NAVIGATING A STEADY FIDUCIARY COURSE Presentation to the FCERA Board of Retirement October 20, 2010 Jeffrey R. Rieger Reed Smith, LLP

2 RECENT TRENDS  Investment losses causing underfunded benefits  Retiree health care  Legislative initiatives  Challenges to current benefit levels  Divergent interests among membership groups  Portfolio risks – derivatives, leverage, hedge funds, volatility  Concerns over potential conflicts of interest

3 TEMPTATIONS  Using pension fund as political playground  Pursuing personal and constituent interests  Pulling back from the public eye  Deferring to consultants

4 FUNDAMENTALS OF STRONG FIDUCIARY STEWARDSHIP  Exclusive benefit rule “The assets of the retirement system are trust funds and shall be held for the exclusive purposes of providing benefits and defraying reasonable expenses of administration.”  Duty of loyalty “… duty to its participants and their beneficiaries takes precedence over any other duty.”  Duty of prudence “… discharge their duties with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting an like capacity and familiar with these matter would use…”

5 TOOLS DESIGNED TO KEEP A STEADY COURSE Open Meetings  It’s the public’s and members’ money – they are entitled to know what you are doing with it  Role of published agenda and back up materials  Prohibition against closed-door deals, serial meetings  Complete information from consultants and robust discussion on policy questions  Input from the stake holders  Education – Board members, system members, public

6 TOOLS DESIGNED TO KEEP A STEADY COURSE Confidentiality  Closed sessions must be limited, meaningful, candid  Sometimes open session is better, even if a basis for closed session exists, but …  A majority of the Board, not just one member, must decide when to waive confidentiality

7 TOOLS DESIGNED TO KEEP A STEADY COURSE Responsible Communications  FCERA Board policies and charters  Board Operations  Code of Conduct  Trustee Education  Board, Chair, Vice Chair and Administrator Charters  Clarity of roles, communications  Respect for colleagues  Managing expectations

8 FUNDING AND PAYING THE PROMISED BENEFITS  Following the law  Vested benefits  Must be timely paid  Funding of promised benefits must be actuarially sound  Employers responsible for full funding  Financial health of plan sponsors a consideration

9 FUNDING AND PAYING THE PROMISED BENEFITS  Non-vested benefits  Not guaranteed  Impact on funding  Board discretionary acts  Deference from courts  Developing a record  Divergent interests among groups of members

10 CONFLICTS OF INTEREST  “Interested” Board members contemplated and approved by CERL and the California Constitution, but conflict of interest laws still apply  Board members must be the first line of defense for themselves  Consult counsel when in doubt, and always disclose interests when they are known  Supreme Court in Lexin: “If the financial interest arises in the context of the affected official’s or employee’s role as a constituent of his or her public agency and recipient of its services, there is no conflict so long as the services are broadly available to all others similarly situated, rather than narrowly tailored to specially favor any official or group of officials, and are provided on substantially the same terms as for any other constituent.”

11 We’re all in this together!