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2 T H E C A B I N E T
3 S T A T E O F F L O R I D A
_________________________________________________________
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Representing:
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STATE BOARD OF ADMINISTRATION
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__________________________________________________________
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8 The above agency came to be heard before
THE FLORIDA CABINET, Honorable Governor Bush
9 presiding, in the Cabinet Meeting Room, LL-03, The
Capitol, Tallahassee, Florida, on January 4, 2001,
10 commencing at approximately 1:35 p.m.
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13 Reported by:
14 NANCY P. VETTERICK
Registered Professional Reporter
15 Certified Court Reporter
Notary Public in and for
16 the State of Florida at Large
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20 ACCURATE STENOTYPE REPORTERS, INC.
100 SALEM COURT
21 TALLAHASSEE, FLORIDA 32301
850.878.2221
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ACCURATE STENOTYPE REPORTERS, INC.
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1 APPEARANCES:
2 Representing the Florida Cabinet:
3 JEB BUSH
Governor
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BOB MILLIGAN
5 Comptroller
6 TOM GALLAGHER
Treasurer
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ACCURATE STENOTYPE REPORTERS, INC.
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1 I N D E X
2 ITEM ACTION PAGE
3 STATE BOARD OF ADMINISTRATION:
(Presented by Tom Herndon,
4 Executive Director)
5 1 Approved 12
2 Approved 15
6 3 Approved 23
4 For Information 23
7 5 Status Report 28
6 Report 70
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15 CERTIFICATE OF REPORTER 73
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ACCURATE STENOTYPE REPORTERS, INC.
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1 P R O C E E D I N G S
2 (The agenda items commenced at 1:40 p.m.)
3 MR. HERNDON: Good afternoon, Governor.
4 GOVERNOR BUSH: Good afternoon.
5 MR. HERNDON: First -- welcome back,
6 Commissioner Gallagher to the Board.
7 TREASURER GALLAGHER: Thank you. It's been a
8 long six years.
9 COMPTROLLER MILLIGAN: You've made a lot of
10 money. It has gone up exponentially.
11 GOVERNOR BUSH: Well, I have a mixed record, I
12 think.
13 MR. HERNDON: So far, but there's still plenty
14 of opportunity. Well, since Commissioner Gallagher
15 came in yesterday, I guess, the market has gone
16 straight up; so it's a good sign.
17 GOVERNOR BUSH: I hope we're heavily invested
18 in the Nasdaq.
19 MR. HERNDON: Well, it did pretty well
20 yesterday. Well, I appreciate your having this
21 unscheduled interim meeting. We have a number of
22 items on the agenda today. I know there are some
23 speakers in the audience who have indicated an
24 interest in speaking.
25 I'm not sure, at this point, if they
ACCURATE STENOTYPE REPORTERS, INC.
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1 ultimately will choose to exercise that option, and
2 I think they're going to -- it would depend, in
3 part, on what is said and how this proceeds, but if
4 I can go ahead and start in on the Agenda Item
5 Number 1.
6 In fact, the first three items are various
7 editions of selection and evaluation criteria for
8 critical components of the overall optional
9 retirement program. As you'll recall, it
10 essentially has got four components to it.
11 There's an education component, a third-party
12 administrator, a record-keeping component, an
13 investment component, and a transition brokerage
14 component, and we have brought before you
15 previously the selection and evaluation criteria
16 for the third-party administrator, and I'm going to
17 talk a little bit later on about where we are in
18 the process of selecting that vendor.
19 But, in each case, what we've done in these
20 three items, as we did for the third-party
21 administrator, is develop a list of selection
22 evaluation criteria that we intend to apply to the
23 search process and to the ultimate selection
24 process for the particular vendor that these
25 criteria are tailored to solicit.
ACCURATE STENOTYPE REPORTERS, INC.
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1 In all three of these cases, we took these
2 selection and evaluation criteria to a joint
3 meeting of our advisory councils back in November.
4 We gave them then a three-week period to reflect on
5 these, and came back in December, on the 21st of
6 December, had a second joint meeting, and had them
7 review these criteria.
8 We, of course, also had our consultants, the
9 three independent consultants, that are working for
10 us, look at these selection criteria, and I think,
11 to the best of everybody's knowledge, they
12 represent the best practices now, in extent,
13 through the industry.
14 As soon as I say that, I'm sure that a week
15 from now or two weeks from now we'll all sit up
16 bolt in the bed and say, my God, how could we have
17 forgotten this very critical item? But now, at
18 least, we generally believe that these all
19 represent the most prevalent industry practice and
20 the best industry practice.
21 The first package that we have in front of
22 you, and by far the most extensive package, is the
23 selection evaluation criteria for the unbundled
24 investment products, and there are a number of
25 those. I'm not going to go through all of those.
ACCURATE STENOTYPE REPORTERS, INC.
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1 There are quite a bit of similarities between
2 the products because essentially, you're asking
3 many of the same kinds of questions. You'd ask
4 probably the same kinds of questions ultimately to
5 a bundled provider, too.
6 That is, what is the performance of your fund?
7 What are the costs of your fund? What is the
8 tenure of the manager? What is the financial
9 strength and stability of your company? What is
10 your experience as it relates to performance over
11 multiple years and multiple quarters, and how do
12 you do in down markets and up markets?
13 These are very standard kinds of questions
14 that are asked in the selection process of managers
15 throughout the country. It's a fairly routine
16 process, and to my knowledge, at least, there have
17 been no real questions raised either by the
18 advisory councils or by members of the industry to
19 these selection and evaluation criteria for the
20 unbundled investment provider.
21 With that, I'd stop commenting and answer any
22 questions on that item.
23 GOVERNOR BUSH: Is there anybody here that
24 wants to speak on the first item?
25 (No response.)
ACCURATE STENOTYPE REPORTERS, INC.
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1 GOVERNOR BUSH: Tom, what is the -- are there
2 standardized fee arrangements so that when you
3 evaluate them, you're not getting into the
4 apple-versus-the-pear comparison?
5 MR. HERNDON: No, unfortunately there isn't,
6 Governor. You can arrive at some standard fee
7 principles, if you will, but those are probably not
8 going to be exactly kind of on point. You tend to
9 pay up for performance.
10 For example, the better performing funds
11 charge higher fees, and they can afford to charge
12 higher fees because they're providing you with an
13 increment of performance that's better than their
14 peers.
15 GOVERNOR BUSH: But is the same -- does the
16 RFP, or whatever the equivalent, do you know how
17 that --
18 MR. HERNDON: We'll eventually have an RFI
19 style product, yes, sir.
20 GOVERNOR BUSH: When you provide the request
21 for information, will there be a variety of
22 different means by which they can make their money?
23 MR. HERNDON: Well --
24 GOVERNOR BUSH: I mean, are you going to have
25 one standardized way so as to measure this in a
ACCURATE STENOTYPE REPORTERS, INC.
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1 competitive --
2 MR. HERNDON: That's correct. We will ask
3 them to provide us with information so that we can
4 compare fee structures to fee structures and
5 performance to performance and so on and so forth
6 in a standardized fashion.
7 There are different ways to look at it. Some
8 firms have performance-based fee schedules, and
9 others don't, and so on and so forth, but we'll
10 standardize it so that we'll hopefully have a clear
11 apples-to-apples comparison.
12 GOVERNOR BUSH: Can I ask another question?
13 MR. HERNDON: Yes.
14 GOVERNOR BUSH: On the -- what are we calling
15 the funds that we created by the SBA?
16 MR. HERNDON: Institutional products.
17 GOVERNOR BUSH: But they're not the -- I mean,
18 they're -- I think you used the term with me once,
19 "generic." I mean, you create them.
20 MR. HERNDON: Well, in a sense, we are -- we
21 have identified the product lineup that we believe
22 represents a diversified mix of products that the
23 participants out there would find to be of greatest
24 utility.
25 All of these products, however, are existing
ACCURATE STENOTYPE REPORTERS, INC.
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1 in the private community today, and we voted 10 not
2 to provide any of these services ourselves. We
3 will advertise, and you just take, for example, a
4 large cap growth product.
5 We will solicit responses from all prospective
6 bidders who wish to provide a large cap growth
7 product. It will all be private companies.
8 They'll be existing products, and basically -- this
9 is a little oversimplified, but if you'll accept
10 this for the sake of convenience, this business is
11 broken up into a retail division, if you will,
12 which tends to be mutual fund companies -- they're
13 marketed direct to consumers -- and an
14 institutional division which tends to be marketed
15 directly to large purchasers like us, large pension
16 plans.
17 They oftentimes may be the same underwriting
18 investment product. They oftentimes are even
19 managed by the same people. One is SEC regulated,
20 and the other is not. One tends to have a retail
21 fee structure 'cause they've got marketing costs
22 and advertising costs and everything else. The
23 other does not 'cause their margins are a much
24 smaller audience of theoretically sophisticated
25 investors.
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1 GOVERNOR BUSH: So you're not creating these
2 funds? I just want to make that --
3 MR. HERNDON: That's correct.
4 GOVERNOR BUSH: I want to make that clear.
5 These are private -- these will be competitively
6 bid, and it will be privately -- now, the consumer,
7 the pension fund member, will not necessarily know
8 what the underlying investment is, but they will
9 have certain parameters that they can look at
10 and --
11 MR. HERNDON: They will get a prospectus for a
12 large cap growth product. They will know, if they
13 wish, who is actually managing that money, but
14 it'll be large cap growth product as opposed to
15 company A large cap growth product.
16 GOVERNOR BUSH: Any questions?
17 TREASURER GALLAGHER: They may say managed by
18 company A.
19 MR. HERNDON: It may say, managed by company
20 A. That's right.
21 GOVERNOR BUSH: All right. Is there a motion?
22 COMPTROLLER MILLIGAN: I move it.
23 GOVERNOR BUSH: Second?
24 TREASURER GALLAGHER: Second.
25 GOVERNOR BUSH: Motion has been made and
ACCURATE STENOTYPE REPORTERS, INC.
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1 seconded. Without objection, it's approved.
2 TREASURER GALLAGHER: Did anybody -- nobody
3 wanted to talk about it, right?
4 GOVERNOR BUSH: No.
5 MR. HERNDON: The second set of selection and
6 evaluation criteria relates to hiring a transition
7 broker or brokers. Here I want to just take a
8 second and characterize a little bit what the task
9 is that faces us.
10 We now have estimates -- and I'll have for you
11 shortly a memorandum that summarizes this, but we
12 now have estimates from three different independent
13 actuarial firms who've given us their forecast of
14 how much money will move out of the DB plan in the
15 first nine months.
16 That's kind of that initial period that we're
17 focusing on. The estimates are essentially 12 to
18 13 billion dollars will move in the first nine
19 months of this program as we give all of those
20 600,000 members the option to move.
21 We don't have internally the resources or the
22 expertise to liquidate $13 billion of our assets,
23 and then transfer those assets into 5 or 10 or 20
24 different investment firms out there necessarily
25 always at the most optimum price and time and
ACCURATE STENOTYPE REPORTERS, INC.
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1 structure.
2 For example, there are opportunities where we
3 can cross securities in kind between firms. We
4 simply don't have the expertise to do that, and
5 certainly not at that volume, and not over a
6 nine-month period, and not with as many
7 participants as are going to be involved in this
8 process.
9 So we are suggesting here that we hire some
10 specialty expertise to help us with this. This
11 also goes to a point that General Milligan has
12 raised on a number of occasions, and that is how do
13 you ensure that you are, at all times, treating
14 both the DB sender and the DC recipient fairly when
15 you sell securities?
16 You don't obviously want to sell your best
17 performing stocks out of the DB portfolio or your
18 dogs out of the DB portfolio and advantage the DC
19 members, and that's a critical issue. You have to
20 look very carefully at how you structure the
21 portfolios that are moving in order to satisfy both
22 sides of the spectrum in that kind of equation.
23 GOVERNOR BUSH: Help me out here. This is all
24 brand new to me. If we have, on the one hand, the
25 defined contribution side, a separate investment
ACCURATE STENOTYPE REPORTERS, INC.
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1 vehicle for people to select from, and on the other
2 side, you have your large list of investments that
3 you make on a wholesale basis, wouldn't you just
4 liquidate, or can you transfer --
5 MR. HERNDON: You may very well liquidate
6 that, some portion. Your first choice, if you
7 can't, is to cross in kind.
8 GOVERNOR BUSH: You save one transaction --
9 TREASURER GALLAGHER: Right. Two
10 transactions.
11 MR. HERNDON: You save two transactions. You
12 save a sell and a buy on both sides.
13 TREASURER GALLAGHER: If your person that's
14 taking over is going to get $300 million dollars on
15 this day for a bunch of our retirees, and you could
16 say, by the way, you know, you're going to have to
17 invest this money, is there anything here that
18 you're going to invest it in? We'll just give you
19 that without having it cost money?
20 That's the theory of it, and that's a huge job
21 to do, and a method to do it is what we're trying
22 to find somebody that's going to do this. Are
23 there people that do this?
24 MR. HERNDON: Yes, there are. There are two
25 firms that are specialty firms. They tend to be
ACCURATE STENOTYPE REPORTERS, INC.
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1 large institutional banks, investment banks, that
2 have this as one of their subspecialties. It's a
3 fairly arcane field, and there are frankly a lot of
4 practitioners in this --
5 GOVERNOR BUSH: My guess is we'll probably be
6 the largest customer.
7 MR. HERNDON: We'll certainly be one of the
8 largest. That's right. What we're proposing here
9 for you to consider is the selection and evaluation
10 criteria that we will employ to hire this manager.
11 GOVERNOR BUSH: Is anybody here that would
12 like to talk about Item 2?
13 (No response.)
14 TREASURER GALLAGHER: I'll move it.
15 COMPTROLLER MILLIGAN: Second.
16 GOVERNOR BUSH: Moved and seconded. Any other
17 discussion?
18 (No response.)
19 GOVERNOR BUSH: Without objection, it's
20 approved.
21 MR. HERNDON: Item 3 is also a set of
22 selection and evaluation criteria. In this case,
23 there's selection and evaluation criteria for the
24 education and advice vendors. Here what we're
25 proposing is the selection and evaluation criteria
ACCURATE STENOTYPE REPORTERS, INC.
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1 for essentially part two of an RFI.
2 We issue part one of an RFI in the true spirit
3 of a request for information, trying to get from
4 the industry their best thinking about how an
5 education program should be designed. It was never
6 our intention to select from any of those
7 participants, but rather we were trying to educate
8 ourselves, as I indicated, in the spirit of an RFI.
9 We now believe we have a pretty good handle on
10 what an education program should look like, how it
11 should function, the kinds of services that we want
12 to offer to the members out there, the web sites,
13 the telephone numbers, the on-site visits and so on
14 and so forth.
15 These are the selection and evaluation
16 criteria that we intend to employ to select that
17 ultimate vendor. It's a critical role here both
18 from a content point of view and from a delivery of
19 services point of view.
20 GOVERNOR BUSH: Again, on the question of cost
21 or fees, is there a standardized way to look at
22 this?
23 MR. HERNDON: There is not necessarily a
24 standardized way, but we're going to try and
25 standardize the responses so that we can get as
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1 much uniformity in response as possible -- but,
2 yes, sir.
3 GOVERNOR BUSH: The reason I ask these
4 questions simply is because this should be a very
5 competitive situation. The more standardized it
6 is, the greater savings --
7 MR. HERNDON: Yes, sir.
8 GOVERNOR BUSH: -- at the same quality, I
9 think.
10 MR. HERNDON: Absolutely.
11 GOVERNOR BUSH: The more that there's freedom
12 to interpret, everybody can make, you know, their
13 own evaluations, and it might be more subjective.
14 MR. HERNDON: Yes, sir.
15 COMPTROLLER MILLIGAN: On your risk element,
16 it's a critical element of the decision-making
17 process that you are apples and apples comparing
18 the criteria that are not appropriate.
19 TREASURER GALLAGHER: I don't know that the
20 risk has anything to say about education on this.
21 COMPTROLLER MILLIGAN: No, no, no. I'm
22 talking about the selection process.
23 GOVERNOR BUSH: Any other -- any questions?
24 COMPTROLLER MILLIGAN: I will comment that I'm
25 glad to see that Florida --
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1 MR. HERNDON: Yes, sir.
2 TREASURER GALLAGHER: Move 3.
3 GOVERNOR BUSH: I'm going to bring up a thorny
4 subject that, first of all, is there anybody here
5 to talk about education?
6 TREASURER GALLAGHER: For the first time I've
7 been up here, I haven't had to talk about
8 education, Governor.
9 GOVERNOR BUSH: I do this at the risk of
10 extending the meeting a little bit. I had a
11 question that might generate some interest, and it
12 relates to the statute and --
13 TREASURER GALLAGHER: Do you want to move 3,
14 or does this have to do with education?
15 GOVERNOR BUSH: Well, it does. That's why I
16 bring it up, Tom. It relates to the statute
17 allowing for additional education. I'm not sure
18 what the term means by the -- by someone other than
19 the person that would be awarded this contract.
20 I'm a little confused about how that plays out
21 because the statute clearly says that there should
22 be a third-party administrator. There should be an
23 education component that's independent, and I
24 believe there's a broad consensus that that's a
25 very smart thing to do.
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1 But then it also states that -- I'm not sure
2 if it specifically states bundled providers or
3 extensive people are allowed -- they may also
4 educate people on the product. In your
5 conversations with everybody, in your understanding
6 of the statute and how you-all are playing this
7 out, are we going to have some kind of conflict
8 down the road that we need to be aware of?
9 MR. HERNDON: Actually, that conflict may be
10 coming a lot quicker than you might think, but --
11 TREASURER GALLAGHER: Next item.
12 GOVERNOR BUSH: Next item.
13 TREASURER GALLAGHER: Some legal matters.
14 MR. HERNDON: Your sense of things is
15 absolutely correct. Your characterization of the
16 situation is absolutely correct. You have a very
17 broad agreement that the "to DC or not DC"
18 education question should be provided by a neutral
19 dispassionate third party.
20 I don't think anybody, either industry or us
21 or the Legislature, disagrees on that point at all.
22 That's very much the appropriate course. The
23 second question is depending on the ultimate
24 decisions that the trustees make, you have 10, 5,
25 20, whatever number of investment choices, that
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1 there should be a third-party independent
2 organization that gives you a non-vested interest
3 education about the relative merits and demerits of
4 those investment choices.
5 You've now made your DC choice. You're in the
6 program -- and some of these are actually occurring
7 simultaneously -- but now you've got 10 choices.
8 What are the merits and demerits of those 10
9 choices?
10 You have a third-party educator who sits there
11 and says, these are the merits and demerits of
12 these choices. Now, you've made a choice. You're
13 in program A. The vendor who provides program A is
14 entitled under the law to provide you with
15 educational services and so forth about its
16 products, about the products that program A is and
17 that vendor A is providing. Absolutely
18 appropriate.
19 Where there is some dispute, or potentially
20 some dispute, is the degree to which vendor A can
21 make any comments about anybody else's products and
22 so forth. This goes back, Governor, to
23 conversations that you and I have had about the
24 conflicts that can arise sometimes where you have
25 people who are selling products and giving advice
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1 at the same time.
2 There's some potential for problems there, and
3 we've had a number of discussions with the vendor
4 community about this. We're still, in fact,
5 talking about that. As recently as this morning,
6 we were talking about it.
7 GOVERNOR BUSH: Nothing in these
8 specifications will alter that conversation?
9 MR. HERNDON: No, it won't. These
10 specifications are for the education vendor.
11 That's the third-party dispassionate vendor.
12 GOVERNOR BUSH: The inverse of it -- you can't
13 ignore the fact that if you have a purpose -- at
14 least from my reading of the law, there was an
15 intent to keep this as a third-party objective
16 decision both in terms of whether you wanted to
17 stay in the defined benefit or move to defined
18 contribution.
19 Then if you decided to go to defined
20 contribution, what your options were that you --
21 that we want the people to have the fullest amount
22 of information possible to make an informed choice.
23 If there's an effort to sell at the same time and
24 in the process of selling, you're not only just
25 touting your investment product, but also
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1 bad-mouthing the others or whatever, that's a
2 conflict to me.
3 That's a potential problem for the people who
4 we represent here, which are the thousands of
5 people who are going to be making this decision; so
6 I just want to make sure that, whether it's in the
7 legal process or some way, that we deal with this
8 up front rather than have this be an ongoing issue
9 come next -- or June 2002.
10 MR. HERNDON: That's precisely the debate that
11 we are having right now and the subject of some of
12 the negotiations, the discussions and so forth.
13 GOVERNOR BUSH: It will be solved before we
14 unleash this?
15 MR. HERNDON: Yes, sir. Absolutely. I don't
16 think we could recommend to you that you go forward
17 if it weren't resolved.
18 TREASURER GALLAGHER: This part doesn't deal
19 with that issue in by itself?
20 MR. HERNDON: Right.
21 GOVERNOR BUSH: Right.
22 TREASURER GALLAGHER: So I'll move again.
23 GOVERNOR BUSH: Is there a second?
24 COMPTROLLER MILLIGAN: Second.
25 GOVERNOR BUSH: Moved and seconded. Without
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1 objection, it's approved.
2 MR. HERNDON: The next item is an
3 informational item, and here I wanted to spend a
4 moment and bring you up-to-date because a lot has
5 been happening here on the legal front. As you'll
6 recall, back in November and December, as we were
7 getting ready to issue the RFI for the third-party
8 administrator, we had some protests filed.
9 We were able to work through those protests to
10 the point that we were able to issue the RFI. The
11 responses had been received. We received six
12 responses, all from very substantial organizations,
13 and, in fact, we are on track right now to bring
14 you and the advisory councils our recommendation
15 for which firm to hire as the third-party
16 administrator for this program at probably the
17 first Cabinet meeting in February.
18 Most of those disputes, certainly on the legal
19 front, have been resolved. On the other hand, the
20 investment policy statement that you approved
21 initially in Panama City and that we have been
22 moving forward on the rule-making process has been
23 protested on a number of different fronts.
24 There are currently three organizations, three
25 entities, that have filed protests against various
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1 aspects of the investment policy statement.
2 They've filed protests about the number of bundled
3 providers, whether or not certain kinds of products
4 can be included in the investment policy statement,
5 whether or not the investment policy statement is
6 an overreaching proposed rule, whether it's a
7 faithful interpretation of the statutes, and so on
8 and so forth.
9 The Board, through our council, both
10 internally and externally, has responded to those
11 protests, and, in fact, we filed motions to dismiss
12 most of them for a variety of reasons, that they
13 lack standing and so forth.
14 Actually, the motions to dismiss were
15 originally scheduled to be heard tomorrow. We have
16 entered into an agreement and presented to the
17 administrative law judge a joint motion between
18 ourselves and the three parties, a motion to
19 postpone those legal proceedings for about a
20 three-week period.
21 In the interim, we have entered into, if you
22 will, again accept this term, "settlement
23 negotiations," for the lack of a better
24 description, trying to see if there isn't some way
25 that we can negotiate a satisfactory solution to
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1 the various parties' interests and to the issues
2 that are being disputed, because we genuinely
3 believe that we can make much quicker progress
4 outside of the court system than inside the court
5 system, and all the parties have been very gracious
6 about doing that.
7 We had a lengthy phone conversation last week.
8 We had another one on Tuesday of this week. We had
9 another one yesterday. We had another one this
10 morning. We've got another lengthy meeting next
11 Wednesday afternoon as well as some additional
12 side-bar conversations.
13 I'm optimistic that we can do some things here
14 that will at least shrink, if not eliminate the
15 contested issues that are in front of us. We are
16 certainly optimistic, and I know the other parties,
17 some of whom are here today in the audience, are
18 also optimistic about that.
19 The upshot of all that is that we hope to be
20 able to bring you a satisfactory resolution to
21 these disputed matters in the next couple of weeks.
22 If not, then we may be in a position to request
23 your further guidance on some of them and/or fight
24 them out in front of the administrative law judge
25 over at the Division of Administrative Hearings.
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1 Of course, the Legislature will be with us
2 shortly, and they can obviously speak to some of
3 these things as well. That's basically the status
4 report, Governor and members. I'd be happy to
5 answer any questions that you might have.
6 COMPTROLLER MILLIGAN: I know you're working
7 hard on this, Tom, and I would refer you to the
8 memorandum, the 14 August memorandum that you
9 provided that deals with some of the legal
10 ramifications. I understand that you're going by
11 information on that particular memo; is that
12 correct?
13 MR. HERNDON: Yes, sir. And that was an
14 additional point I appreciate your reminding me
15 about because we had done some work earlier with
16 respect to the responsibilities that you, as
17 individuals, and many of the staff at the SBA have
18 as fiduciaries to the pension fund in situations
19 like this.
20 While some of that earlier work is probably
21 not as tightly focused as it needs to be, we are
22 meeting with our fiduciary counsel, who's a
23 third-party legal advisor, to try and give us some
24 additional information that would be of use to you
25 particularly as you start to confront some of these
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1 decisions about where your fiduciary duty lies and
2 how you exercise it; so I think that will be
3 helpful. We'll try and have that for you in the
4 next few weeks.
5 GOVERNOR BUSH: All right. Any other
6 comments? Treasurer?
7 TREASURER GALLAGHER: Do you still have a
8 hearing set for January 5th?
9 MR. HERNDON: No. Well, I take that back.
10 Actually, let me say, we had filed a joint motion
11 to postpone that hearing, and the last I heard was
12 the judge -- it has been postponed? The judge
13 hadn't ruled on it when I came down here, so I
14 wasn't exactly sure, but it has been postponed.
15 GOVERNOR BUSH: I assume no one wants to speak
16 on this? Does anyone want to speak on it?
17 MR. HERNDON: The next --
18 GOVERNOR BUSH: We have --
19 MR. HERNDON: Oh, I'm sorry.
20 GOVERNOR BUSH: Someone volunteered.
21 MR. CAMPBELL: Would it be appropriate now or
22 later? What's your next item? I'm sorry.
23 MR. HERNDON: Status on the program.
24 MR. CAMPBELL: Okay. Fine.
25 MR. HERNDON: The next item is just a status
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1 report on the overall program, and again, if I can
2 kind of go back to my earlier characterization that
3 essentially there are five elements of this
4 program, the investment policy statement, which is
5 the constitution, the cornerstone of this whole
6 program.
7 It's the program objectives and everything
8 else associated with it. It describes the
9 operation of the program which I just talked about.
10 That is the subject of a number of legal protests
11 that we're hoping to resolve.
12 The third-party administrator, the central
13 record-keeper for the program -- as I indicated, I
14 called Mr. Stipanovich and Gwenn Thomas, the two
15 cochairs there -- are currently in the process of
16 collecting scores of the third-party administrator
17 contract or responses from the scores, and we will
18 have a report to you in the next day or two on who
19 the short list of finalists are.
20 We'll then have some oral interviews, and I
21 know they're also planning on visiting the sites of
22 the finalist firms, and we plan to bring that
23 recommendation to you at the February -- I think
24 it's the 6th -- Cabinet meeting, for the
25 third-party administrator.
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1 We'll also have our advisory councils briefed
2 and involved in that discussion, and have a
3 conference call scheduled with them, I believe, on
4 the 25th. They'll be encouraged to attend the
5 on-site visits as well as to sit in on the oral
6 interviews and so forth and so on.
7 TREASURER GALLAGHER: I have a question.
8 GOVERNOR BUSH: Yes, sir.
9 TREASURER GALLAGHER: The third-party
10 administrative function is one that will keep
11 individual accounts for all pensions; is that
12 correct?
13 MR. HERNDON: Correct.
14 TREASURER GALLAGHER: It will monitor how many
15 dollars that person has in whatever fund they
16 invest in.
17 MR. HERNDON: That's correct.
18 TREASURER GALLAGHER: There have been a lot of
19 people talking that they want more choices. Now,
20 is this third-party administrator going to have the
21 ability to allow the pensioners to move funds among
22 the generic funds and obviously into bundled
23 providers, but also, I think they should have a
24 choice with multiple bundled providers and also the
25 choice to be able to move the money, their
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1 investments, between funds that are held by
2 different bundled providers so that they would get
3 the full choice of everything that the State has
4 approved to be offered.
5 MR. HERNDON: Yes, sir.
6 GOVERNOR BUSH: Unbundle bundled?
7 TREASURER GALLAGHER: Well, the statute
8 doesn't say bundled. It says, "multiple products,"
9 and so I think --
10 GOVERNOR BUSH: You get to pick between the --
11 TREASURER GALLAGHER: Everybody wants choice,
12 and however many products we have, I believe, and I
13 want to make sure the third-party administrator is
14 going to be able to allow the people to move their
15 money and make choices among any of the choices
16 that are out there and not be like if you get
17 locked into the institutional things, you can't go
18 to a bundled provider. You've got to be moved over
19 there if you like something that they're offering.
20 If you're in one of those bundled provider
21 groups and you like the product of another bundled
22 provider, you ought to be able to move there. The
23 third-party administrator should be able to watch
24 your money so that you have all those choices.
25 MR. HERNDON: That's absolutely exactly what
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1 is anticipated.
2 TREASURER GALLAGHER: I mean, everybody wants
3 people to have all the choices they can get.
4 That's what I want them to have.
5 MR. HERNDON: That is the appropriate role for
6 the third-party administrator.
7 GOVERNOR BUSH: I'm a novice at this. You've
8 redefined what bundled provider means.
9 TREASURER GALLAGHER: Well, the statute
10 doesn't say, bundled provider. It never says that
11 in the statute.
12 GOVERNOR BUSH: I'm just saying for
13 practicality what you're describing. You want a
14 chance to hear from others that know more about it
15 than I do, but what you just described was
16 unbundling what theoretically was a bundled set of
17 investments.
18 TREASURER GALLAGHER: But you're not giving
19 people enough choices that way. They only have
20 choices in that bundle if they did that.
21 GOVERNOR BUSH: I'm not disagreeing. I just
22 want to make clear what you're proposing is --
23 TREASURER GALLAGHER: Well, right now --
24 MR. HERNDON: Well, not what you're proposing,
25 but you're saying --
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1 TREASURER GALLAGHER: I'm just making sure
2 right now that the third-party administrator's
3 contract would allow that, choose that to be an
4 alternate.
5 GOVERNOR BUSH: This is a great question
6 because assume for a moment that we have the --
7 whatever the numbers of options available.
8 TREASURER GALLAGHER: Twenty-one or 30.
9 GOVERNOR BUSH: Well, it's less than that now.
10 MR. HERNDON: Right now it contemplates 12
11 institutional products and up to 9 in a single
12 bundled provider, but that's the current --
13 GOVERNOR BUSH: So let's assume that rather
14 than do that, somehow, some way, there would be
15 three bundled providers. So now you have 50
16 choices or something like that, right?
17 TREASURER GALLAGHER: Right.
18 GOVERNOR BUSH: The survey data that I saw
19 from the Legislature, there was a point past
20 which -- or maybe it was the experts up in Panama
21 City. There's a point past which you get --
22 TREASURER GALLAGHER: Overloaded, yeah.
23 GOVERNOR BUSH: Believe me I'm a choice guy.
24 Sign me up for options, but there is a point past
25 which -- I don't know if the third-party
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1 administrator has the capacity -- maybe it doesn't
2 matter. Maybe there's --
3 TREASURER GALLAGHER: Well, that was my
4 question. I wanted to make sure that they have --
5 GOVERNOR BUSH: That's an excellent question.
6 Is there a point that we make it -- we put the
7 third-party administrator in a place where their
8 costs are so high that they're incapable of doing
9 it?
10 MR. HERNDON: There are obviously practical
11 limits ultimately to the number of choices that you
12 can have a third-party administrator keep track of,
13 just in terms of computer capacities and so forth,
14 but in today's technology, it is a relatively
15 straightforward -- again, put quotations around
16 that phrase -- relatively straightforward process
17 to manage the movement of money among a couple of
18 dozen, 30, or --
19 GOVERNOR BUSH: So to put it in perspective,
20 to use my example, the difference between 21 and 30
21 or 40 or 50, no big deal.
22 MR. HERNDON: The marginal cost impact of
23 something like that is relatively small. You'll
24 see some difference. It shouldn't be dramatically
25 different.
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1 GOVERNOR BUSH: All right.
2 MR. HERNDON: And the contract is designed,
3 the RFI is designed to do just exactly what you're
4 suggesting, Commissioner Gallagher, to have that
5 capability present from the get-go.
6 TREASURER GALLAGHER: Because not doing that
7 in the front could really limit us in the back.
8 MR. HERNDON: You know, you have to be able
9 to -- I mean, ultimately remember, it is the
10 participant's money, and if the participant says, I
11 don't like company A, for whatever reason -- they
12 may not like the color of their logo -- I want to
13 move my money, they have that right, within the
14 program structure that you have authorized, to move
15 it wherever they wish anytime they wish.
16 TREASURER GALLAGHER: Well, good. That's
17 important.
18 MR. HERNDON: Sure. So we'll be back to you
19 the first Cabinet meeting in February, keeping my
20 fingers crossed, with the recommendation on the
21 selection of that vendor. The transition broker,
22 with your approval today of those selection
23 criteria, the RFI will be out on the transition
24 broker within the next couple of days.
25 We hope to have that transition broker on
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1 board because they can help us immeasurably in
2 terms of designing how we structure our portfolio
3 over the course of the next several months heading
4 into the distribution process in March of next
5 year.
6 So we may contract, even though there's no
7 physical work for them to do for several months,
8 but they can be of tremendous value to us for
9 structuring of portfolios and so forth; so that
10 will go out fairly quickly, in fact, probably
11 within the next few days.
12 The unbundled investment providers, based on
13 the selection and evaluation criteria that you've
14 authorized today, we will begin the process of
15 selecting those unbundled investment providers. We
16 have previously discussed and shared with all the
17 parties our proposed process for selecting these
18 unbundled investment providers.
19 We're currently working with our lawyers to
20 make sure that we have everything nailed down
21 tightly, but I would hope that within the next week
22 or 10 days, we'll have those solicitation processes
23 activated and going.
24 Finally, the education provider, as I
25 indicated, we've already completed part one of that
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1 RFI. We've solicited a lot of very good
2 information. In the process, we've redesigned that
3 RFI for the actual selection now, and that, too,
4 will be going out in the next few days.
5 On balance, I think we're in pretty good
6 shape. We do lose some time -- I don't want to
7 sidestep that issue -- with the litigation, and we
8 face the prospect of losing additional time if
9 we're not able to resolve some of these matters,
10 but I think right now, at least, we're still on
11 target.
12 I'm optimistic that we can settle these
13 remaining matters and keep moving forward. I'll be
14 sure and let you know if anything happens that
15 contradicts that statement, but right now things
16 look fairly good.
17 TREASURER GALLAGHER: It would seem to me that
18 it would be good to get these legal issues behind
19 us because if you don't, what could end up
20 happening is we could end up with what we have
21 approved out to bid and awarded, et cetera, and the
22 only options are the institutional things, and all
23 the other providers won't be there when it starts.
24 I think they need to be there when it starts.
25 MR. HERNDON: Yes, sir.
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1 TREASURER GALLAGHER: So you need to put it
2 together because you-all will be left behind the
3 train when it leaves the station if you don't get
4 it worked out.
5 MR. HERNDON: We agree.
6 GOVERNOR BUSH: Anybody want to speak from the
7 audience? Dominic?
8 MR. CALLABRO: Mr. Governor, I have a question
9 really.
10 GOVERNOR BUSH: Well, come over here and sign
11 in. You don't have to wear a tie. You have to
12 stand two feet back with no tie though.
13 MR. CALLABRO: Thank you, Governor, and thank
14 you, General, and thank you, Mr. Treasurer. My
15 name is Dominic Callabro. I'm president and C.E.O.
16 of Florida Tax Watch. I really just have a
17 question of Mr. Herndon, and that really is, I
18 think one of the pivotal questions will be the cost
19 of the asset pool that we are prospectively talking
20 about.
21 I think most want to have the proper balance
22 of appropriate and meaningful competition and
23 appropriate choice. Is there evidence, Mr.
24 Herndon -- I don't think you answered the
25 Governor's question about, have the consultants
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1 provided some information as to what's the proper
2 balance between enough choice so that you have
3 meaningful and thoughtful decision-making and real
4 competition, and then so much so that it begins to
5 merely confuse, with an asset pool that is maybe
6 geometrically larger than has ever been done in the
7 history of our country.
8 So, I think, one of the questions, what's the
9 right balance of bundled and unbundled providers,
10 in terms of an information point, that can help the
11 SBA make a proper balance decision between enough
12 choice to provide thoughtful decisions and real
13 competition, and the one that could be confusing?
14 I think it's probably a combination of so many
15 bundled and so many unbundled providers, but it
16 would be real helpful to all of us, especially
17 you-all, as you make this decision, to know what
18 the best advice outside says. That's my question.
19 TREASURER GALLAGHER: Well, let me just --
20 Dominic, I know he's going to answer it, but --
21 I'll let him answer now before I tell you what I
22 think.
23 MR. HERNDON: Well, there are a couple of
24 different answers to the question. Number one, I
25 would say that, to my knowledge, there is no single
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1 magic answer that says that 23 is sufficient, and
2 24 is too much, and 22 is not enough. I'm
3 obviously picking those figures out of thin air.
4 Having said that, the U.S. Department of
5 Labor, which is the regulatory body that regulates
6 ERISA funds, funds that are provided to the broader
7 community out there, does not regulate public
8 pension funds like ours, but nevertheless, their
9 rulings and the body of law that has built up
10 around them is fairly dispositive on this point.
11 It has said, in the past, that as few as three
12 investment choices, provided they're sufficiently
13 diversified from one another and there's no
14 correlation among the returns, is adequate to
15 provide an individual with choice.
16 Now, whether or not you and I might agree with
17 that is a different matter altogether. We, as you
18 know, hired three different consulting firms to
19 work with us and develop the list of 12 that
20 you-all have previously endorsed, at least
21 initially.
22 There are other parties who suggested that we
23 add, subtract, and so on and so forth, but by and
24 large, the consultants were very satisfied with
25 those 12, that they represented an ample number of
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1 choices. It was diversified enough. It
2 represented a full spectrum of risk and reward and
3 so on and so forth.
4 In addition, of course, we've added one
5 bundled provider who can provide up to nine; so
6 that gives you the potential for 9 more or 21
7 choices, and presumably those will not be all
8 duplicative. There will be some duplicates perhaps
9 and some complimentary.
10 So you're clearly getting to the point where
11 you have more and more choices, but is there some
12 artificial ceiling? I'm not aware of any that I've
13 ever seen that says 51 is too many and, you know,
14 so forth.
15 GOVERNOR BUSH: It's the difference between
16 ice cream. You can get chocolate, vanilla and
17 strawberry. That's three. Then you go to
18 Baskin-Robbins, and you've got 32 or 33.
19 TREASURER GALLAGHER: If you go to two places,
20 you end up with 60, I guess. I view it like this,
21 Tom. I think that one of the reasons -- instead of
22 setting exactly how many it ought to be, I think
23 that we should -- we know we've got 12. We know
24 that we have -- and I think we should have more
25 than one bundled provider as an alternative.
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1 But we should look at what they've all offered
2 and pick from those what are really good products
3 that give a diversified, additional diversification
4 for our investors, and let them pick from those.
5 So maybe, you know, some bundled providers may have
6 three really great products, and four that we
7 already think are covered somewhere else, or we
8 don't even think are appropriate.
9 When you get them all in, you look at them.
10 You start spreading them out with your consultants
11 and say, okay, we're covering this here. This
12 isn't covered. This isn't covered. This isn't.
13 Let's keep these choices.
14 You know, you may end up with 25 or whatever,
15 and sort of give the choice, so we'll make sure we
16 cover the spectrum as opposed to trying to do it in
17 the front when we don't really know what kind of
18 good products people could be offering us.
19 MR. HERNDON: Well, I do recall --
20 TREASURER GALLAGHER: We're not limited, but
21 we're not saying we're going to have this many or
22 this many. We look to see what's available and
23 make sure we give enough choices, and if something
24 comes along later, then add to it.
25 GOVERNOR BUSH: Tom, correct me if I'm wrong,
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1 but we have approved a minimum of, under the
2 definition, that 9 is 9, not 1, 21 choices.
3 MR. HERNDON: That's correct.
4 GOVERNOR BUSH: We have a minimum of that, but
5 I asked a question last time we were gathered -- I
6 think it was in Panama City -- the last time about
7 this subject, and that more can be added at the
8 time we were making this approval. We have the
9 ability to do what you're saying, based on what
10 comes back to us.
11 TREASURER GALLAGHER: I mean, I'd want to have
12 that ability to look at what everybody offers and
13 not be locked into all --
14 COMPTROLLER MILLIGAN: I clearly understand
15 that's where we've been, and it may be more and it
16 may be less because it still boils down to the
17 responsibilities that we have as trustees, and that
18 gets back to the cost, the fees, and it gets back
19 the effecting the investment interests of the
20 members of the FRS.
21 TREASURER GALLAGHER: Do you all see that if
22 we did one multiple provider that had 9 products,
23 would we have to buy all 9, or just pick the ones
24 we wanted?
25 COMPTROLLER MILLIGAN: Absolutely not. I
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1 mean, this thing is totally flexible.
2 TREASURER GALLAGHER: Is that the way you see
3 it, Tom?
4 MR. HERNDON: Yes, sir.
5 TREASURER GALLAGHER: Okay. Because I think
6 we should make sure that we pick ones that are --
7 COMPTROLLER MILLIGAN: I think it's important.
8 If I may, I've spent a lot of time, and I know
9 you-all have, too, looking at really what our
10 trustee responsibilities are. I am looking forward
11 to really getting this additional clarification, or
12 illumination that we will get here in, I hope, the
13 not too distant future.
14 We are very clearly restrained in what
15 decisions we can make and not make based on being
16 trustees and the fiduciary responsibilities that we
17 have. Clearly that can drive you to having more,
18 or less, or eliminating parts of, whatever, if you
19 are, in fact, adhering to what your
20 responsibilities are. Everything I've heard them
21 say up until now clearly supports that, clearly.
22 GOVERNOR BUSH: I'm learning more about
23 bundled providers than I ever thought in my wildest
24 dreams I'd learn. I think the reason why it's
25 bundled, from a practical point of view -- well,
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1 there's someone here, I know, that's interested in
2 the subject. Maybe you could comment on what our
3 conversation is or my point of view, the legal
4 practicality of this.
5 Our personal responsibility is to make sure we
6 do the right thing in terms of our fiduciary
7 responsibility. If there's a legal issue ongoing,
8 and if there's conflicts, you know, that we can try
9 to resolve so that this moves forward, it would be
10 helpful as well.
11 The conversation as it's going, if you could
12 focus on that a little bit and make a comment on
13 that.
14 MR. CAMPBELL: I will try to do that,
15 Governor, and thank you. I was going to reserve
16 until the end, until Tom was completed, but I thank
17 you for the invitation to come up here now. I am
18 Malcolm Campbell. I am with Teachers Insurance and
19 Annuity Association-College Retirement Equities
20 Fund, short for -- or long for TIAA-CREF.
21 We appeared before you on September 26 in
22 Panama City. TIAA-CREF is a bundled provider and
23 proud of it. We have been one for over 85 years.
24 We're the largest, and I think, Steve, you have
25 something that you're going to provide the members
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1 of the panel. (Tendering documents.)
2 We believe that a bundled provider can add
3 value to the design of the public employees' option
4 retirement plan. What we have provided you there
5 is a simple chart to try to capture some of the key
6 issues of cost and performance.
7 There's backup material as well including an
8 answer to each of the 9 or 10 questions that Tom
9 Herndon had prepared for you as part of the
10 material that's in the next presentation, I
11 believe, as the differences between the bundled
12 provider community and the SBA.
13 In short, however, if I could just call your
14 attention to what two of the three of you heard on
15 September 26th in Panama City, a clear definition
16 and a clear understanding -- I think that was your
17 understanding when you voted to add -- to approve
18 the addition of one, at least one, bundled provider
19 to the PEORP -- was that a bundled provider offered
20 not only an array of investment products -- and at
21 that time, it was being presented to you as 9, up
22 to 9 investment products, but also services as
23 well.
24 I think that, Governor, you questioned Tom
25 Herndon on that point, and he very clearly made it,
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1 made it great clear to you that what was
2 contemplated was a bundled provider that would
3 offer not only investment products, but also
4 services, and also, that if the RFP process came
5 back with more than one good, solid bundled
6 provider who had good products and good services,
7 he answered to you, yes, you, the trustees, could
8 take more than one.
9 GOVERNOR BUSH: Can you answer the comment on
10 Treasurer Gallagher's comment about the ability of
11 beneficiaries of the defined benefits program to
12 choose between -- pick and choose inside the
13 bundled provider?
14 MR. CAMPBELL: Absolutely. I was about ready
15 to pop up, but Steve told me not to pop up at that
16 point, but the answer is, that can happen. I mean,
17 it's happening today, the state university system,
18 ORP, on the campus this year, and I've very sorry
19 it happened right here with Florida State, but --
20 the game.
21 GOVERNOR BUSH: Oh, the game.
22 MR. CAMPBELL: The game.
23 GOVERNOR BUSH: I thought another crisis we
24 have to deal with.
25 MR. CAMPBELL: Indeed, there are, I believe,
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1 four and now a fifth option, all bundled providers,
2 that are available on the campuses, and individuals
3 actually do allocate some of their contributions to
4 VALIC, and some to TIAA-CREF, and some to the new
5 contributor of a new bundled provider --
6 GOVERNOR BUSH: Assume I don't understand
7 this. It would be an accurate assumption. Are you
8 allocating, you know, out of 100 percent of the
9 money that they have as part of their pension,
10 their account, are they allocating say, a third, a
11 third, a third? Say, if they wanted to, they could
12 do one-third, one-third, one-third, or are they
13 picking individual investment alternatives that
14 you're proposing to them and picking those
15 specifics?
16 MR. CAMPBELL: It's all of the above.
17 GOVERNOR BUSH: It could be either one?
18 MR. CAMPBELL: Most people -- and we discussed
19 this before --
20 GOVERNOR BUSH: So what he proposed, you-all
21 deal with all the time?
22 MR. CAMPBELL: Yeah. We deal with it now
23 within the structure of the TPA or within bundled
24 providers right now.
25 GOVERNOR BUSH: Okay.
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1 TREASURER GALLAGHER: Is there overarching in
2 the TPA?
3 MR. CAMPBELL: No, there is not in that
4 design; so it's a little bit more the individual
5 has to say, frankly, from now on, I want to have
6 the money that's now going to the CREF stock fund,
7 I want that to go --
8 TREASURER GALLAGHER: Now you hit the right
9 issue, "from now on." You see, I recognize when
10 you're open-ended, you pick out what you're going
11 to do. You want to add something else -- in your
12 cash flow, you can move your cash flow as it goes
13 out wherever you want.
14 We're talking about a choice here where people
15 can move their money without being penalized in
16 between -- within your bundled, you can do it. I
17 know, and also to another actual --
18 MR. CAMPBELL: I'm sorry if I misled you. You
19 can move your money from the CREF stock account to
20 VALIC's, whatever that stock account, and you could
21 basically clear out your CREF account.
22 TREASURER GALLAGHER: Without penalty?
23 MR. CAMPBELL: Without penalty.
24 TREASURER GALLAGHER: I gather penalty would
25 mean a loss of cost of any percentage based on a
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1 closeout.
2 MR. CAMPBELL: No. I mean, you would just
3 take whatever risks in the marketplace and the
4 transfer between day one and day two. That's about
5 it --
6 TREASURER GALLAGHER: Obviously.
7 MR. CAMPBELL: -- or however long it takes to
8 do that. In fact, that's with respect to the
9 market to market --
10 TREASURER GALLAGHER: Okay.
11 MR. CAMPBELL: -- investment options.
12 GOVERNOR BUSH: Thanks.
13 MR. CAMPBELL: I did have another comment, but
14 I think in terms of the flow, it may be helpful to
15 hear Tom's continued presentation, and then --
16 GOVERNOR BUSH: You don't want to trump him?
17 MR. CAMPBELL: I think it would be helpful.
18 GOVERNOR BUSH: He'll always have the last
19 word though.
20 MR. CAMPBELL: He'll always have the last
21 word.
22 GOVERNOR BUSH: That's fine. Would you like
23 to add something, Tom?
24 MR. LANGE: Good afternoon, General Milligan
25 and Governor Bush and Treasurer Gallagher. I
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1 represent VALIC. It's an American general firm.
2 We have about 250,000 customers here in Florida,
3 and I agree completely with -- I shouldn't say that
4 that way.
5 I agree with many of the statements that Tom
6 Herndon has put forth this morning -- this
7 afternoon. We are in negotiations with the State
8 to rectify our differences. We, of course, do not
9 like to be in litigation with the State.
10 We feel, however, that we were forced to do
11 that because we were going down a path that isn't
12 what we wanted. We don't think it's what the
13 Legislature wanted, and I think it was not an
14 intentional distortion of events and the
15 circumstances and decisions, but it certainly
16 appeared that way, and that's what we're trying to
17 rectify.
18 I'd like to start out with a little education,
19 if I could. Bundled and unbundled, normally they
20 don't mix. If you think about unbundled, it's
21 taking the pieces and building your own and
22 whatever that is.
23 In this case, you take a TPA, a third-party
24 administrator. You take an educational company,
25 and you take a product. "Investment vehicle" would
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1 be a better term because "product" ends up being
2 all of those combined, put together.
3 So you can go to the parts shop and buy parts
4 for almost anything and build something from
5 scratch. You can make a pie that way, or you can
6 get one that's store-bought. A bundled provider
7 just provides all these things together.
8 It's a package. The State was going down a
9 path, we think, to create their own bundle. They
10 did it from parts in an unbundled process. They
11 wanted to choose the TPA, choose the educational
12 company and choose the investment vehicles that
13 they would bundle together.
14 GOVERNOR BUSH: Doesn't the law require that?
15 Doesn't the statute say that's what's to be done?
16 MR. LANGE: Not exactly. It says to hire a
17 third-party administrator, and realize that we had
18 members of the Senate and members of the House tell
19 us, as an industry, to go out somewhere and get
20 unified.
21 By the way, that's never been done before, not
22 in my 30 years. We've never had industry really
23 get together, and everybody says -- well, now it's
24 the Senate -- get together and come back with the
25 best model for us here in Florida because we're
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1 going to be the centerpiece for this whole country
2 for pension reform, and we are.
3 So we all got together, and we said, you
4 really need a third-party administrator, and it
5 needs to be a non-provider. It needs to be able to
6 be unbiased, and it needs to be a facilitator.
7 There are 790-some-odd entities in this state that
8 have to have payroll deductions or moneys submitted
9 on behalf of employees, 650,000 of them, give or
10 take, and it's a huge task.
11 Anybody in that position as TPA would have an
12 unfair advantage if they were also a provider.
13 Same with the education. Did we want every company
14 to come in and really ridicule or criticize the DB
15 plan in favor of the DC plan?
16 And the answer was, no. That would be biased
17 again; so we need an educational company that would
18 provide unbiased generic education on the DB to DC
19 decision because that's a big one. These people
20 are going to make a decision that's almost
21 irrevocable.
22 I mean, they might get one other chance to
23 change it, but it's a big decision. Then we, as
24 the provider industry, said, okay, we'll do
25 everything we have to do, and you do those other
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1 two things.
2 We'll cover the -- you know, the costs will
3 really be borne by the employees, and the
4 investment liability will be borne by those
5 employees. Frankly, they welcome it. If you've
6 ever participated in a 401K plan or another
7 co-contributory program for your employer, you will
8 invest in company stock.
9 It's a natural course. If you believe in the
10 company, you should, but you're not going to put
11 all your eggs in that basket. The whole idea here
12 was to allow the employee the chance of investing
13 somewhere besides the State.
14 The State has a really fine DB plan. It's
15 huge. It's 100-some billion dollars, and that is
16 the company's stock plan kind of. You're putting
17 all your faith that the State of Florida is going
18 to provide you with an adequate retirement, but
19 people have said, look, the state university
20 system, the community college, some of your
21 higher-up state management people have had an
22 optional plan for some time, and the rest of us
23 would like one, too.
24 We want to bear that investment risk. We
25 don't want to have the liability be borne by the
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1 State. We want to bear it ourselves; so the
2 Legislature got together and got together with us,
3 and said, let's put this all together, but this is
4 650,000 people, and we need lots of choices.
5 I've been a proponent from the get-go saying
6 we needed 10. You've got the best companies in
7 America here trying to become part of this plan and
8 help design it.
9 GOVERNOR BUSH: Ten bundled providers.
10 MR. LANGE: Yes. Now, the State --
11 TREASURER GALLAGHER: Ten, 9 each, like 90
12 more? Is that sort of what you're saying?
13 MR. LANGE: Well, sir, that's probably not a
14 good reference point because a bundled provider
15 provides what the customer wants and needs. Years
16 and years ago when 403B was first announced for
17 public school employees in 1961, it was called a
18 "tax incurred annuity."
19 Hardly anybody buys annuities anymore. They
20 buy mutual funds. We used to be primarily an
21 annuity company. We're not anymore. We're a
22 mutual fund company, and we used to have our own
23 proprietary mutual funds.
24 If you need a mutual fund, we have one, but
25 they want to look it up in the paper. They want to
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1 compare it to this company and that company, and we
2 were asked and forced, and the demands kept coming
3 in.
4 We, as participants in your company, VALIC, we
5 want more choice, and the IRS for years restricted
6 us to 20 investment options much to the chagrin of
7 our participants. They wanted more than 20 in a
8 bundled plan.
9 That was just recently lessened, and we're up
10 to 65 investment options in a single product that
11 we offer to the state university system, or the
12 state deferred compensation plan, or the
13 schoolteacher on a voluntary basis. They aren't
14 asking us for less choice. They're asking us for
15 more than 62.
16 Now, there are nine investment classes if
17 you're going to diversify your investments, if it's
18 done on a globally renown company; so basically
19 there's nine investment classes, and if you're
20 going to be fully diversified and you're going to
21 do some sort of risk tolerance evaluation of
22 yourself, you're going to have to spread your
23 investments.
24 Tom earlier said three. That would be in the
25 short spectrum, and nine might be on the wide
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1 spectrum, but you need to have diversification to
2 be there, so we aren't -- if you define a bundled
3 provider as nine investment choices, and you say
4 the third-party administrator for the State does
5 all the administration, and separates accounts, and
6 let's people move back and forth, and an
7 educational company does everything else including
8 giving investment advice, you have a distortion of
9 all the elements that are best for a bundled
10 provider and all the elements that are best for an
11 unbundled provider.
12 An unbundled provider would be the State
13 putting this all together themselves, and I think
14 we were heading down that path. Bundled provider
15 is when you get packages that are out there that
16 the people like, and we already have those packages
17 in the state university system, ORP, and state
18 deferred comp and others, but those are much
19 smaller plans than what we're talking about for
20 this plan.
21 They all have five and six providers, bundled
22 providers. I don't personally care if the State
23 wants to be a competitor of mine. I think a
24 low-cost index fund bundled provider, which the
25 State is building for itself, is just like any
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1 other competitor.
2 I think everybody should have a chance to
3 compete. This is what free enterprise is all
4 about, but what we're saying is that the State is
5 going to have bias because the third-party
6 administrator is part of their bundle. The
7 educational company is part of their bundle --
8 GOVERNOR BUSH: That's what the law --
9 MR. LANGE: -- and the --
10 GOVERNOR BUSH: Let's talk about that just for
11 a second 'cause this is where --
12 TREASURER GALLAGHER: It's the law you guys
13 wrote.
14 GOVERNOR BUSH: This is where we keep tripping
15 over this. This is where we just cut through all
16 the stuff, and everybody -- if all the lawyers left
17 the room, this is the issue. This is where, it
18 seems to me, is the issue.
19 The statute created this structure, and I've
20 never quite understood, since from what I've been
21 told, at least, the major drivers of the political
22 process were the bundled providers, how you allow
23 this to happen because you are at a competitive
24 disadvantage, but it's an appropriate one in the
25 sense that this should be an independent decision.
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1 This is a protection form of it only it's a
2 competitive position for the benefit of the State.
3 It's to the benefit of the people in the pension
4 that are going to make the defined contribution
5 choice.
6 I've never -- I mean, your fee structure,
7 based on the services that you intend to provide,
8 are going to have to be higher than -- because you
9 just said it. You just said -- the end result is
10 your fee structure includes a level of education
11 and third-party administration that is not
12 necessary the way that the statute was set up
13 MR. LANGE: I agree and disagree with you.
14 GOVERNOR BUSH: Tell me. Help me understand
15 this because this is --
16 MR. LANGE: First of all, let me back up to
17 what I feel the State is trying to do. The State
18 is -- and we've had this discussion. I mean, I've
19 had it with many of you individually and several of
20 you collectively.
21 The State is creating its own bundle. Let's
22 get back to that for a minute. We can say they're
23 private companies. You can create a particular
24 type of fund, 12 of them, and you can say that
25 you're going to hire a money manager to manage
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1 those funds, but the money manager won't hold the
2 funds.
3 They'll have to be held in a trust. In a
4 mutual fund company like Putnam or Templeton or one
5 of VALIC's mutual funds, those are inherently
6 trustlike anyway. They're registered investment
7 vehicles, and they satisfy the trust requirements.
8 The State wants to take a private money
9 manager, hire them independently, and they can fire
10 them to manage a block of money that the State will
11 still hold in their bank account, which is what a
12 trust really is, and they can hire and fire that
13 manager.
14 They're going to provide the educational
15 component that goes with it. You form your own
16 mutual fund. The trouble with it is that in this
17 bill that we have that's turned into law that you,
18 Governor, signed, there's no provisions for the
19 trust, so you can say the intent is to have these
20 12.
21 Our argument, one litigation, one part of it
22 is we're not sure the State, without going back to
23 the Legislature, can go forward with the 12
24 unbundled providers because they don't have the
25 trust capability.
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1 If they had that trust capability, then why
2 wasn't it in the legislation in the first place?
3 Why didn't the legislators that put this all
4 together do it? They did it because we define
5 "product" differently than it's been defined.
6 We define a product as a VALIC product
7 offering 62 different investment choices in the
8 infrastructure behind it. Think about an apple pie
9 for a minute. You can go to the grocery store.
10 You can buy sugar and apples and crust and all this
11 other stuff.
12 Somebody has got to cook it. Somebody has got
13 to put it all together and make it. Okay? You're
14 buying the pieces. Boy, you got the best deal on
15 sugar. You got the best deal on apples, but
16 something is missing.
17 Where is Grandmother to mush all this stuff
18 together and put it in the oven? I'm not kidding
19 you. That's the infrastructure that's missing
20 here.
21 TREASURER GALLAGHER: Defined contribution is
22 letting the individuals do the cooking.
23 MR. LANGE: Exactly.
24 TREASURER GALLAGHER: Let them have the
25 choices.
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1 MR. LANGE: Exactly, not the State.
2 TREASURER GALLAGHER: That's right. It could
3 be from the State or from the individual.
4 MR. LANGE: You're going to have to go out and
5 buy those other things now to complete your pie.
6 Can you afford an oven? Can you afford a book?
7 Can you afford an instruction book, a cookbook,
8 whatever you want to call it?
9 I don't think so. I think if you call up a
10 mutual fund company today -- and I want to make a
11 comment on what General Milligan said a few
12 meetings ago. He asked a question, if one of these
13 institutional funds was called on their 800 number,
14 would they provide investment advise.
15 The answer to me is clearly, no. There's
16 nobody there to answer the phone. This is an
17 institutional wholesale fund in the trust held by
18 the State, managed by their manager who they can
19 fire and hire, and nobody there, except the
20 educational company, can give advice.
21 Well, that means you've got to go over here to
22 Peter to get advice about Paul, and we're going all
23 over the place. What we're saying is we bring all
24 that together at the same time. I, again, don't
25 mind --
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1 TREASURER GALLAGHER: You're not only going to
2 Peter for advice about Paul. You're also giving
3 advice about John, George, and James, and you're
4 giving them biased advice because they don't all
5 sell a product.
6 MR. LANGE: Mr. Treasurer, if you went to the
7 car dealer down the street and wanted to buy a car,
8 would you like it if they told you you could only
9 have a red, blue or yellow?
10 TREASURER GALLAGHER: No. But I tell you
11 what, if I went to the car dealer, I'd know one
12 thing. If he was a Ford dealer, he was not going
13 to sell me a Chevrolet.
14 MR. LANGE: But you would learn everything --
15 TREASURER GALLAGHER: And he's not going to
16 tell me that Chevy is better either, but if I go to
17 Motor and Trend, or Consumer Guide, who don't sell
18 cars, I'm going to be able to get a lot better
19 advice.
20 MR. LANGE: Let's think -- think about advice
21 for a minute. Do you want advice to come from one
22 point of view, or do you want advice to come from
23 multiple points of view? The typical rationale of
24 a reporter for a newspaper or a T.V. station, they
25 have to get their information confirmed. They need
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1 a second source.
2 If you have one educational company providing
3 all education, you're only going to get one point
4 of view. You're never going to get that second
5 point of view; so you can go to your Ford dealer
6 and learn all about Ford so when you go to Chevy,
7 you can make an accurate, intelligent comparison
8 yourself.
9 GOVERNOR BUSH: You have to get what the
10 statute says of the educator is supposed to not
11 only provide information about the difference
12 between defined benefit and defined contribution,
13 in other words, a car and motorcycle, but then once
14 you pick the car, you also have these options, and
15 an independent person takes a look at this from
16 that perspective. That part makes sense to me.
17 TREASURER GALLAGHER: Here's the other thing.
18 GOVERNOR BUSH: They're doing it for the
19 individual pension.
20 TREASURER GALLAGHER: Right. And those people
21 aren't -- you know, the people that are talking to
22 that education group, that's not the only source in
23 the world for them. I mean, people are smart now.
24 In the newspaper, they're learning.
25 The reason they want choices is because they
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1 recognize that there's other things out there, and
2 they may want to call up and say, by the way, I'm
3 thinking about this. How is that for me?
4 MR. LANGE: There's a simple example of a
5 pyramid where the pyramid represents all the
6 650,000 people in the State of Florida. The top
7 little triangle of that pyramid is all the
8 do-it-yourselfers.
9 They're going to go to the Internet. They
10 know how to invest, and I want to tell you
11 something. They won't be satisfied with an index
12 fund. They'll want to get something higher than
13 that because they're going to think index is going
14 to be average. Average can be good.
15 TREASURER GALLAGHER: That's why that's not
16 the only option.
17 MR. LANGE: But it's going to be presumed to
18 be average. They want maybe somebody to do a
19 little -- maybe they'll have an index fund. Maybe
20 they'll have some other actively managed funds, but
21 they're going to get into that because they're
22 going to know what they're doing.
23 The next layer is those people that need some
24 education, some advice, and all of those first two
25 are going to be satisfied by the educational
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1 component that the State is delivering.
2 The third group, though, and by far the
3 largest group, needs their hands held. They're not
4 sure where they're supposed to go. The biggest
5 choice in their life is DB to DC, and if somebody
6 doesn't come and share that information with them
7 and build a relationship with them and carry them
8 through that process, they're not going to go
9 there.
10 TREASURER GALLAGHER: But didn't we all agree
11 that that's the educational component's job?
12 MR. LANGE: But can it be -- we, as an
13 industry, said, we don't think that one educational
14 entity can do that. You heard what's going to
15 happen. You're going to get --
16 TREASURER GALLAGHER: That's the reason they
17 put the educational thing in there is to not have
18 the industry all beating on these people trying to
19 rip them apart as to what they ought to do.
20 MR. LANGE: Well, the intent of the
21 Legislature, the advice of the industry, all of
22 that, what was written, and what's being
23 interpreted, are not the same, and thus, we're in
24 litigation.
25 Thus, we had Representative Fasano at our last
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1 joint council meeting stress that this is not what
2 we brought to the table here through the
3 Legislature. What you are defining for us, what
4 you are interpreting is not what we wanted, is not
5 what we billed.
6 GOVERNOR BUSH: Then it should have been
7 written differently. I mean, I'm dangerous. I'm
8 not a lawyer, but if you read it, it's as clear as
9 clear can be. I'm going to speak to Representative
10 Fasano about this because I --
11 MR. LANGE: It also said one or more bundled
12 providers, and we were going to end up, for a while
13 there, with none.
14 TREASURER GALLAGHER: Well, the process isn't
15 done yet. I just got here, and I expect to have
16 more than one.
17 MR. LANGE: I am telling you-all this because
18 I feel sometimes we miss some of the laymen's terms
19 here. We have an issue that is very critical to
20 us. We have 250,000 customers. You, Governor, at
21 the last SBA meeting, heard from employee group
22 after employee group asking for more choices.
23 That's all we've asked. I, again, don't care
24 if the State is a competitor of mine. I welcome
25 that, but let us all have the same playing field,
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1 and let us define ourselves as we are. A bundled
2 provider provides education, administrative
3 services, product and infrastructure.
4 We can't be told you can only have 9
5 investment options, and we're thinking of choosing
6 those 9 for you, and you can't do education, and
7 you can't do any administration. It's can't,
8 can't, can't, can't. We end up not being what we
9 are.
10 TREASURER GALLAGHER: But it's very clear in
11 the law that education is not to be done by the
12 providers. It's to be done by the education
13 provider.
14 MR. LANGE: I'm not an attorney, so I can't --
15 GOVERNOR BUSH: Basically, it's both. I mean,
16 the law says --
17 TREASURER GALLAGHER: It's a conflict.
18 GOVERNOR BUSH: -- the bundled providers can
19 provide education, but it's a requirement of the
20 third-party education alternative as well; so my
21 question, again, is where you started.
22 The reason why you have talented lobbyists,
23 and the reason why they all come every time and the
24 unbundled folks don't come --
25 TREASURER GALLAGHER: Whomever they are.
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1 GOVERNOR BUSH: -- I'm just guessing -- is
2 because this is -- you want this to be a profitable
3 venture, and I assume that's a good thing. I'm all
4 for that. I don't see how you make this profitable
5 the way that this has been structured where we're
6 basically saying, if you don't take the bundled
7 provider option, you're going to get certain things
8 for free.
9 If you take the bundled provider option,
10 you're going to get those services, but you're
11 going to have to pay for them, and I don't know how
12 you're going to compete.
13 MR. LANGE: Well, you'll be surprised the very
14 small BP difference between the bundled providers
15 and the unbundled.
16 GOVERNOR BUSH: We hope so. We're excited --
17 COMPTROLLER MILLIGAN: That's what we should
18 be all about here. All of this discussion, as far
19 as I'm concerned, is missing the mark as to what
20 our responsibilities are, and that's really the --
21 return on the investment to the members of the FRS
22 and the costs and the fees, and we'll make a
23 decision based on who provides the best product for
24 the investors which are the members of the FRS.
25 MR. LANGE: Absolutely. All we're asking
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1 for --
2 COMPTROLLER MILLIGAN: It may be all bundled,
3 and it may be all institutional because I haven't
4 seen this yet. I haven't seen what you guys --
5 MR. LANGE: And as I said --
6 COMMISSIONER MILLIGAN: I'm not competition.
7 GOVERNOR BUSH: I'd like to add one thing to
8 that, General, and that is that we also make sure
9 that we're not going to have 600,000 people being
10 bombarded with information that, amongst the
11 choices that they might make, that would push one
12 group up and tear down the other in a competitive
13 marketplace.
14 To me, that is -- that would defeat the whole
15 purpose of empowering people to make choices for
16 their own future and giving them a benefit that's
17 horrible in a world that requires and demands that
18 provide, you know, for talented and productive
19 workers and so forth.
20 That element also needs to be worked out to my
21 satisfaction. I guess that's part of the
22 conversation that you and the SBA are having as
23 well.
24 MR. LANGE: Yes, sir. In a closing remark,
25 the state university system, ORP, the 457 plan for
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1 your state employees deferred compensation plan,
2 both have a multitude of providers. I am not aware
3 of any issue where employees said they were
4 barraged or harassed.
5 I'm not aware of an issue where they were told
6 they have too many choices that are overwhelmed.
7 I'm not aware of anybody coming to my company,
8 legally or socially, to say that we give them too
9 many choices and it's overwhelming. Thanks for
10 your time.
11 GOVERNOR BUSH: It was informative. Tom,
12 where are we on the agenda? Are we finished?
13 MR. HERNDON: We're very close to being
14 finished, Governor. I have one last item. I can
15 move through that fairly quickly. It's basically a
16 report on the recommendations of the joint advisory
17 meeting Mr. Lange was just referring to which we
18 held on the 21st of December.
19 At that point, we had a long discussion, a
20 good panel discussion. We discussed the selection
21 and evaluation criteria that you had earlier in the
22 day, and then, as Mr. Lange indicated, we did have
23 a discussion and a consideration of a set of
24 amendments that Representive Fasano was offering to
25 the investment policy statement.
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1 Those nine amendments were ultimately
2 discussed at some length. The advisory council did
3 recommend three of them for your consideration, and
4 we have sent you, in memo and minutes form, if you
5 will, kind of a recap of those amendments and are
6 not making any recommendation to you at this time
7 regarding the adoption of those amendments, quite
8 frankly, pending the negotiations and how they
9 proceed.
10 If you are willing to grant us some
11 forbearance in that respect, we may come back to
12 you a little bit later on this month if
13 negotiations break down, or if they're successful
14 and make some recommendations about those
15 amendments that would include them or recommend
16 that they not be included.
17 That was basically the consideration of the
18 amendments. The advisory council also considered
19 Representative Fasano's suggestion that the
20 bifurcation that the staff of the SBA have proposed
21 the rule be recombined in a consolidated form, and
22 the council also adopted that motion, and bring
23 that forward for you to consider.
24 Again, there, too, we're simply suggesting
25 that the soup is not quite ready yet for tasting,
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1 and perhaps in another couple of weeks it will be.
2 TREASURER GALLAGHER: Let me just say that I
3 agree with the amendments that were done here
4 except I just want to let people know that as much
5 as I wouldn't want to do it, I'd be willing to move
6 ahead with the unbundled without the bundled if the
7 bundled guys can't get this stuff worked out.
8 MR. HERNDON: That completes the agenda,
9 Governor.
10 GOVERNOR BUSH: Thank you all very much for
11 coming. We're going to be back on the --
12 MR. HERNDON: We'll be back on the 26th, at
13 the regular scheduled Cabinet meeting, and we'll
14 have some interim materials for you.
15 TREASURER GALLAGHER: 23rd.
16 MR. HERNDON: 23rd. I'm sorry. Thank you.
17 (The State Board of Administration Agenda was
18 concluded.)
19 (Meeting concluded at 3:00 p.m.)
20
21
22
23
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1 CERTIFICATE OF REPORTER
2
3 STATE OF FLORIDA:
4 COUNTY OF LEON:
5 I, NANCY P. VETTERICK, do hereby certify that
6 the foregoing proceedings were taken before me at the
7 time and place therein designated; that my shorthand
8 notes were thereafter translated under my supervision;
9 and the foregoing pages numbered 1 through 72 are a true
10 and correct record of the aforesaid proceedings.
11 I FURTHER CERTIFY that I am not a relative,
12 employee, attorney or counsel of any of the parties, nor
13 relative or employee of such attorney or counsel, or
14 financially interested in the foregoing action.
15 DATED THIS 4TH DAY OF JANUARY, 2001.
16
17
18
19 ___________________________
NANCY P. VETTERICK
20 100 SALEM COURT
TALLAHASSEE, FL 32301
21 (850) 878-2221
22
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24
25
ACCURATE STENOTYPE REPORTERS, INC.
Cabinet
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