Michigan-2017-SB0688-Engrossed

SB-0688, As Passed House, December 12, 2017

SB-0688, As Passed Senate, December 7, 2017

SUBSTITUTE FOR

SENATE BILL NO. 688

A bill to amend 1965 PA 314, entitled

"Public employee retirement system investment act,"

by amending sections 13 and 20h (MCL 38.1133 and 38.1140h), as

amended by 2016 PA 530.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 13. (1) This act supersedes any investment authority

previously granted to a system under any other law of this state.

(2) The assets of a system may be invested, reinvested, held

in nominee form, and managed by an investment fiduciary subject to

the terms, conditions, and limitations provided in this act. An

investment fiduciary of a defined contribution plan may arrange for

1 or more investment options to be directed by the participants of

the defined contribution plan. The limitations on the percentage of

total assets for investments provided in this act do not apply to a

defined contribution plan in which a participant directs the

investment of the assets in his or her individual account, and that

participant is not considered an investment fiduciary under this

act.

(3) An investment fiduciary shall discharge his or her duties

solely in the interest of the participants and the beneficiaries,

and shall do all of the following:

(a) Act with the same care, skill, prudence, and diligence

under the circumstances then prevailing that a prudent person

acting in a similar capacity and familiar with those matters would

use in the conduct of a similar enterprise with similar aims.

(b) Act with due regard for the management, reputation, and

stability of the issuer and the character of the particular

investments being considered.

benefits to participants and participants' beneficiaries, and of

defraying reasonable expenses of investing the assets of the

system.

(d) Give appropriate consideration to those facts and

circumstances that the investment fiduciary knows or should know

are relevant to the particular investment or investment course of

action involved, including the role the investment or investment

course of action plays in that portion of the system's investments

for which the investment fiduciary has responsibility; and act

accordingly. For purposes of this subsection, "appropriate

consideration" includes, but is not limited to, a determination by

the investment fiduciary that a particular investment or investment

course of action is reasonably designed, as part of the investments

of the system, to further the purposes of the system, taking into

consideration the risk of loss and the opportunity for gain or

other return associated with the investment or investment course of

action; and consideration of the following factors as they relate

to the investment or investment course of action:

(i) The diversification of the investments of the system.

(ii) The liquidity and current return of the investments of

the system relative to the anticipated cash flow requirements of

the system.

(iii) The projected return of the investments of the system

relative to the funding objectives of the system.

(e) Give appropriate consideration to investments that would

enhance the general welfare of this state and its citizens if those

investments offer the safety and rate of return comparable to other

investments permitted under this act and available to the

investment fiduciary at the time the investment decision is made.

(f) Prepare and maintain written objectives, policies, and

strategies with clearly defined accountability and responsibility

for implementing and executing the system's investments.

(g) Monitor the investment of the system's assets with regard

to the limitations on those investments under this act. Upon

discovery that an investment causes the system to exceed a

limitation prescribed in this act, the investment fiduciary shall

reallocate assets in a prudent manner to comply with the prescribed

limitation.

(h) Prepare and maintain written policies regarding ethics and

professional training and education, including travel, which

policies contain clearly defined accountability and reporting

requirements for the system's investment fiduciaries.

(i) Publish a summary annual report that includes all of the

following:

(i) The name of the system.

(ii) The names of the system's investment fiduciaries.

(iii) The names of the system's service providers.

(iv) The system's assets and liabilities and changes in net

plan assets on a plan-year basis.

(v) The system's funded ratio based on the ratio of valuation

assets to actuarial accrued liabilities on a plan-year basis.

(vi) Except as otherwise provided in this subparagraph, the

system's investment performance net of fees on a rolling calendar-

year basis for the previous 1-, 3-, 5-, 7-, and 10-year periods.

For a system for which the state treasurer is the investment

fiduciary, the summary annual report must include the system's

investment performance net of fees on a rolling calendar-year and

fiscal-year basis for the previous 1-, 3-, 5-, 7-, and 10-year

periods.

(vii) The system's administrative and investment expenditures

pursuant to standards of the Governmental Accounting Standards

Board, including, but not limited to, a list of all expenditures

made with soft dollars and all expenditures for professional

training and education, including travel expenditures, by or on

behalf of system board members that are paid by the system, if any.

(viii) The system's itemized budget containing all projected

expenditures, including, but not limited to, expenditures for

professional training and education, including travel expenditures,

by or on behalf of system board members that are paid by the

system.

(ix) The following information as provided in the system's

most recent annual actuarial valuation report:

(A) The number of active members.

(B) The number of retirees and beneficiaries.

(D) The total annual retirement allowances being paid.

(E) The valuation payroll.

(F) The employer's computed normal cost of benefits expressed

as a percentage of valuation payroll.

(G) The employer's total contribution rate expressed as a

percentage of valuation payroll.

(H) The weighted average of member contributions, if any.

(I) The actuarial assumed rate of investment return.

(J) The actuarial assumed rate of long-term wage inflation.

(K) The smoothing method utilized to determine the funding

value of assets.

(L) The amortization method and period utilized for funding

the system's unfunded actuarial accrued liabilities, if any.

(M) The system's actuarial cost method.

(N) Whether system membership is open or closed to specific

groups of employees.

(O) The actuarial assumed rate of health care inflation.

(x) In addition to the expenditures reported under

subparagraph (vii), for a large sponsored system a travel report

listing all travel outside this state in the immediately preceding

fiscal year that was funded in whole or in part with public funds.

The report must include the total expenses for all out-of-state

travel funded during the immediately preceding fiscal year and all

of the following information for each travel occurrence:

(A) The name of each person receiving reimbursement for travel

outside this state or whose travel costs were paid by the large

sponsored system and funded in whole or in part with public funds.

(B) The destination.

(D) A brief statement of the reason for the travel.

(E) An itemization of the transportation and related costs,

including, but not limited to, the amount for food, lodging, and

vehicle rental and listing the names of hotels, restaurants,

vehicle rental agencies, and vehicle models.

(xi) For a state unit, an executive summary of both of the

following:

(A) The state unit's unfunded actuarial accrued liabilities

for retiree health and pension.

(B) The information described in subparagraph (v).

(j) An investment fiduciary of a large sponsored system shall

submit a summary annual report described in subdivision (i) to the

financial review commission created under the Michigan financial

review commission act, 2014 PA 181, MCL 141.1631 to 141.1643.

(k) For a state unit, submit the executive summary required

under subdivision (i)(xi) to the senate and house of

representatives appropriations committees and the senate and house

fiscal agencies not less than 30 days after publication.

(l) For a system other than a state unit, submit the summary

annual report published under subdivision (i) to the department of

treasury not less than 30 days after publication.

(4) An investment fiduciary who is an investment fiduciary of

any of the following shall comply with the divestment from terror

act, 2008 PA 234, MCL 129.291 to 129.301, in making investments

under this act:

(a) The Tier 1 retirement plan available under the state

employees' retirement act, 1943 PA 240, MCL 38.1 to 38.69.

(b) The Tier 1 retirement plan available under the judges

retirement act of 1992, 1992 PA 234, MCL 38.2101 to 38.2670.

the state police retirement act of 1986, 1986 PA 182, MCL 38.1601

to 38.1648.

(d) The Michigan public school employees' retirement system

created under the public school employees retirement act of 1979,

1980 PA 300, MCL 38.1301 to 38.1437.

(5) Subject to section 13g, an investment fiduciary may use a

portion of the system's income to defray the costs of investing,

managing, and protecting the assets of the system; may retain

investment and all other goods and services necessary for the

conduct of the affairs of the system, including investment

advisors, consultants, custodians, accountants, auditors,

attorneys, actuaries, investment personnel, administrators, and

physicians; and may enter into contracts for and pay reasonable

compensation for those services. Subject to an annual appropriation

by the legislature, a deduction from the income of a state-

administered system resulting from the payment of those costs must

be made.

(6) Subject to this subsection and subsection (13), an

investment fiduciary may use a portion of the system's income to

defray the costs of professional training and education, including

travel costs, of system board members, which professional training

and education, including travel, are directly related to the

administration, management, and operation of the system. The

governing board vested with the general administration, management,

and operation of the system or other decision-making body that is

responsible for implementation and supervision of the system shall

adopt an annual budget for professional training and education,

including travel, authorized under this subsection. The budget

adopted under this subsection must reflect the number of board

members, the size of the system, and the educational objectives of

the system. The system's total aggregate cost for professional

training and education, including travel costs, authorized under

this subsection for a fiscal year must not exceed $150,000.00 or an

amount that is equal to the total number of system board members

multiplied by $12,000.00, whichever is less. The system's total

cost for professional training and education, including travel

costs, authorized under this subsection for an individual system

board member in a fiscal year must not exceed $30,000.00. Beginning

January 1, 2013, the department of treasury shall adjust the dollar

amounts in this subsection by an amount determined by the state

treasurer at the end of the immediately preceding calendar year to

reflect the cumulative annual percentage change in the consumer

price index. As used in this subsection, "consumer price index"

means the most comprehensive index of consumer prices available for

this state from the Bureau of Labor Statistics of the United States

Department of Labor.

(7) Before any investment services are provided, an investment

service provider shall provide the investment fiduciary of the

system with a complete written disclosure of all fees or other

compensation associated with its relationship with the system.

After investment services are provided to the investment fiduciary

of the system, an investment service provider shall provide on an

annual basis written disclosure of all fees including, but not

limited to, commissions, 12b-1 and related fees, compensation paid

or to be paid to third parties, and any other compensation paid by

the system to the investment fiduciary of the system. As used in

this subsection, "investment service provider" means any

individual, third-party agent or consultant, or other entity that

receives direct or indirect compensation for consulting, investment

management, brokerage, or custody services related to the system's

assets. For purposes of this section only, investment service

provider does not include a retirement system.

(8) The system must be a separate and distinct trust fund and

the assets of the system must be for the exclusive benefit of the

participants and their beneficiaries and of defraying reasonable

expenses of investing the assets of the system. With respect to a

system, an investment fiduciary shall not cause the system to

engage in a transaction if he or she knows or should know that the

transaction is any of the following, either directly or indirectly:

(a) A sale or exchange or a leasing of any property from the

system to a party in interest for less than the fair market value,

or from a party in interest to the system for more than the fair

market value.

(b) A lending of money or other extension of credit from the

system to a party in interest without the receipt of adequate

security and a reasonable rate of interest, or from a party in

interest to the system with the provision of excessive security or

at an unreasonably high rate of interest.

political subdivision sponsoring the system of any assets of the

system for less than adequate consideration.

(d) The furnishing of goods, services, or facilities from the

system to a party in interest for less than adequate consideration,

or from a party in interest to the system for more than adequate

consideration.

(9) With respect to a system subject to this act, an

investment fiduciary shall not do any of the following:

(a) Deal with the assets of the system in his or her own

interest or for his or her own account.

(b) In his or her individual or any other capacity act in any

transaction involving the system on behalf of a party whose

interests are adverse to the interests of the system or the

interest of its participants or participants' beneficiaries.

account from any party dealing with the system in connection with a

transaction involving the assets of the system.

(10) This section does not prohibit an investment fiduciary

from doing any of the following:

(a) Receiving any benefit to which he or she may be entitled

as a participant or participant's beneficiary of the system.

(b) Receiving any reimbursement of expenses properly and

actually incurred in the performance of his or her duties for the

system.

officer, employee, agent, or other representative of the political

subdivision sponsoring the system.

(d) Receiving agreed upon compensation for services from the

system.

(11) Except for an employee of a system, this state, or the

political subdivision sponsoring a system, when acting in the

capacity as an investment fiduciary, an investment fiduciary who is

qualified under section 12c(1)(b) shall meet 1 of the following

requirements:

(a) Be a registered investment adviser under the investment

advisers act of 1940, 15 USC 80b-1 to 80b-21, or the uniform

securities act (2002), 2008 PA 551, MCL 451.2101 to 451.2703.

(b) Be a bank as defined under the investment advisers act of

1940, 15 USC 80b-1 to 80b-21.

(12) An investment fiduciary shall not invest in a debt

instrument issued by a foreign country that has been designated by

the United States Department of State as a state sponsor of terror.

(13) A large sponsored system shall not pay the expenses for a

person to travel outside this state from funds under its control

unless 1 or more of the following conditions apply to the travel:

(a) It is required by legal mandate or court order or for law

enforcement purposes.

(b) It is necessary to protect the health or safety of

citizens of, or visitors to, this state or to assist other states

in similar circumstances.

increase revenues, including protecting existing federal funds or

securing additional federal funds.

(d) It is necessary to secure specialized training for the

person that is substantially related to performing the duties of

the position and is not available within this state.

(14) Subject to section 13g, an investment fiduciary of a

large sponsored system that invests or has invested in a hazardous

waste deep disposal well facility regulated under part 111 or 121

of the natural resources and environmental protection act, 1994 PA

451, MCL 324.11101 to 324.11153 and 324.12101 to 324.12117, is

subject to all of the following:

(a) The investment fiduciary shall not make an additional

investment in the hazardous waste deep disposal well facility

unless the investment is solely to prepare the property on which

the hazardous waste deep disposal well facility is located for sale

for purposes other than operation as a hazardous waste deep

disposal well facility or similar hazardous facility.

(b) The investment fiduciary shall sell, redeem, divest, or

withdraw all investments in the hazardous waste deep disposal well

facility within 180 days after any of the following circumstances

occur:

(i) The operator of the hazardous waste deep disposal well

facility files for bankruptcy.

(ii) The sale, transfer, purchase, or acquisition of a

controlling interest in the operator of the hazardous waste deep

disposal well facility.

(iii) An Environmental Protection Agency action for a

violation at the hazardous waste deep disposal well facility.

(iv) An Environmental Protection Agency revocation of the

operator's license.

(v) An Environmental Protection Agency or department of

environmental quality order to terminate operations at the

hazardous waste deep disposal well facility.

(15) For a state unit, a representative of the office of

retirement services in the department of technology, management,

and budget shall appear before the senate and house of

representatives appropriations committees on request of the

committee chair to testify about the system's summary annual report

required under subsection (3).

(16) The department of treasury shall post on its website an

executive summary of each summary annual report submitted to the

department of treasury under subsection (3)(l). The executive

summary must include the applicable system's unfunded actuarial

accrued liability for ~~retiree health and~~ pension. The department of

treasury shall submit each executive summary required under this

subsection to the senate and the house of representatives

appropriations committees and the senate and house fiscal agencies

not less than 30 days after posting.

(17) As used in this section, "state unit" means a system

established under the state employees' retirement act, 1943 PA 240,

MCL 38.1 to 38.69, the public school employees retirement act of

1979, 1980 PA 300, MCL 38.1301 to 38.1437, the judges retirement

act of 1992, 1992 PA 234, MCL 38.2101 to 38.2670, and the state

police retirement act of 1986, 1986 PA 182, MCL 38.1601 to 38.1648.

Sec. 20h. (1) In addition to the provisions of this act, a

system is subject to the applicable accounting, auditing, and

reporting requirements contained in the following acts and parts of

acts:

(a) 1919 PA 71, MCL 21.41 to 21.55.

(b) The uniform budgeting and accounting act, 1968 PA 2, MCL

141.421 to 141.440a.

PA 380, MCL 16.191.

(2) A system shall retain its financial records for a minimum

period of 6 years from the date of the creation of the record

unless state or federal law requires a longer retention period. As

used in this subsection, "financial records" includes, but is not

limited to, records pertaining to expenditures for professional

training and education, including travel expenditures, by or on

behalf of system board members that are paid by the system.

(3) Except as otherwise provided in this subsection,

information regarding the calculation of actual or estimated

retirement benefits for members of the system is exempt from

disclosure by the system or the political subdivision sponsoring

the system pursuant to section 13(1)(d) of the freedom of

information act, 1976 PA 442, MCL 15.243. Upon a majority vote of

the governing body of the political subdivision sponsoring the

system, the system shall provide the designated representative of

the political subdivision with a reasonable opportunity to inspect,

copy, or receive copies of all information regarding the

calculation of actual or estimated retirement benefits for members

of the system. The system may require that information provided by

the system under this subsection be provided only on a promise of

confidentiality by the political subdivision sponsoring the system.

A system may make reasonable rules to ensure the confidentiality of

records exempt from disclosure under applicable state and federal

law. The system may charge a fee under this subsection in

accordance with section 4 of the freedom of information act, 1976

PA 442, MCL 15.234. All fees and expenses incurred by the political

subdivision sponsoring the system that are related to this

subsection ~~shall~~ must be borne by the political subdivision and

~~shall~~ must not be deducted from or offset against the political

subdivision's required pension contributions to the system.

(4) Except as otherwise provided in this subsection, a system

shall have an annual actuarial valuation with assets valued on a

market-related basis. The actuarial present value of total

projected benefits must include all pension benefits to be provided

by the system to members or beneficiaries under the terms of the

system and any additional statutory or contractual agreements to

provide pension benefits through the system that are in force at

the actuarial valuation date, including, but not limited to,

service credits purchased by members, deferred retirement option

plans, early retirement programs, and postretirement adjustment

programs. A system that has assets of less than $20,000,000.00 is

only required to have an actuarial valuation as required under this

subsection done every other year.

(5) A system shall provide a supplemental actuarial analysis

before adoption of pension benefit changes. System assets must not

be used for any actuarial expenses related to the supplemental

actuarial analysis under this subsection. The supplemental

actuarial analysis must be provided by the system's actuary and

must include an analysis of the long-term costs associated with any

proposed pension benefit change. The supplemental actuarial

analysis must be provided to the board of the particular system and

to the decision-making body that will approve the proposed pension

benefit change at least 7 days before the proposed pension benefit

change is adopted. For purposes of this subsection, "proposed

pension benefit change" means a proposal to ~~change~~ increase the

amount of pension benefits received by persons entitled to pension

benefits under the system. Proposed pension benefit change does not

include a proposed change to a health care plan or health benefits.

(6) The system shall make the summary annual report created

under section 13 available to the plan participants and

beneficiaries and the citizens of the political subdivision

sponsoring the system. If the system has a website, the system

shall publish the summary annual report on the website. If the

system does not have a website, the political subdivision

sponsoring the system shall publish the summary annual report on a

website that the political subdivision has created or may create.

~~(7) For a system other than a state unit, if the system's~~

~~actuarial accrued liability for retiree health or pension is not at~~

~~least 60% funded according to the most recent summary annual report~~

~~created under section 13, the system shall post an informational~~

~~report on the system's website outlining the steps, if any, the~~

~~system may be taking to decrease the system's unfunded actuarial~~

~~accrued liability. If the system does not have a website, the~~

~~political subdivision sponsoring the system shall make the steps~~

~~the system may be taking under this subsection available to the~~

~~plan participants and beneficiaries and the citizens of the~~

~~political subdivision. The system shall submit to the department of~~

~~treasury, in a reasonable time frame and in a manner determined by~~

~~the department of treasury, the steps the system may be taking~~

~~under this subsection. As used in this subsection, "state unit"~~

~~means that term as defined in section 13.~~

Enacting section 1. This amendatory act does not take effect

unless Senate Bill No. 686 of the 99th Legislature is enacted into

law.