John T. Mitchell, President of Mitchell, Vaught & Taylor Investment Advisors, Inc., penned an excellent summation of how consolidation will work in Illinois. Please read his notes regarding this situation below:

As you probably already know, SB1300 (the police and fire pension fund consolidation bill) passed both houses on 11/14/2019, and awaits Governor Pritzker’s signature. The effective date for the law is January 1, 2020, but the transition boards of trustees for each statewide fund (police and fire) have a lot to do before local pension fund assets will be transferred into the statewide funds. Below is a summary of some of the basic facts of the bill to help you understand how some aspects of the bill will be implemented. Contact John Mitchell at 312-922-1717 for more information.

Consolidation Bill Summary

IMPORTANT: This summary was prepared by an MVT staff member to help us understand the consolidation bill. It is not a legal opinion or investment advice.

NOTE: All italicized text is directly quoted from the bill.

Effective Date

• January 1, 2020
• This is the effective date of the Act, not the date when the consolidated funds will be established or when existing funds will be transferred. That is yet to be determined, but no later than 30 months after the effective date, or June 30, 2022.
• It’s anyone’s guess when existing funds will be transferred, and the funds may only get 30 days’ notice. However, before any money can move, the transition board must:
  • Be appointed.
  • Meet.
  • Appoint an Interim Executive Director.
  • Hire custodians, legal counsel, consultants, etc.
  • Adopt rules.
  • Audit existing funds.

Transition Board of Trustees for the Fund

• No later than one month of the effective date (i.e., by February 1, 2020) or as soon thereafter as practicable, appointed by the Governor, with the advice and consent of the Senate. Nine Members:
  • Three members representing municipalities… appointed from among candidates recommended by the Illinois Municipal League.
  • Three members representing participants and who are participants, 2 of whom shall be appointed from among candidates recommended by a statewide fraternal organization representing more than 20,000 active and retired police officers in the State of Illinois, and one of whom shall be appointed from among candidates recommended by a benevolent association representing sworn police officers in the State of Illinois.
  • Two members representing beneficiaries and who are beneficiaries, one of whom shall be appointed from among candidates recommended by a statewide fraternal organization representing more than 20,000 active and retired police officers in the State of Illinois, and one of whom shall be appointed from among candidates recommended by a benevolent association representing sworn police officers in the State of Illinois.
  • One member who is a representative of the Illinois Municipal League.
• Term of Office
  • The transition board members shall serve until the initial permanent board members are elected and qualified. The initial election for permanent trustees shall be held and the permanent board shall be seated no later than 12 months after the effective date of this amendatory Act of the 101st General Assembly. (i.e., December 31, 2020)

Operation and Administration of the Fund

Interim Executive Director (ED)

• Appointed by the Transition Board no later than 2 months after the transition board is appointed or as soon thereafter as may be practicable.
• Serves until a permanent executive director is appointed by the board, with such appointment to be made no later than 6 months after the end of the transition period.
• ED reports to the Board and the Board determines the ED’s salary.

Custodians

• The board may appoint one or more custodians to facilitate the transfer of pension fund assets during the transition period, and subsequently to provide custodial and related fiduciary services on behalf of the board.

Legal Counsel, Auditors, Investment Advisors, Other Consultants & Personnel

• The board may also appoint external legal counsel and an independent auditing firm and may appoint investment advisors and other consultants as it determines to be appropriate and enter into contracts for such services. With approval of the board, the executive director may retain such other consultants, advisors, fiduciaries, and service providers as may be desirable.
• With approval of the board, the executive director may employ such personnel, professional or clerical, as may be desirable and fix their compensation.
• The appointment and compensation of the personnel, including the executive director, shall not be subject to the Personnel Code.

Budget

• The board shall apply moneys derived from the pension fund assets transferred and under its control to pay the costs and expenses incurred in the operation and administration of the Fund.
• The board shall from time to time transfer moneys and other assets to the participating pension funds as required for the participating pension funds to pay expenses, benefits, and other required payments to beneficiaries.
• An office for meetings of the board and for its administrative personnel shall be established at any suitable place within the State as may be selected by the board.
• The board shall contract for a blanket fidelity bond in the penal sum of not less than $1,000,000 to cover members of the board of trustees, the executive director, and all other employees of the board…the premium on which shall be paid by the board.

Adoption of Rules

The board shall adopt such rules (not inconsistent with this Code) as in its judgment are desirable to implement and properly administer this Article. Such rules shall specifically provide for the following:

• the implementation of the transition process,
• the process by which the participating pension funds may request transfer of funds,
• the process for the transfer in, receipt for, and investment of pension assets received by the Fund after the transition period from the participating pension funds,
• the process by which contributions from municipalities for the benefit of the participating pension funds may, but are not required to, be directly transferred to the Fund,
• compensation and benefits for its employees.

The adoption and effectiveness of such rules shall not be subject to Article 5 of the Illinois Administrative Procedure Act.

Transition Period Transfer of Securities, Assets, and Investment Functions

• The transition period shall commence on the effective date of this amendatory Act of the 101st General Assembly and shall end as determined by the board, consistent with and in the application of its fiduciary responsibilities, but in no event later than 30 months thereafter.
• The board may retain the services of custodians, investment consultants, and other professional services it deems prudent to implement the transition of assets described in this Section.
• The permanent board of trustees shall not be bound by any contract or agreement regarding such custodians, investment consultants, or other professional services entered into by the transition board of trustees.
• Audit of Transferor Pension Funds
  • As soon as practicable after the effective date of this amendatory Act of the 101st General Assembly, the board, in cooperation with the Department of Insurance, shall audit the investment assets of each transferor pension fund to determine a certified investment asset list for each transferor pension fund. The audit shall be performed by a certified public accountant engaged by the board, and the board shall be responsible for payment of the costs and expenses associated with the audit.
  • Upon completion of the audit for any transfer or pension fund, the board and the Department of Insurance shall provide the certified investment asset list to that transferor pension fund.
• Transfer of Funds
  • Upon determination of the certified investment asset list for any transferor pension fund, the board shall, within 10 business days or as soon thereafter as may be practicable as determined by the board, initiate the transfer of assets from that transferor pension fund. Further and to maintain accuracy of the certified investment asset list, upon determination of the certified investment asset list for a transferor pension fund, that fund shall not purchase or sell any of its pension fund assets.
  • When the Fund is prepared to receive pension fund assets from any transferor pension fund, the executive director shall notify in writing the board of trustees of that transferor pension fund of the Fund’s intent to assume fiduciary control of those pension fund assets, and the date at which it will assume such control and that the transferor pension fund will cease to exercise fiduciary responsibility. This letter shall be transmitted no less than 30 days prior to the transfer date.
  • Upon receipt of the letter, the transferor pension fund shall promptly notify its custodian, as well as any and all entities with fiduciary control of any portion of the pension assets. Each transferor pension fund shall have sole fiduciary and statutory responsibility for the management of its pension assets until the start of business on the transfer date.
  • At the start of business on the transfer date, statutory and fiduciary responsibility for the investment of pension fund assets shall shift exclusively to the Fund and the Fund shall promptly and prudently transfer all such pension fund assets to the board and terminate the relationship with the local custodian of that transferor pension fund.
  • Within 90 days after the end of the transition period or as soon thereafter as may be practicable as determined by the board, the Fund and the Department of Insurance shall cooperate in transferring to the Fund all pension fund assets remaining in the custody of the transferor pension funds.
  • The board shall adopt such rules as in its judgment are desirable to implement the transition process, including, without limitation, the transfer of the pension fund assets of the transferor pension funds, the assumption of fiduciary control of such assets by the Fund, and the termination of relationships with local custodians. The adoption and effectiveness of such rules and regulations shall not be subject to Article 5 of the Illinois Administrative Procedure Act.

Management and Direction of Investments

• The board may not delegate its management functions, but it may, but is not required to, arrange to compensate for personalized investment advisory service for any or all investments under its control with any national or state bank or trust company authorized to do a trust business and domiciled in Illinois, other financial institution organized under the laws of Illinois, or an investment advisor who is qualified under the federal Investment Advisers Act of 1940 and is registered under the Illinois Securities Law of 1953.
• This Section does not prohibit the board from directly investing pension fund assets in public market investments, private investments, real estate investments, or other investments authorized by this Code.
• The Fund shall not be subject to any of the limitations applicable to investments of pension fund assets by the transferor pension funds.
• The Fund shall be subject to the provisions of Section 1-109.1, including, but not limited to: utilization of emerging investment managers; increasing racial, ethnic, and gender diversity of its fiduciaries; utilization of businesses owned by minorities, women, and persons with disabilities; utilization of minority broker-dealers; utilization of minority investment managers; and applicable reporting requirements.
• The limitations set forth in Section 6 of the Public Funds Investment Act shall be applicable only at the time of investment and shall not require the liquidation of any investment at any time.
• The pension fund assets transferred to or otherwise acquired by the Fund shall be placed in the custody of a custodian who shall provide adequate safe deposit facilities for those assets and hold all such securities, funds, and other assets subject to the order of the Fund.
• The board shall separately calculate account balances for each participating pension fund. The operations and financial condition of each participating pension fund account shall not affect the account balance of any other participating pension fund. Further, investment returns earned by the Fund shall be allocated and distributed pro rata among each participating pension fund account in accordance with the value of the pension fund assets attributable to each fund.

11-19-2019/jwm