Transcript

AGENDA

The Division of Bond Finance of the State Board of Administration (the "Division") has submitted for approval as to fiscal sufficiency a proposal to issue an amount Not Exceeding $15,000,000 State of Florida, Department of Management Services, Florida Facilities Pool Revenue Bonds, Series 2000A (the "Bonds") on behalf of the Division of Facilities Management of the Department of Management Services. The Bonds are being issued for the purpose of providing funds for the construction of Phase II of the Duval Regional Service Center in Duval County and paying certain costs associated with the issuance and sale of the Bonds. It is anticipated the Twenty-third Supplemental Revenue Bond Resolution, which authorizes the issuance and sale of the Bonds, will be approved by the Governing Board of the Division on February 22, 2000.

A study of this proposal and the estimates of revenue and other available moneys expected to accrue indicate that the proposed Bonds are fiscally sufficient and that the proposal will be executed pursuant to the applicable provisions of law.

RECOMMENDATION: It is recommended that the Board approve the fiscal sufficiency of the proposal outlined above. (Att. #2)

A comparison of the actuarial liabilities and actuarial value of assets follows. These figures are based upon the actuarial assumptions used to determine the actuarial costs of the FRS.

"Most contribution rates required to fund the FRS in accordance with Florida law have remained the same as the rates developed in the 1998 actuarial valuation due to use of a portion of surplus assets towards rate stabilization. This is due to the implication of the new funding policy effective July, 1998. These results met last year’s expectations of the new funding policy which was designed to eliminate contribution rate volatility resulting from dynamic economic conditions. The new funding policy allows for "contribution holidays" if desired by the Legislature, if favorable demographic and economic conditions continue to contribute to FRS actuarial liability surpluses.

When compared to the 1993, 1995 or 1997 valuation results, the 1998 and 1999 lowered rates are within levels that represent normal fluctuation particularly when considering the system’s exceptional investment experience, and adjusts for plan and assumption changes made during the past decade. The past 12 years present a marked contrast to the previous decade of escalating contribution rates which preceded 1987."

It is our recommendation that the Trustees endorse the rates as proposed by the actuary. As far as the methodology is concerned, we believe that while generally sound, the process as currently executed has a notable deficiency which could lead to instability in contribution rates over the long-term and/or excessively high contribution rates in the near- to intermediate- term.

As currently applied, the actuarial model incorporates no mechanism for determining when and how excessive funding surpluses are to be recognized and incorporated into the process by which contribution rates are determined.

A specific "surplus credit rule" or mechanism has not been incorporated into the actuarial model because, at least in part, of confusion over who is responsible for such a determination. There are at least four parties who have been identified as responsible:

"8. The Working Group agrees that contribution rate stability is a desirable goal, and recommends that the Division of Retirement (DOR) act to minimize year-to-year fluctuations in contribution rates. The Working Group believes that under current law the DOR has the authority to manage the recognition of gains and losses in such a manner as to attain significantly higher levels of rate stability than would exist under recommendations 1 through 7 alone." (emphasis supplied)

The Division has sanctioned a change in the actuarial methodology which holds surplus amounts in reserve, but has not articulated a methodology for determining the maximum level of surplus that is adequate to insure higher levels of rate stability and how any excess above that amount is to be recognized to reduce retirement system contributions.

The 1999 legislature enacted s 121.031 (3)(b), F.S., which requires the AAEC to develop: "…an analysis of the actuarial assumptions and actuarial methods and a determination of whether changes to the assumptions or methods needs to be made…" (emphasis supplied)

The AAEC has met once to review the economic and demographic assumptions proposed by the state actuary for its 1999 valuation report, but has not considered any issues related to the actuarial methods (or model), such as a surplus credit mechanism.

In its report entitled Florida Retirement System Valuation as of July 1, 1998, Milliman & Robertson, the state actuarial firm, interpreted the situation as follows:

"In the event the surplus becomes excessive, the Division of Retirement and the system's actuary could recommend a 'contribution holiday' [one form of excess surplus recognition]. Page I-2 (emphasis supplied).

Again, no methodology for determining what constitutes an excessive surplus has been put forth to date.

This year in its 1999 valuation report, Milliman & Robertson identified the legislature as the determining party:

"The new funding policy allows for 'contribution holidays' if desired by the legislature, if favorable demographic and economic conditions continue to contribute to FRS actuarial liability surpluses." Page I-6 (emphasis supplied).

To date, the Legislature has not adopted any legislation specifying a surplus credit mechanism, nor has such legislation been introduced.

RECOMMENDATION: The SBA staff suggests that the Trustees make the following recommendation to the Florida Legislature, pursuant to their responsibilities under Section 121.0312, Florida Statutes:

1. The actuarial model used to determine contribution rates for the purposes of the regular actuarial valuation report should include a specific surplus credit mechanism.

2. This mechanism should be developed by pension system finance professionals, taking into account possible volatility in investment returns and the uncertainty over actual growth in plan liabilities. At the same time, the mechanism should not allow an unnecessarily large surplus to accumulate.

3. Once adopted, the mechanism should not be altered in response to short term budget exigencies.

Pursuant to the advisory opinion from the Groom Law Group dated March 19, 1999, it is appropriate for the Trustees to consider "broader matters that affect the FRS, such as future funding concerns…" Moreover, as noted above, Florida law expressly requires a review by the Trustees of the process by which contribution rates are established, and the law solicits commentary by the Trustees.

The risk to the pension system of operating without an established surplus credit mechanism is that the funded status of the FRS may be jeopardized because either (a) contributions will become more volatile, diminishing the willingness and ability of FRS employers to make contributions to the fund in accordance with necessary rates established by the actuary, or (b) that in the absence of a fixed rule the surplus will be drawn to unreasonably low levels.

The final meeting of the Commission was held on Thursday, February 10. The draft final report will be submitted as soon thereafter as practicable.

A. The Florida Hurricane Catastrophe Fund is seeking technical/clarification language related to its statute, 215.555(4)(d)2 F.S. In last year’s legislation implementing the $11 billion industry cap, language regarding reimbursement contracts was inadvertently placed in an incorrect section. This year’s proposed technical correction will correct the error by placing a corresponding reference in Section (4) Reimbursement Contracts referring to the method used by the Board for the reimbursement of covered losses to companies, taking into consideration the $11 billion cap.

B. The State Board of Administration is requesting the repeal of current statutory language related to Northern Ireland investments (121.153 F.S.). The recent success of the Northern Ireland peace talks eliminates the need for the current statutory prohibition regarding investments. Current language directs the State Board of Administration to invest in companies making advances in eliminating ethnic and religious discrimination in Northern Ireland as well as directs the State Board of Administration to correspond with financial institutions with which we maintain accounts in order to gauge their exposure to operations in Northern Ireland. Since enactment of the statute, we have monitored and reported on our investments in Northern Ireland. To date, no transactions have occurred. Repeal of the language would streamline our investment and reporting process. The Investment Advisory Council supported this repeal proposal at their December 17, 1999 meeting.

C) The State Board of Administration is proposing language to streamline the reporting requirements related to the Lawton Chiles Endowment Fund (215.5601 F.S.). The statue requires the State Board of Administration to report on the financial status of the endowment to the Governor, Speaker of the House of Representatives, President of the Senate, the chairs of the respective appropriations and appropriate substantive committees of each chamber and the Revenue Estimating Conference on February 15 and August 15 of each year. By statute, the State Board of Administration currently reports annually, by January 1, on the status of each fund under management. Additionally, we report similar investment information to the Trustees on a monthly basis. The proposed statutory revision would reduce the Endowment’s reporting requirement to one annual report and 12 monthly reports, consistent with current State Board of Administration practice.