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HomeMy WebLinkAbout1993-07-29 - Agendas - Final• • AGENDA FIREMEN'S PENSION AND RELIEF BOARD July 29, 1993 11:00 a.m. City Hall Room 326 1. Approval of the minutes of the June 29, 1993 meeting 2. Approval of the Pension List for August, 1993 3. Old Business 4. New Business A. Financial Statement for period ending Dec. 31, 1992 B. Other 5. Adjournment • • • MINUTES OF A MEETING OF THE FIRE PENSION BOARD A meeting of the Fayetteville Firemen's Pension and Relief Board was held on Tuesday, June 29, 1993, at 10:00 a.m. in Room 326 of the City Administration Building, 113 W. Mountain, Fayetteville, Arkansas. PRESENT: Marion Doss, Pete Reagan, Ron Wood, Retiree Darrell Judy, Mayor Fred Hanna, City Clerk Sherry Thomas, City Treasurer Glyndon Bunton, LaGayle McCarty, Assistant City Attorney, and Martha Lindsey, Finance Department. ABSENT: Retiree Richard Baird CALL TO ORDER Mayor Hanna called the meeting to order. MINUTES Reagan, seconded by Judy, made a motion to approve the minutes of the June 3, 1993 meeting. The motion was approved unanimously. PENSION LIST Reagan, seconded by Doss, made a motion to approve the pension list for July. There were no changes in the pension list. The motion was approved unanimously. OLD BUSINESS NEW LEGISLATION REPORT Reagan asked to comply with Act 1197 of 1993 does the fund have to be actuarially sound to increase the minimum benefit. McCarty stated that it does not have to be. The act merely increases the minimum amount for both volunteer and full time retirees with all other regulations staying the same. Reagan asked regarding the Drop Plan, if a firefighter has in 20 years of service and opts for this plan, 1/2 of his salary goes into the trust fund, does the city's share continue to be paid? McCarty stated that it would continue to be paid. Reagan asked Mayor Hanna if the City would continue to pay 12% or would they pay only 6%. Mayor Hanna stated he did not know, but suggested Reagan get with Ben Mayes and/or Personnel Director Don Bailey to determine this answer. Reagan stated the Fire Pension Board needs to meet on this Drop Plan and decide if Fayetteville will participate in this plan and if so, guidelines for participation need to be established. He suggested a workshop be set up to discuss this plan. Doss stated the should also be person chooses goes to a trust level and not McCarty stated passed. June 29, 1993 long range effects on the pension fund of this plan considered. He asked if after working 20 years, a to participate in this plan and 50% of his salary fund, will his retirement benefit be frozen at that take into consideration future pay increases. that issue was not addressed in the act that was Mayor Hanna stated he would ask Ben Mayes to research this it can be discussed further at the next pension meeting. RICHARD BAIRD act so Darrell Judy stated he had contacted Richard Baird, and Baird wants to continue to be a member of the Board. He would like for Howard Boudrey to fill in for him until he is able to attend the meetings himself. GARY SPRINGSTON TERMINATION Reagan asked if Gary Springston withdrew his pension contributions from the fund. Thomas stated Springston did withdraw. She prepared a check request withdrawing the pension in the amount of $14,980.60 which is the total of his contributions during the time he was a firefighter. NEW BUSINESS ROXBURY INVESTMENT REPORT Richard Yada and Curtis Williams of Merrill Lynch were both present, and they introduced Katie Hayden who is with Roxbury Investments and was present to give a report on the Roxbury portfolio. Ms. Hayden gave the pension board a brief history of the company which was founded in 1986 but was founded by Tony Browne and Harry Wilson, both of whom have many years' experience in the investment business. The company manages $1.2 billion, has 7 institutional clients and 119 individual clients. There are 22 employees and 5 owners. Ms. Hayden stated Roxbury buys stocks that are selling below the worth of the company. Roxbury combines both growth and value in the same portfolio. They look to invest in companies that maintain a constant earning stability and return money in the form of dividends. Roxbury invests in basically 50 stocks, and they do research and personally visit each of the 50 companies in which they invest. She stated the portfolio consists of between 30-60% blue chip stocks, 20-40% small to medium stocks, and about 20% in specialized stocks. • • • June 29, 1993 Ms. Hayden stated Roxbury does have a sell discipline that when prices decline 15% from their high or cost, they look to see if the stock should be sold. In the last 10 years, compared with 31 other managers, Roxbury has been in the top 10% of the managers. They have outperformed their peers since 1983 by 5.7%. Roxbury has reworked the client portfolios to try and do the best in today's economy. Roxbury is seeking to invest in the types of securities that are not sensitive to interest rate changes. They do feel interest rates will remain low for some time to come. Reagan stated for the past 1 and 1/2 years, the pension fund portfolio has been down compared to the rest of the market. He asked for an explanation of this from Ms. Hayden. Ms. Hayden stated when Roxbury started with the account in 1990, the market was down. In 1991, the market was up, and they earned about 42% interest. Roxbury realized the portfolio needed to be changed to deal with the recession because the companies that had been performing well would not continue to do so. Since Roxbury has had the account, the pension fund has had about an 11.7% return. She stated January and February were terrible, but they have had a good month and expect to have good quarter. The market is up about 3.5% year to date, and the portfolio is up about 1%. Reagan stated he was concerned about the length of time it was taking to reposition the portfolio. Ms. Hayden stated Roxbury buys stocks in blocks, and if they sold huge blocks of stock at one time, it could drive down the value of the stock. So, they slowly reposition the stocks to keep from losing value. Reagan asked what percentage of growth they are aiming at for 1993. Ms. Hayden stated she does not know because of all of the uncertainty in the market and economy. They hope to have a growth rate between 15 and 18%. Richard Yada stated Wal Mart was down 20% since January, which indicates growth is down in the majority of areas of the stock market. Ms. Hayden stated retailers are hurting right now. She feels the pension fund portfolio is about 92% restructured. Yada stated as of yesterday, the fund was actually up for the year. Curtis Williams asked if Roxbury does economic Ms. Hayden said they did do some forecasting. certain stock selection which leads them into forecasting. Roxbury studies a industry study of June 29, 1993 that particular sector. She stated Roxbury's long term record has been better than the market. Since inception of the account with Roxbury, which was March 31, 1990, the pension fund has had an 11.3% annualized average rate of return. Williams explained that an ADR, or an American Depository Receipt, was a foreign based company that is listed on the American stock exchange. An example of this is Nestle's, which is a Swiss company. At Merrill Lynch, they are trying to get the portfolio at 20% in foreign stocks. The United States now only consists of about 35% of the world economy as opposed to the 65% that we used to represent. Glyndon Bunton asked with the small to medium sized stock companies, when does Roxbury expect to see gains. Ms. Hayden stated the fear of inflation has caused these stocks to decline. One of these companies, Alza Corporation, as of yesterday, only had a relatively small loss. They are a drug delivery system company, and they should be able to do ok in the market. ADJOURNMENT • The meeting adjourned at 11:10 a.m. • ! • • fiICIE f Cr JS um =SEIN1fS, I11C. MES ES • I IES • fll>I YSE June 10, 1993 Arkansas Fire and Police Pension Review Board 124 W. Capitol, Suite 940 Little Rock, AR 72201 RE: Administration of DROP option Ladies and Gentlemen: 1300 Tower suk ing ,111&Canter Stews Uthe Rods, Mcnn 72201 301/3764043 During the April 6, 1993 meeting of the Pension Review Board our firm was asked to prepare information concerning the Deferred Retirement Option Program (DROP). This information was intended to be sent to the plans in the form of a memo. The last two months we have received several calls with questions concerning the DROP. Many calls were also taken by the staff. It became • clear to our office in consultation with the staff that more regulatory power than just a memorandum to the plans was needed. Therefore, we have compiled the information as requested and would like to request that the Pension Review Board consider mak- ing this a Board Rule. If you would vote to begin the process today, there would be time to make the proper notifications and hear comments at the scheduled July 14, 1993. This would allow this Board Rule to be in effect by August 13, 1993 which is the effective date of the laws governing the DROP. We appreciate your consideration of this matter. We will be happy to discuss your questions and comments about the proposed Board Rule that is attached • Sincerely, Jody Carreiro, A.S.A. Associate Actuary 1 1 • • • ARKANSAS FIRE AND POLICE PENSION REVIEW BOARD BOARD RULE !f 10 • • This Board Rule is promulgated by the Arkansas Fire and Police Pension Review Board by the authority of Arkansas Code Annotated 524-11-203. This Board Rule will be effective on August 13, 1993. This Board Rule is not intended to conflict with any part of A.C.A. S24-11-101 et. seq. The purpose of this Board Rule is to describe the administration of the Deferred Retirement Option Plan (DROP). Q.1. What is the DROP program? A.1. In 1993, the Arkansas Legislature passed two laws which establish a "Deferred Retirement Option Program" (DROP) for paid firefighters and for police officers. Act 757 of 1993 established the plan for police officers and Act 1004 of 1993 did the same for paid firefighters. Both of these Acts will be effective on August 13, 1993. The DROP is a retirement option that may be elected by a member of one of these plans. This option, if elected by the member, allows them to "drop" their retirement bene- fit into a DROP account and accumulate a lump sum. The member may continue to work up to five years while the DROP account accumulates. Q.2. If a local fire or police pension board wishes to start a DROP program, what must be done? A.2. Both Act 757 and Act 1004 make the DROP a local option. If the local pension board wishes to make it available to its members, the board must vote to do so. A sample board resolution is Attachment 1 to this Board Rule. If a local board does elect to make the DROP an option, a copy of the board resolution must be filed with the Arkansas Fire and Police Pension Review Board. June 10, 1993 Draft • • 1 The local fire or police pension fund in my city has con- solidated with LOPBI for administrative purposes. How can we start the DROP program? A.3. JRESERVED1 Q.4. When can an individual member of the plan elect the DROP? A.4. The DROP is a retirement option and can be elected when a member is eligible for retirement; that is, anytime after attaining 20 years of service. Q.S. How does the individual elect to begin the DROP? A.5. Attachment 2 of this Board Rule is an election form for the member. This form would have to be filled out prior to the member beginning the DROP. When an individual elects the DROP they have agreed to two important items: First, they have fixed their retirement benefit at the amount they would receive if they retired normally at this time. The retirement benefit will NOT change during the DROP period and will NOT change when the member actually quits the department. In other words, when you go on DROP, the monthly retirement you draw will be fixed at that time and will never change, even when they actually retire. The member's benefit will NOT increase because of increased pay. The benefit will NOT increase because of the extra service. - Second, they have agreed that they of the department for a period not Note that a person is not required DROP is just an extra option for a will be in the employ to exceed 5 years. to go on DROP. The member. Q.6. What is the amount of DROP payments? A.6. A member's DROP account will be credited monthly for the amount of the retirement benefit at the time the DROP is elected. For example, an officer whose final salary is $3,000 per month with exactly 20 years of service, who is a member of a standard police pension plan, would have • June 10, 1993 Draft • • • r 50% or $1,500 per month credited to his DROP account. This member would begin receiving this same $1,500 per month at the end of the DROP period. Q.7. What if aur pension plan receives a benefit increase dur- ing the DROP period? A.7. There is an exception in the laws that would apply if the entire plan increased benefits under the usual procedure when the Pension Review Board approves the increase. For example, if the pension plan in the above Q&A received approval for a benefit increase to a base benefit of 60% of salary, the DROP payment would increase to 60% of $3,000 or $1,800 per month. This member would begin receiving this same $1,800 per month at the end of the DROP period. Q.B. Would the member continue making contributions while on DROP? A.B. The member would continue making contributions to the • plan (not to the DROP account) while they are on DROP. That is, 6% of current salary (4% of current salary for policemen participating in Social Security). Q.9. Besides the normal retirement benefit, what goes into the DROP account? A.9. One half of the employer matching contributions go into the DROP account. That is, 3% of current salary (except for police funds participating in Social Security, which would be 2%). The account is also credited with interest once a year. Q.10. Can you give an example of how the DROP account accumu- lates? A.10. Let's use the example of the police officer with exactly 20 years of service. The pension plan is standard, that is, 50% of final salary. They do not participate in Social Security. The officer's final salary is $3,000 June 10, 1993 Draft • 4 • • • • • per month. For this example, assume the salary does not change during the DROP period. He remains on DROP for 3 years (i.e., 36 months). Monthly DROP amount=50% of $3,000 = $1,500 per month 1/2 city match = 3% of $3,000 = $90 per month DROP payments=36 X $1,500 $ 54,000 City Match=36 X $90 3,240 Interest 2.324 DROP account at end of 36 months $ 59,564 Q.11. Rom is the interest that is credited to the DROP account calculated? A.11. The Acts which established the DROP accounts specify that interest will be credited annually. The law does not specify the way to credit this interest. There are 3 methods of crediting interest to the DROP accounts that will be considered acceptable. Of these three, Method 1 is preferred. Method 1 One year's interest is credited to the begin- ning of the year's balance in the DROP. No interest is credited to the activity during the year. No interest will be credited for the year the DROP account is dis- tributed. Method 2 One year's interest is credited to the begin- ning of the year's balance in the DROP. One half year's interest is credited to the sum of all activity in the DROP regardless of date of activity. No interest will be credited for the year the DROP account is distributed. Method 3 One year's interest is credited to the begin- ning of the year's balance in the DROP. All activity in the DROP account is weighted according to the date of activity. This weighting may be based on months or days. This weighted activity would then receive one year's interest. No interest will be credited for the year the DROP account is distributed. Q.12. Can you give an example of each method of crediting interest? June 10, 1993 Draft • • • • A.12. ¥ethod & Assume the following facts. • • • December 31, 1993 DROP balance 94 DROP payments 12 X $1,350 94 City match 12 X $81 Interest rate The interest credited for 1994 is gethod 2 Assume the following facts. December 31, 1993 DROP balance 94 DROP payments 12 X $1,275 94 City match 12 X $76.50 Interest rate The interest credited for 1994 Beginning of year balance 1/2 DROP payments 1/2 City match Investment Base times interest rate 1994 DROP interest is Method 3 Assume the following facts. DROP elected September 1, 1993 City match payments Interest rate The interest credited for 9/1/93 payments=$1,272 X 10/1/93 payments=$1,272 X 11/1/93 payments=$1,272 X 12/1/93 payments=$1,272 X Investment Base times interest rate 1993 DROP interest 1993 is 4/12 3/12 2/12 1/12 $ 10,000 16,200 972 7% $ 10,000 X 7% $ 700 $ 8,000 15,300 918 6.5% $ 8,000 + 7,650 + 459 16,109 X 6.5% $ 1,047 $ 1,200/mo. 72/mo. 6% $ 424 + 318 + 212 + 106 1,060 X 6t $ 63.60 Q.13. How is the interest rate certified by the actuary? A.13. The Pension Review Board will communicate the necessary information from the annual reports that are submitted to it to the actuary for the Pension Review Board. The June 10, 1993 Draft • • • • • actuary will then from time to time issue a list of local plans which have elected participation in the DROP and the certified interest rate for the DROP. The interest rate used in the actuarial valuations as of December 31, 1991 was 6%. Therefore, this would be the minimum rate of interest credited to the DROP accounts at that time. This rate of interest may be changed from time to time. • Q.14. Does the plan have to maintain separate and/or distinct assets for the DROP accounts? A.14. No. The assets of the members' DROP accounts are com- mingled with the other pension assets. The DROP accounts are simply liabilities of the plan, and are accounted for separately. DROP accounts are bookkeeping items and should not affect the investment of the pension fund. Q.15. Where is the DROP account administered? A.15. The DROP accounts remain part of the local pension fund during the DROP period. The amount of each DROP account is calculated separately for each member who has elected the DROP. Q.16. What is the duration of the DROP? A.16. A member's DROP will continue for 5 years or until termi- nation of employment, whichever is first. Q.17. What happens at the end of 5 years? A.17. At the end of 5 years (or termination of employment if earlier) the member's DROP account is distributed. The member may receive the DROP account in a lump sum or as a monthly annuity payable for the -life of the member. The June 10, 1993 Draft • • member would also begin to receive the same monthly retirement amount that had been going into the DROP account. • The member has. also agreed to terminate his employment with the department at this time. Q.18. What happens if the individual dies during the DROP period? A.18. One section of the member DROP election form allows the member to name a beneficiary. If a member dies during the DROP period, the named beneficiary would receive the balance of the DROP account in a lump sum payment. The member's widow (if there is one) would begin to receive the normal widow's benefit based on the benefit at the time the DROP was elected. Q.19. What happens if the individual leaves the department dur- ing the DROP period? A.19. A member who leaves the department after electing the DROP option but before the five years have expired would begin receiving the same monthly retirement amount that had been going into the DROP account. They would also receive the DROP account either as a lump sum or as an annuity as discussed in Q&A.17. Q.20. What happens if an individual is disabled during the DROP period? A.20. A member is considered to have retired at the time that they elected the DROP option. If a member is disabled during the DROP period, they are treated as if they left the department. The same procedure is followed as dis- cussed in Q&A.19. Q.21. How is the DROP account converted to an annuity at the end of the DROP period? June 10, 1993 Draft • • • Mm - A.21. The final DROP account can be converted to a monthly annuity amount at the option of the member. If this is done, the monthly amount must be calculated by using the factors that are Attachment 3 to this Board Rule. The factors are for a monthly benefit for the life of the member only. The factors are based on the member's age on their nearest birthday at the date of the conversion. (The age nearest birthday means that if the person is closer to age 55 then age 56, use age 55. If they are closer to age 57 then to age 56, use 57.) After the DROP account is converted to an annuity, there is no longer any need to track the DROP account separately. There is also included on Attachment 3 factors to convert the DROP account to monthly payments for a certain number of months. This type of annuity would be paid whether or not the member lived for the number of months selected. Q.22. Can you give an example of converting to an annuity? A.22. We are given the following situation. DROP elected September 1, 1993 DROP payments (based on $3,000/mo pay) Police plan participating in Soc. Sec. 93 City match payments ($3,000/mo pay) 94 City match payments ($3,040/mo pay) 95 City match payments ($3,162/mo pay) 96 City match payments ($3,288/mo pay) 97 City match payments ($3,420/mo pay) 98 City match payments ($3,556/mo pay) Interest rate all years (Method 1) DROP account balance 12/31/93 DROP account balance 12/31/94 DROP account balance 12/31/95 DROP account balance 12/31/96 DROP account balance 12/31/97 DROP account balance 8/31/98 Final Age nearest birthday of 55 on 8/31/98 DROP converted to monthly benefit Retirement benefit Total monthly income beginning 9/1/98 NOTE: If this member had NOT gone on the DROP, his retirement benefit on 9/1/98 would be based on $3,556 per month pay and would be: $ 1,500.00/mo. 240.00 729.60 758.88 789.12 820.80 568.96 6% $ 6,240.00 25,344.00 45,623.52 67,150.05 89,999.85 102,568.81 X 0.0070869 726.90/mo. 1.500.00/mo. $ 2,226.90/mo. $ 1,878.00/mo. June 10, 1993 Draft • Q.23. What would be paid when the member in the above example dies (after 9/1/98)? • A.23. The $726.90 increment from the DROP stops. If the retiree had an'eligible spouse she would receive $1,500 per month. Q.24. Does the plan have to purchase an annuity from an Insur- ance Company at the end of the DROP period? A.24. No, the DROP account is converted to a monthly benefit and the separate DROP accounting is no longer necessary. The money leaves the plan as the calculated monthly increments are paid to the retired member. Q.25. What is the retirement benefit at the end of the DROP period? A.25. The monthly benefit that will be received by the member after the DROP period is the retirement benefit as calcu- lated at the date the member began his DROP. The monthly benefit does NOT change after the DROP period. This same monthly amount is now paid to the individual instead of into the DROP account. The retirement benefit at the end of the DROP - Does NOT change with increases in salary during the DROP period; - Does NOT change with extra service during the DROP period; - Is the SAME amount as was being credited to the DROP account. Q.26. Why is the service or salary increases after the DROP period begins not used in calculating the benefit after the DROP period? A.26. Item (e)(1) of Section 1 of both Acts clearly states that "The member's monthly retirement benefit shall not change, unless the plan receives a benefit increase." This item is important to the law since local plans could not afford the cost of the DROP program otherwise. The DROP is an additional retirement option. Once the DROP June 10, 1993 Draft • • • • is elected, it cannot be changed. A pension plan cannot afford to allow someone to change retirement options after they have retired. • If a member believes that it is not to his advantage to go on DROP because he may get more benefit from future pay raises and service, then he does not have to elect to go on DROP. Q.27. What antra reporting will be required to be made to the Arkansas Fire and Police Pension Review Board? A.27. The financial and member information required to be reported annually would be supplemented by a detailed listing of each member on DROP and the amount of their DROP account as of the end of the current reporting period. The Pension Review Board has the right to request additional information concerning the calculation of the DROP account. June 10, 1993 Draft • • • Attachment 1 RESOLUTION TO ELECT PARTICIPATION IN THE ARKANSAS FIREFIGHTERS DEFERRED RETIREMENT OPTION PROGRAM Whereas, Act 1004 of 1993 established the Arkansas Firefighters Deferred Retirement Option Program pursuant to the approval of the local pension board; Whereas, this local pension board believes that it is to the advantage of the members of this pension plan and of benefit to our municipality for this option to be made available to our members; It is therefore resolved, that the Board of Trustees of the City of Police Pension and Relief Fund approves and elects that this plan have the Deferred Retirement Option described in Act 1004 of 1993 available to its members. The Board of Trustees, in electing to participate in this plan, agree to abide by the followings 1. The Deferred Retirement Option Program (DROP) will be made available to all members of the plan who are eligible. 2. The DROP account will be maintained as a part of the total pension fund. 3. The DROP accounts will be administered accord- ing to Arkansas Fire and Police Pension Review Board Rule 110. 4. Once the DROP account is elected, a member's monthly retirement cannot increase due to pay raises or extra years of service worked. That is, the monthly payments made to the member at the end of the DROP period will be the same as the amount of monthly payment into the DROP account. 5. A copy of this signed resolution will be filed with the Arkansas Fire and Police Pension Review Board. June 10, 1993 Draft + r' • • Attachment 1 (continued) This election may be effective on the date of resolution, but no earlier than August 13, 1993. DATE Chairman Secretary/Treasurer Member Member Member Member Member June 10, 1993 Draft • • Attachment 2 Arkansas Fire and Police Local Plans Deferred Retirement Option Plan (DROP) Member Election Form I hereby elect the DROP as my retirement benefit option from the Pension Plan in place of the normal retirement benefit. I under- stand that in electing the DROP I have agreed to the following statement: 1. The amount of the DROP payments will be $ per month. This amount is the same as if I retired today. 2. I understand that the monthly benefit that I will receive at the end of the DROP period is the exact same amount stated in item 1, regardless of any pay raises I receive or extra years of service I may work. 3. I understand that at the end of the DROP period I will • have the option to receive the DROP account as a lump sum or convert the DROP account to a monthly annuity amount. 4. I understand that the DROP account will remain in the pension fund until I leave the department. I do not have the ability to withdraw from the DROP account until the time of my departure. 5. I am agreeing that if I am still employed with the department at the end of 5 years that I will resign at that time. 6. I understand that neither the pension fund or the depart- ment has given any tax advice concerning the way the DROP account is taxed. I have or will consult my own tax advisor for this information. I have elected this option to commence Date Member signature Date Plan Representative June 10, 1993 Draft • 1 • • • • • Attachment 2 (continued) Arkansas Fire and Police Local Plans Deferred Retirement Option Plan (DROP) Member Election Form DESIGNATION OF BENEFICIARY I hereby designate the following beneficiary to receive any bene- fits from the DROP plan if I die prior to my termination of employment: Signature of Member Date Please select one of the following: _ I certify that to the best of my knowledge, the above named Member is single or that his spouse cannot be located. Signature of Plan Representative Date or Notary I certify that I have agreed with my spouse on the selection of the above beneficiary or benefibiaries. I understand that if I am not the named beneficiary, I will not be entitled to benefits under the Plan. Signature of Spouse Date I certify that I have witnessed the spouse's signature above. Signature of Plan Representative Date or Notary June 10, 1993 Draft • • Attachment 3 • • Factors Arkansas Fire and Police Local Plans Deferred Retirement Option Program (DROP) for converting the DROP account to a monthly annuity Factors for converting to a monthly annuity payable for the life of the member only. Age nearest Bithday at End of DROP 46 47 48 49 50 51 52 53 54 55 56 57 58 Multiply DROP account by this factor 0.0061608 0.0062362 O .0063263 O .0064190 O .0065144 0.0066128 O .0067141 0.0068339 0.0069581 0.0070869 0.0072205 0.0073593 0.0075250 Age nearest Bithday at End of DROP 59 60 61 62 63 64 65 66 67 68 69 70 Multiply DROP account Dv this factor O 0076984 O .0078800 O .0080704 0.0082702 O .0084996 O .0087420 O .0089987 0.0092709 0.0095602 0.0098656 O .0101912 O .0105390 Factors for converting to a monthly annuity pa number of months listed whether or not the mem Number of Monthg 60 72 84 96 108 120 132 144 156 168 180 192 204 Multiply DROP account by this factor 0.0191657 O .0164180 0.0144621 0.0130009 0.0118695 O .0109690 O .0102364 O .0096296 O .0091196 O .0086856 O .0083125 O .0079887 O .0077055 Number of Months 216 228 240 252 264 276 288 300 312 324 336 348 360 yable for the ber is alive. Multiply DROP account by this factor O .0074562 O .0072353 O .0070387 O .0068627 O .0067045 O .0065618 O .0064327 0.0063155 0.0062087 0.0061112 0.0060221 O .0059403 0.0058652 June 10, 1993 Draft 1 1 1 1 1 1 i• 1 1 1 1 1 1 1• 1 1 FAYETTPP QUARTERLY REPORT June 30, 1993 CITY OF FAYETTEVILLE FIRE PENSION AND RELIEF FUND 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 NM Capital Management, Inc. Quarterly Investment Comment Second Quarter 1993 SECOND QUARTER MARKET REVIEW Sluggish economic growth, concerns about tax mcreases and healthcare reform had a moderating effect on the financial markets during the second quarter. The S&P 500 was essentially flat with a three-month return of 0 4% Broad government/ corporate bond indices outperformed stocks for the quarter with returns of approximately 2.2% to 3.0% stemming from a decline in interest rates in June. For the first half of 1993, bonds outperformed stocks. Bonds returned 6%-8% while the S&P 500 returned 4.7% for the six months. Bond indices and the S&P 500 have provided excellent double digit returns (approximately 10.5%-13.5%) over the last year. Stocks reached their highs in March and again in June while bonds prices peaked on June 30 with the lowest yields in twenty years. NMCM's "value" style of investing has continued to be rewarding during the second quarter. Our stock returns generally have outperformed the market over the last three months, six months and twelve months. The favorable performance versus the S&P 500 over the last twelve months is striking and likely unsustainable. However, our value -oriented stock selection process should continue to produce rewarding long-term returns. ECONOMIC AND INVESTMENT OUTLOOK After what was perceived as decent economic growth for the first quarter of this year, Gross Domestic Product (GDP) was revised down in May to a disappointing 0.9%. Economic signals have been mixed, resulting in periods of encouragement over the strength followed by disappointment over the apparent weakness Swings in inflation expectations and interest rates have created a trading range environment in the financial markets this quarter. Despite the plethora of economic statistics, it appears that the recovery is still on track and will continue to grow with low inflation in the months ahead. The apparent slow growth has been influenced by a significant long-term reduction in defense spending. During the first quarter of 1993, defense spending fell dramatically. Excluding defense, GDP was up 2.6% during the first quarter. Growing imports, also a drag on GDP, reflect the economic weakness in key U.S. trading partners -- Japan, Canada and Europe. As foreign economies turn around, U.S. and worldwide economic growth will improve. Recent economic weakness, as reflected in the drop in consumer confidence in June, weak June employment growth, a decline in the May leading indicators, plus a favorable inflation report in May contributed to an abrupt decline in interest rates in June. The diminishing inflation fears (which may be temporary) reduced concerns that the Fed might increase short term rates. Despite the slow economy and low inflation, real corporate profits have generally been strong, reflecting substantial productivity growth. Corporate restructuring, which began in earnest in the manufacturing sector in the mid-1980s and more recently the service 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 sector, is now producing good earnings increases even in an environment of slow volume growth and intense price competition. The economic environment of low interest rates with improving corporate profits is favorable for stocks. In addition, a continued heavy flow of funds from maturing CDs and called bonds, resulting in a shift of money market funds into stock and bond mutual funds, provides a source of buying power that can drive the markets higher. Another positive is the potential for increased investment from abroad based on expectations of continued recovery, stable U S. interest rates and a stronger dollar. Also positive is the prospect of many companies buying back their own stock as excess cash builds from improving sales and several years of cost cutting and debt reduction. Although the present environment looks favorable, tax increases, healthcare reform costs, re -regulation and trade problems remain a concern. EQUITY STRATEGY While we favor stocks over bonds and cash in the present environment, our equity strategy is not dnven by top-down econonuc forecasts. After a disciplined analysis of individual company operations and balance sheet fundamentals, we invest in stocks which are good long-term values. Equity Focus Comment Nature's way is simple and easy, but men prefer the complex and artificial. - Lao Tsu This observation of human nature, first written down in the third century B C in the valleys of Northern China, provides a bit of insight into what otherwise remains an incomprehensible mystery. Highly complex, quantitative, "black box" investment strategies continue to proliferate. Some investment firms have even gone so far as to rename portfolio managers "portfolio engineers" and require these individuals to be highly trained in the most advanced fields of mathematics and analytics. This trend continues despite its tremendous cost, complexity and the mounting body of both objective and anecdotal evidence that most of these models just don't work. At NMCM, we believe that investment wisdom resides in simplicity. We accept the obvious and inevitable fact that we simply don't know what is going to happen tomorrow. All the esoteric quantification in the world is very unlikely to improve this lack of prognosticative ability very much, if at all. Neither we nor anyone else knows what is going to happen, never mind how all of these combined "happenings" are going to change the price of one individual stock or group of stocks. We accept this a priori circumstance calmly and construct our strategic response to this age old investor's dilemma at the simplest as opposed to the most complex level One result of this is our emphasis upon the disarmingly simple yet powerful price to book value ratio (P/BV). It has been observed that portfolios comprised of low P/BV stocks have tended to persist in outperforming the stock averages over time. Yet, very few professionally -managed equity portfolios have a P/BV lower than the market average! With the S&P trading at 3 times BV versus a fifty year, year-end mean of 1.7 times, portfolios invested in stocks with P/BVs equal to or above the market should probably be viewed with alarm. While nothing is ever absolute or guaranteed, the financial markets have rather consistently demonstrated a propensity to repeat themselves, especially when answering one extreme level of valuation with an equally extreme correction. We have no idea when and why such a corrective reaction may or may 1 1 1 1 1 1 IS 1 1 1 1 1 • 1 not occur. However, having observed that one is far less likely to sustain a serious injury when falling from a low footstool than when falling from the top of a very high ladder, we do take comfort in the relatively more conservative valuation of our equity portfolios which currently have a P/BV of around 1.6 times. Over the last few months, we have progressively tightened our valuation discipline, selling issues which appeared fully valued and consolidating our base in clearly undervalued securities with well established "margins of safety" and the potential to eventually return to investment "favor" at a value well above the current price. Simple? Certainly the purveyors of complex quantitative forecasting models probably think so. It brings to mind a favorite, amusing anecdote about the fate of the world's "smartest man". Having argued to his satisfaction that his superior brain should be saved for posterity, he grabbed one of two remaining parachutes on a crashing plane and jumped to safety, leaving behind a priest and a hippie to determine which one of them should be given the one remaining chute. Following a moment of silent contemplation of their unfortunate predicament, the hippie laughed out loud and turning to the priest said: "No sweat, padre, the world's "smartest man" just jumped out with my knapsack? FIXED INCOME STRATEGY Renewed signs during June that the economy was sluggish and that inflation was still very modest pushed Treasury bond prices higher and yields down to lows not seen for twenty years. The benchmark 30 -year bond ended June yielding 6.7%, down from 6.9% at the end of March and 7.4%. six months ago Shorter maturities, such as the 5 -year Treasury, also finished the second quarter at a low of 5.0% compared to 5.2% on March 30 and 6.0% on January 1. During the three months ended June, the yield curve flattened slightly as long maturity bond yields declined and short-term bond yields rose. This minor flattening of the yield curve was expected in light of the abnormal disparity between long and short rates that existed earlier this year. With interest rates at present levels and our expectation of continued improvement in the economy, we do not anticipate a further significant decline in yields. Interest rates are probably close to lows for this cycle. The rise in gold prices during the quarter, considered by many to be a precursor of rising inflation and interest rates, may be a sign that the decline in rates is nearly over. If industrial materials' prices also start to rise, which has not happened yet, an upturn in rates will likely follow. Assuming a continued slow recovery, we do not expect a sharp rise in rates any time soon. Thus, over the next few months, we think interest rates are likely to remain fairly stable. However, signs of economic strength and/or inflation worries may cause the Fed to nudge short rates higher. In this environment, we remain cautious. Consequently, we continue to emphasize intermediate maturities of high quality bonds. 1 1. 1 1 1 1 1 1 1 IS 1 1 1 1 1 1 • 1 1 Dear Client, In accordance with the Association of Investment Management and Research (AIMR), please be advised that the returns shown for the various segments of your portfolio (cash, equity, etc.) are supplemental information to the total fund return. 1 NM CAPITAL MANAGEMENT, INC. Page 1 1cCLIENT : FAYETTPP - CITY OF FAYETTEVILLE FIRE PENSION AND RELIEF FUND 111,AGER: NTSC 1 1 1 1 1 1 1 1 1 1 1 1 1 • REPORTING PERIOD: 04/01/93 TO 06/30/93 CASH AND EQUIVALENTS EQUITIES GOVT/CORP BONDS ACCRUED INCOME TOTAL PORTFOLIO COMPOSITION MARKET % OF VALUE TOTAL 196,013.41 1,679,632 63 1,102,984.70 24,756.61 3,003,387.35 6.5 55.9 36.7 0.8 STATEMENT OF CHANGES PORTFOLIO MARKET VALUE AT 04/01/93: DEPOSITS WITHDRAWALS INCOME EARNED CAPITAL APPRECIATION 100.0 PORTFOLIO MARKET VALUE AT 06/30/93: $2,935,806.47 0.00 (4,527.79) 44,003.62 28,105.05 $3,003,387.35 TOTAL PORTFOLIO CASH AND EQUIVALENTS EQUITIES GOVT/CORP BONDS BALANCED INDEX - I T BILLS 00 REINVESTED V'T/CORP INTERMEDIATE BOND CONSUMER PRICE INDEX 04/01/93 TO 06/30/93 2.5% 0.8% 1.8% 3.8% 1.1% 0.8% 0.4% 2.2% 0.6% CUMULATIVE ANNUALIZED YEAR-TO-DATE PAST TWELVE MONTHS SINCE INCEPTION SINCE INCEPTION 9.0% 1.8( 9.4% 9.4% 5.2% 1.6X 4.7% 6.2% 1.5% INVESTMENT EARNINGS (APPRECIATION + INCOME) SINCE INCEPTION 01/18/90: 1 17.3% 3.4% 20.1% 15.4% 12.1% 3.4% 13.5% 10.5% 2.9% S987,218.14 48.4% 20.8% 50.5% 51.2% 46.4% 21.4% 48.6% 42.4X 14.2% 11.9% 5.6% 12.4% 12.5% 11.5% 5.7% 12.0% 10.6% 3.9% 1 1• 1 1 1 1 1 1 1 '• 1 1 1 1 1 • 1 • DATE PRINTED: 07/20/93 Cash and Equivalents MONEY MARKET FUNDS Fixed Income GOVERNMENT ISSUES Equities COMMON STOCKS ACCRUED INTEREST ACCRUED DIVIDEND TOTAL PORTFOLIO NM CAPITAL MANAGEMENT, INC. Portfolio Summary PRICING DATE: 06/30/93 DATE OF APPRAISAL: 06/30/93 FAYETTPP - CITY OF FAYETTEVILLE FIRE PENSION AND RELIEF FUND ESTIMATED MARKET % OF ANNUAL VALUE PORTFOLIO INCOME YIELD 196,013.41 1,102,984.70 1,679,632.63 21,807.93 2,948.68 3,003,387.35 6.5 36.7 55.9 0.7 0.1 100.0 5,351 79,775 47,436 2.7 7.2 2.8 132,562 4.4 1 1 1 1 1 1 IS 1 1 1 1 1 1 • 1 • NM CAPITAL MANAGEMENT, INC. DATE PRINTED: 07/20/93 Common Stock Summary PRICING DATE: 06/30/93 DATE OF APPRAISAL: 06/30/93 FAYETTPP - CITY OF FAYETTEVILLE FIRE PENSION AND RELIEF FUND X OF % OF MARKET COMMON TOTAL COMMON STOCKS VALUE STOCKS PORTFOLIO Capital Goods Industrial Capital Goods Technology Consumer Durables Consumer Non -Durables Energy Finance Basic Industry Transportation Utilities TOTAL COMMON STOCK 66,800.00 368,775.00 263,425.00 372,482.63 119,100.00 101,350.00 125,562.50 130,575.00 131,562.50 1,679,632.63 4.0 22.0 15.7 22.2 7.1 6.0 7.5 7.8 7.8 2.2 12.3 8.8 12.4 4.0 3.4 4.2 4.3 4.4 100.0 55.9 1 ' DATE PRINTED: 07/20/93 • 1 1 1 1 1 1 1 SHARES / FACE VALUE IS 1 1 1 1 1 • 1 196,013.41 DESCRIPTION NM CAPITAL MANAGEMENT, INC. Page 1 Client Appraisal FAYETTPP - CITY OF FAYETTEVILLE FIRE PENSION AND RELIEF FUND Cash and Equivalents MONEY MARKET FUNDS MONEY MARKET FUND UNIT COST TOTAL MARKET COST PRICE PRICING DATE: 06/30/93 DATE OF APPRAISAL: 06/30/93 % OF ESTIMATED MARKET X OF ASSET ANNUAL CUR VALUE PORTFOLIO CLASS INCOME YLD 1.00 196,013.41 1.00 196,013.41 Fixed Income GOVERNMENT ISSUES 220,000 US TREAS 8.500X 05/15/97 100.04 100,000 FNMA DEB 9.550% 09/10/97 99.34 100,000 FNMA DEB 9.150% 04/10/98 99.34 300,000 US TREAS 7.875% 11/15/99 102.95 250,000 US TREAS 7.500X 11/15/01 101.00 TOTAL GOVERNMENT ISSUES Equities COMMON STOCKS Capital Goods - Industrial 3,200 HARNISCHFEGER INDUSTRY Capital Goods - Technology 4,200 AUGAT INC 1,800 BOEING CO 3,400 PRECISION CASTPARTS CP 2,500 ROCKWELL INTL CORP 1,400 UNITED TECHNOLOGIES CORP 2,300 1,900 4,000 2,000 2,949 5,500 3,900 1,100 1,800 4,100 220,092.35 113.13 99,343.75 116.53 99,343.75 116.25 308,852.10 113.59 252,504.85 112.22 980,136.80 248,875.00 116,531.30 116,250.00 340,781.40 280,547.00 6.5 100.0 5,351 2.7 8.3 22.6 18,700 3.9 10.6 9,550 3.9 10.5 9,150 11.3 30.9 23,625 9.3 25.4 18,750 7.5 8.2 7.9 6.9 6.7 1,102,984.70 36.7 100.0 79,775 7.2 16.69 53,412.85 20.88 66,800.00 12.17 43.91 19.00 23.28 47.44 TOTAL Capital Goods - Technology Consumer Durables ARVIN INDS INC BROWN GROUP INC CROSS (A.T.) COMPANY TANDY CORP TOTAL Consumer Durables Consumer Non -Durables ARCHER DANIELS MIDLAND DELTA WOODSIDE HANSON PLC SPONSRD MCDONALDS CORP MERCANTILE STORES RYKOFF-SEXTON INC TOTAL Consumer Non -Durables Energy 2,200 NORSK HYDRO A S SPONSORED ADR 700 ROYAL DUTCH PETE NY REG GLDR 5 TOTAL Energy 22.07 26.43 15.35 26.85 20.55 13.36 18.93 31.54 34.97 17.66 51,123.55 79,041.25 64,587.85 58,189.85 66,420.60 319,363.10 50,754.35 50,225.86 61,404.85 53,698.90 216,083.96 16.75 37.00 21.50 33.25 54.00 33.50 31.25 16.75 30.00 60,591.92 23.63 73,497.20 11.38 73 829 05 17.00 34,692.38 49.13 62,950.85 33.88 72,420.40 14.38 377, 981.80 70,350.00 66,600.00 73,100.00 83,125.00 75,600.00 2.2 4.0 1,280 1.9 2.3 2.2 2.4 2.8 2.5 4.2 4.0 4.4 4.9 4.5 368,775.00 12.3 22.0 77,050.00 59,375.00 67,000.00 60,000.00 263,425.00 2.6 2.0 2.2 2.0 4.6 3.5 4.0 3.6 0 0.0 1,800 2.7 408 0.6 2,500 3.0 2,520 3.3 7,228 2.0 1,748 2.3 3,040 5.1 5,120 7.6 1,200 2.0 8.8 15.7 11,108 4.2 69,670.13 2.3 4.1 62,562.50 2.1 3.7 66,300.00 2.2 3.9 54,037.50 1.8 3.2 60,975.00 2.0 3.6 58,937.50 2.0 3.5 372,482.63 12.4 22.2 23.88 52,537.90 24.63 54,175.00 75.16 52,613.55 92.75 64,925.00 105,151.45 119,100.00 295 0.4 2,200 3.5 3,536 5.3 473 0.9 1,836 3.0 0 0.0 8,340 2.2 1.8 3.2 816 1.5 2.2 3.9 2,934 4.5 4.0 7.1 3,750 3.1