 Good morning, you're with the Vermont House government operations committee. We are meeting here this morning to generally to talk about how the pension systems in Vermont are governed. And to hear some thoughts from some folks who've spent a great deal of time looking at best practices and thinking about how pension systems should be governed. Before we dive into to some witness testimony here though I think it's really helpful for us to, to just acknowledge that there's, there was a lot of information, misinformation that we heard in the public hearings that we've held over this past week. A lot of folks don't understand who makes the decisions on how our pension systems operate and, and how the investment decisions are made and. And so I, I think it's worthwhile reiterating that the reason we're having this conversation about governance is because the legislature doesn't have a direct role in in governing the pension system in the state and I believe rightly so. I don't think you want political decision makers to to be making investment decisions on behalf of public employees in Vermont. But the disconnect that I was uncomfortable with was, was the implication that somehow, you know, political decision makers screwed up and that's why we're, that's why we're having conversations about governance. And so just to sort of set the table here for for this conversation about pension governance. We are going to spend some time understanding how other states pension systems are run so that we might consider borrowing some best practices and and making some changes here in Vermont. And so I understand that there have been a lot of what we'll call cafeteria table conversations if we were present in the State House and there was a complicated issue that a lot of people had really intense feelings and thoughts and expertise on. We would gather in the cafeteria and we would share ideas and and and and come up with a suggestion and so I think what we have right now is, is the result of a cafeteria table conversation and so I'm going to ask Tom Galanca who is the chair of our pension investment committee to share, share what you've been up to for the last couple of days. Thanks manager and thanks committee and you probably getting sick of hearing from me over the past couple weeks but I think you're making a tremendous effort here and I want to applaud you for for everything you've done in trying to bring this issue to light. I want to start by saying really, you know, in terms of governance because today's conversation really is on governance and the guiding principles really of my sort of testimony really falls into four categories and I think I've looked at it through that lens and and one of which is I think to improve the system and actually we're looking at the current system and how to improve it. There's really four things I think this committee needs to look at and to look at any proposal that comes to the table. One is a is a process of independence that the pick is allowed to pursue from the Treasurer's office because I think that will help us as we've expanded in size and scope from $2 billion up to five and if you add more money into it up to $6 billion that there is a need to have a more independent and more structure approach to the pick. Second thing is to maintain the equity on representation I think that's vitally important for this to consider. Third is accountability and there's a lot of questions in regards to accountability, both to the public as well as the legislature, I think be picked needs to be held accountable and in terms of investment performance and I would welcome that and a proposal. And then the final thing I think of my four comments is continuity and maintain the progress that we've, we've currently seen over the past four years and continue it into any new system. In the past week or so we have been looking at the proposal and it goes a long way into that we've, we've heard many different views. We've submitted some ideas for change that I think could be enacted and looked at. I haven't shared those yet today because we just kind of finalized some agreed ideas I think there's like 17 items that we've kind of put together. And I would recommend that we have a process to sort of review each of those and we can give you our input into why we thought those were good prospects and why we didn't sort of answer any question on those but I didn't want to bombard you with those 17 sort of ideas that we thought about until we had this conversation today. Today I thought would be a good day. We're meeting up before our meetings of the past couple days so it's kind of overlapping some of these governance conversations. But I wanted to bring to the table to individuals that are have tremendous amount of knowledge in pension fund management, particularly national expertise and best practice and to that end we brought in the CIO of the Vermont committee and state of Vermont investment committee and also Jim Voico and last year we did a nationwide search for a replacement for our investment consultant moving away from new engine knowing that pension consultants and we had probably about 18 companies world class organizations submit proposals and RV case standard suit above the rest in regards to what we needed here in Vermont so I brought Jim in, particularly here today because I think he brings a real good perspective and can answer a lot of questions of how other states do it. And what does he consider as best practice and answer sort of on the fly questions of, you know, how you know things we should consider or what specifically what the legislature should mandate that they get to have that that level of accountability and transparency that that you guys can feel comfortable with going forward that we're, we are performing up to par and if there are areas of need and then we can address them, you do it in a more timely manner than every five years from experience study. So with that I'll open up to questions to committee for me but or I can turn it over to Eric or Jim, whoever wants to start and maybe make some introduce themselves and and go from there, if that works. So committee do you have any questions for Tom. All right, nobody's diving in. Thank you for the introduction. Who, who would you like to call on first time since you, why don't we, why don't we call on Eric, because we brought Eric in I think it's been two and a half years now or three years now going on. And he's really helped transform the investment staff to be one more of a professional staff that interacts in a more interactive way with our investment consultant so Eric, let's introduce you. And thank you madam chair members of the committee. My name is Eric Henry I'm Chief Investment Officer been in my role just about two and a half years now as Tom mentioned, bring to that role 25 years of institutional investment management experience and on my arrival here in Vermont. In meeting my small team one of the first tasks we undertook was underwriting every product in the portfolio at a very detailed level. It's essential that we as fiduciaries on this fund understand each product in the portfolio, its role in the overall strategy of funding the pension fund liabilities, its risk return trade off characteristics. What are the overall value proposition are we getting value for the level of fees we're paying to the for each of those products. That process identified several that we believe we're just too complicated, too expensive or too opaque for us to really be able to oversee them in an effective manner. So we sought to terminate them. At the end of the day it's essential that we understand each of these products, how we expect them to perform a different economic scenarios, and importantly when we're going to like them and when we're not going to like them because there will be times when we have good products that play an important role in the portfolio that just tend to be out of favor. The process resulted in us terminating our entire hedge fund program. Again just too expensive to complicated wasn't delivering value that decision alone saved us $80 million by avoiding a loss and the only on structured global product products that essentially melted down last spring, and avoided further exposure to losses. More recently in hedge funds like Melvin capital and Archigos which you may be reading about in the press. We needed a number of active public sector managers whose secret sauce we simply didn't understand those mandates were indexed and in until if and until we can find a better strategy, where we think we're convinced to manager can add value. But in that process we saved upwards of 100 basis points and annual management fees on these products, and importantly eliminated strategies from the portfolio that simply weren't meeting expectations. Without this process our team is really able to take ownership of the investment process and this was new, getting my small team involved in the actual and identifying investment opportunities, analyzing those opportunities, doing due diligence on those opportunities with the investment consultant and taking recommendations to the committee. But as a result of that process and this underwriting of everything in the portfolio, if and when there's a problem now the staff will own it. So we're here to expect a committee whose role is to govern and set policy to own every single manager hiccup or manager problem along the way. Instead, our team of small team in conjunction with the consultant does the detail on the ground due diligence and keeps track of these managers so that when there is a problem, we can respond effectively and quickly. As an advisor to the committee and as an extension of staff but it's important to note that it's not the consultants portfolio. One of the things that we've been successful and doing is being very judicious and clear about what strategies we want to pursue, what level of risk we want in the portfolio, and how we decide to oversee them. So if we've made great strides in professionalizing our small team by getting them involved in the process by having them formulate recommendations by having them present to the committee on complex and complicated issues. And further we believe that having a higher level of autonomy for the committee will allow us to continue to professionalize our staff and enhance our ability to attract and retain talent for the long term here in the state of Vermont. The main members Andy Cook and Katie Green are top performers and I commend my predecessor for hiring them. We could not find two better people to serve in the roles that they're serving in. And as VPIC and grows, as the VPIC portfolio grows, we envision a world where their performance, their responsibilities grow, and their professionalism grows alongside those VPIC assets. This assure us proven oversight of the VPIC pension assets, not only for the members and beneficiaries of the pension plans as required by our fiduciary duty, but also at best cost and reasonable sustainable cost to the taxpayers of Vermont. Happy to take any questions, but I know that Jim Boyd Co has a lot of valuable information that I think will be helpful to the committee as well. Again, thank you, Madam Chair and members of the committee. It's an important topic and I applaud your efforts in taking on. Thank you Eric for being here today. Committee members any question about what you've just heard from the CIO John Gannon. Thank you Madam Chair. Eric, thank you very much for testifying this morning. You know, I read the Wall Street Journal every morning so I'm very familiar with Archegos, but it just may want to explain it to the to the committee members and what it is and what has recently happened to it. Sure. So our Archegos was involved in gaining some very complicated and opaque positions in some companies and with those with those complicated concentrated exposures, those little problems tend to magnify themselves throughout the portfolio. Similarly with Melvin Capital, they were caught up in the short squeeze on Game Stock and other companies that really did not have consensus was their futures were not bright. Yet these Reddit forums conspired to bid off the prices of these companies and squeeze the folks that were holding those shares short. So many of those funds tried to hold on, and many of them got caught up and I mean that this brings back to back to life that I think it was either Keynes or Galbraith said, you know, the markets can remain irrational longer than you can remain solvent. And that's one of the things we keep in mind in designing the portfolio we stay away from leverage. One of the product that the Allingons Global Alpha product that when we looked at it. The marketing materials on it described that is fully liquid, a fixed income substitute, you know, it sounded like a very safe product. Yet when we looked at the holdings the actual exposure in the portfolio was four times the dollars we had invested to me that was leverage, even though the folks on the, you know, the advisors were insisting up and down no no that's not leverage. We believed it was leverage, we terminated the product. In the end, it certainly behaved as if it was leverage times. When markets dislocate. And Eric, just archegos is a hedge fund or claimed to be a hedge fund. Correct. And Mr. Wang, who I think is the CEO of Archegos was also involved in Tiger Asia, which was another hedge fund, which pled guilty to criminal fraud charges. Is that correct. I think so we've not dug deeply into Archegos I followed it more at a headline level and I'm thankful that we didn't have exposure to any of those products through the fund to funds that we had previously been invested in. Okay, thank you. Any other questions from committee members Mark Higley. Thank you chair thank you Eric and Tom and everyone. So there was an article it seemed like, you know, everybody's an expert. But there was an article in Vermont bigger. I believe on the 24th from a public pensions and capital market expert criticizing VPIC and of course the treasurer for risky and high fee Wall Street investment strategies. Any response to that and again it was a it was a lengthy article. I don't understand all the ins and outs of investments but again any validity to that is is that something that's taken out of context what what do what do you have to say on that. Let me say two things. Number one the work that we did upon my arrival and streamlining and simplifying the portfolio eliminated what I believe were any overly risky or overly expensive portfolios. We believe everything in the portfolio now warrants a role there. We recognize that you don't make returns without taking some level of risk, the key to managing an institutional portfolios to balance that level of risk. The key to maximize returns within the portfolio at acceptable levels of risk and liquidity. One of the areas where we do pay higher fees is in private markets. We do so in order to seek to achieve an illiquidity premium, and we've had success in doing so. If you look at our exposure to private equity funds of funds. Those funds have added 1000 basis points of extra value above and beyond their fees in comparison to the public market equivalent benchmarks. That's paying fees that's net of all fees paid. So yes we are invested in private equity, we are invested in private real estate. We stay away from funds that are levered, we stay away from funds where we believe the bets are outsized, we stay away from funds where it's difficult to value the holdings. The funds in private equity funds are illiquid. They are valued, we do get audited statements from them. And importantly, we understand the cash flows to come out of those funds as those companies are sold, and values realized. Thank you Eric for that. Rob Leclerc. Good morning. Thank you madam chair. Good morning Eric thank you for being here. I would like to see the changes to the funds that you had recommended. Who did you make the recommendations to and who ultimately made the decision to make the changes. We made the recommendations to the Vermont pension investment committee and those members voted in support of those changes allowing us to proceed they have the ultimate authority to approve any hiring or firing of investment managers or strategies in addition to setting policy and setting the asset allocation. And has it always been that way in your understanding. You know I can't speak for much before my time of arrival but certainly since the Vermont pension investment committee has been formed. They've been tasked with the authority to approve those manager hirings and firings. Very good. Thank you. Peter Anthony. Thank you madam chair and thank you very much Eric for testifying and helping us wind our way through governance and practices. My question, and you may have already answered it just previously. But you do look at even if the profile or performance characteristics of a particular asset use might be attractive you, nevertheless way that attractiveness fit, if you will, with the attendant fees is I think that's what you testify to I draw attention to that because I think rightly or wrongly. There are unfounded allegations that we seem, because some of these fees are not publicly disclosed either they're proprietary or whatever that we may be involved in but vehicles, where the return to fee ratio is unacceptable and I, I think I heard you say, we carefully weigh the value to the overall character of the fund with the fees that are attended there to am I do I did I hear you right. Absolutely correct fees are essential. They come directly out of the bottom line and those managers to whom we're paying fees need to be generating value above and beyond those fees. These all day long to our managers who are generating significant outperformance, again in the private market space, we believe we can get access returns by seeking the liquidity premium. We've identified best in class partners to do so. One of our benefits in this space is that we're small relative to other states pension funds, so it can allow us to gain access to funds that are maybe a little smaller and niche year it may be a little more nimble. But again we we we obsess over fees. They're critical that's the one thing we can control, we can't control what the stock market does we can't control what interest rates do, but we can control fees and we can control our expectations for those managers. Thank you well put I have one follow up Madam Chair and that is back to a change which I think is in the process, namely, trying to increase the frequency of what the committee or I will call reality checks, which is to say try to match what actually how various aspects of the pension fund are performing, compared to predictions of how we think it should perform or should have performed, sort of experience checks, do you internally, and this by the way would be done, usually out of the Treasurer's Office, or by one or VPAC. I guess I'm curious as to whether or not you internally do those kinds of did this turn out the way we thought it was going to turn out. And what have we learned if it didn't, and how frequently do you do those kind of retrospective. How are we doing in our decision making and judgment. Sure we do asset allocation studies every year where we run capital market assumptions based on our target allocation, and look at other potential changes to the allocation to determine whether there might be a more efficient direction for the portfolio. We also, as we are generally managing the day to day operations, we're forecasting cash needs to meet benefit payments and capital costs so that we're sure we have sufficient liquidity on hand to do those things. We get too far into the actuarial side because the pension plans boards oversee that but they're doing annual valuations we look at those valuations, they do periodic experience studies we certainly look at those periodic experience studies, and we do periodic asset liability studies where we're modeling not only the investment returns of the portfolio through Monte Carlos, but looking at their impact on pension funding and contribution levels going forward. And I'm chair I have two questions one is about sort of the transparency and how all of this information about how these decisions are made and what the fees are and what the returns are are made available to stakeholders and who that list of stakeholders includes. So all of our investment performance and fees are disclosed not only in conjunction with the board materials on the treasurer's website but in the quarterly investment performance reports that are posted under the pension plan section of each website we show in there. Investment performance for numerous periods for each strategy and each manager, as well as fees paid to those strategies. So someone would have to seek that out on the treasurer's page it's not sent to people who are invested in the pension or anyone it's just posted on those pages. Correct. Thank you. My other question is actually kind of is going back to Representative Higley's question about the article that was posted in Vermont digger it also pointed to the fact that it might make sense to invest. All or the vast majority in index funds. And I'm wondering what percentage of our current investments are invested in index funds and how that decision was made and I also believe Burlington recently has done that for something very similar for their municipal pensions. And I suspect Representative Cooper can weigh in more there but I'm curious about that. I am a very big proponent of index funds, you're able to capture the market returns for essentially no fee, and we've indexed over half of our portfolio on the active on the public active equity manager the bar for us to hire or retain an active equity managers extremely and we need to show a proven ability to outperform their fee where I think we need where we venture beyond index funds and beyond public equities is in search of excess returns. That's where we've gone to private markets not only does that add an element of diversification away from the public stock market, but it also again allows us to capture that illiquidity premium. What you would have with it simply indexing the portfolio to a 70% S&P and 30% to a US bond index is one evaluation. The valuations of S&P 500 companies right now are very high relative to history valuations of bonds in the Barclays of the Barclays global aggregate or the Barclays US aggregate bond index are very high as well. Essentially zero interest rates and a return to normal will certainly be very painful for those holdings in the US bond exposure could very well be painful for those holdings in the S&P 500 just given where the valuations are. So we've diversified in our index strategy beyond the US. We don't think we're smart enough to know when the US will outperform non US holding so we've essentially adopted a global equity index, the AQUI IMI which essentially has every region of the globe at its relative calf weight. But move we believe it's prudent to move beyond simply a 70 30 portfolio to add elements of diversification and illiquidity to help us capture us capture the illiquidity premium. It's very easy to look back in time and say if you had done this strategy or that strategy would have outperformed where you are much more difficult to do that in advance. Of course thank you so much and my last is just a follow up around the transparency around the private equity and the real estate is that transparency the same as it is for public index funds. We disclose fees paid we disclose holdings we disclose valuations, we do so quarterly. Great thank you. Thank you Madam Chair I just was hoping to be reminded when you started the beginning of your presentation you said when you took over and started making these changes could you just remind me how long ago that was two and a half years ago. Thank you. Tonya Bihowski. Thank you madam chair, a quick follow up to representative Lefebvre's question what would you say on average and I certainly am not an expert is sort of the amount of time you need to wait to start to see that. We need to wait to start to see the return on investment for big changes like the ones you made just a little over two years ago. I would say we've seen them relatively quickly just by virtue of eliminating the fees on the active equity products we've eliminated. We've seen them very quickly by virtue of avoiding then $80 million loss on all eons. We've seen them very quickly by moving out of hedge funds and adopting bond exposures a downturn hedges we went into the downturn last March. These other you know other changes take much longer, much longer to see when you're committing to a private equity fund. You won't know the outcome of that for 10 or 15 years. These take a very long time and some you can see relatively quickly. I recognize that your crystal ball is very likely not working, but it's possible that some of these huge issues that we're seeing could start to write themselves as the investment changes start to. We start to see the impacts of some of these investment changes not that I'm saying it's going to fix the whole problem but the problem may shrink and change based on how the market changes, given the changes we've made in investments. We certainly hope that's the case. Thank you. Bob Hooper. Thank you madam chair, Eric that was a nicely caveat a dancer. Two things. There's a lot of confusion I think around what unfunded liability is what the obligation is to it and how it gets compensated for. I think explanations in the past have been somewhat confusing. Maybe you could add your perspective to it. And, and we'll go from there. So I, I will say that when we design the investment portfolio we're doing so with an eye to funding those pension liabilities with an understanding of the cash flows of those plans and doing our best to maximize returns again with an acceptable level of risk and liquidity. Theoretically, as you add illiquid assets, you increase expected returns for that portfolio and in you, you should increase realized returns over the long run. The challenge we face and doing so for these three pension plans is that they all three have dramatically different cash flow profiles and different funded statuses. In the municipal plan, for example, we're, we're redeeming about $13 million a month to meet those payroll obligations in the municipal plan, incoming contributions more than cover the outgoing payroll so we're not forced to redeem anything in your municipal plan. Arguably the municipal plan is a higher tolerance for illiquid assets than does the teachers plan, though to date we've managed this as one portfolio with one set of allocate one standard allocation for all three pens. The chairman and I have had a number of discussions about moving in the direction of separate allocations for each plan. And we may well and we may well proceed that direction in the future, though, the past two and a half years again has been focused more on fundamentals, streamlining the portfolio, gaining and ending of each product in its role and rationalizing fees. It's good that you brought that up the pick used to have separate silos for each plan when we came in and we abandoned that in favor of cost savings basically so it's, we've been talking about it for a long time it's good to hear that everybody is looking to move in that direction. Are you, because I know you monitor what's happening with the plan daily expecting a turnaround in the return of this particular year that will be significant earnings. So in terms of reinvestment returns for this current fiscal year. Yeah, well that's a difficult question. If you look at the returns year to date they're very strong and you know I had a discussion with with a person. A few months ago, you know the question was well, when will you know when we have a good idea what the fiscal year's return will be. And the answer is after the fiscal year has concluded because we just don't know what's going to happen. You know we've seen these dislocations like Brexit and taper taper tantrum and other things that tend to happen in mid June, and we just until the fiscal year has ended but certainly to date performance has been strong. We hope it continues and markets retain their, their valuations and we hope that earnings on the companies in which we're invested continue to increase to justify the level of valuation, but we just don't know until the period has ended. And last question Madam chair, based upon the lowering of the assumed rate of return, the probably the wrong word but the compounding effect of stronger returns will be effectively have impact on the state's contribution any unfunded liability to some degree. To the extent our actual returns exceed the assumed rate of return. Those excesses come into the plan funding calculations as an experience gain. Those gains are smoothed over I believe a five year period. So that over time, when you have years that are above seven and below seven. You're not moving the contribution rate around erratically but rather trying to smooth out changes in that rate over the long run. Thank you doing a hell of a job. I want to just ask you to come back for a moment to something that rep Hooper just asked you about with respect to the, the relative health of each of the different pension systems. If I am a teacher, the health of my system is in a very different place than if I am a municipal manager, and, and you are you talked about the fact that your, your investment strategy is looking across the whole system. What should I be worried about if I'm a teacher and what is the threat to my retirement system based on the fact that that the teacher system is only 50% funded right now. So I want to be careful not to get into pension policy we have pension boards that set policy and that pension folks that on those pension boards and that oversee those pensions are pension experts, just like we on the pension committee are able to focus solely on the investment program. As we think about funding those pension plans again our goals to maximize returns within this acceptable levels of risk and liquidity. We're doing so to assure that we can meet the obligations to pay those not only those teachers but also state employees and municipal employees. From our view, we don't see the investment program supposing any sort of threat to any of the plans instead we see it as an effective tool and funding those pension liabilities over the long term. That pension funding calculation also includes contributions from the state and contributions from the employees. Again, those those two issues are beyond our area of expertise roles to manage the pension fund assets. We believe we've designed a portfolio that will do so prudently over time. Thank you Madam Chair I want to go where I think you were going. Stay out of policy but I have to return to a comment you made Eric. When you did distinguish the. I think you put it you put it in terms of cash flow of the teachers situation versus the state employees. And I guess you innovated and I want you to confirm this if it's true that on a cash flow basis you actually had to to what would you say abandoned some assets in order to meet the monthly payout obligation, maybe not systematically maybe only occasionally. And it's that fact that says to me, without cross subsidies, that is, between groups, which I'm against, it means that we really have to do something on the teacher side that we might not have to do on the state employees side to make sure we're not eating assets to satisfy monthly payments, or am I reading you wrong. I will say from an investment standpoint we've not abandoned any strategies in the teacher plan. Again all three plans are subject to the same strategies and we're convinced that the all three plans have sufficient liquidity on hand to enable us to pursue those strategies. And then we decide to move beyond our current targets to illiquid assets. There could come a point where there are different tolerances for illiquidity in those plans we're not at that point. In terms of, you know, the fast soundness of those plans. There's an actuary that does valuations and the assume rate of return serves a very important role in calculating the required contributions to those plans to keep them sound. Again that's that's something that's handled by the actuaries and the pension boards. Thank you Eric. So I think I'd like to go to Jim Voitko and want to say thank you for being with us this morning and just to orient folks who are following along at home. You, I would love for you to just describe how you fit into this conversation and, and maybe help us understand the, the sort of broad perspective that you have on how pensions around the country are governed. Well, thank you Madam Chair, I'm very pleased to be here. I, I offer anything I say today with a certain amount of humility. After 40 years of institutional investing, you one has to carry away a certain level of humility. So, just by way of background, as Tom said, we, my firm RVK was recently retained by VPIC to be their general consultant, and their advisor on investments. And as he described in Eric described, we work as an extension of staff but we report to the committee itself. There's no, no question about our reporting lines. We have a defined scope of work that covers some of the things that were mentioned here today by Eric, for example, asset allocation, asset liability work, manager evaluation, performance reporting, and many other tasks that the general consultant does. We have a team. So quite a large team consists of at least four consultants. I'm the, I'm the most senior one but, but it is led by two other consultants. And we have been hard at work since last fall with, with Eric and Tom and the committee, doing exactly what Eric described, which is evaluating opportunities for investment. We're doing a fee analysis, so that VPIC can get the exposures that they think are appropriate for the portfolio, but at the lowest cost possible. My firm is a nationally ranked general consultant, pensions and investments rank us at number four whatever that means we don't. It's not important to us, but we do have quite a few public funds, many of them state level across the country, both in the east side of the, of the country and the west. New York State, for example, the common retirement fund is a longtime client of our firm, but we also work in Oklahoma we work in Wyoming. We work in California. So we get to see quite a few public fund governance structures and investment portfolios. Plus we also do at twice each year, a review of about 90 different public funds looking at their asset allocation. Their use of active versus index products their actual rate of return and and many other statistics that we've kept track of for more than two decades. Myself personally, I grew up on Wall Street. I served in the federal government for a period of time as a technical analyst in energy and and other regulatory industries spent 20 years on Wall Street was a chief investment officer for an asset management company with about $50 billion, then became an executive director of the statewide Oregon pension system in which every public employee at all levels belongs to the same plan. I had a seat on the Oregon Investment Committee, which is similar to VPIC and structure it oversees all of the state's investment funds, including workers compensation but also the $45 billion pension plan, and a number of other plans as well and I served as the executive director, operating that plan as well that I served as the CEO for the last 16 years I've been a senior consultant and president of RBK so I just wanted to let people know that if I say something it's probably because I've run into it sometime over the last 40 years. I mean, I guess there are so many things I could say about what you've said already, but one of the things I guess I would say is that everything that I have experienced in institutional investing, and in governance structures the decision making that goes into investing is a set of trade offs. And I think that's the challenge for for this committee and for the legislature as a whole. Those trade offs are things like you want enough views at the table in an institution like VPIC to have some diversity of views and multiple eyes on possible investment decision making, but it can't be so large that decision making efficiency goes to heck in a hand basket if you will. And we've seen boards as large as 1819 20 individuals, and there clearly is a potential efficiency loss when there are so many voices at the table. But on the other hand, as I said, you need it's valuable to have a number of sets of voices, even in those few states that have single fiduciaries New York and Michigan come to mind. They use advisory committees to advise the single fiduciary and those and we have worked with both of those as I've mentioned, and these are real advisory committee so so that's one trade off another trade off. One of the things that that you have to grasp is that there are two tasks in running a public pension system. There's a big category of what we would call administrative tasks that is getting pension benefits paid, keeping click careful record of benefits earned. Investment tasks. States have varied widely as to how they balance that trade off. In the case of Oregon, West Virginia, Wisconsin, just to use a few examples. In Florida is also an example. They have created structures very much like you have in Vermont with an investment committee, our board that focuses solely on investments, they're not distracted by disability hearings or other actuarial debates and things like that they are focused solely on investments. There's a real advantage to that. And Montana is a yet another example of that, but there are also states that try to combine the two into single boards, and they struggle with that. And sometimes they create subcommittees that try to focus on investments. And that's successful but oftentimes, if you sit on one of these boards that do both the administrative side and the investment side, no member of that board wants to be out of the investment decision making process. So oftentimes as in the case of CalPERS, they have an investment committee but guess what, it's the committee of the whole. So that's a challenge. That's a trade off. Another one is membership, which I know that the composition of the board, which I know is one of the things that you're interested in. And the trade off there is representation versus independence. There's probably the largest number of seats in public pension boards are driven by representation. They represent the retirees they represent the active employees they represent the employers. Sometimes even they represent economic sectors of the of the state. That's, that's true in at least one state I'm aware of. Versus independence where the individuals charged with making investment decisions really have no ties to any particular constituency. That balance is a difficult one to strike and it's above my pay grade. I will say that there have been some academic studies that suggest that and not many of them but there have been some that suggests that if the in the balance is struck more toward representation that independence in investment decision making that can be a problem. So, I'll move to the next set of trade offs which is representation versus expertise independence and expertise are not necessarily the same thing both are valuable. And, you know, I know that that's also an issue that you are wrestling with and is very difficult because financial expertise is difficult to define when it comes to the very specific tasks necessary to run a multi asset class portfolio for a public pension plan plan, like the plans that in Vermont. There are many financial professionals who do a great job at what they do, but what they do is not terribly applicable to running an institutional fund. And so that's the challenge that somebody in a legislative body like yourself would would face is how do we define something that's that's so where the tasks that are necessary are are not ubiquitous across all of the financial expertise professions. In the, in the broad and sprawling financial services industry. With respect to transparency which was one of the questions that was raised, we would say that most states have decided there is there is no material trade off transparency is a good thing. Here in simple the the sole exceptions are that are written into statute in other states relate to things that would harm the fund itself and therefore the beneficiaries things like the boards are allowed to discuss in private litigation. So not uncommon, or they're allowed to address pending decisions that could adversely affect investments like the sale of particular securities or real estate, where the knowledge of that they were considering that might affect the value of them and therefore adversely affect the participants. So, so I think these trade offs are very, are very important if you're thinking about structural changes in governance and the decision making process. I will say one thing that I have been asked by the treasure and by the chair of the pick to discuss and that is, how does one assess risk in the portfolio. And my recommendation has been that there are very standard best practices to pursue in assessing the health and risks to the asset base for a pension plan but also the combined effect of the contribution policy, the benefit policy, and the investments. And so I have offered up some thoughts to that to that effect in terms of asset allocation using what we call stochastic that's a geek term that we that we statisticians use that basically ask the question. Okay, this is what we expect to happen. How big is the distribution of possible outcomes either worse or better that we might expect. And the other is asset liability, which our firm and me personally are very, very supportive of we're a tremendous supporters of asset liability work. One of the challenges that your structure has is that you have the benefit of having the pick focused solely on investments, and you have your administrative boards focused very tightly on the administration of the pension plans. But there is one element that has to be done periodically and that is, look at these plans holistically, the contribution policy, the benefit policy, and the investments, not, not individually but together. And the way that you can get the benefits of the structure that that you have in Vermont is by mandating periodic asset liability studies. It is the gold standard for assessing the current health of a pension plan in all dimensions, as well as the likely future path, as well as the distribution of possible future paths that it might take. And we've done something on the order of 50 to 60 of these, just in recent years because pension plan public pension plans but also some corporate funds and some, and some special special purpose funds are all struggling to essentially get a handle on how they meet the obligations that are created in that in the benefit policy, and understanding what the effect of the contribution is. And now I'll say something that might, I don't mean it to be provocative, but it happens to be a fact that if you were to look at the five most underfunded state pension plans in the country. It is almost certain that what you would see that they would share is a reluctance on the part of the plan sponsor to the ultimate plan sponsor to make the actuarially required contribution. It's Kentucky, Illinois, New Jersey, you can go on down the list. That is the common factor because no matter how terrific your investment strategy is, no matter how great VPIC is at executing it no matter how great Eric is in terms of balancing that return seeking versus prudent risk, prudent levels of risk. If there are insufficient contributions there's nothing to invest. So it's, it's, it's fundamental, and that is is contribution policy is fundamental it is turning out, and a bigger driver of unfunded liabilities across public pension plans in the United States, then perhaps any other factor. So that's, that's a summary of sort of the, the points that I wanted to bring to your attention today. I'm happy to answer any questions that I can. I'm happy to make a few short comments about the topics that have been brought up so far today, whatever you like madam chair. I'll give you a couple hands up and then, and then we can go back to any comments that you might have to previous questions time to be hosting. Thank you madam chair. And thank you for being here to help us wrap our heads around governance. My question is when the last time that kind of holistic study or audit of everything and how it works together was done for the Vermont systems. My question, I don't know the answer to, and maybe Eric or Tom knows. We have not been asked to do one yet they are very extensive studies, and they take as long as three or four months to execute, but they are there. And they offer, in my opinion, unbelievable insight into the health of a pension plan. Tom, Jim that is the study we've been asking and I've been asking Eric to perform and oh, hey Eric, what you hope that I say well it's crazy. It's a figure now what it actually go down you're just retail investor but I really think understanding the liabilities is essential and I've been asking for these type of questions for the past number of years, and getting the way to do it and the correct question between the actuaries and the consultant has been a difficult part and that's one of the exciting features I find with RVK and one of the reasons we went with them. Okay, so a quick follow up. Does that mean that study is upcoming so we can have a true sense of the health or is it still in process where where are we at in that process because I want that information. Well we had one I think in 2019 Eric I don't know if you remember the first liability study we did which was more of an initial stab at it with seagull. We can get you that copy from the one we've already done a couple years ago. The process with RVK is to be determined so we don't have that just yet that will be that'll be as soon as practical. Great. And representative I will say that best practices in order to make the study credible. Two things have to happen. One is is that we should we RVK should be using the freshest actuarial data possible so we'd like to schedule it right after the completion of a of a actuarial valuation. The second thing is a high level of cooperation between ourselves and your actuary because credibility means when we bring the study forward, we have to say it, it reflects precisely what you've heard from your actuary, but then goes beyond that. And as I said, creates this holistic view but these are not trivial studies these are these take as long as four months to execute because they cover all aspects of the pension plan. Thank you very much. That is helpful for me to understand. Robert Claire. Thank you madam chair. Jim I got a couple of questions and I'm not sure if the second one of your, you're the right person for but I think you touched upon it but can you touch upon. When you have a person who's a member of the pension of how their perspective helps on the investment side of things. And the second question I have is, we've heard a few times that the the great recession back in 0709 has affected, obviously the plans performance. Are you able to speak to how it's affected us to to where we are in today's times and dollars. Let me take the first one and that is is that I don't think that there's any generic answer to how representative person say a retiree typically contributes to investment decision making. And I think that in my sense is and it's just a sense that representative positions are are often created to essentially ensure that stakeholders have a direct view and some say into pension decision making whether it's pension administration, disability policy actuarial policy or, or investments. And I have experienced personally and our firm has rep. We are filling representative positions who have been excellent contributors to investment decision making. And some that that were shall we say working hard to figure out the investment side of the world even though they may understand the liability side the benefit policies very very well, which you would expect, because that's, that's the world that they come from. I have a clear answer there. And with respect to where we are in dollars. I don't know the I don't have that at the tip of my tongue. I agree with Eric so far. This turnaround in performance has been somewhat sustained, and the portfolio is in increasingly better shape as the VP committee, and Eric and his staff continue to work to refine it. And we have, we, since we've been brought on board and back in November, I can't tell you how many interactions we've had it's been unbelievable though the, the flow back and forth between ourselves between the board, and certainly with the staff. But I will say this about performance. I mentioned investing benefits from consistent application of a thought out strategy over a very long period of time. I know that the long, long time period is sometimes seen as an excuse, but I will tell you that in 40 years, the kind of short term bets, somebody mentioned the hedge fund family office that blew up. The, the, the big performance blow ups, Orange County years ago, as an example, have been driven by investment strategies that have tried to be overly opportunistic, and not structurally sound and, and move through time with some measure of consistency. And what that means is that there are going to be years in which, so far, you exceed your expectations the expectations that are built into your contribution policy, here's that link again, contribution policy, you know, benefits. And, and so, but there are going to be years in which it falls short, the capital markets can't be commanded to give you returns, you have to structure your, it's like creating a fishing net that you move through the capital markets ocean and you hope to catch as many fish, as you possibly can. That's exactly what Eric and his team and be pick are trying to do they're trying to create a diversified portfolio that may not be the best performer in any given year, but over 10 or 15 years catches a lot of fish. I'm prone to using metaphors I apologize for that. I'll stop there. Thank you. Bob Hooper. And as a metaphor user Jim that was a great metaphor. My question is sort of simple I think. Before you applied for the contract I'm sure that you basically said what are we getting ourselves into. And you've had some experience with now being in it. In your preparation to engage in a bid and since you've been employed. Have you found a structure in place at the pick to be functional and effective. You know I the representatives on the committee may find this that I'm an interested party because obviously I work for VP, but I will tell you point blank that the every every aspect of the decision making process that we have had the opportunity to observe, which I think is everything. Since we were brought on board has been best practice. I can't think of a single, a single deviation from best practice, and the conversations and discussion have been reflective of that trade off that I talked earlier about having a diverse set of views, but not so many people at the table that the conversation breaks down. I think we've all been at dinner parties where there's so many people around a big table that you can't have one conversation. That can't happen in an investment committee there has to be one conversation. So, take it for what it's worth. I'm, I'm too old and to battle scarred to blow smoke at people. I have not nor has my team seen anything in the decision making process that is other than best practice to date in our engagement. I'll stop there. As a follow up every some conversation about where you come from having bearing everyone that sits at the table is first obligated to their fiduciary obligation, which I know you would teach and reflective of the position that the committee is taking. What influence upon what you bring forward in recommendations for products and participation in markets, I would assume. There is no question. When you, when you when you collect billions of dollars in a single place. It attracts attention. I've run a pension plan I've seen that attention firsthand. I'm not an attorney I'm certainly not in a fiduciary attorney so I want to be very careful and humble here, but I've heard many, many conversations and instructions and advice given by fiduciary council to the clients that we serve. And the, the phrase for the sole benefit of the beneficiaries for the sole benefit of the participants is one that is repeated over and over and over again. And yet there are so many temptations to use those billions of dollars for other things. These like that are above our pay grade, we try to help our clients achieve their goals, but their goals, you know, are partly driven by fiduciary law statutes, and their sense of fiduciary duty. So I'll stop there representative Hooper I think I hope that was, I hope that was responsive. I appreciate that answer and I'll ask you now one tongue in the cheek question, aside from that guy out in Nebraska or wherever he is, is anybody always right in this environment. Well I think I know who you're referring to and by the way he's not always right. He has some brilliant decisions, and he's also had, he's also had some investments go south on him as well. But again, I would go back to the comment that I made about continuity of approach. Warren Buffett had, if nothing else suffers from a huge amount benefits from a huge amount of continuity of approach. If you look at the investment letters over the years, you'll see the same principles of investing that he follows echoed over and over again, whether he's had a good year or a bad year. You know, investing billions of dollars looks easy to anyone who hasn't had the responsibility of doing it. It is not easy, I can tell you that. It's also a public pension plan a DB pension plan and a portfolio move like an aircraft carrier, you spin the wheel, and eventually it turns because just the sheer weight of the vessel. And the fact that liabilities don't change all that much over time, and that the capital markets don't respond to to your changes in your portfolio like that. In some respects VPIC has had an unusually productive couple of years under Tom and Eric's leadership, simply because the changes they've made have been pretty much in sync with what's been happening in the market and continue to be so to their credit But the I gave a speech once to a group of legislators. And in fact I was asked to give it several times in which I said to legislators and I hope you won't take this the wrong way that I'm preaching to you but your life is is so much wrapped around your annual or by annual budgets. And the budgeting exercise is completely foreign to the financial dynamics, the annual budgeting exercises completely foreign to the financial dynamics of a public pension plan particularly a perpetual one that presumably may go on for 100 years. And getting your arms around that is very difficult. When I was an executive director, I had to appear before many many business groups, and they have a different paradigm in their mind, their paradigm of course is the annual profit and loss statement in the balance sheet. Those are somewhat useful to a public pension plan but again, foreign to the to the financial dynamics of a public defined benefit pension plan, which moves slower, and are particularly given this decisions in most states by the Supreme Congress in those states that these are contract obligations are are are completely different than what most businesses deal with the world they live in, and quite frankly what most of the of the financial decisions that legislators have to deal with dealing with their periodic budget decisions. You, one of the members asked the question, for example, what is the threat to teachers, because the plan is underfunded and more so than your other plans. I can't give you legal advice. I don't know. And I'm not qualified, but in states where this their Supreme Court their Constitution or their statutes have been conceived as committing a promise of benefits. And the pool of assets becomes merely a tool in executing that promise, if the fund were to disappear tomorrow, the promise and the obligation would still exist. So I have always said to retirees when I ran program that myself is that if the courts in our state, when I was the executive director felt that way and they did. They've got little to worry about, you know, the state has an obligation to them. One might argue that for active employees, there's always the threat that legislative bodies may, if the, if the statute that state allows it, might change benefits and create new tiers that would adversely affect their futures. Again, above my pay grade, but it's happened in many states so I'm not saying that there's, there's no risk to, to active employees. There may be some, but that's the framework in which I've observed in states across the United States. So I'll stop there sir. Thank you. Thank you madam chair. I wanted to go back a little bit to your discussion of the in depth risk and liability kind of deep dive and point out. It also sounds sort of boring to my colleagues on the committee deep dive into the state employee side, because at the present time it's an aggregate about five different profiles, if you will, of benefit packages and contribution rates and all the things that have been kicked off. And I guess what I want to bring to your attention is for us to be surgical or skillful at trying to make adjustments we would need what you just described on a disaggregated basis for those groups. Otherwise, we will invariably be continuing what I think are suspect, maybe some cross subsidy some inequities, the pay out to, or, or, or contribution to benefit ratios are all over the place. So let me just stop there that that would be terrifically helpful as we move forward. The other subject that you raise goes back to what kind of people, and what kind of relationship to VPIC would be desirable and you talked about independence and expertise and of course, and, and we have a working proposal that wants to expand the number of people beyond the current number. Maybe more more than maybe more than two maybe less maybe the same. That's what I want to know, because the key connection to the political environment in the current regime is the treasure, the treasure in our state like many states is elected. How does the notion of independence play in the context of having a not only a supporting staff connected to a politically elected person or treasure. So that person chairing a board and having a vote in light of your discussion about independence no one's questioning treasures expertise. It's really a question of independence from whatever winds of change are. So let me shut up there for a moment and I have a follow up but Well, you asked two big questions. Let me deal with the elected officials sitting on the investment board first. I can tell you that this is a, a special example of what I would call the representative seat. The elected official obviously couldn't get elected and they're without being able to claim that they represent the majority of the voters of the state. I mean that's, that's a given. And so they're standing as, as claiming as being eligible for a representative seat on an investment board is unquestioned. It's unquestioned. On the other hand, states have addressed this question of the trade off between the natural turnover that happens in elected officials member continuity is one of the important things, as well as the fact that elected officials are also typically members of the pension plan itself so they have several different representative hats in different ways. On the one hand, we have Michigan and New York, where the elected treasure and comptroller respectively are the sole fiduciaries and make all final decisions so that's one extreme. On the other extreme, we have situations where the, the treasurer or the CFO of the state might be given a seat on the investment board. Particularly it's not the chair and New Mexico is an example of that for example, for instance, as is, as is Pennsylvania. And so, Oregon is an example as well. So, no, no state has staked out sort of the most common or best way I don't know what the best way is to judge this trade off between the unquestioned claim of being a representative of the statewide taxpayer population versus the question of how much independence that do do you desire. That's a that's a decision well above my pay grade. I will just say that that states have decided this in multiple ways. And I'm knowing a little bit about Vermont I suspect that you will find your own way, the Vermont way. Now, if I could, if you don't mind I, I would like to deal with the question that you raised about an investment committee that has multiple underlying fan plans, we call that the board of investment structure. And as I said earlier, it has the great advantage of putting all investment decisions with a single group of people that focus on nothing but investment decisions and I'm as I mentioned, Montana has that example. And Wisconsin has that example West Virginia, Florida, they're quite a number. And even though it's not the most common structure across the country. The, but, and I understand the worry about cross subsidization, but I think that that's a very small risk. And partly it's because cross subsidization can only occur, really on the administrative side when money is moved. From the credit of one plan to the credit of another plan, and an investment board typically doesn't do that. That's handled by the, the boards that administer the plan they are the record keepers, or who's what portion of the assets that the investment committee is managing. This plan or that plan or this tier or that tier. In some cases when individual participants have some kind of right that's that's asset tide. An example might be a hybrid plan where it's part DB part DC. However, one of the challenges and Tom's comments earlier referred to this that that are faced by multiple underlying entities is whether or not. And it's an investment challenge, not a cross subsidization challenge it's an investment challenge that do do we as as is currently done in Vermont, try to construct an asset strategy with liquidity, liquidity considerations as as Eric mentioned, that fit the some of the liability streams and liquidity demands of the underlying clients, and it's done that ways in some states. But on the other hand, if the, if the requirements of the underlying funds are wildly different. Then the question becomes should we really be thinking about different asset allocations for different plans so I'll give you an example. We, we had a client once that had a general general employees plan that was about 70% funded. And they had a judges plan that was 124%. I'm recalling these figures from memory so please don't hold me to them. And those were quite different. And why was the judges plan so overfunded. It wasn't because they were subjected to benefited from different investment decisions they did not. It was because they had a different funding mechanism a different contribution mechanism. It was funded off of court fees, and court fees were such that they exceeded the essentially what the actuary would call the actually really required rate. So we had some pretty disparate. Those were those were pretty disparate situations. And so we recommended consideration of perhaps a separate approach to the judges plan, because it makes no sense to wildly overfund a plan particularly one that was fed by fees that were not subject to being raised or lowered as contribution rates are for most public pension plans. But in order to do that, in order to do that one has to not only consider different asset allocations, but one has to structure the investment portfolio to allow what we call unitized approach and a unitized approaches. I don't take this the wrong way but it's kind of like turning it into a mutual fund in which each of the participating underlying employers own units in the fund, but they own units in different parts of the fund. So a very overfunded plan where you say we don't need to take risk. They might own more of the fixed income units and less of the equity units the risk oriented units with another plan that really needed a sustained 1020 30 year to to acquire returns. They might own more of the risk assets going forward and fewer of the of the conservative ones because they can't because conservative ones in excess would drive up the contribution rates. So I know I know I've gotten mighty technical but I did want to say that cross subsidization is probably a very very small risk, but the challenge to be pick in in this in in serving underlying funds is is real. But it's not always. It's not always the case that you should treat your underlying entities differently Montana doesn't, for example. But there are situations where this unitized structure is used in order to differentiate the underlying clients. So I know I've probably gotten way too deep in the weeds and I apologize sir but I hope that was helpful. Thank you very much. I did worry about disparate contribution rates and benefit payouts maybe I shouldn't but that's a, I latched onto that, rightly or wrongly. One other. If you will question that I'd like you to expand on, you have repeatedly emphasize continuity both on the investment strategy side, and also participation in the investment oversight body, however big or however constituted. Consequently, it probably is not and I'd like you to comment on this is probably not a good idea to essentially say so and so has a seat on the board and can appoint someone to serve in his or her stead. I'm worried I worry about the collision of G I, I, I don't want to go and do this this month or next month, or this year. And all of a sudden continuity is out the window because I can't find anybody to consistently pay attention to this. And so it seems to me, what you want is independence but you also want like a multi year commitment. You want to go beyond the learning curve, and you obviously want to, as you've already explained, avoid any potential conflicts because of either pecuniary or employment. If you will interference with your fiduciary responsibilities am I am I sort of reading that correctly. You are. Let me just say, again, it's just an opinion based on experience that nothing undermines the credibility and trust in a public state public pension plan, then, then pay to play corruption, those sorts of things. Those are things that every citizen pretty much understands quite well, and I have seen examples of this in several different states and how problematic it can be. So, there's that with respect to stand ins or I have seen both kinds of situations in the case of Pennsylvania when we worked with them some years ago. The state treasurer, and I think it's the state treasurer and maybe the several legislators that had seats on the board, we're allowed to nominate a substitute if they were unavailable, who could cast vote in there and ask questions and participate in the discussion in lieu of their attendance. So that's one extreme. And on the other extreme, when I sat on the, the essentially the peak clone of the investment committee of Oregon, the governor insisted that there would be an attendance requirement. And if you failed to attend at a given rate. He would remove you as a matter of policy. And that actually did happen if I recall correctly. So, so again, there's no one state has followed it precisely the same path. But there's two extreme examples of states that have addressed this issue of stand ins and commitment, at least to attend. So I'll stop there sir I hope that was responsive. Thank you so much. We have several committee members who have standing meetings at noon and so I think we are going to call that a wrap for this morning and I want to thank you, Jim and Eric and Tom for being with us. We are rescheduling Mr Briggs for this afternoon since we didn't get a chance to get to his, his thoughts this morning. Thank you so much for coming and sharing your perspectives with us so that we and others who are following this discussion can understand more about how the investment decisions are made for this public pension system. Very informative. Thank you all and.