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HomeMy WebLinkAbout1992-07-30 Minutes• MINUTES OF A MEETING OF THE FIRE PENSION BOARD A meeting of the Fayetteville Fire Pension and Relief Fund Board of Trustees was held on Thursday, July 30, 1992, at 11:00 a.m. in Room 362 of the City administration Building, 113 W. Mountain, Fayetteville, Arkansas. PRESENT: Firemen Marion Doss, Danny Farrar, and Pete Reagan; Retirees Richard Baird and Darrell Judy; Administrative Services Director Ben Mayes; and City Clerk Sherry Thomas. Others present: Fire Chief Mickey Jackson and Richard Yada of Merrill Lynch. ABSENT: City Manager Scott Linebaugh. CALL TO ORDER The meeting was called to order by Marion Doss. MINUTES Reagan noted that on the last page, the second paragraph of the Yada report in the April 30 meeting, the sentence which reads, H. for a total charge of $11,393.89 or 4.5% . . ." should read • "for a total charge of $11,393.89 or 1.5% . . ." Reagan, seconded by Baird, moved to approve the minutes of the April 30 meeting as corrected, and the May 28, 1992 meeting. The motion was approved by a unanimous vote. • PENSION LIST City Clerk Sherry Thomas reported that the pension checks had been mailed out for June. There were no changes on the Pension Lists for June and July. Reagan, seconded by Farrar, made a motion to approve the Pension Lists as they stand from the last meeting. The motion was approved by a unanimous vote. OLD BUSINESS ARVLE KING Reagan reported that he had in his possession a letter from Dr. McDade, Arvle King's neurosurgeon, indicating that Mr. King was scheduled for evaluation in his office on August 19, 1992. ROY SKELTON Reagan further asked whether there had been any response from Roy Skelton's evaluation with Dr. B. Dean as requested by the City. • City Clerk Sherry Thomas stated she was unaware of any letters from the City Attorney to Roy Skelton or of any response. It was her understanding that Dr. Dean had indicated he would contact Roy Skelton directly regarding an appointment. Ms. Thomas stated she would check on the status of Skelton's evaluation with Dr. Dean and report back to the board. ACT 891 Jackson asked whether any information had been received on Act 891, referred to in the minutes of the May meeting. He stated he was questioning the act which dealt with firemens' pensions. He understood this referred to House Bill 1007. Mayes reported they were awaiting information on this act and hoped to have something at the next meeting. NEW BUSINESS PENSION CHECK AUTHORIZATIONS Baird asked whether when the board does not conduct a formal meeting, in order to keep everything legal, should a majority of the members sign an authorization prior to distribution of pension checks. Mayes responded that it is common practice for the Fire Pension and Relief Fund Board not to meet on a monthly basis, and suggested the City does that which is legally obligated. Board approval is obtained after the fact at the next meeting. Mayes stated if there were a change in the Pension List, he would recommend they require the Board members to appear to sign the authorization for payment of pension checks in the months when no meeting was held. City Clerk Sherry Thomas stated the retirees have earned their pensions and have a legal right to be paid whether the Board approves them or not, which is more of a formality. Whenever a meeting is not held in a certain month, the procedure has been to approve the preceding month's pension payments at the next meeting. Ben Mayes, Director of Administrative Services, suggested that they ask City Attorney Jerry Rose for verification on the legal technicalities for this approval procedure. ACTUARY REPORT Richard Yada highlighted areas of interest contained in the actuarial report prepared by the Pension Review Board. There are enough assets in the pension fund to cover all active member contributions (6%) as well as all payments to the current retirees. He explained that the only area which the Fireman's • • • • • • July 30, 1992 Pension Fund is not actuarially sound is with actuarially calculated retirement of active members, which should be at 45% of future payments earned by active members, and currently is at 31%. Yada added that at the time of the last actuary report prepared in 1989, the Fireman's Pension Fund was at 15%. Yada further reported that payroll comes in at $585,898. Necessary employer contribution required in addition to investment income is at $195,273. The actual 1991 contributions total $312,696. Therefore, the income coming into the account more than covers what is being paid out by $117,000. The cost calculations reflect actuarially accrued liability benefits that the actuary had calculated and will be needed in the future to pay benefits. Yada reported total liability is currently $7,427,386. If the plan contained this sum, it would be considered 100% funded and actuarially sound. At the current time, the plan is $1,427,422 short of actuary soundness, and he explained this is not a problem. Turnback insurance funds of $112, back insurance totalled $109,371 to account for the retirees as shrinking amount, but currently almost equal. 743 were received. In 1991, turn- . Yada explained the law changed far as the formula. This was a under the new law, it is staying The millage in 1991 was $131,933, and net investment income was $446,372, up over 1989 and 1990. Total income was $795,000, and total expenses were $378,762. In response to Reagan's question regarding the source of administrative expenses listed, Yada stated the City submits these figures, and he was unsure exactly where they came from. Director of Administrative Services Ben Mayes responded he did not currently have the additional detail regarding the breakdown of administrative expenses; however, he would be able to provide that information at a later time. He explained that a small amount is charged for the actuary report as well as a charge for an independent audit. There were total assets of $5,189,846 contained within the account broken down over three years which have increased to approximately $5,999,964 at the end of 1991. Yada further explained investment returns of 7.9% in 1989, 6.9% in 1990, and 8% in 1991 only account for actual dollars realized and are made up of interest, dividends, profits taken, minus losses. The investment returns do not account for the increase in stock, for example, when purchased at $10 per share, and increase to $100 per share. These returns will be picked up in the next report 11/2 • • • • • .1 July 30, 1992 years from now, as was seen in 1991 with the capital gains in stocks and bonds. Baird questioned the discrepancy between $5,999,000 shown for 12/31/91 and Yada's portfolio total at that same time of $6,142,000, for a difference of $142,200. Ben Mayes explained that the state uses a cost basis for assets in their figures. Therefore, the $5,999,964 was cost or what was paid for the investments, and Yada's total reflects an "unrealized gain", for example, stocks purchased at $20, now worth $80, but not yet sold. This gain is not recognized until the stock is actually sold and the gain is taken on the books. Mayes reported that as of December 31, 1991, the plan had a total market value of $6,304,000, including Merrill Lynch's $6,142,000 plus investments held by the City in one treasury bill of $157,000, and miscellaneous cash. Therefore, the total market was $6.3 million, including appreciation in stocks and bonds not recognized in the actuary report. He went on to explain that it is typical in private industry when evaluating pension plans to use market values in lieu of cost. Mayes recalled that at the time the plan with Merrill Lynch began, there were a couple of T-bills earning very good interest rates which the board chose to hold onto instead of cashing them out. One of these treasury bills of $157,000 held by the City has not matured yet and is not being held under Merrill Lynch's management, but under that of the City. In response to Baird's question whether this $157,000 treasury bill shows up on every financial report, Mayes responded that it does appear on all financial reports for the plan as a whole prepared by the City, but not in Merrill Lynch's report. This figure is included in the 12/31/91 total of $5,999,964, the amount held by the City and invested. Mayes further explained that the $5,999,964 is the cost of every investment owned by Merrill Lynch and the City. In addition, there exists a checking account, which maintains a minimum cash balance, out of which pension checks are paid, and doesn't appear in Merrill Lynch's reports. This balance hasn't changed in three years, and was dropped from the reports. The $5,999,964 is shown on all financial statements and also on the actuary report. Mayes noted this has nothing to do with the fact that they use cost instead of market. He estimated the balance to be around $150,000. Once this treasury bill matures, the Board will make a decision where to invest. Comparisons from prior years reflect an annual payroll which peaked out in 1982 at $810,996, as a result of the last person hired prior to December 31, 1982, after which they went into the new pension plan. At the end of 1991, the annual payroll reveals $585,898. The unfunded actuary liability shows an increase as each person works another day toward retirement, having peaked in 1989 at $1,976,463, with a large decrease from 1989 through 1991. • • • July 30, 1992 Yada explained the report which reflects the 6% contribution and that the plan is 100% funded to cover all active member contributions, and payments to the current retirees is reflected at 100% funded. The current active member percentage of the fund, after the benefit increase in 1987, decreased to 15% in 1989, and was up to 31% in 1991. Actuary soundness for retirement of active members would be reached at 45%, or an additional 14%. The report shows 48% in 1981 and three benefit increases given between then and 1987 caused this value to decrease. The 45% figure at the end of 1991 increases by 5% each year, and by the end of the year 2002, this fund must reach 100%. Reagan asked Ben Mayes to verify the benefits reflected under employer contribution of 12%, as those figures appear to be in error. Ben Mayes explained the City held U.S. Treasury note has a current rate of 8.75% interest, and was purchased in September, 1988 at $157,961, matures in November 15, 1993, and at the end of 1991, had a market value of $224,634. This note will not change between now and maturity, remaining at $157,961. Mayes explained the bond has a market value at the end of December 1991 of $224,634, and face value of approximately $200,000; between now and November 15, 1993 when the bond matures, the $24,000 disappears, even with 8 3/4%. The yield to the maturity date is somewhere between 3% to 4%. He further explained that in the income portfolio situation such as this, the security is sold at a higher rate of return. INVESTMENT REPORTS Richard Yada, from Merrill Lynch, addressed the Board with the current stock portfolio recap. Roxbury portfolio began the year with $796,707, was down to $740,810 at the end of June, and currently, the market value is $776,457 He explained the growth stocks, invested by Roxbury, were up 30% last year; however, these stocks have not been kind to money managers in 1992. Even though the Dow Jones is up, Roxbury is down for the year. Roxbury is 88% invested, with 12% in cash. The realized capital gains and loss summary reflects that Roxbury has taken $52,400 profit in 1992, plus $8,000 in dividends and interest. The actuary was calculated on Roxbury for 1992 with a realized gain of approximately $62,000, or over 8% return. New Mexico Capital Management portfolio began the year with $2,523,916. At the end of June it showed a value $2,579,402, and on this date, the portfolio value is at $2,648,982. The New Mexico Capital Management portfolio is made up of 55% stocks. The income account shows $63,333.71 since the first of 1992; with profits • taken of about $46,000 with nothing sold or purchased in the month of June. • • • • July 30, 1992 Yada next gave a recap of the three portfolios plus an index comparison. Through the end of June, treasury bills were up 2.10%; Dow Jones industrial average with the reinvested dividends were up 6.19%; S&P 500 was down .75% He explained that the Dow Jones industrial average was made up of 30 stocks (market companies), and the S&P 500 is a closer indication of what the market is doing. Long term treasuries were up .20%, and high grade corporate bonds were up 3%. The consumer price index (measure of inflation) through May was up 1.31% at 2% above the rate of inflation. The balanced account in both stocks and bonds of New Mexico Capital was up 1.67%, representing a fair average. Roxbury Capital was down 7.02% compared to up over 30% in 1991. Growth stocks are giving some back this year, and they remain down from the market average. The income account was up 3.44% and appears to be an excellent manager. The checking account has kept a minimum with withdrawals sent back to the checking account to supplement dividend contributions. A market value as of the end of June showed $2,859,000, minus accrued interest or $2,833,123, and began the year at $2,821,624, minus withdrawals of $84,000, for an investment base of $2,737,624. As of this date, the market value was $2,872,829. The income account generated $99,299.76 in dividends and interest through the end of June. Profits were taken in 1992 of approximately $2,500 with very little sold. Not recognized in the statement is MCI Communications that was sold at $43,745.95 and had a cost of $38,254.85 for a gain of $5,500. Richard Yada pointed out a government security with a $15 value and matures May 15, 1996. The market value is Between now and May 15, 1996, the $745 will disappear, have a yield at maturity of a little less than 4%. If a investment comes along that pays more than 4%, they will treasury, capture the profit, and immediately put the work. 1000 face $15,745. and will suitable sell the money to In response to Baird's question why if a bond is worth so much, do you end up losing so much, Yada stated that is what someone is willing to pay right now. The reason for the $745 loss is that the going interest rate for a 4 year treasury is currently 4%, and the interest is received yearly at 7.375% on $15,000, or approximately $1,100 per year. Before selling a treasury bond, Yada explained they look for something of equal rating with a little longer maturity for a higher return. Those treasury bonds issued after 1985 can be called 5 years earlier than maturity date; however, corporate bonds have a set call date. They may also look for bonds close to call date paying a high coupon paying 8 to 9%, and take a profit before it is called. Yada addressed a Security Pacific bond with a locked in rate of 9.75%, purchased 1k years ago at $48,705, and matures on May 15, 1999 with a yield at 10%. Security Pacific merged with the Bank of America, who if loaded with money, will request that the 9.75% bonds be called, and could be bought back at • • • July 30, 1992 $51,000. Closer to the maturity date, the $55,286 begins to decrease, and when this happens, they will sell and reinvest. Occidental Petroleum shows them paying 5.10% yield based on the current price and dividend, but they paid a lot more for it; therefore, the actual rate of return is about 3%. Yada explained that when they changed over to New Mexico and Roxbury, the board requested the security not be sold since the majority owner of the company, Arman Hammer, who was close to his demise. The upcoming management change was anticipated to make the value of the stock increase. They are currently in the midst of restructuring, and this stock will increase with oil and gas prices. Sale of this stock would produce a $59,000 loss, which would knock the actuary down one percentage point. In conclusion, Richard Yada stated that the actuary looked good and the portfolios are doing really well. He reported nothing has changed with the sale of New Mexico Capital Management to John Hancock, and the same people are managing the company. BOARD LIABILITY Baird posed the question of what the liability of the board members is to the Fire Pension and Relief Fund Board. Is it necessary to have bonds or insurance? Have there been boards sued for mismanagement? He expressed his concern that managing $6 to $7 million is no joke, and a lot of people will be depending on this fund for a long time. Yada stated the board looked at an insurance policy about 4 years ago. Since this type of insurance is extremely expensive, and it was decided not to be feasible as long as they act as a board, and everything is done by majority vote rules. He further reported that Arvest would soon be conducting a seminar in Rogers or Bentonville dealing with pension funds and liabilities, and suggested that this could be helpful. Doss stated that since the board is nominated and elected by the members, liability is shared among all members of the fund. Yada stated each board member is a fiduciary to the plan, and entrusted by the members to act in a prudent manner in all regards concerning a pension plan. If the board instructed that an investment be made without study and the proper back-up, they could be sued. Baird reported a case where a board was sued and each member had to hire their own attorney to defend the case. Even though the case was settled, the members still owed thousands of dollars. He stated that he does not wish to be put in that position. • • • • July 30, 1992 Reagan responded that it would depend on the nature of the suit, but if you were sued individually, each member has their own attorney. If a case is won, the fees can be recovered. City Clerk Sherry Thomas stated the City used to carry public official liability insurance which covered various boards and their members. It was suggested that they consult with City Attorney Jerry Rose on this issue and ask for his opinion and advice. ADJOURNMENT The meeting was adjourned at 12:16 p.m.