MEMORANDUM #35, 2007

Commonwealth of Massachusetts | Public Employee Retirement Administration Commission
Five Middlesex Avenue, Suite 304, Somerville, MA 02145
Ph 617 666 4446 | Fax 617 628 4002 | TTY 617 591 8917 | www.mass.gov/perac
Domenic J. F. Russo, Chairman | A. Joseph DeNucci, Vice Chairman
Mary Ann Bradley | Paul V. Doane | Kenneth J. Donnelly | James M. Machado | Donald R. Marquis
Joseph E. Connarton, Executive Director


M E M O R A N D U M

TO:             All Retirement Boards

FROM:      Joseph E. Connarton, Executive Director

RE:             Implementation of Chapter 68

DATE:        August 23, 2007

These are the Principles for the Guidelines/Regulations for the Implementation of Chapter 68 of the Acts of 2007, An Act To Reduce The Stress On Local Property Taxes Through Enhanced Pension Fund Investment.  These Principles provide the manner and methodology to be used by the Commission in performing its responsibilities pursuant to Chapter 32, Section 22 (8) (c1/2).

The Commission will conduct an annual analysis of the investment performance of all retirement systems for the ten year period ending the previous December 31st.  In analyzing the funded ratio of a system the Commission shall use data as of January 1st and if such data is not available the Commission shall use data as of the date of the most recent actuarial valuation, provided that it shall consider the results of any actuarial valuations filed with the Commission by July 1st.  Those systems found to have investment performance over the 10 year period ending on December 31 that is less than that of the PRIT Fund by a margin of 2.00% or more shall fail to meet that investment standard.  In the event that a system has performed exactly 2.00% below that of the PRIT Fund it shall be deemed to have failed to meet the standard.  Those systems found to have a funded ratio of less than 65% as of January 1st (or if no data as of that date exists, as of the date of the most recent actuarial valuation) shall fail to meet the funding standard.  In the event that a system is found to have a funded ratio of exactly 65% it shall be deemed to have met the funding standard.

The first such analysis shall be conducted pursuant to Section 3 of Chapter 68 and will be based on investment returns for the 1997-2006 period and, in the event that the system does not complete an actuarial valuation as of January 1, 2007 on or before October 1, 2007, the data contained in the actuarial valuation most recently completed as of January 1, 2007 shall be used.

Actuarial Standards

These Principles for Guidelines/Regulations are to be used solely for the analysis to be conducted by the Commission pursuant to Chapter 68.  The Commission Actuary shall determine the appropriate actuarial methodology and assumptions to be used in performing other tasks pursuant to Chapter 32 such as the establishment of funding schedules and appropriations.  Consequently, the investment return assumption found acceptable by the Commission Actuary in the valuation that establishes the funded ratio under Chapter 68 may differ from that which is found to be acceptable by the Commission Actuary for those other purposes.

The Funded Ratio to be considered pursuant to Chapter 68 shall be based on a full actuarial valuation of the retirement system.  No actuarial update or other estimate will be accepted.

In conducting that actuarial valuation, market value of assets or actuarial value of assets, whichever is greater, shall be used.

The Investment Return Assumption

The Investment Return Assumption to be used in conducting that actuarial valuation may not be more than .25% above the assumption used in the previous actuarial valuation of the system provided that no such assumption will be permitted above 8.50%.  The Commission Actuary, based on the system’s funding history, funding schedule, asset allocation and other factors he deems appropriate, may authorize an increase greater than .25% above the assumption used in the previous actuarial valuation of the system, provided, that in no event shall such an assumption exceed 8.50%.

Investment Standards

In reviewing investment performance time weighted annualized return shall be used.

Analysis shall be based on gross rates of return as determined by the Commission.

Those rates of return previously published in the PERAC Annual Reports 1997-2006 shall be the basis of the first analysis to be conducted pursuant to Chapter 68.  Analysis of subsequent periods will adjust the time frame to be used.  However, the returns posted in those Reports, with the addition and subtraction of yearly returns as appropriate shall provide the historical returns for those years to be used in establishing a ten year investment return for each system and the PRIT Fund.

In the event that a system fails to comply with the provisions of 840 CMR 4.01, 840 CMR 4.02, 840 CMR 4.03 or 840 CMR 4.04, the Commission shall use its best effort to assess investment performance based on such information as has been provided to it by the system.

In the event that a system fails to comply with the provisions of Chapter 32, Section 23(2)(e), the Commission shall use its best effort to assess investment performance based on such information as has been provided to it by the system.

Voluntary Transfer

A Board that decides to voluntarily transfer assets to PRIT in accordance with Chapter 68, Section 4 shall provide PERAC with a copy of its vote and a copy of the approval of that action by the majority of the local governing body*.  Upon receipt of that information, the Commission shall issue a certification to the Board that it has voluntarily transferred its assets to PRIT pursuant to Chapter 68, Section 4 and that the decision may not be revoked for five years.  The Board action and the approval by the majority of the local governing body must take place on or before October 1, 2007 in order for the action of the Board to take place pursuant to Section 4.  Failure to receive approval of the local governing body or to comply with these timelines will result in an order to permanently transfer assets to PRIT if the system does not meet the standards set forth in Chapter 68.

The option to act pursuant to Section 4 shall cease as of October 1, 2007.

*              “The decision to voluntarily transfer ownership and control of all of its assets to the PRIM board shall be made by the retirement board of each system, subject to the approval of a majority of the local governing body as follows: in a county, by the county commissioners, in a city having a Plan D or Plan E charter, by  the city council and the manager, in any other city shall, by the city council and the, mayor, in a town, by, the board of selectmen, in a regional retirement system by the regional retirement board advisory council and in all other districts, by the governing board thereof.”

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