FRESNO COUNTY BOARD OF RETIREMENT



BOARD OF RETIREMENT

FRESNO COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION

February 17, 2010

Trustees Present:

Michael Cardenas Nick Cornacchia Franz Criego

Vicki Crow Eulalio Gomez James E. Hackett

Steven Jolly Phil Larson John Souza

Others Present:

Ronald S. Frye, Alternate Trustee

Les Jorgensen, FCERA Member

Roger Greening, FCERA Member

Joy Clark, FCERA Member

Dennis Plann, FCERA Member

Ron Madsen, FCERA Member

Robert Skowronski, FCERA Member

Jeffrey Rieger, Reed Smith ~ via tele-conference

Susan Coberly, Senior Deputy County Counsel

Roberto L. Peña, Retirement Administrator

Becky Van Wyk, Assistant Retirement Administrator

Elizabeth Avalos, Administrative Secretary

1. Call to Order

Chair Gomez called the meeting to order at 8:35 AM.

2. Pledge of Allegiance

Recited.

3. Public Presentations

None.

Consent Agenda/Opportunity for Public Comment

A motion was made by Trustee Larson, seconded by Vice Chair Hackett, to Approve Consent Agenda Items 4-8. VOTE: Unanimous (Absent – Crow, Souza)

*4. Approve the February 3, 2010 Retirement Board Regular Meeting Minutes

RECEIVED AND FILED; APPROVED

*5. Summary of monthly statistics from the Retirement Association Office on service credit purchases, retirement benefit estimates, public service, age adjustments, final compensation calculations, and disability retirement applications for January 2010

RECEIVED AND FILED

*6. Public Records Requests and/or Retirement Related Correspondence from Gary Anderson, FCERA Member; John Stimpson, Prisma Partners; Chris Staneluis, Elessar Investment Management; Toby Elliman, Guidance Capital; Teal Lynch, Thomson Reuters; Doug Hogel, SunGard Astec Analytics; Jakema Lewis, Investment Management Weekly; Jonathan Choslovsky, Albourne America, LLC; Bill Irvine, Eaton Vance Investment Managers; Mike Pedone, GE Capital Real Estate; Susan Coberly, Fresno County Senior Deputy County Counsel; Katina O’Leary, Opus Capital Management; Rahul Ratan, Institutional Investor; Simren Desai, Setter Capital Inc., Leland Scholey, Federated Global Institutional Sales; Carl Winfield, Money Management Letter; and Linda Jordan, Mesirow Financial

RECEIVED AND FILED

*7. Update of Board of Retirement directives to FCERA Administration

RECEIVED AND FILED

*8. Board Communications

RECEIVED AND FILED

Trustees Crow and Souza joined the Board at 8:39 AM.

9. Discussion and appropriate action on the Annual Consumer Price Index (CPI) for the Cost of Living Adjustment (COLA) as of April 1, 2010 (G.C. §31870.1) rounded to -0.5%

Roberto L. Peña, Retirement Administrator, opened discussions by reminding the Board that the calculation of the annual Consumer Price Index (CPI) for the Western Region resulted in a percentage change of -.038%, which when rounded to the nearest one-half percent as required by GC §31870.1 results in a -0.5% cost-of-living factor to be used by FCERA on April 1, 2010 for the annual Cost-of-Living Adjustment (COLA).

Mr. Peña reviewed the COLA “bank” table provided by the Segal Company summarizing the accumulated COLA carry-over from each year and noted that the COLA bank would be decreased by 0.5% for those who retired on or before April 1, 2009. Mr. Peña explained that for those who have only a 0.5% COLA bank, there is no cost of living increase this year.

Mr. Peña drew attention to the two approaches described in the Segal letter. Approach A would result in a negative COLA bank balance and Approach B would never allow the COLA bank balance to fall below zero.

Attorney Jeffrey Rieger, Reed Smith, addressed the legal ramifications and implications of the negative COLA for those retiring between April 2, 2009 and April 1, 2010 noting that because G.C. §31870.1 does not specifically address the negative COLA bank issue it is open to interpretation and he recommended that the Board adopt Approach B based on the plain language of the code section.

Attorney Rieger commented on the various interpretations of the code section that other retirement systems are considering implementing noting that most are considering different approaches.

Trustee Criego asked the following questions:

1. Which approach is most equitable for the retirement system versus the members? And members versus the retirement system?

2. Which approach is most prudent as to the retirement system versus the members? And Members versus the retirement system?

3. Which plan do you [Attorney Rieger] prefer for the members?

Attorney Rieger responded as follows:

1. “Does not view things as what is equitable for the retirement system because the retirement system is supposed to operate under the law and do the best that it can to implement the law. It’s not really a question of equity, it’s a question of what is owed and then by determining what is owed the Board is doing the equitable thing by paying what is owed and preserving the fund to pay benefits in the future by not overpaying benefits.”

Attorney Rieger noted the legislature could have made their meaning clearer in the statute if they wanted to.

2. “In terms of prudence, again that falls back on doing your best to implement what you think the law provides. Clearly, if the Board implements Approach A in the long-term it will save the system some money if inflation comes back and vice versa when it comes to the members. It is less advantageous to the members who receive a negative COLA bank due to that interpretation. Either approach would be prudent.”

3. “I [Attorney Rieger] don’t have any preference for the members. My job is to help you get the law right, but clearly Approach B is more advantageous for the member.

In response to a concern of Trustee Crow regarding the possibility of sustained deflation over the next couple of years, Attorney Rieger noted that in the event there is deflation in the next couple of years, members would benefit with more purchasing power with Approach B without any offset when inflation returns.

Trustee Souza stated that in the event the Board chooses to not decrease the COLA bank by 0.5% for the new retirees then the Board should not decrease the bank for the current retirees.

Attorney Rieger explained that “the statute does set up a scenario where members are treated differently because of the initial benefit floor. All members except for the members retiring this year have a positive COLA bank of at least 0.5% and because of the positive bank, retirees’ benefits will not decrease this year. In the event of deflation next year some member benefits will decrease and that is because they have a cost of living benefit that has accrued in past years and the statute allows a decrease in the past benefits when there is deflation. However, the statute does have one exception which is the member’s initial allowance.”

Attorney Rieger further explained that “the legislature decided that as a policy matter the members’ allowances would never drop below its initial amount and that was a favorable decision that the legislator made for the members. In some cases that issue causes a different treatment to members in a given year even though all members are subject to the same statute.”

Mr. Peña briefly reviewed a SACRS survey distributed in December 2009 that focuses on the different interpretations and views of the statute, as it relates to the negative COLA, by other retirement systems.

Mr. Peña noted his support for tracking the negative cost of living in the event deflation continues for the next couple of years.

A motion was made by Trustee Jolly, seconded by Trustee Crow to Adopt Approach A ~ No reduction in the members’ benefits payable as of April 1, 2010 because any such reductions would reduce the benefits below the amounts paid as of the original date of retirement. The COLA Bank as of April 1, 2010 will be adjusted to -0.5% to reflect the -0.5% change in the CPI.

In response to question from Vice Chair Hackett regarding whether members are counseled on the impact of a negative COLA, Mr. Peña noted that, as information became available, members were/are informed of the COLA during counseling sessions. In addition, the information is included in the Winter edition of the FCERA Newsletter.

Les Jorgensen, FCERA Retiree, addressed the Board noting his support for Approach B.

Roger Greening, FCERA Retiree, asked the Board to consider the current County layoffs and recent Retirement expenditures (Trustee Travel and the Administrator’s merit increase) when deciding to decrease the Retiree’s COLA bank.

Joy Clark, FCERA Retiree, addressed the Board noting her support for Approach A.

Dennis Plann, FCERA Retiree, reminded the Board of the recent health insurance increase for County retirees and noted that the current retirees’ purchasing power has decreased as a result of those increases.

At the request of Trustee Larson, Mr. Peña explained the differences between Approach A and B. Mr. Peña noted that adopting Approach A will not reduce new retiree’s allowances below the amount to which they are entitled.

Chair Gomez restated the motion as follows:

To Adopt Approach A ~ No reduction in the members’ benefits payable as of April 1, 2010 because any such reductions would reduce the benefits below the amounts paid as of the original date of retirement. The COLA Bank as of April 1, 2010 will be adjusted to -0.5% to reflect the -0.5% change in the CPI. ROLL CALL VOTE: Yes – Cardenas, Cornacchia, Crow, Jolly, Larson, Souza. No – Criego, Hackett, Gomez. MOTION PASSED.

RECEIVED AND FILED; APPROVED

10. Discussion and appropriate action on Cost of Living Adjustment Underpayment presented by Roberto L. Peña, Retirement Administrator

Roberto L. Peña, Retirement Administrator, opened discussions by reminding the Board that during Administration’s review in 2009 of the members’ files for the Final Compensation Project, it was discovered that the COLA Bank percentages used to determine the Supplemental Cost-of-Living portion of the member’s benefit have been incorrect since April 2, 2002. It was determined that the error impacted approximately 860 members.

The error occurred in a two-step manner. First, in 2002 FCERA’s actuary made an error while updating the prior actuary’s COLA Bank table for the 2001 banked balances used to calculate the Supplemental COLA benefit. As a result, the COLA Bank balance percentage for most of the years as reported in the actuary’s COLA letters since 2002 included the incorrect COLA bank percentages.

The second error took place when a schedule of the COLA Bank percentages was compiled to be used for the Supplemental COL benefit calculation portion of Final Compensation Calculation Project. The correct Supplemental COL benefit had been paid in 2001 (based on the letter by that actuary); however, as a result of the error contained in the schedule of SUPP COL Bank percentages prepared by the subsequent actuary, incorrect percentages were applied to calculate the new SUPP COL benefit for 2001.

These errors caused an underpayment of Supplemental COLA benefits to those members with SUPP COL benefits, as well as, members that retired between April 2, 1998 and April 1, 1999. Administration will recalculate the supplemental cost-of-living benefit calculation for the years of 2002 through current and provide the members with a letter explaining the reason for the underpayment and the amount that they are entitled to for the period of April 1, 2002 to the current processing date. The underpayment will include interest at FCERA’s actuarially assumed rate(s) through the payment date as required by the underpayment of benefits policy.

One permanent employee and two extra-help employees will be concentrating on the project full time. It is estimated that this process will take about nine months to complete. As the project develops, Administration will have a better understanding of how long the project may take and will keep the Board informed of the progress.

In response to a question from Trustee Jolly regarding whether this issue should have been noted during the actuarial audit, Mr. Peña stated that an issue such as this would not necessarily have been part of the audit. However, processes are now in place to prevent this issue moving forward.

In response to a question from Trustee Jolly regarding the underpayment for those members with SUPP COL benefits, Mr. Peña noted that the payments will come from the SUPP COL reserve.

Ron Madsen, FCERA Retiree, offered an explanation of how the change may have occurred noting that each of the prior actuaries potentially calculated the CPI using different processes and formats with each outcome correct when rounded. Mr. Peña disagreed with Mr. Madsen explanation and reviewed the areas in question.

RECEIVED AND FILED

11. Discussion and appropriate action on proposed Policy for monitoring effects of setting uniform employer contribution rates presented by Jeffrey Rieger, Reed Smith

Attorney Jeffrey Rieger, Reed Smith, opened discussions by reminding the Board of its direction that Administration work with Reed Smith to develop a policy addressing employer contribution equity.

Attorney Rieger noted that FCERA has historically set uniform employer contribution rates for membership tiers based on a pooling of the total assets and liabilities attributed to the employees in each tier without distinguishing among employers’ varying policies or experience. Attorney Rieger stated that FCERA’s historical practice of establishing uniform employer contribution rates based on a pooling of all assets and liabilities by tier is fully authorized under the County Employees’ Retirement Law and other applicable law.

The Board of Retirement has discretionary authority, however, to establish different contribution rates for different employers. Provided that there is a reasonable actuarially-based nexus between an employer’s contributions and the liabilities attributable to that employer’s employees over time, the Retirement Board has broad latitude in setting contribution rates in order to assure the actuarial soundness of the retirement system.

A motion was made by Trustee Crow, seconded by Trustee Jolly, to Accept the policy as presented. VOTE: Unanimous

RECEIVED AND FILED; APPROVED

12. Discussion and appropriate action on Member Account Interest Crediting process presented by Becky Van Wyk, Assistant Retirement Administrator

Becky Van Wyk, Assistant Retirement Administrator, opened discussions by reminding the Board that the Interest Crediting Policy states that interest will be credited to member accounts “at the rate of ½ of the cost-of-living increase percentage provided to FCERA members who retired on or before April 1 of that calendar year”. This rate is also used to determine the net cost required for retirement contribution adjustments.

Ms. Van Wyk noted that, because the cost of living for calendar year 2009 is a negative 0.5% and based on the interest crediting policy, no interest will be credited to the members’ accounts for the six month period ending on June 30, 2010 or December 31, 2010.

Trustee Crow reminded the Board of the lengthy discussions and processes in developing the Interest Crediting Policy noting the discussions were held in open session with public input.

A motion was made by Trustee Crow, seconded by Trustee Larson, to confirm the Interest Crediting Policy as presented. VOTE: Unanimous

RECEIVED AND FILED; APPROVED

13. Discussion and appropriate action on Brown Armstrong Audit Services Contract Extension

Becky Van Wyk, Assistant Retirement Administrator, opened discussions by reminding the Board that Due Diligence Policy adopted by the Board on April 2, 2008 states “…for each of the primary service providers listed below, contracts will be issued for a three-year period with two additional one-year periods at the discretion of FCERA.”

The Due Diligence Policy further states that “…staff will, at least every five years, provide the Board with a recommendation as to whether FCERA should formally review the contracts in question by issuing a Request For Proposals, or by taking other appropriate forms of inquiry.”

Ms. Van Wyk noted that at the Regular Board meeting held on March 15, 2006, the Board approved a contract with the audit firm of Brown, Armstrong, Paulden, McCowan, Starbuck & Keeter (Brown Armstrong) to perform the audit of the financial statements for the three years beginning June 30, 2006. The contract included a provision for additional years to be negotiated. Thus, on April 15, 2009, the Board approved a one year amendment to the contract with a 10% price increase for the audit of the financial records for the fiscal year ended June 30, 2009.

Brown Armstrong has offered to extend the contract another three years with a 15% decrease in fees, which would be $55,445 per year. The contract with Brown Armstrong was executed prior to the adoption of the Due Diligence Policy thus the contract period is unstated.

Ms. Van Wyk referred to a copy of Brown Armstrong’s most recent peer review dated January 30, 2009 which indicates that Brown Armstrong received the highest rating available; “pass” and current resumes of the professionals assigned to work on FCERA’s audit and recommended that the Board accept this information as sufficient reason to extend the contract with Brown Armstrong.

Should the Board accept Brown Armstrong’s offer of a 15% decrease, then an amendment to the audit contract will be prepared for its approval with a cost of $55,445 for preparing the audit for the fiscal years ended June 30, 2010, 2011 and 2012.

Alternatively, the Board could authorize an extension of one year or two years, or direct the issuance of a Request for Proposal.

Trustee Crow expressed her support for extending the audit contract noting that Brown Armstrong has done a “fine” job.

Trustee Cornacchia noted the importance of the RFP process and encouraged the Board to request Administration to move forward with the RFP process in hopes of negotiating a better deal.

Trustee Crow noted that because the RFP process is time consuming for staff and that there are a limited number of firms offering audit services for retirement systems, she supports accepting Brown Armstrong’s competitive offer. Trustee Criego agreed.

Roberto L. Peña, Retirement Administrator, noted that the FCERA staff is pleased with the services provided by Brown Armstrong. General discussions ensued regarding the 15% reduction versus issuing an RFP.

A motion was made by Trustee Crow, seconded by Trustee Larson, extend the audit contract with Brown Armstrong as presented. VOTE: Yes – Cardenas, Criego, Crow, Gomez, Hackett, Jolly, Larson. No – Cornacchia, Souza.

RECEIVED AND FILED; APPROVED

14. Discussion and appropriate action on professional services contract with SCS for the purchase and implementation of a new general ledger system

Becky Van Wyk, Assistant Retirement Administrator, referred to the draft contract with Specialist in Custom Software, Inc. (SCS), the firm selected to install the new general ledger system for FCERA and noted that the contract has been reviewed and agreed to by attorneys associated with Reed Smith, fiduciary counsel.

Ms. Van Wyk recommended that the Board approve the contract with SCS as presented.

In response to a question from Trustee Cornacchia regarding the price for implementation, Ms. Van Wyk noted that SCS generally does not lock in a price for implementation until after the design phase is completed. Their experience is that changes to the requirements described in the Request for Proposal tend to come up during the design phase. Those changes can impact the cost of the project, positively or negatively.

A motion was made by Trustee Criego, seconded by Trustee Larson, to Approve the contract with SCS as recommended. VOTE: Unanimous (Absent – Crow)

RECEIVED AND FILED; APPROVED

Roberto L. Peña, Retirement Administrator, pulled Closed Session Agenda Item 15.A.1. as there was nothing to discuss.

15. Closed Session:

A. Conference with Real Property Negotiators – pursuant to G.C. §54956.8

1. Property: 1713 Tulare Street, Fresno, CA 93721

Agency Negotiators: Brian Decker of Colliers Tingey

B. Disability Retirement Applications – Personnel Exception (G.C. §54957):

1. Debra Villegas

2. Jerry Ore

3. Carol Thompson

16. Report from Closed Session

15.A.1. Pulled.

15.B.1. Debra Villegas - Decision -To Approve the Findings of Fact and Decision granting Service Connected Disability Retirement benefits. M – Jolly. S – Souza. VOTE: Unanimous

15.B.2. Jerry Ore - Decision - To Approve the Findings of Fact and Decision granting Service Connected Disability Retirement benefits with an effective date of January 30, 2008. M – Jolly. S – Souza. VOTE: Unanimous

15.B.3. Carol Thompson - Decision - To Approve the Findings of Fact and Decision granting Carol Thompson Service Connected Disability benefits. M – Jolly. S – Souza. VOTE: Unanimous

Trustee Crow departed at 10:32 AM.

17. Report from FCERA Administration

Roberto L. Peña, Retirement Administrator, reported on the following:

1. The upcoming SACRS Spring Conference 2010.

2. The deadline for submitting the Conflict of Interest Form 700.

3. Roy Norman’s resignation as manager of the FSBC.

4. The Correctional Officer’s contribution refund issues.

18. Report from County Counsel

Susan Coberly, Senior Deputy County Counsel, had nothing to report.

19. Board Member Announcements or Reports

The Trustees had nothing to report.

There being no further business, the meeting adjourned at 10:42 AM.

Roberto L. Peña

Secretary to the Board

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