The 2004 Legislature, in Laws 2004, Chapter 223, modified the manner in which the consulting actuarial firm that performs the official actuarial valuations is selected. The 2004 legislation, principally Minnesota Statutes, Section 356.214, replaced the Legislative Commission on Pensions and Retirement with the seven retirement system directors, acting jointly, as the party contracting with the consulting actuarial firm on behalf of the State of Minnesota, its public employees, the taxpayers, and the fourteen statewide and major local public retirement plans.

Laws 2004, Chapter 223, amended the portions of Minnesota Statutes, Chapters 352, 352B, 353, 354, 354A, 356, and 422A relating to the preparation of annual actuarial valuations by substituting a consulting actuary retained jointly by the three major statewide retirement systems for the current consulting actuary retained by the Legislative Commission on Pensions and Retirement and by specifying the parameters within which the jointly retained actuary would function. The 2004 legislation included the following specific provisions:

1. Official Production Actuary to be Retained Jointly by the Seven Retirement Systems Chief Administrators. The consulting actuary for the production of the official actuarial valuations of the various statewide and major local Minnesota public pension plans is required to be retained jointly by the chief administrative officers of the seven major retirement systems, the Minnesota State Retirement System (MSRS), the Public Employees Retirement Association (PERA), and the Teachers Retirement Association (TRA), the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), the Minneapolis Employees Retirement Fund (MERF), and the St. Paul Teachers Retirement Fund Association (SPTRFA), with the consulting actuary selection subject to ratification by the Legislative Commission on Pensions and Retirement. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (a).

2. Jointly Retained Actuary Must be an Approved Actuary. The actuary retained jointly must be a Fellow in the Society of Actuaries (FSA), a private credentialing organization, or must have at least 15 years of experience with major public pension plans. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (a).

3. Actuarial Valuations Must Comply with Actuarial Standards. The 14 annual actuarial valuations prepared by the jointly retained actuary must comply with Minnesota Statutes, Section 356.215, the actuarial reporting law, and with the Standards for Actuarial Work adopted and revised periodically by the Legislative Commission on Pensions and Retirement. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (c).

4. Annual Actuarial Valuations and Major Plan Quadrennial Experience Studies. Actuarial valuations must be prepared for the 14 current plans annually by the jointly retained actuary and experience studies for the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and the Teachers Retirement Association (TRA) must be prepared every four years by the jointly retained actuary. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (b).

5. Commission Chair Could Request Additional Experience Studies. Experience studies for any of the smaller 11 statewide or major local pension plans would be performed by the jointly retained actuary when requested by the Commission chair. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (e).

6. Five-Year Maximum Actuarial Services Contract. The contract jointly retaining the consulting actuary has a maximum duration of five years. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (f).

7. Actuarial Services Contract Subject to Competitive Bidding and Open Meeting Consideration. Competitive bidding procedures are required to be used in selecting the jointly retained actuary and the consideration of actuarial services bids and the consulting actuary selection must be conducted in open meetings. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (g).

8. Contracting Procedures and Contract Substance Under Joint Rules. The joint retirement system chief administrative officers are required to specify requirements for the procedure under which the actuarial services contract will be bid and the requirements for the substantive provisions of the actuarial services contract, with those rules subject to Commission notification and an opportunity for Commission comment. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (f).

9. No Reliance Limitation Applicable to the Legislature or the Commission. If the actuarial services contract includes a limit on the parties who can rely on actuarial results under the contract, the limit cannot be extended to the Legislature or the Commission. New Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (g).

10. Actuarial Services Contract Cost to be Allocated. The cost of annual actuarial valuations and quadrennial experience studies must be allocated among the various pension plans on the basis of the plan’s proportional share of the total work effort. The cost of actuarial cost estimates prepared at the request of a pension plan or interested party must be billed to the plan or interested party and may be pre-billed to interested parties. The cost of actuarial cost estimates prepared at the request of the Legislative Commission on Pensions and Retirement are payable by the Commission. New Minnesota Statutes, Section 356.214, Subdivision 2.

11. Cost Estimates of Legislation to be Reported to the Commission. Any cost estimates for pending legislation prepared by the jointly retained actuary under the contract are required to be reported to the Legislative Commission on Pensions and Retirement at the same time as they are transmitted to the requester. New Minnesota Statutes, Section 356.214, Subdivision 3.

12. Adjustment to the Pension Commission’s Appropriation. The Fiscal Year 2005 appropriation allocation to the Legislative Commission on Pensions and Retirement under First Special Session Laws 2003, Chapter 1, Article 1, Section 2, Subdivision 4, is reduced by $152,000 to account for the reassigned actuarial responsibilities.

13. Conforming Changes and References. References to the consulting actuary retained by the Legislative Commission on Pensions and Retirement in Minnesota Statutes, Chapters 352, 352B, 353, 354, 354A, 356, and 422A, and related cross-citations are revised and the current consulting actuary provisions in Minnesota Statutes, Section 3.85, the statute governing the Legislative Commission on Pensions and Retirement, are repealed.

As the Commission staff understands the process, from materials provided by the Public Employees Retirement Association, which was the retirement system designated as the lead entity on the actuarial contract process, the bidding process utilized by the joint retirement system administrators panel consisted of the following elements:

1. Process Design. The seven retirement system administrators met on May 8, 2004, to discuss how to conduct the actuarial services bidding and selection process, even though S.F. 806 (Betzold) had not yet been enacted. The administrators developed a tentative schedule, designated a subcommittee to make the initial review of proposals (consisting of the three statewide administrators and at least one first class city teacher retirement fund association administrator), determined that the successful proposal selection decision would require an affirmative vote of five of the seven administrators, decided on a three-year initial actuarial services contract, with two one-year potential extensions, decided that PERA would be the lead agency in the process, and decided that invoices under the actuarial services contract must be reviewed and approved by all administrators prior to PERA processing and payment.

2. Development of the Request for Proposal. An initial draft version of the Request for Proposal (RFP) was developed by PERA during the week of May 3, 2004. The initial draft version of the RFP was transmitted to the Legislative Commission on Pensions and Retirement staff on May 7, 2004. The Department of Administration gave preliminary approval to the initial draft of the RFP on May 10, 2004. The RFP was finalized on May 14, 2004, based on the review and comments of the various system administrators. The final version of the RFP was sent to the Legislative Commission on Pensions and Retirement staff during the week of May 17, 2004, following a request by the Commission staff.

3. Actuarial Firm Contacts. During the week of May 10, 2004, PERA contacted eleven actuarial firms (seven with offices in Minnesota and four with offices outside Minnesota) to determine their interest in receiving a Request for Proposal (RFP), with nine of the contacted firms expressing an interest. One unsolicited request for the RFP was also received after the May 17 publication of the notice of the RFP in the State Register. The actuarial firms earmarked for contact about the RFP were identified by the various retirement system administrators.

4. Bidder Questions. Between May 17, 2004, and June 4, 2004, PERA was available to answer questions about the Request for Proposal. Questions were received from two actuarial firms. PERA did not conduct a potential bidders’ meeting on the RFP, as had been the prior practice of the Legislative Commission on Pensions and Retirement.

5. Receipt of Proposals. Proposals were required to be delivered to PERA before 3:00 p.m. CDT on June 4, 2004. Proposals were received from four actuarial firms, which were EFI Actuaries, Mellon Human Resources, Milliman, and The Segal Company.

6. Proposal Review Subcommittee. A four-administrator subcommittee initially reviewed the four proposals. The subcommittee members were Mary Most Vanek (PERA), David Bergstrom (Minnesota State Retirement System (MSRS)), Gary Austin (Teachers Retirement Association (TRA)), and Karen Kilberg (Minneapolis Teachers Retirement Fund Association (MTRFA)). A preliminary subcommittee meeting was held on June 10, 2004, at which the bid evaluation forms were distributed and at which the next meeting date was set. Apparently, no public notice for the June 10, 2004, meeting was posted. On June 17, 2004, the subcommittee met again, after subcommittee members evaluated the proposals on their own, and collectively scored the proposals. The scoring criteria set forth in the Request for Proposal indicated that the proposals would be evaluated 10 percent based on the firm’s understanding of contract responsibilities, 20 percent based on the firm’s approach and work plan, 25 percent based on the firm’s qualifications, 30 percent based on the assigned actuary’s qualifications, and 15 percent based on the proposed contract cost. The June 17, 2004, meeting also selected two of the four bidders as finalists for interviews, The Segal Company and Milliman, and eliminated two of the four bidders, EFI Actuaries and Mellon Human Resources, because their compensation requirements were almost twice the compensation bid from the lowest cost bidder. According to proposed evaluation forms provided by PERA after the June 22, 2004, selection meeting, the two firms selected for interview had the highest evaluation scores and the two firms rejected for interview had the lowest evaluation scores. PERA reports that the notice for the June 17, 2004, meeting was posted. The Commission staff member intending to attend the June 17, 2004, meeting arrived at the meeting five minutes late and found that the meeting had already adjourned.

7. Consulting Firm Interviews and Selection. The Segal Company and Milliman were interviewed by the seven retirement system administrators (six chief administrators and a designee, a Teachers Retirement Association Assistant Executive Director). Each interview lasted approximately 90 minutes, with initial comments from the actuarial firm representative or representatives, responses to prepared questions asked by Mary Vanek, and responses to follow-up or additional questions from other administrators. After the second interview, the seven administrators discussed their impressions of the two interview sessions and discussed a summary of the proposals apparently prepared for the June 17, 2004, meeting, principally contract costs. The committee, after almost an hour of deliberating, voted 6-1 to retain The Segal Company if a contract could be successfully negotiated and if reference checks did not reveal unanticipated problems. No formal minutes exist from the June 22, 2004, meeting, but a summary of the June 22, 2004, meeting was provided by PERA to the Commission staff at the request of the Commission staff.

8. Reference Checks. David Bergstrom contacted Chris DeRose, the Executive Secretary of the Michigan State Retirement System, and Sparb Collins, the Executive Director of the North Dakota Public Employees Retirement System, two of the references provided by The Segal Company. Both references recommended The Segal Company without any expressed qualification or reservation. J. Michael Stoffel contacted Donna Mueller, the Chief Executive Officer of the Iowa Public Employee Retirement System, one of the references provided by The Segal Company. Ms. Mueller also recommended The Segal Company.

9. Liability Insurance Coverage. The Segal Company did not request any Errors and Omissions liability limitation. The Segal Company carries a $10 million Errors and Omissions liability policy. The policy is cumulative in its coverage during each year.

10. Compensation Refinement/Change. The Segal Company original bid included the preparation of ten actuarial cost estimates without additional charge. When requested by the joint retirement system administrators to revise its compensation requirements with the elimination of the ten "no extra charge" actuarial cost estimates, The Segal Company reduced its annual actuarial valuation fee by $10,000, to $155,000 per year.

The consulting actuarial firm recommended by the seven retirement systems is The Segal Company. The principal actuary proposed for the contract is Ms. Leslie L. Thompson, FSA, MAAA, EA, Senior Vice President. The home office for The Segal Company is located in New York, New York, and the office proposed to provide the actuarial consulting services for the Minnesota retirement plans under the contract is located in Englewood, Colorado. The Segal Company has a Minneapolis office, but that office is not proposed to be involved in providing actuarial services under the contract.

Ms. Thompson has been employed by The Segal Company for eight years and has 25 years of actuarial consulting or insurance company actuarial experience. Her primary public pension plan experience has been in Iowa, Nevada, North Dakota, Ohio, and South Dakota. In addition to co-consultants from other Segal offices, the production team in Colorado consists of an Actuarial Manager (ASA), a Senior Actuarial Analyst, and three Actuarial Analysts.

The Segal Company primarily provides actuarial consulting services for Taft-Hartley Act, jointly trusteed, pension plans, with about 20 percent of its current actuarial consulting business involving public sector clients. The Segal Company is an employee-owned corporation that is not publicly traded and declined to provide annual financial statements.

As of July 2, 2004, the proposed actuarial services contract document negotiated between the joint retirement system administrators and The Segal Company has not yet been forwarded to the Commission staff.

1. Statutory Role. Minnesota Statutes, Section 356.214, newly enacted by the 2004 Legislature, provides that the contract between the recommended consulting actuarial firm and the seven retirement system administrators, acting jointly on behalf of the State, its employees, its taxpayers, and its public pension plans, is not effective until it has been reviewed and approved by the Legislative Commission on Pensions and Retirement.

   Because the action would not involve the recommendation of proposed legislation, under the Commission staff’s understanding of the Commission’s rules, approval would require a majority of Commission members attending the meeting if a quorum is present (thus, a minimum of four members if a quorum of six members are in attendance).

   Minnesota Statutes, Section 356.214, Subdivision 1, does not specify any criteria for the Commission to use in making its review and reaching a decision to approve or reject the actuarial consulting firm and actuarial services contract recommendations.

2. Potential Course of Action. The Commission staff suggests that the Commission undertake its review and approval duty with respect to the proposed contract between The Segal Company and the Public Employees Retirement Association (PERA) on behalf of the seven retirement system administrators, acting jointly, in a manner analogous to the advice and consent function of the Senate under Article V, Section 3, of the Minnesota Constitution.

   Specifically, the Commission should receive the comments of the Executive Director of the Public Employees Retirement Association (PERA), Mary Vanek, representing the recommending panel of retirement system administrators, should receive comments from the consulting actuarial firm representative, if a representative is present, should receive any comments in support or in opposition from interested parties, and then should vote on the contract recommendation from PERA.

3. Additional Potential Considerations. Although the Commission staff does not believe these concerns should, on their own, absent other significant adverse considerations, result in a rejection of the consulting actuarial firm/actuarial services contract recommendation form the joint retirement system administrators, the process used in arriving at that recommendation did not fully conform with the statutory requirements of Minnesota Statutes, Section 356.214.

   Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (f), requires that the joint retirement system administrators establish procedures in advance its for the consideration and selection of bidders for the actuarial services contract and for the contents of the actuarial services contract. It also requires those proposed procedures and requirements be submitted to the Commission for review and comment before final approval by the joint administrators. The joint retirement system administrators did not forward any proposed procedures and requirements to the Commission prior to undertaking the bidding process. While the procedures and requirements utilized by the joint retirement system administrators appear to the Commission staff to have been adequate to identify appropriate candidates, the required advance interaction between the Commission and the joint retirement system administrators on the requirements and procedures for the contract process before undertaking the process as envisioned when the 2004 legislation was developed and drafted may have improved the bidding process.

   Minnesota Statutes, Section 356.214, Subdivision 1, Paragraph (f), also requires that the actuarial contract bid consideration and selection meeting be open to the public and that notice of the date, time, and subject of the meeting to the public must be reasonable and timely. Members of the Commission staff and one member of the PERA staff were the only attendees at the June 23, 2004, consultant selection meeting who were not members of the joint retirement system administrators panel or a designee. The only public notice of the meeting appears to have been a letter-sized sheet taped to a sign board located in the lobby of the Minnesota Retirement Systems building. No notice or sign was located on the floor where the meeting occurred and the receptionist located adjoining the meeting room was not aware of the nature of the meeting when asked about the meeting by the Commission staff. No notice of the June 17, 2004, or the June 24, 2004, meetings were published in the State Register and no notice of either meeting could be found by the Commission staff on the websites of PERA, the Minnesota State Retirement System (MSRS), or the Teachers Retirement Association (TRA). No tape recording apparently was made of the June 17, 2004, meeting or of the June 23, 2004, meeting and no formal minutes or other official record of either meeting appears to exist.

   The statutory requirements that the bidding process be formulated in advance of the consideration of potential or actual bidders, with legislative involvement, and that the bidding process be conducted in open meetings with adequate advance public notice are intended to insure the integrity of the selection process and to improve the quality of the result. Laws 2004, Chapter 223, represents the delegation from the Legislature of a function of considerable importance to the Legislature and to the State. Since the result of the delegated duty cannot be guaranteed, the primary mechanism for the Legislature in influencing the direction of the delegated decision is to insure that the process is open, fair, and governmental. The actual process used by the retirement system administrators fell short of the process expectations of the Legislature. The Commission would be within its appropriate function to note these deficiencies and to attempt to gain assurances from the joint retirement system administrators that future actuarial contract bidding will more closely adhere to the statutory requirements governing this delegation.

Attachments:

Summary of RFP

Evaluation Form:  EFI

Evaluation Form:  Mellon

Evaluation Form:  Milliman

Evaluation Form:  Segal

June 25, 2004, Memo

Segal Contract