STAFF SUMMARY OF MEETING
POLICE OFFICERS' AND FIREFIGHTERS' PENSION REFORM COMMISSION
|Time:||09:01 AM to 11:52 AM|
|This Meeting was called to order by|
|This Report was prepared by|
X = Present, E = Excused, A = Absent, * = Present after roll call
|Bills Addressed: ||Action Taken:|
|Presentation by FPPA on the Portfolio||FPPA Presentation|
09:02 AM -- Presentation by FPPA on the Portfolio
Representative Benefield, Chair, called the meeting to order and welcomed everyone to the meeting of the Police Officers' and Firefighters' Pension Reform Commission (commission). Thirteen of 15 commission members attended the meeting along with the following staff: Mr. Ed DeCecco from the Office of Legislative Legal Services, and Mr. Geoffrey Johnson and Mr. Ron Kirk of the Legislative Council Staff. A handout entitled "Annual Update to the State of Colorado Pension Reform Commission"dated August 7, 2009, was distributed to the commission members (Attachment A).
Representative Benefield, Chair, began by discussing a date for the final meeting of the commission for consideration of legislation. Representative Benefield suggested the date of September 14 and it was agreed upon by the commission.
Presentation by FPPA
09:05 AM -- Mr. Dan Slack, Chief Executive Officer, Colorado Fire and Police Pension Association (FPPA), began by discussing the current members of the FPPA Board of Trustees and presented a history of the pension fund. He continued by discussing the role of the board as the primary governing fiduciary of pension funds for the FPPA. He noted that the board has worked to achieve a fully-funded status for FPPA plans and that the plans serve all members of the FPPA. Mr. Slack noted that the FPPA is very-well situated in terms of its funding level and its diversity of investments.
Mr. Slack discussed the charts on pages 8 and 9 of the report. The commission briefly discussed FPPA plan funding status provided in the overview of the report. Mr. Slack noted that the FPPA has oversight for more than 200 plans which include: the Affiliated Local Plan (old hire members) (54 plans); the Statewide Defined Benefit Plan (new hire members) (1 plan, 193 employers); the Statewide Hybrid Plan (16 employers); the Statewide Money Purchase Plan (1 plan, 33 employers); and the Colorado Springs Defined Benefit Plan (new hire members) (2 plans, 1 employer).
Mr. Slack continued by discussing the impact of the national financial markets crisis on FPPA pension plans. The commission responded by engaging in a brief discussion about the funding status of the FPPA pension funds and recent changes to the actuarial method used to determine the funding status of the portfolio. In response to committee questions, Mr. Slack briefly discussed recent studies relating to FPPA funds. He continued by noting that every five years the plans' actuarial assumptions are plotted against real data to update the funding status of the portfolio. After data analysis, the assumptions are altered to better reflect a more realistic scenario of the financial markets and the pension fund.
Mr. Slack continued by explaining that the board has the flexibility to change the retirement age in the plan from 55 to 60 years of age, but noted that retirement age ties into the difficulties of the job for firefighters and police officers. He said that the board has looked very closely at the actuarial status of FPPA plans and evaluated Cost of Living Adjustments (COLAs) accordingly. Mr. Slack closed by noting that the board has considered employer contribution increases, but has not yet made a decision on this option.
The commission discussed the possibility of changes to contribution rates. Mr. Slack clarified that the board does not have the discretion to change these rates as they are set in statute. Mr. Slack closed by reiterating that the FPPA is well-positioned financially.
Mr. Joe Newton, Actuary, Gabriel, Roeder Smith & Co., introduced himself to the commission and discussed the status of the FPPA portfolio. Mr. Newton began by discussing information presented in Appendix A of the report and commented on factors that affect pension plans. Mr. Newton discussed the FPPA defined benefit plan and noted that it is a plan allowing pensioners to know the level of their pension benefits. Mr. Newton discussed the FPPA defined contribution plan and explained the difference between defined benefit and defined contribution plans. Mr. Newton commented on the advantages and disadvantages of each type of plan.
Mr. Newton discussed the risk characteristics of the FPPA defined benefit plan. He said that the goal of the FPPA board is to establish stable contribution rates that guarantee a sound pension system. Mr. Newton noted that, as investment performances improves, contribution rates may drop over time. Mr. Newton continued by discussing the relationship between investment performance, benefits, and contribution rates.
The commission briefly discussed the FPPA pension benefits system and the flexibility in COLAs paid by FPPA. Mr. Newton clarified that COLAs are based on long-term sustainability of the FPPA system, rather than year-to-year fluctuations in markets. The commission discussed the role of the board of trustees in terms of inflation-related COLA adjustments.
Mr. Newton continued by discussing economic assumptions that are built into the actuarial funding status of pension funds. He commented on price inflation, wage inflation, salary increases, investment returns, and the effect of these variables on funding status. He commented on the FPPA pension system relative to peer pension systems in the United States. Mr. Newton discussed the 8 percent rate that is assumed for investment performance by the FPPA Board. He noted that the FPPA's real rate of return can be seen after inflation is subtracted from annual growth rates in the FPPA portfolio. He said that, after inflation, the return on investment is approximately 4.5 percent. Mr. Newton noted that long-term funding status is critical in pension management.
Mr. Newton noted that most pension systems in the United States use asset smoothing to present a more realistic picture of pension funding status. He said that averaging over a five-year period is often used for determination of funding status. Mr. Newton continued by discussing historical values of pension assets and noted that decisions need to be made based on long-term projections. The commission discussed the 8 percent rate assumption for FPPA investment performance.
Mr. Newton commented on employer contribution rates and he discussed the FPPA's actuarial accrued liability. He explained that the term considers asset performance levels for purposes of target-level returns. He noted that pension unfunded liabilities can be recouped over time depending upon asset performance. Mr. Newton discussed the many factors that can ameliorate unfunded pension liabilities. Mr. Newton commented on the relationship between actuarial value of assets and actuarial accrued liability and he discussed the funding ratio of the statewide benefit plan. He noted that Colorado's 8 percent employer contribution rates are lower than similar plans in the United States. Mr. Newton closed by discussing the relationship between contribution rates and member benefits.
Mr. Newton shifted the discussion to FPPA old hire plans and said that there are few active members remaining in these plans. He said that the current unfunded liability of the old hire plans may require changes to contribution levels in the future. He closed by noting the suspension of state funding for the old hire plans and commented on the impact of the suspension.
Mr. Kevin Lindahl, General Counsel, FPPA, began by introducing himself and commenting on the FPPA's legislative goals. Mr. Lindahl commented on state contributions to FPPA old hire plans and the current schedule for these contributions. Mr. Lindahl clarified that there are over 54 old hire plans currently affiliated with the FPPA. He said that each of these plans has a pension board, and is administered locally. Mr. Lindahl gave the commission a brief history of legislative involvement with the FPPA and commented on the evolution of the unfunded liability of the old hire plans. Mr. Lindahl discussed the benefit structure of the volunteer plans and noted that the average benefit is approximately $300 per month for volunteer firefighters. Mr. Lindahl said that the FPPA provides support to local boards administering volunteer pension plans.
Mr. Lindahl continued to discuss the FPPA old hire plans and the benefits tied to these plans. Mr. Lindahl emphasized that the FPPA does not use assets from one plan to meet liabilities of other plans. Mr. Lindahl discussed the allocation of state funding between old hire plans. Mr. Lindahl commented on current statutory provisions relating to state contributions for old hire plans, and he talked about the three-year suspension of state assistance for the plans. He noted that if investment performance is better than the projected 8 percent assumption, then state assistance that is required could diminish over time.
Mr. Lindahl continued by discussing the history of benefits for old hire plan benefit recipients. He said that, over time, these benefits have increased and he discussed the differences between plans in terms of investment strategies. Mr. Lindahl closed by noting that there are 13 departments that currently are not covered under the FPPA pension system. He discussed options available to these plans.
11:21 AM -- Presentation on FPPA Investments
Mr. Scott Simon, Chief Investment Officer, FPPA, began by discussing the recent history of equity and debt markets. He said that, in 2008, major investment banks were failing and the price of oil reached nearly $150 per barrel. He said that, since this time, government involvement in the private sector has been significant. He noted that, as of the close of 2008, equity markets were down approximately 37 percent and that the United States has experienced four quarters of declining growth in GDP. Mr. Simon discussed market volatility and corresponding changes to pension asset allocations.
Mr. Simon noted that during the market crisis the FPPA has continued to meet its obligations without the need to sell quality assets. He said that during this time the FPPA did not overreact and cautioned members against panic. He said that the financial position of the FPPA is improving with the 40 percent growth in equity markets since March.
Mr. Simon noted that the current assets governed by the FPPA are approximately $2.7 billion. He commented on the importance of portfolio diversification to sound investing. He noted that diversification lowers portfolio risk. Mr. Simon stated that the pension funds administered by the FPPA are only minimally exposed to mortgage-backed securities and will not likely suffer the losses that other institutionalized pension plans are experiencing.
Mr. Simon continued by commenting on the long-term health of FPPA funds and the effect of the national financial crisis on the FPPA portfolio. He identified a number of securities firms that have been hired by the FPPA to manage its portfolio and said that asset allocations vary among these firms. He said that approximately 20 percent of FPPA funds are invested in alternative investments, including venture capital investments. He noted that FPPA funds have grown 9.7 percent since market lows in March, 2009.
Mr. Simon said that the board does not anticipate any dramatic changes in asset allocation in the near term. He said that 2008 was the worst year in the FPPA's history and that a 28.9 percent decline in portfolio was experienced in that year. He commented on the extent of the market rebound in 2009. Mr. Simon closed by discussing the FPPA's investment philosophy and noted that the FPPA plans its investment strategy with long-term trends in mind. He said that the most significant losses to the portfolio in 2008 were in domestic equities. He added that diversification has lowered the risk to FPPA funds, and that this diversification will permit the long-term 8 percent actuarial assumed rate of return to be achieved.
The commission briefly discussed FPPA portfolio asset allocation.
The commission meeting adjourned.