Agenda Item 9
February 25,2014
Public Hearing
MEMORANDUM
February 21, 2014
TO:
FROM:
County Council
Robert H. Drummer, Senior Legislative
Attorney~
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SUBJECT:
Public Hearing:
Expedited Bill 15-14, Personnel- Board ofInvestment Trustees
Consolidated Retiree Health Benefits Trust Board of Trustees - Investments - Amendments
Expedited Bill 15-14, Personnel - Board of Investment Trustees Consolidated Retiree
Health Benefits Trust Board of Trustees - Investments - Amendments, sponsored by the Council
President at the request of the County Executive, was introduced on February 4. A Government
Operations and Fiscal Policy Committee worksession will
be
scheduled in March.
Bill 15-14 would:
(1)
repeal the requirement that investments made by the Board of Investment
Trustees and the Consolidated Retiree Health Benefits Board of Trustees retain
U.S. indicia of ownership;
repeal the prohibition on investments in County related bonds by the Board of
Investment Trustees and the Consolidated Retiree Health Benefits Board of
Trustees;
repeal the restriction on real estate investment by the Consolidated Retiree Health
Benefits Board of Trustees; and
generally amend the law regarding the Employees' Retirement System,
Retirement Savings Plan, the Deferred Compensation Plan, and the Consolidated
Retiree Health Benefits Trust Fund.
(2)
(3)
(4)
Background
The Uniform Management of Public Employee Retirement Systems Act (UMPERSA) is
a uniform model act published by the National Conference of Commissioners on Uniform State
Laws in 1997. The model act contains provisions that would govern the establishment and
management of a public employee pension trust, including principles governing the investment
and management of trust funds by the trustees. A summary ofUMPERSA is at ©16-18. This
model act has not been enacted in its entirety in Maryland. However, the General Assembly did
enact Chapter 146 of the 2005 Laws of Maryland (codified at State Personnel
&
Pensions Article
§40-1 01), which requires all local jurisdictions establishing a public pension system after July 1,
2005 to adhere to the principles of UMPERSA addressing the investment and management of
funds. This law also requires each existing local pension system to certify to the Joint
Committee on Pensions of the Maryland General Assembly that it adheres to the UMPERSA
principles addressing the investment and management of funds or explain any deviations.
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Expedited Bill 27-07, Personnel - Retirement - Investment Authority, enacted on
December 4, 2007 and signed into law on December 17, 2007, removed the restrictive list of
investments that the Board could use in order to comply with the fiduciary rules of UMPERSA.
Bill 27-07 did not remove all of the restrictions on investments.
The Boards of the Montgomery County Employee Retirement Plans and the Montgomery
County Consolidated Retiree Health Benefits Trust are currently precluded from making
investments maintaining indicia of ownership of assets outside the jurisdiction of the U.S. courts.
Since investment opportunities are increasingly located outside of the United States, many
without maintaining United States indicia of ownership within the jurisdiction of the courts of
the U.S, current law constrains the pool of investments available to the Employee Retirement
Plans and Consolidated Retiree Health Benefits Trust. This restriction may unnecessarily limit
the returns that can be generated by these entities.
Restricting the Boards from making these investments may hinder their ability to fulfill
their fiduciary duty. Similarly, the Employee Retirement Plans and Consolidated Retiree Health
Benefits Trust are currently prohibited from investing in County-related bonds, which precludes
participation in investments with certain investment managers. The Consolidated Retiree Health
Benefits Trust is also prohibited from making investments in real estate funds if more than 10%
of such fund's assets comprise real estate in Montgomery County; this precludes participation in
investments with a wide variety of real estate investment managers.
The goal of the Bill is to provide the Boards with the flexibility to make investments with
indicia of ownership outside of the United States courts, investments in County-related bonds,
and County-related real estate, as consistent with their fiduciary duties.
This packet contains:
Bil11S-14
Legislative Request Report
Memo from County Executive
Fiscal and Economic Impact statement
UMPERSA Summary
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Expedited Bill No.
_---'-'15"---'-14.!-...._~_:
Concerning:
Personnel - Board of
Investment Trustees - Consolidated
Retiree Health Benefits Trust Board
of Trustees -
Investments ­
Amendments
Revised: January
16, 2014
Draft No.1
Introduced:
February
4,2014
Expires:
August
4,2015
Enacted: _ _ _ _ _ _ _ _ __
Executive:
Effective: _ _ _ _ _ _ _ _ __
Sunset Date:
...:.N..:.:o~n~e
_ _ _ _ __
Ch. _ _, Laws of Mont. Co. _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President at the request of the County Executive
AN EXPEDITED ACT
to:
(1 )
repeal the requirement that investments made by the Board of Investment
Trustees and the Consolidated Retiree Health Benefits Board of Trustees retain
U.S. indicia of ownership;
(2) repeal the prohibition on investments in County related bonds by the Board of
Investment Trustees and the Consolidated Retiree Health Benefits Board of
Trustees;
(3) repeal the restriction on real estate investment by the Consolidated Retiree Health
Benefits Board of Trustees; and
(4) generally amend the law regarding the Employees' Retirement System,
Retirement Savings Plan, the Deferred Compensation Plan, and 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, 33-160 and 33-162
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.
Deleted from 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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BiIINo.IS-14
1
Sec.
1.
Sections 33-59, 33-60, 33-125, 33-145, 33-160 and 33-162 are
amended as follows:
33-59.
Board of investment trustees.
2
3
4
5
*
(b)
Membership.
*
*
*
6
7
*
*
(4) The following 6 trustees must be appointed by the Executive
and confirmed by the Council:
(A) An active County employee who is a vested member of
the retirement system and the Merit System, and not a
member of a collective bargaining unit. A 3-year term
for this trustee ends on March 1 of every third year after
the trustee is confirmed by the Council.
(B) A retired County employee who is a member of the
retirement system.
Before appointing this trustee, the
8
9
10
11
12
13
14
15
16
Executive must consider, and should select from, a list of
3 to 5 individuals recommended by the Montgomery
County Retired Employees' Association. The Executive
must notify the Council when nominating an individual
not recommended by the Association. A 3-year term for
this trustee ends on March 1 of every third year after the
trustee is confirmed by the Council.
(C) Two persons recommended by the Council who are
knowledgeable in pensions, investments, or financial
matters. A 3-year term for these trustees ends on March
1 of every third year after each trustee is confirmed by
the Council.
17
18
19
20
21
22
23
24
25
26
27
;..2\
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Bill No. 15-14
28
29
30
31
32
(D)
Two individuals knowledgeable in pensions, investments,
or financial matters. Before nominating these trustees, the
Executive must consider, and should select from,
individuals recommended by citizens or countywide
citizens' groups.
An
individual recommended by a
citizens' group need not be a member of the group. The
Executive must notify the Council when nominating an
individual not recommended by a citizens' group. A 3­
year term for these trustees ends on March 1 of every
third year after each trustee is confirmed by the Council.
33
34
35
36
37
38
(5)
A trustee appointed under paragraph [(3)]
ill
continues to serve
39
after the trustee's term ends until the Council confirms a
successor, but the term for each position is not affected by any
holdover. A trustee who, after appointment and before the end
of a term, is no longer qualified for the trustee's position is
removed from the Board by operation of law.
40
41
42
43
44
45
*
(1)
In this
*
*
means the Employees'
Section, "retirement system"
46
47
48
Retirement System.,. [or] the Retirement Savings Plan.,. or the Deferred
Compensation Plan under Article IX.
33-60.
The board of investment trustees-Powers and duties.
49
50
51
52
*
(b)
*
*
*
Agents for transfer ofproperty.
*
[(6)
*
Except as authorized by executive regulation adopted under
method (3) that is substantially equivalent to federal ERISA
regulations on maintenance of indicia of ownership of plan
53
54
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Bill No. 15-14
55
56
57
58
59
assets, the board must maintain the indicia of ownership of the
assets of the retirement system within the jurisdiction of the
district courts of the United States.]
(c)
Authorized investments.
*
[(3)
*
*
60
61
The board or an investment manager must not invest any
retirement system asset in any bond, note, or debt instrument
issued by:
(A)
(B)
62
63
The County;
Any political subdivision within the County;
Any agency supported or financed wholly or partly by
taxes levied by the County Council; or
64
65
(C)
66
67
(D)
Any agency supported by bond issues underwritten by
the County.]
68
69
70
71
72
73
*
33-125.
*
*
Powers and duties of the Board.
*
(b)
*
*
*
*
Agents for transfer ofproperty.
*
[(6)
74
75
76
The Board must maintain the indicia of ownership of the assets
of the retirement savings plan within the jurisdiction of the
district courts of the United States.]
77
78
79
*
33-145.
*
*
Powers and duties of the board.
*
(c)
*
*
*
*
80
81
Agents for transfer ofproperty.
*
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Bill No. 15-14
82
[(6)
The Board must maintain the indicia of ownership of the
83
84
85
assets of the deferred compensation plan within the jurisdiction
of the district courts of the United States, except as authorized
in regulations adopted under method (3) that are substantially
equivalent to
federal
regulations
under
the
Employee
86
87
Retirement and Income Security Act (ERISA) regarding indicia
of ownership of plan assets.]
88
89
90
*
33-160.
Board of Trustees.
*
*
*
91
92
*
(t)
*
Officers.
The Board must select a chair, vice chair, and secretary
93
94
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
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.
95
96
97
98
99
100
101
102
103
104
105
106
107
108
*
33-162.
Trust Fund management.
*
*
*
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*
*
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Bill No.
15~14
109
110
III
(c)
Transfer Agents.
*
[( 6)
*
*
The Board must maintain the indicia of ownership of the Trust
Fund's assets within the jurisdiction of the United States federal
courts, except as authorized in regulations that the Executive
adopts under method (2).
Those regulations must be
112
113
114
115
116
117
substantially equivalent to federal regulations under the
Employee Retirement Income Security Act (ERISA) regarding
indicia of ownership of plan assets.]
118
119
120
121
122
123
124
125
126
(d)
Authorized investments.
*
[(2)
*
*
The Board or any investment manager must not invest in real
property, including securities based on ownership or other
interests in real property, unless the investment is a pooled
investment in which the Board has no power to manage the real
property. A pooled investment must not invest more than 10
percent of its assets in real property located in the County. This
10 percent limit applies to the market value of the total assets on
the preceding June 30.
If
the market value of investments in real
property in the County exceeds the 10-percent limit as a result of
market forces, the Board or the investment manager need not sell
an existing equity investment. The Board may obtain valuations
and take appropriate steps to comply with this 10-percent limit.]
127
128
129
130
131
132
[(3)]
[(4)
ill
*
*
*
133
134
135
The Board and any investment manager must not invest any
Trust Fund asset in any bond, note, or debt instrument issued by:
(A)
the County;
t6J
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Bill No. 15·14
136
137
138
139
(B)
(C)
a political subdivision in the County; or
an agency supported by bond issues undetwritten by the
County.
However, the Board or any investment manager may invest plan assets
in bonds, notes, and debt instruments of any of these entities if the
investment is held indirectly through a mutual fund or other pooled,
investment vehicle and complies with any limit in the Internal Revenue
Code.)
*
*
140
141
142
143
144
145
146
*
Sec. 2.
Expedited Effective Date.
The Council declares that this legislation is necessary for the immediate
protection of the public interest. This Act takes effect on the date on which it
becomes law.
Approved:
147
148
149
150
151
Craig
L.
Rice, President, County Council
Date
152
Approved:
153
Isiah Leggett, County Executive
Date
154
This is a correct copy ofCouncil action.
155
Linda M. Lauer, Clerk of the Council
Date
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LEGISLATIVE REQUEST
REPORT
Expedited Bill
15-14
Personnel
-
Board ofInvestment Trustees
-
Consolidated Retiree Health Benefits Trust
Board ofTrustees -Investments
-
Amendments
DESCRIPTION:
The Bill would repeal the requirement that investments made by
the Board of Investment Trustees for the Montgomery County
Employee Retirement Plans and the Board of Trustees for the
Montgomery County Consolidated Retiree Health Benefits Trust
maintain the indicia of ownership of assets within the jurisdiction
of the courts of the U.S. The bill would also repeal other
categorical restrictions on investments, including County-related
bonds and County-related real estate, and make technical changes.
The Boards of the Montgomery County Employee Retirement Plans
and the Montgomery County Consolidated Retiree Health Benefits
Trust are currently precluded from making investments maintaining
indicia of ownership of assets outside the jurisdiction of the U.S.
courts. Since investment opportunities are increasingly located
outside of the United States, many without maintaining United
States indicia of ownership within the jurisdiction of the courts of
the U.S, current law constrains the pool of investments available to
the Employee Retirement Plans and Consolidated Retiree Health
Benefits Trust. This restriction may unnecessarily limit the returns
that can be generated by these entities. Restricting the Boards from
making these investments hinders their ability to fulfill their
fiduciary duty, as the Uniform Management of Public Employee
Retirement Systems Act (UMPERSA) mandates that all
categorical restrictions on types of investments be eliminated.
Similarly, the Employee Retirement Plans and Consolidated
Retiree Health Benefits Trust are currently prohibited from
investing in County-related bonds, which precludes participation in
investments with certain investment managers. The Consolidated
Retiree Health Benefits Trust is also prohibited from making
investments in real estate funds if more than 10% of such fund's
assets comprise real estate in Montgomery County; this precludes
participation in investments with a wide variety of real estate
investment managers.
PROBLEM:
GOALS AND
OBJECTIVES:
The goal of the Bill is to provide the Boards with the flexibility to
make investments with indicia of ownership outside of the United
States courts, investments in County-related bonds, and County­
related real estate, as consistent with their fiduciary duties.
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The
Bill
also makes other clarifying changes such as providing that
a retiree member of the Board of Investment Trustees may be a
member of the Deferred Compensation Plan and that the vice chair
of the Board of Trustees for the Consolidated Retiree Health
Benefits Trust assumes the duties of the chair when the chair is
unavailable.
COORDINATION:
The Board of Investment Trustees, 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:
Department of Finance
N/A
Numerous other governmental retirement plans, including the State
of Maryland Retirement and Pension System, Virginia Retirement
System and D.C. Retirement System, have no similar requirement
that investments maintain the indicia of ownership of assets within
the jurisdiction of the U.S. courts. Neither the Maryland State
Retirement and Pension System nor Virginia Retirement System
have a prohibition against investing in State-related bonds.
SOURCE OF
INFORMATION:
Linda Herman and Bradley Stelzer, Board of Investment Trustees,
Board ofTrustees
Amy Moskowitz, Office ofthe County Attorney
Morgan Lewis, outside legal counsel for the Board of Investment
Trustees
APPLICATION
WITHIN
MUNICIPALITIES:
N/A
PENALTIES:
N/A
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OFFICE OF THE COUNTY EXECUTIVE
ROCKVILLE, MARYLAND 20850
Isiah Leggett
County Executive
MEMORANDUM
December 19,2013
TO:
FROM:
SUBJECT:
Craig Rice, Council President
~"""-
_ _ _ __
Isiah Leggett, County
Executiv~7
f7IV..J
Expedited Bill to Amend the County's Retirement Law
I am attaching for the Council's consideration a bill that would amend the
County's law to allow the Employee Retirement Plans and Consolidated Retiree Health
Benefits Trust to delete a provision which requires the Boards overseeing the investment
ofthe Trust Funds to maintain the indicia of ownership ofassets within the jurisdiction of
the district courts of the United States. The bill would also delete other categorical
restrictions on investments and make technical changes.
The County Code currently requires the Employee Retirement Plans
(ERP) and Consolidated Retiree Health Benefits Trust (CRHBT) to maintain the indicia
ofownership ofassets within the jurisdiction of the courts of the United States. (Sections
33-60,33-125,33-145, and 33-162). These provisions ofthe County Code mirror the
Employee Retirement Income Security Act (ERISA) which governs private retirement
plans, but not the ERP. The Board ofInvestment Trustees for the ERP and the Board of
Trustees for the CRHBT (collectively, ;'Boards") have been advised by outside legal
counsel that it is viewed as an acceptable practice by plans subject to ERISA to make
investments with indicia of ownership outside ofthe U.S. provided that documents
relating to the investment are held in the U.S. under the untested theory that this satisfies
the requirement that the courts of the U.S. maintain jurisdiction of the assets. The outside
counsel for the Boards has advised them that a better approach for the ERP and CRHBT
would
be
to remove the requirement that investments maintain U.S. indicia of ownership
rather than to rely on "acceptable practice." Outside legal counsel also noted that such a
provision is unusual in governmental retirement plans. Numerous other governmental
retirement plans, including the Maryland State Retirement and Pension System, Virginia
Retirement System, and D.C. Retirement Board, have no similar requirement that
investments maintain the indicia of ownership of assets within the jurisdiction ofthe U.S.
courts.
Due to the increasingly global nature of investment opportunities, the bill
under consideration is important, since it would remove the requirement that investments
montgomeryc:ountymd.gov/311
240-773-3556 TTY
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Craig Rice, Council President
October 19,2013
Page 2
for the ERP and CRHBT maintain indicia of ownership of assets within the jurisdiction
of the courts of the U.S. and allow the Boards to pursue investments with favorable return
potential without doubt that the "acceptable practice" continues to be sufficient. The
changes included in the bill also serve to improve the Boards' ability to perform their
fiduciary duty, as the Uniform Management of Public Employee Retirement Systems Act
(UMPERSA) mandates that all categorical restrictions on types of investments be
eliminated due to the limitations these restrictions place on the trustee's ability to perform
their fiduciary duties in the investment of retirement plan funds and the potential loss of
investment income. The Council previously took action in Bill 27-07 to eliminate other
categorical restrictions on investments from the Code.
The County Code also currently contains categorical restrictions on the
ERP's and CRHBT's ability to invest in County-related bonds (33-60 and 33-162) and
the CRHBT's ability to make real estate fund investments if more than 10% of such
fund's investments are located in the County (33-162) ("County-related real estate
investments"). The prohibition against investing in County-related bonds cannot be
adhered to by certain investment managers as their fiduciary duty requires them to pursue
the best investment opportunities on a risk/return basis without restriction. This
restriction limits the Boards' ability to perform their fiduciary duty and, therefore, to
adhere to UMPERSA.
It
is important to note that the Boards currently do not have
authority to make direct investments in securities, as 33-60(c)(1) and 33-162(d)(1)
require that all investments be made through an investment manager. Under the proposed
legislation, there would be no changes to the requirement to use an investment manager,
meaning that only investment managers - not the Boards directly - could purchase
County-related bonds. Other local jurisdictions such as Virginia and Maryland do not
restrict investment by their retirement systems in State-related bonds. Also, prior
legislation removed the restriction on the Board of Investment Trustees' ability to make
County-related real estate investments for the ERP; removing the same restriction for the
Board of Trustees for the CRHBT brings parity to the Boards' ability to pursue real estate
investments.
The Bill also makes several other technical changes such as clarifying that
a retiree member of the Board of Investment Trustees may be a member of the Deferred
Compensation Plan and that the vice chair of the Board of Trustees for the Consolidated
Retiree Health Benefits Trust asswnes the duties of the chair when the chair is
unavailable.
Thank you for your prompt consideration of this bill.
IL:lh
Attachments
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Fiscal Impact Statement
Council Bill XX-13
Board of Investment Trustees - County Retirement Plans
Board of Trustees - Consolidated Retiree Health Benefits Trust
1. Legislative Summary.
This bill would amend the Montgomery County Code by removing requirements that
investments made by the Boards overseeing the County's Retirement Plans and the
Consolidated Retiree Health Benefits Trust (CRHB1) retain U.S. indicia of ownership.
The bill would also delete other categorical restrictions on investments, including
County-related bonds and real estate located in the County, and make technical changes.
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.
Implementation of this bill would not impact County revenue. County expenditures
could be impacted if the bill resulted in the ability to generate higher investment returns,
which would reduce the required County contribution to the Retirement Plans and the
CRHBT. The extent or degree of the impact is unquantifiable. The assumption is that
there is an opportunity cost to limiting available investment options.
3.
Revenue and expenditure estimates covering at least the next
6
fiscal years.
Not applicable
4.
An actuarial analysis through the entire amortization period for each bill that would affect
retiree pension or group insurance costs.
Not applicable
5. Later actions that may affect future revenue and expenditures if the bill authorizes future
spending.
Not applicable
6.
An
estimate of the staff time needed to implement the bill.
Not applicable
7.
An
explanation of how the addition of new staff responsibilities would affect other duties.
Not applicable
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
11. If a bill is likely to have no fiscal impact, why that is the case.
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Implementation of this bill would not impact County revenue. County expenditures
could be impacted ifthe bill resulted in the ability to generate higher investment returns,
which would reduce the required County contribution to the Retirement Plans and the
CRHBT. While the extent or degree of the impact is unquantifiable, it is believed that
there
is
an opportunity cost to limiting available investment options.
12. Other fiscal impacts or comments.
Not applicable
dtnnifer Hughes, DireCtO
Office of Management and Budget
Date
@
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Economic Impact Statement
Bill
xx-13
Board of Investment Trustees - County Retirement Plans
Board of Trustees - Consolidated Retiree Health Benefits Trust
Background:
This legislation would: .
• amend the requirements of the County retiree member ofthe Board of Investment
Trustees.
• amend the requirement that investments made by the Board of Investment
Trustees must retain U.S. indicia of ownership.
• amend the requirement that investments made by the Consolidated Retiree Health
Benefits Board of Trustees must retain U.S. indicia of ownership.
• amend the Employees' Retirement System to delete the prohibition of investments
in County related bonds.
• amend the Consolidated Retiree Health Benefits Trust to delete the prohibition of
investment in Montgomery County real estate.
• amend the Consolidated Retiree Health Benefits Trust to delete the prohibition of
investments in County related bonds.
• generally amend the law regarding the Employees' Retirement System,
Retirement Savings Plan and the Deferred Compensation Plan.
• generally amend the law regarding the Consolidated Retiree Health Benefits Trust
Fund.
1. The sources of information, assumptions, and methodologies used.
The source of information is from the staff ofthe Montgomery County Employee
Retirement Plans. Assumptions and methodologies are not applicable.
2. A description of any variable that could affect the economic impact estimates.
Not applicable. Bill xx-13 would have no economic impact because the proposed
legislation is a technical change that removes the requirement that investments made
by the Board of Investment Trustees for the County's Retirement Plans and the Board
of Trustees for the Consolidated Retiree Health Benefits Trust retain a U.S. indicia of
ownership. The Bill also deletes other categorical restrictions on investments,
including County-related bonds and real estate located in Montgomery County. The
Bill also makes other technical changes relating to membership of the Board of
Investment Trustees and duties of officers on the Board of Trustees. No economic
impact results from these technical changes since they do not affect employment,
spending, savings or other economic variables.
Page 10f2
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Economic Impact Statement
Bill xx-13
Board of Investment Trustees - County Retirement Plans
Board of Trustees - Consolidated Retiree Health Benefits Trust
3.
The Bill's positive or negative effect,
if
any on employment, spending, saving,
investment, incomes, and property values in the County.
Not applicable. See #2 above. Bill xx-13 would have no economic impact.
4.
If
a Bill
is
likely to have no economic impact, why
is
that the case?
See #2 above. The proposed legislation removes the requirement that investments
made by the Board of Investment Trustees for the County's Retirement Plans and the
Board ofTrustees for the Consolidated Retiree Health Benefits Trust retain
a
U.S.
indicia of ownership. The Bill also deletes other categorical restrictions on
investments, including County-related bonds and
real
estate located in Montgomery
County. The legislation also makes other technical changes relating to membership
of the Board of Investment Tr1:!Stees and duties of officers on the Board of Trustees.
No economic impact results from these changes.
5.
The following contributed to and concurred with this analysis: Linda Herman and
Brad Stelzer of the Board of Investment Trustees and David Platt and Rob
Hagedoorn, Finance;
Date
~
.
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,I
SUMMARY
Uniform Management of Public Employee
Retirement Systems Act
'
More than $1 trilUon in assets are managed in the United States in retirement systems for public
employees
of
state and local government. A mixture of state law governs these systems, unlike
private retirement systems which are governed primarily by federal law, the Employee Retirement
Income Security Act (ERISA). State law has not kept up with modern investment practices so that
trustees for these systems are very frequently not be able to maximize return for the level of risk
that is appropriate to these systems. This means less money to pay retirement benefits than
would be the case
if
trustees could use modem portfolio theory. (More on modem portfolio theory,
later.)
In 1997 the Uniform Law Commissioners have promulgated the Uniform Management of Public
Employee Retirement Systems Act (UMPERSA) to remedy the deficiency. It will provide legal
rules that permit public employee retirement systems to invest their funds in the most productive
and secure manner. And these advantages can be obtained with a minimum of regulatory
interference. How does UMPERSA work?
ALL ASSETS HELD IN TRUST
Except for certain insurance-based assets, all assets of a retirement system are held in trust and
the trustee has the independent, exclusive'authority to invest and manage those assets. The
trustee is defined as the person with the ultimate authority to manage a retirement system or to
invest or manage its assets. By declaring that all retirement system assets are held in trust,
UMPERSA assures that public employees are guaranteed the highest standard of conduct in the
management
and
investment of assets for retirement that the law can establish. A trustee is the
highest fiduciary, carries the greatest burdens
of
care, loyalty and utmost good faith for the
beneficiaries to whom he or she is responsible.
As well as ordinary trustees' powers, a trustee under UMPERSA has the power to establish an
administrative budget and to employ the services necessary to administer
the
trust The
trustee
may delegate functions that -a prudent trustee or administrator acting in like capacity and familiar
with those matters could properly.delegate under the circumstances." This delegation rule, which
reverses the common law rule about delegation of trust functions, is important with respect to the
trustee's investment obligations.
PRUDENT INVESTMENT RULES
UMPERSA follows
the
Uniform Prudent Investor Act in its articulation of prudent investment rules.
These rules provide trustees with the great advantage of modem portfolio theory. When the
trustee Is responsible for investment of the assets of a publ\c employee retirement system, he or
she must invest as a prudent investor Invests his or her own assets. Prudent investment is a
fiduciary duty. A prudent investor takes all factors into account in considering investment
decisions, such as general economic conditions, effects of inflation or deflation. expected total
return from income and appreciation of capital, and the role that every investment fills in the entire
portfolio. There is a positive obligation to diversify investments, unless special circumstances
indicate that it is not prudent to do so. Diversification is the best method for reducing risk of loss.
In return for these obligations, the trustee obtains the power to invest in any property or
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investment consistent with UMPERSA.
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Although a trustee under UMPERSA may invest in assets other than interest·bearing instruments
and real estate, the prudent investment rules do not promote unreasonable risk-of-Ioss or
speculative investment. The trustee must make a careful risk·return analysis in light of the
objectives of the retirement system, including the income needs of that system. The availability of
a broader range of investments and diversification means risk can be safely and significantly
managed with the prospect of much greater retum.
Since most of the public employee retirement systems are backed by state and local
govemments, if they fail to generate the income to pay retirement benefits, the taxpayer inevitably
assumes the burden. Thus prudent investment reduces taxpayer risk, as well.
As a corollary to prudent investment obligations, the trustee's
performance in
investment
;s
measured by the performance of the entire portfolio, not just the performance of individual
investments. Also, performance is measured in light of the facts and circumstances when
investment decisions are made. Hindsight is ruled out.
TRUSTEE LIABILITY
A trustee or other fiduciary who breaches a duty imposed by UMPERSA is personally
liable
for
any loss or for any profit made through use of trust assets. No agreement may exonerate a
trustee or fiduciary from liability. The retirement system or the fiduciary may insure against such
losses.
REQUIRED DISCLOSURES
UMPERSA requires each retirement system to provide three information resources.
A
"summary
plan description" is required, as are subsequent updates when the system changes the plan. The
summary plan description is a brief disclosure of the benefits the plan provides, how one qualifies
for benefits. and how a member may become disqualified. Each system must publish "annual
disclosure of financial and actuarial status" in detail. This is a co'mprehensive compUation of
finanCial and actuarial information. And last, an "annual report" must be published. The "annual
report"
is
a brief summary of the "annual disclosure offinancial and actuarial status."
All
three must be available at the retirement system's principal offices for public inspection. The
administrator must honor requests for copies, but may charge
a
reasonable fee for supplying
them.
The administrator must send copies
of
the "summary plan description" to new participants in a
retirement system within three months after they join. Updates must be sent out at least seven
months after the fiscal year in which the plan changes have been made. A complete revised
"summary plan description" with all prior changes incorporated must be sent to participants at
least every fIVe years. The "annual report" must be sent to participants within seven months of the
end of the fiscal year which is reported.
UMPERSA contemplates the creation of an agency as a central repository of information on
public
employee
retirement systems. Disclosures of the "summary plan description", subsequent
changes, the"annual disclosure of financial and actuarial status" and the annual report must be
filed with the designated agency.
ENFORCEMENT
A public employer, participant. beneficiary or fiduciary may bring equitable action in a court for
relief from a violation of UMPERSA or breach of a
dtJty.
The agency may also bring injunctive
.
relief against a violation of UMPERSA.
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CONCLUSION
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UMPERSA will provide for improved investment retums for public employee retirement systems.
It will guarantee important information to public employers, trustees and participants about the
administration of these systems.
It
provides clear liability and enforcement rules. State and local
governments, trustees and fiduciaries, partiCipants and the taxpayer. who must pay for financial
deficiencies in such systems. all stand to gain from the adoption of UMPERSA. Every state
should adopt it as soon as possible.
@
2002
National Conference of CommiSSIoners on Uniform
State laws
211 E. Ontario Street, Suite 1300
Chicago,
Illinois
60611
tel: (312) 915-0195
t
fax:: (312) 915-0187
I
e-mail;
nccusl(ijlnccusl.oTg
®
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1L/26/2007