Not applicable. This bill does not affect retiree pension or group insurance costs.
5.
Later actions that may affect future revenue and expenditures if the bill authorizes
future spending.
The bill does not authorize future spending.
6.
An estimate of the staff time needed to implement the bill.
No additional staff time is needed to implement the bilL
7. An explanation of how the addition of new staff responsibilities would affect other
duties.
No new staff responsibilities are created as a result ofthis bill.
8. An estimate of costs when an additional appropriation is needed.
Not applicable.
9.
A description of any variable that could affect revenue and cost estimates.
Not applicable.
10. Ranges of revenue
or
expenditures that are uncertain or difficult to project.
Not applicable.
(j)
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11.
If
a bill is likely to have no fiscal impact, why that is the case.
The delegation and attendance provisions have no impact on revenues and do not
generate any additional expenses.
12. Other fiscal impacts or comments.
None.
13. The following contributed to and concurred with this analysis:
Linda Herman, Board of Investment Trustees
Akiko Kawashima, Board of Investment Trustees
Blaise DeFazio, Office of Management and Budget
Naeem Mia, Office of Management and Budget
~~-Fo.~
Jennifer A. Hughes, Director
Office of Management and Budget
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Economic Impact Statement
Council Bill 24-12
Board of Investment Trustees Consolidated Retiree Health Trust
Board of Trustees - Delegation
Background:
This proposed legislation (Bill) would:
1. authorize the Board of Investment Trustees to adopt VYTitten policies and
procedures to delegate certain duties;
2. modify the laws concerning excused absences for a member of the Boatd of
Investment Trustees;
3. modify the laws concerning excused absences for a member of the Consolidated
Retiree Health Trust Board of Trustees;
4. generally amend the law regarding the Employees' Retirement System,
Retirement Savings Plan and Deferred Compensation Plan; and
5. generally amend the law regarding the Consolidated retiree Health Benefits Trust
Fund.
1. The sources of information, assrunptions, and methodologies used.
Not applicable.
2. A description of any variable that could affect the economic impact estimates.
Not applicable. Bi1124-12 would have no economic impact.
3. The
Bill's
positive or negative effect, if any on employment, spending, saving,
investment, incomes, and property values in the County_
Not applicable. Bill 24-12 would have no economic impact.
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4.
a Bill is likely to have no economic impact, why is that the case?
The Bill modifies current law so that procedures of the Board are consistent with the
policies and procedures of other County Boards.
5. The following contributed to and concurred with this analysis: David Platt and Mike
Coveyou, Finance
Dat~
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I
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3
TESTIMONY FOR EXPEDITED BILL 24-12, PERSONNEL
RETIREMENT TRUST FUNDS
Good afternoon, for the record, I am Jeff Sharpe, Chair of the Board of Investment
Trustees, which oversees the assets of the County's three retirement plans. I am here
today on behalf of the Board to testify in support of Bill 24-12, Personnel - Retirement
Trust Funds.
The proposed Bill would amend the County Code to permit the Board to delegate its
duties as the Board deems appropriate and consistent with its fiduciary duties and its
written policies and procedures.
The County Code establishes the Board of Investment Trustees and provides the Board
the power to invest the assets of the retirement system, authority to direct the payment of
benefits, and describes other actions to be taken. The Board has been advised by its legal
counsel that the delegation of its duties is permitted under common law. However, the
Board's counsel has advised them that the delegation authority should be provided in its
governing document, the County Code. Numerous retirement plans, including the
Maryland State Retirement and Pension System, currently provide for the Boards,
overseeing the investment of retirement trust fund assets, to delegate certain functions to
staff. This bill would allow for a similar delegation of duties by granting the Board the
authority to delegate as it deems appropriate and consistent with its fiduciary duties and
its written policies and procedures.
The bill also would change the attendance requirements for the Board to make them
consistent with those that currently apply under County Code Section 2-148 to all other
County Boards, Commissions and Committees.
We look forward to working with the Council in its deliberations on this legislation.
®
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Montgomery County Employee Retirement Plans
Cbic.f Administrative
Officer
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Governance
Board of Investment Trustees
September 2012
Montgomery County Employee Retirement Plans
®
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Plan Governance
(
~
• Good governance does not guarantee a good outcome, but
.t
a
sound process has a
better chance of leading to a good outcome than a poorly designed process."
(Russell Investments, an investment managementfirm)
2
®
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Duty of Prudence
Montgomery County Code 33-61C
-
A fiduciary must discharge the fiduciary's duties regarding
the trust
with the care, skill, prudence, and diligence under the circumstances that a
prudent person acting in a similar capacity and familiar with the same matters would
use to conduct a similar enterprise with similar purposes.
Adherence to this statute includes:
• Focusing on conduct - how was the investment chosen & what the process was rather than
what was the result.
• Examining the scope and diligence of the fiduciary's investigation.
• Requiring the standard of one familiar with the topic under consideration, not the standard of
a lay person.
• Requiring the fiduciary to seek expert advice if a fiduciary lacks experience/education with
regard to a particular matter.
3
§)
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Trustee Roles
-Learning about new asset
classes/strategies
-Gaining perspective from managers,
consultants, strategic partners
Investment
Policies
-Set target asset
allocation
-Establish risk budget
-Review budget status
-Legal monitoring
-Determine roles and responsibilities
-Approve budgets
-Review attribution, risk budgeting
-Manager and cost monitoring
-Custodian and consultant selection
-Asset class & portfolio structure
-New strategy & investment vehicles
-Manager selection/terminations
*
-Contract execution and modifications
*
*
=
Board is
currently
evaluating delegatioll ofthese items to Staff
4
Q
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Trustee Challenges
Changes in asset allocation and strategies:
June
30
2
2006
Equities (long-only)
Equities (long/short)
Fixed Income
Inflation-Linked Bonds
Commodities
Currencies
Private Equity (fund-of-funds)
Private Equity (direct)
Private Real Assets
Hedge Ftmds (fund-of-funds)
Hedge Ftmds (direct)
X
X
X
June
30
2
2011
X
X
X
X
X
X
X
X
X
X
X
X
Additional asset classes/markets
Increased manager evaluation
&
monitoring
Additional education needs
More technical nature of investments
places less emphasis on in-person
presentations.
Volatility
m
investments
and
opportunity types requires fast action.
5
Q
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Impact of Decisions
It
is our experience that the largest impact the
Board has on the investment program is through
setting the asset allocation.
Although the asset allocation decision is made only
periodically, the effort must be ongoing and
iterative to maximize the likelihood of a good
decision:
IVICERS
0/0
of Rolling lO-YI'Retul'n fr'om
Asset
Alloc~ltion
(Avel'age 93%)
94%89%
870/0
·95%
00%
80%
60%
40%
20%
0%
/
2011
\
/
2006
2007
2008
2009
2010
~
6
®
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History - Shifts in Delegation
/_._--""._-_._.
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nVITL4L PRA CTICE
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WHAT CHANGED?
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7
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Roles & Responsibilities -
Investment
ROLE
.Deterirune,Illve.sfmefilObJectlves
BOARD
r~:f"
STAFF
INDEPENDEN'f3RJ)
PARTY
t~ic\:muI!en<!~
(C01~1;llt'¥lJ$)
.
~:';> ',
Y
"~
>'
;
'~mc!
CQ1!~tJ'~irtts
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,
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Approves
Conduct
AssetiLiablUty Study, Set
.Target
Asset
Allocation
~llcJ
Ranges
';-~--,i-r;>;
(';~_"',
-,.,
,
>2i
Input
'-r-;:t
Reconunends
(coll.')ultants)
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Select Benchmarks for PeJ10nnance
.
Measurement
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1l11d
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.
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Approves
Input
.
Reconunends
(COll.'>'ultants)
.
,Recomille~icis
._if"
.
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'.j, \'
,<
;
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'J\ppl'ove~
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(consultants)
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(consultants)
.'
.
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Execution
of rebalancillg and
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management programs
lYforutofSJReviews
Appro\'es
Input
(collf:mltants)
8
®
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Roles
&
Responsibilities -
Investment
BOARD
STAFF
'l"""''!''')··
,
l.
,~¥
.,
~.
INDEPENDENT
JRD
PARTY
:Ev~iHa ii~~,
~r"(l!vest~ent ~oli~
··
(at
tri~~~h.on, ri8k.i~'lIdgeQ~~g)·
,
Dedsiolls
.
Rep()its
(col~iltallisrytls~odirui)
Reports (c:nstodian
&
investment
mgrs)
l\Ionthly Investment Perfonnnuce
.
Evaluation
(overall,
sector-level,
manager-level)
"
.M
olutorsiReviews
Reports
QU!.\1'terl\rluvestment
'P
erfOl'ln'1Dce
,
.
'~Evuh(~tlQn
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,(
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,
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A
IlIl1Ul
I Review of Asset Class
I.lvestJne·ntN1~naierOvei'sight
. Reviews
RepOlts
. Input
(consultants)
Reports
(coJisultants)
.
.
.
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.
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9
®
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Roles
&
Responsibilities
-
Governance
BOARD
STAFF
~',
INDEPENDENT
JRD
PARTY
,....... t.
Detel'hiin,~~klv~rua
il(;e
.",';
(r()lesand
respOnslb.UUies):
.:
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Budget
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(coIlSllltitnts)
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Esta~Ush
alld1\j:6difyPQUcies,
'
.
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.4\pptc;V'es
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Establish
Ilia
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Reviews
.Trml.'muts
.
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.
Qo'pttacrExecutioil
and
.Am6D(hp
e
n ts
,;'1
.
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.
Reviews
t,
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(coun~,el)'
.
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Director
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10
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Roles
&
Responsibilities -
Governance
BOARD
STAFF
.
.;.~
:J:_~
INDEPENDENT 3
RD
.
PARTY
Fhl~
llcfal
DiscIoSl11'eStatemeilt
.
H
~"":-.
:)i;
i:Et~cs
C()l.lIIIii~S!QIi
;:!
"',
uJa
Board'
oS
Standards of Professional
&
Ethical
Conduct
Required Filing
Required Filing
Required Filing
(cOlUlsel)
Se,m~AluHlaH~jsk
··
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,
Dne Diligence and Continuing
Education Travel Requests
Approves
Transmits
nfa
Ailnna.l
Dtsdosure
Tu
mSJliits
11
~
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Staff Investment Committee
COID()osition
~
Executive Director
tLillda
HenllmlJ
~
Setuor POlifolio Manager - Fixed Income
&.
OPPolimllstic
(Stuart
Potter)
~
~
Selllor Porttolio tvIanager
(Brad
Ste/;erJ
Plivate
~'larkets
POlifolio .tvlanager Public Eqtuties and
COlluuodities
(;\larc
Esel/l
Structure:
~
Elected Officers (anllually)
Chair sets agenda, fommlates matelials
\vituembers
&.
conducts the meetings
Secretary takes nunutes that are later
revie\ved by all members
POlitolio Mgrs present issues rdated
to their p01ifolios
~
Meeting F01mat
Agenda and matelials provided to cOllunittee
members plior to meeting
Meet every
:1
weeks or ad hoc, as needed
Board Consultants input as needed
Roles ami Res,)onsibilities:
~
Policy Recollullendations
~
Risk Management
~
Rebalancing
&.
Liquidity Management
~
All
members provide teedback on all projects
~
Asset Allocation!Strategy Reconuuendations
Review of investment manager IUling/tennination
reconunendations or adju5tment of the assets under
management of a CtuTent manager
~
12
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Staff Investment Committee - Diligence Process
Phase I
c::)
Phase II
c=:)
Phase III
*
IC members, consultants,
strategic partners, peers,
publications
6
*
Evaluation vs. key investment
criteria, peer comparisons
*
Manager candidate list
*
Analysis of manager information
*
Semifinalist selection
*
Summary write-up
+
llC member
+
consultant
*
Firm, investment team and strategy review
*
Operational review (evaluate systems,
policies, procedures)
*
Preliminary legal review
*
Lead PM
*
Insurance approval (County's risk
management)
*
legal negotiations
*
Fee negotiations
[b
*
Current and former clients/investors
*
Former firm
*
employees
Business partners & vendors
L=¢
*
Key merits and risks
*
Portfolio fit
n,
b
*
Deep analytic review
*
Manager scorecard
b
*
Full
review
*
Portfolio construction
13
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Checks
&
Balances
Board
Evaluation. ofindependenl analysis of
fund and manager perfonnance
Ability
to question and comment on Staff
recommendations
Monitoring of Staff recommendations and
pertonnance
Ability
to revoke delegation at any time
Staff
T
Review/Evaluate
Executive Director: Evaluate Staff
recommendations
Vet ideas via Staff Investment
Committee
Establ
i
sh guide!
i
ne::; and monitor
investmcntmanagers
IndependentlUeporting
r
I
1*
!
I
Consultant
Vendors
Report and evaluate
investment
decisions
Recommend
Consultant
Investment
managers
J'ortfolio
Construction
Asset allocation
Strategies
Trends
Report compliance
with :investment
.
guidelin~s!policies
Anllualaudit of
retiren:u:int plans
AnnuaJ actuarial
changes to asset
alloca.tion, addition
of new st.r;degies,
sectors
14
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Staff Investment Conlmittee (IC) Process
Sands Capital
(IC actions shown in bold/italics)
Phase I:
Nov 2010 - Jan 2011
Investment Ideas
Staff and Wilshire analyze performance, account departures and
management issues at Numeric. Both on-site and off-site meetings are
conducted with Numeric as well as other
130/30
managers. Portfolio
Manager (PM) presents recommendation to IC to terminate Numeric's
130/30
mandate.
IC approves recommendation
Board approves Staffs recommendation to terminate Numeric'
130/30
mandate.
IC reviews PM's analysis of alternative investment options as possible
alpha sources within Large Cap equities. PM recommends issuing an RFI
for a Large Cap Alpha Search.
IC approves recommendation
Board approves Staffs recommendation to issue an RFI for a Large Cap
Alpha Search.
January 2011
Attachment - 1
Jan - March 2011
March 2011
Attachment - 2
April May 2011
Attachment 3A
Attachment
3B
Attachment - 3C
Attachment - 3D
Selection ofProspective Managers to Receive RFI
Criteria was determined by the IC and Wilshire. Quantitative analysis using
Wilshire Compass resulted in 1,117 products meeting the initial criteria.
The attached spreadsheet is sorted by the 3 year Information Ratio (a
measure of risk adjusted return) for each benchmark product and reflects
the following:
• Products highlighted in yellow represent top quartile Information
Ratios
• Red area represents less than 2% excess return for three year rolling
periods
51 products (49 firms) selected based on the following criteria:
• Consistent >2% excess returns over three year rolling periods
• Input from the Wilshire Research Team based on their due diligence
Requests for Information sent to 23 firms representing 24 products based
on the following:
• Quantitative and qualitative analysis conducted by Staff and Wilshire
• Comments and concerns on eliminated products
• Summary of RFI response
Semi-finalists identified by IC and Wilshire for follow-up calls - 7
products
• 5 products selected
• Summary of strength/concerns reason for eliminating 2 products
 PDF to HTML - Convert PDF files to HTML files
Phase II:
May - Sep 2011
Attachment 4
Due Diligence
IC and Wilshire evaluate finalists - 5 products
• Site visits conducted
• Summary of strength/concerns
• Eliminated 3 products
Reference Checks
Reference calls of current and former clients conducted by IC members
Full Write Up and StaffInvestment Committee Vote
IC reviews recommendation and Board presentation.
IC approves
recommendation
Recommended portfolio construction.
IC approves recommendation
August - Sep 2011
Attachment - 5
September 2011
Attachment 6A
Attachment - 6B
Phase III:
September 2011
Attachment 7
Attachment - 7A
Attachment
7B
Contract Management
Insurance review by County Risk Management
Legal negotiations by Staff and County Attorney
Copy of Contract
wi
Attachments
Recommendation to Board
Wilshire recommendation
Staff recommendation
September 2011
Attachment - 8A
Attachment - 8B