Tucked away in Act 44 of 2009, landmark legislation intended to relieve the significant financial strain on municipalities throughout Pennsylvania, in particular Philadelphia and Pittsburgh, the General Assembly imposed a set of best-practices standards on every municipal pension plan in the Commonwealth. Act 44 contains sweeping changes for the use of professionals by municipal pension systems by imposing substantial selection procedures and disclosure requirements. Chapter 7-A of Act 44 mandates an open competitive selection process for any and all professional services contracts when the municipal pension system is a party. Basically, any entity receiving money from a municipal pension fund, such as actuaries, fund custodians, fund managers, plan advisors and other professional consultants, going forward, may be retained only after being selected through a competitive process. Furthermore, under Act 44, the “most qualified” bidder must be selected. Finally, Act 44 contains conflict-of-interest standards, restrictions on political contributions, and annual disclosure requirements.
This article explains the mandates of the new Act and provides a checklist of tasks necessary for compliance by a municipality.
Overview of the Act
Competitive Selection Process
All professional services contracts in which the municipal pension system is a party must develop procedures to select the “most qualified person” to provide those services. While the Act does not offer much direction on who might be a party to a municipal pension system contract, the best approach for determining the types of professional pension services that fall within this new mandatory selection procedure would be any entity that receives fees from or payment out of the municipal pension fund. To the extent that a municipality retains outside counsel and other professionals to advise on developing and implementing its Act 44 selection process, then Act 44’s competitive selection process would not apply if these compliance advisors are not paid out of the pension fund. However, if a decision is made to pay these experts out of the pension fund, then the selection of those professionals must comply with the mandates of the Act. The selection procedure must be open and timely advertised, and include written application forms as well as disclosure forms.
The advertisement announcing the request for proposals must specify the following:
- The services that are the subject of the proposed contract. For example, actuarial services, or fund management services.
- A set of specifications relating to the services being sought
- The procedures adopted by the municipality for applicants to compete for the contract
- The disclosure of political contributions, as well as financial, commercial or business relationships with municipal officials that need to be reported as part of the application process
The procedures for receiving and evaluating applicants to determine the most qualified must, also, include a review of the applicant’s qualifications, experience, expertise and compensation to be charged. The disclosure forms must identify the names and titles of each individual who will be providing professional services to the municipal pension system. The applicant must also include this information for any advisors or subcontractors. In addition to the above, potential conflicts of interest must be disclosed. These disclosures include whether any representative of the applicant is a current or former official or employee of the municipality requesting proposals; whether any representatives of the applicant have been a registered federal or state lobbyist; and the description of the responsibilities that each representative of the applicant will have with regard to providing services under the contract with the municipal pension system. Also, resumes for each individual included in this disclosure must be provided upon request.
The selection procedure must further incorporate a conflict-of-interest policy that would restrict, for a minimum of one year, the following: (1) participation by a former employee of a contractor or a potential contractor in the review of a proposal or negotiation of a contract with that contractor; and (2) participation of a former employee of the municipal pension system in the submission of a proposal or the performance of a contract.
Following the successful completion of the selection process, all applications and disclosure forms would be considered public documents, except such portions of the applications and disclosure forms that qualify as proprietary information, and any other information otherwise protected by law. Moreover, the Act limits any increase in the cost of the contract by 10 percent or $10,000, unless the increase and a written justification for the increase are made public and posted on the municipal pension system’s website at least seven days prior to the effective date of the contract amendment. For example, if a municipality receives significant audit findings from the Auditor General’s Office that triggered substantial additional work by the actuary, then the professional services contract could be increased to pay for the additional work by the plan actuary for preparing a challenge to those audit findings. Finally, the municipality must prepare a summary of the relevant factors that resulted in the selection of the successful applicant. This written statement must be included with the documents awarding the contract.
Within 10 days of the decision selecting the successful applicant, a copy of the summary must be delivered to all of the bidders and posted on the municipality’s website. This notice must be communicated to the unsuccessful bidders and posted on the website at least seven days prior to the execution of the professional services contract. The selection of the successful bidder would clearly constitute an “adjudication” under the Local Agency Law. Since Act 44 imposes a “most qualified” standard; since the municipality or municipal pension system must specify the relevant factors for reaching a decision on the “most qualified” applicant; and since this written justification for that decision must be communicated to the unsuccessful applicants, municipalities should be prepared for a losing bidder to file a request for a Local Agency Law hearing to contest the selection. Consequently, great care and attention must be paid to the development and implementation of this bidding process in light of the money at stake, and the fierce competition for business in the financial services industry.
Any entity that submits an application to or enters into a contract with a municipal pension system must identify the employment or compensation of a third-party intermediary, agent or lobbyist to directly or indirectly communicate with a municipal pension system official or employee, or a municipal official or employee. Disclosure would not apply to an official or an employee of an investment firm acting within the scope of the firm’s standard professional duties. Moreover, there is a very broad ban against solicitation of political contributions. Specifically, anyone involved in an application for a professional services contract with a municipal pension system may not solicit from third parties a contribution to any municipal official or candidate for a municipal office in a municipality where the municipal pension system is organized. This would include the political action committee of that municipal official or candidate. Finally, once an advertisement for a professional services contract has been posted, no bidder or agent for the bidder may communicate with any official or employee of the municipal pension system, other than for requests for technical clarification.
Political Contribution Prohibitions
The Act prohibits participation in a municipal pension system contract by anyone who has made a political contribution to an official or candidate in a municipal election for a period of two years since the contribution. This two-year prohibition does not apply to any contribution made before December 17, 2009 – the effective date of Chapter 7-A of Act 44. Moreover, any party to a professional services contract with a municipal pension system may not have a direct financial, commercial or business relationship with any official of a municipal pension system or the municipality that controls the municipal pension system, unless the system consents in writing to the relationship following full disclosure. For example, if Bank X holds the general fund and capital fund accounts for PA Borough, then, after being selected as the “most qualified” bidder as a result of the competitive selection process, but before Bank X can enter into a contract to serve as custodian for the Borough’s pension funds, the municipal pension system must consent in writing following full disclosure by the bank of this relationship.
The Act’s disclosure requirements, in light of the consolidation in the financial services industry, become further complicated because the financial, commercial, and business relationships between individual elected and appointed officials and entities with professional services contracts must be scrutinized. The new law also prohibits a party to a professional services contract with a municipal pension system from offering or conferring a gift having more than nominal value, including money, services, loans, travel, lodging, entertainment, discount or other thing of value to any official, employee or fiduciary of a municipal pension system.
All contract bidders and current contract holders must disclose any political contribution of at least 5 percent, made within the past five years by any officer, director or executive-level employee or owner of the successful bidder, where the political contribution to an office holder, candidate or political party for any public office in the Commonwealth, exceeded $500. This information on political contributions must be updated annually. Successful bidders and current contract holders must also provide the following for each individual making political contributions: name and address, the contributor’s relationship to the contractor, the name and office or position of each recipient of a political contribution, the amount of the contribution, and the date of the contribution. The disclosure form for entities holding a professional services contract must also contain a list of gifts to an officer or employee of the municipal pension system or municipality that controls the municipal pension system; information on the retention of any third-party intermediary, agent or lobbyist and their duties that the Act does not appear to limit to involvement in obtaining the contract; and the description of any financial, commercial or business relationships with any official of the municipal pension system or of the municipality. The municipal pension system is responsible for preparing these disclosure forms that become part of any contract and must be posted on the municipality’s website. All successful bidders must update their form annually. Because Disclosure Forms must be filed annually, even if no change occurs with the professionals currently providing pension services, each of those current providers must submit Completed Disclosure Forms by December 17, 2010. For Pennsylvania State Association of Boroughs TEAM Members, Model Disclosure Forms will be provided free as a benefit for Program Members. Contact Deb Janney at DJanney@Boroughs.org or 717-236-9526 ext 25.
The Act incorporates the following penalties: (1) The municipal pension system must void the contract for anyone who knowingly makes a material misstatement or omission in a disclosure form, and shall prohibit that company from entering a contract for a period of up to three years; (2) if any company violates the above full disclosure requirements more than two times in a 36-month period, the contracts are void and the debarment shall be for a period of at least three years. A duty is placed on all bidders and municipal officials and employees to disclose any apparent, potential or actual conflict of interest, and to properly act to eliminate the conflict. For municipalities that have established a stricter code of ethics than those in the Act, those local standards are not preempted by the Act. Although not in the Act, in the event that municipal officials fail to comply with the bidding requirements, they could be open to a surcharge action and fall under other statutory sanctions imposed on public officials who ignore or fail to uphold their official duties.
Implementation of the Act
Act 44 was passed September 18, 2009 and Chapter 7-A of the Act, which is analyzed here, took effect 90 days later on December 17, 2009. One of the more confusing aspects of this new law is its failure to identify when a municipality is obliged to impose the competitive selection process on entities rendering professional services, such as the plan actuary, the fund custodian, fund managers or advisors. Although the simple answer would be at the conclusion of the current contract, unfortunately, since most agreements are open ended, with clauses that permit either party to terminate after a brief notice period running anywhere from 30 days to six months, no bright line implementation date exists. We would urge every municipality throughout the Commonwealth to begin immediately to develop selection procedures for its pension plan professionals. Regardless, the disclosure requirements for current pension professionals and municipal pension officials are currently in effect, and with an annual filing obligation, completed disclosure forms should be submitted by December 17, 2010 for posting on the municipality’s website.
In an effort to assist municipalities with this enormous task, we have developed a checklist, but first we would offer a word of caution. The imposition, through Act 44, of best-practices standards by the General Assembly represents a sea change in how municipalities select professionals to provide services for their pension funds. First, the process is exclusively competitive with a legislative mandate to select not just a qualified professional, but also the “most qualified.” Second, the process is transparent. All applications, not just the successful one, must be posted on websites with a written analysis detailing the rationale for why the winning applicant was selected. For possibly the first time ever, Pennsylvania municipal bodies will have to provide a written justification for what had been unfettered discretionary decisions.
Third, the process is subject to scrutiny and review. In securing the right for multiple years to service a $5 million, $10 million or $20 million pension fund, real money is at stake for actuaries and financial services companies. Since Act 44 has eliminated all discretion for the municipal pension system in the selection process by requiring appointment of the “most qualified” applicant, representatives in the financial services industry might see little downside in litigating selection decisions under the Local Agency Law. For example, spending $20,000 to litigate the right to manage $10 million in pension assets for three to five years translates to a business decision for each of the unsuccessful applicants.
Fourth, the compliance process will be expensive. Even without the litigation contemplated in point three above, the development of selection guidelines, the drafting of application and disclosure forms, the implementation of the screening process, and the memoralization of the rationale for selection of the winning applicant, will require advice from outside consultants. Consequently, a threshold decision for every municipality will be whether to move its pension fund(s) to a consortium of funds such as PSAB’s Municipal Retirement Trust, PMRS or ICMA-RC. However, even that decision would require, initially, adherence to the mandates of Act 44. For those municipalities that decide to retain control of their pension funds, significant time, money and resources will need to be committed to preliminary preparation for bidding professional pension services, as well as for the development and implementation of the selection process itself. To assist with these efforts, we have developed the following compliance checklist.
Act 44 Compliance Checklist
Complete a Study of the Current Organizational Structure of Each Plan
Every municipality should perform an analysis, for each pension plan, of all plan documents, the Pension Ordinance/Resolution, and contracts and agreements with all current pension plan professionals, as well as relevant collective bargaining agreements to ascertain the parameters, framework, and responsibilities for the municipal pension system. This would include determining what body or entity controls the municipal pension plan. Specifically, does the municipality’s elected body serve as the plan trustees retaining oversight responsibilities for the municipal pension system, or has some other body or entity been authorized to oversee the fund. In addition, all collective bargaining agreements must be reviewed to determine whether the municipality has voluntarily bargained away what would normally be non-bargainable managerial rights for oversight of the pension fund. Furthermore, with the assistance of the appropriate consultant, the municipality must evaluate its current scheme for using pension professionals to determine whether a better framework exists. Finally, a chart of termination notice requirements and expiration dates for agreements with current pension professionals must be created.
Develop a Schedule for Compliance
This involves two components. One is implementation of the disclosure requirements that are now in effect for every municipality’s current pension professionals, and the other is the timing for requesting proposals, for the first time, under the Act 44 selection process. Obviously, the scheduling of the latter will be influenced by the contractual expiration dates for current pension plan professionals. This phase should also include development of a page on the municipality’s website for the posting of application and selection materials, as well as disclosure forms.
Preparation and Adoption of Selection Procedures
The importance of this step cannot be understated. Not only does it involve the development of the bidding specifications for each professional service being sought, and drafting of application and disclosure forms, but, most importantly, a municipality should, prior to receiving and comparing applications, also create a set of criteria to evaluate and rate each applicant. While it is unknown how courts will interpret Act 44, it is important to note that courts have found due process violations when the criteria used by a municipality to evaluate a candidate in a competitive selection process was not disclosed beforehand. Also, the municipality must decide the term for each new contract. Draft contracts for services to be provided should be part of the application package. Each municipality should give serious thought to retaining an outside consultant to participate and advise throughout this phase.
Commence the Application Process
This involves advertising the request for proposals, the evaluation and rating of each proposal, the selection of the most qualified applicant, and the preparation of the written summary of the factors that resulted in the award of the contract. Once the selection is made, the unsuccessful bidders must be notified and the results posted on the municipality’s website. After seven days, assuming no challenges are filed, the contract may be executed.
We hope you find our efforts to explain and analyze Chapter 7-A of Act 44 helpful.