HomeMy WebLinkAbout1988-07-26 Minutes• • MINUTES OF A POLICE PENSION BOARD MEETING A quarterly meeting of the Fayetteville Police Pension and Relief Fund Board of Trustees was held on Tuesday, July 26, 1988 at 4:00 p.m. in Room 326 of City Hall, 113 W. Mountain Street. PRESENT: CALL TO ORDER Chairman Jim Pennington, Treasurer Scott Linebaugh, Secretary Eldon Roberts, members Jerry Friend, Rick Hoyt, Jr., Dr. James Mashburn and retiree Hollis Spencer. Also present was City Clerk Suzanne McWethy, Accounting Supervisor Zelda Parson, Bill Conrad and Don Trumbo of A. G. Edwards, and Richard Yada of Merrill Lynch The meeting was called to order by the Chairman with all seven members present. ELECTION REPORT Chairman Pennington reported that Jerry Friend had been elected by the police officers to fill a two-year term (formerly held by Mike Mitchell) and that the retired officers had re-elected Hollis Spencer for another two-year term. MINUTES Chairman Pennington asked that the following correction be made to the minutes of the March 8 meeting: Under Minutes, the word "fire" in the first paragraph should read "five" Chairman Pennington asked Dr. Mashburn if he had any problem with the request for retirement from Loren Rickman, after examining Rickman. Mashburn said everything was fine. It was moved by Hoyt, seconded by Spencer, and unanimous, to approve the minutes of the last meeting as corrected. OLD BUSINESS CITY ATTORNEY OPINION Linebaugh said there had been a question at the last meeting regarding retirement and he stated he would get an opinion from the City Attorney because "a good case J Police Pension Board Minutes July 26, 1988 Page 2 could be made for an officer to retire whether or not he had paid back withdrawn funds." Linebaugh said McCord's opinion is "if a police officer was hired and wanted credit for back service but refused to pay for the back service...that legally he would not be under the pension plan but would have to fall under the LOPFI plan." Linebaugh passed around a copy of the statute which addressed credit for service and restoration. He said the statute does not mention any time limit for the payback. Roberts said that, since the department has already hired John Brown and Mark Hanna, they will have to pay back withdrawn funds if they want to be members of the plan. Linebaugh agreed. Linebaugh said it was never clear at the last meeting how John Brown and Mark Hanna's situation would be handled. He said the Board should ask the City Attorney to draft a contract with the officers to cover the actions taken by the Board at the last meeting. Hoyt said the contract should reflect the new information raised by Linebaugh. Roberts said the officers had been informed of the Board's actions but he agreed they should have something in writing. Linebaugh said he thought there should be a binding contract. It was clarified that the motion made at the last meeting was "that John Brown and Mark Hanna be given one year..from March 8, 1988 to pay back the money they owe plus interest to be members in good standing, or they lose all previous time." Roberts asked if, in one year's time, the officers haven't paid the money back, they "fall into the LOPFI system." Linebaugh said technically that was true. Linebaugh said he would arrange for the City Attorney to draw up a contract to send to the officers. NEW BUSINESS ARTHUR YOUNG REPORT Linebaugh referred to the report which had been distributed which was a financial statement and related disclosures for the Police Pension Fund prepared by Arthur Young and Company (as of December 31, 1987). He said this report was required to be made to the Pension Review Board yearly. He said, in the management letter which accompanied the report and is addressed to the City Board, the point was raised that the "pension funds have increasing unfunded liabilities which will create larger funding requirements in the future" and Arthur Young recommended the City consult with the actuary to develop a plan to take care of the unfunded liabilities. • Police Pension Board Minutes July 26, 1988 Page 3 INVESTMENT POLICY Linebaugh referred to the list of Active Securities being handled by the City. He said there had been discussion about whether to invest additional money with a money manager. He said he thought the Board should discuss the fact that it does not have an investment policy, and he thought the Board should adopt such a policy. He referred to a copy of a policy adopted by the City of Fort Smith. Dr. Mashburn said he thought past minutes would show that, although the Board never established a written policy, they agreed not to invest more than a certain percentage of the fund in fixed income and in stocks. Linebaugh said right now the Board has a little over $1 million invested with money managers and may want to consider investing more. Linebaugh referred to materials he distributed which related to dealing directly with a brokerage firm instead of through a money manager. He said he sent the Board a copy of an opinion from the City Attorney on the subject. He said in a fire pension meeting Merrill Lynch talked about dealing directly with a broker, and the Little Rock City Attorney's opinion is that pension boards can deal directly with a broker, which he said does not agree with a memorandum from Cathyrn Hinshaw, Executive Director of the State Pension Review Board. Linebaugh said the Fayetteville City Attorney's opinion agreed with. Hinshaw in that the pension board should not deal directly with a broker but should go through a money manager. Dr. Mashburn said he thought the Board should follow the law. Hoyt said he would rather get an opinion "higher than Cathyrn Hinshaw's", such as from the Attorney General. Linebaugh said there is an opinion from the Attorney General which the City Attorney reviewed and agreed with. Hoyt said Hinshaw may be right but he thought she had a conflict of interest because she manages both old and new funds. Hoyt said he wanted to get an opinion concerning Fayetteville's old and new pension funds. Hoyt said the Attorney General's opinion was addressed to Hinshaw and we don't know what questions she asked him. Linebaugh said he thought the Board's main concern should be the advice it receives from its City Attorney. Hoyt said he would feel more comfortable if the City Attorney was in agreement with the Attorney General rather than in agreement with Hinshaw. Linebaugh said Board members may want to contact the City Attorney themselves to discuss the matter. Roberts said he agreed with Hoyt. He said the City Attorney's opinion was great but was still subject to scrutiny at the Attorney General's level. He asked why the Board couldn't get an Attorney General's opinion. Linebaugh said a broad opinion was prepared by the Attorney General for Hinshaw which dealt with the subject. Linebaugh said he had no problem with getting an Attorney General's opinion directed to the board but felt it was important to note that his opinion is not the law. Police Pension Board Minutes July 26, 1988 Page 4 Pennington said he had visited with the City Attorney and he indicated that, in effect, the Board is free to get any legal opinion they see fit and are willing to pay for. Linebaugh asked the Board to consider whether or not they want to invest additional funds with a money manager. He said he would be in favor of that. Dr. Mashburn suggested the Board agree on an investment policy first. Linebaugh said Ft. Smith's investment policy addresses how they will hire an investment counselor, sets guidelines for what they are trying to achieve, and sets out percentages which will be invested. Pennington said that city reviews its investment counselor every year by sending out requests for proposals. Pennington asked if the Board agreed an investment policy should be drafted for their consideration. Dr. Mashburn, seconded by Hoyt moved that we establish an investment policy to be presented and discussed at a special meeting. The motion passed unanimously. Mashburn said he felt the Board shouldn't make any investments until it has established a policy. BROKERS' COMMISSIONS Linebaugh referred to a letter he received from Cathyrn Hinshaw regarding commissions charged by brokers from whom RNC has taker) .bids. He said the information shows that the Board would be smart to compare rates, if not go out for bids. He also distributed schedules which showed the fees we are paying to Merrill Lynch per share and the percent of trade value. He said we were paying even higher fees than LOPFI was paying before they began taking quotes. He said our fees per share were ranging from .31 per share to .64 per share, and percent of trade value was ranging from just below 1% up to 1.5%, compared to LOPFI's quotes which run from a range of .07 to .21 per share. Pennington said he thought this subject would be a good point for discussion at the meeting on the investment policy. In answer to a question from Dr. Mashburn, Linebaugh said the staff would prepare a draft of an investment policy if the Board requests it be done. Pennington said the staff could draft a policy but would also like comments from the Board members. Hoyt noted that the information provided by Linebaugh showed quotes ranging from a low fee of $70 to the $320 fee which was paid to Merrill Lynch on 1000 shares of GTE Corp. Hoyt asked what the reason was for the disparity. Yada said if the Board chose a specific security for Merrill Lynch to purchase and told them another broker would make the purchase for a specific fee, Merrill Lynch would beat the fee you quoted. Hoyt said the Board couldn't do that because the money manager has to choose the security. Yada said that was true. Yada explained in this case Merrill Lynch searched for a money manager for the board. He said, as far as the transactions are concerned, Merrill Lynch does not control the commission. He explained because they did the money manager search for the board and because the board selected RNC, RNC calls Merrill Lynch and Police Pension Board Minutes July 26, 1988 Page 5 tells them they want to buy 1000 shares of a certain stock for the Fayetteville Police Department and wants them to discount it 25%. Yada said, if Merrill Lynch doesn't want to discount it that much, they tell RNC they can't do that, and RNC will then call some other broker. Linebaugh asked if it wasn't true that can't happen in our arrangement, because Merrill Lynch is the custodian of our account and RNC has to go through Merrill Lynch. Yada said RNC doesn't have to go through Merrill Lynch at all. Linebaugh said Jacques Devore told him that today, and he understood Fayetteville signed an agreement to that effect. Yada said that was entirely wrong. Pennington asked for something in writing from the money manager and from the broker identifying to the board what the posture is. Hoyt asked if one broker can charge a $70 fee and Merrill Lynch charges a $320 fee for the same transaction, does RNC or Merrill Lynch get the $250 difference. Linebaugh said the fee was paid to Merrill Lynch. Linebaugh said the Board may want to discuss going out for bids on brokerage fees, because of the wide range of fees being quoted. It was generally agreed that this should be included in an investment policy. Dr. Mashburn asked if the Board members could have a,.. -draft of an investment policy a couple of weeks before a meeting is held. Pennington agreed this was a good idea. Linebaugh suggested everyone review the Ft. Smith policy, since a lot of it will be in the draft policy. Jerry Friend, being a new member of the Board, asked if there was some information available to assist him in understanding the relationships between RNC, Merrill Lynch, A. G. Edwards and the Board. Linebaugh said he could provide a copy of the contract with RNC. He explained that RNC was hired by the Board as a "money manager" to decide what investments should be made with the funds. He said they call Merrill Lynch which purchases the investments. He said Merrill Lynch may call RNC and advise them of investments to make. Dr. Mashburn said the Board initially decided to put $1 million of the fund with money managers and chose to invest $500,000 through A. G. Edwards which has its money manager and $500,000 with Merrill Lynch which uses RNC as the money manager. A.G. EDWARDS REPORT Bill Conrad, reporting on behalf of A. G. Edwards, reported that at the end of June the quarterly statement shows the value of the investment to be $481,945. He said the market was down last week and this morning the value was $457,668. He said he talked to the money manager today who said the portfolio has about $75,000 in cash. He said the dividends from stock investments are currently earning about 3.2%. He told the Board that Jim Allen in Little Rock is the money manager for the investments. r• • Police Pension Board Minutes July 26, 1988 Page 6 MERRILL LYNCH REPORT Richard Yada, speaking on behalf of Merrill Lynch, distributed material to the Board. He said Curtis Williams from Merrill Lynch spoke to the Fire Pension Board at their last meeting regarding the possibility of doing some investing with Merrill Lynch and about developing an investment policy. In answer to a question from Roberts, Linebaugh said the Fire Pension Board has not yet developed an investment policy. Yada said the Ft. Smith policy was done by Arthur Anderson Company and Merrill Lynch was consulted by Arthur Anderson to help them write that policy. He said Ft. Smith's police and fire pension funds were 100% managed, with most of their funds being with RNC Capital Management. He said they also have an investment policy for their fixed income which Merrill Lynch helps them manage. Yada said that Merrill Lynch searched for a money manager for the Board and found an independent money manager, RNC. He said that RNC has no connection with Merrill Lynch. He said if RNC was not following guidelines set by the Board, Merrill Lynch would come to the Board and advise them. He said, since Merrill Lynch found RNC for the Board, RNC gives Merrill Lynch the first shot on transactions. He said both RNC and Merrill Lynch work for the Board and report to the Board and monitor each other. He said if RNC calls Merrill Lynch to purchase stock and does not like the way Merrill Lynch._is-handling transactions, RNC would report that to the Board. Yada said that RNC handles the LOPFI Plan which is 100% managed. He said Merrill Lynch did the money manager selection for the LOPFI system. He said the LOPFI system requires no service as Cathyrn Hinshaw has made it perfectly clear she doesn't want brokers reporting to her. He said LOPFI hired Gabriel, Roeder, Smith & Co. to monitor RNC which costs them close to $2,000 every three months. Yada said RNC makes the investment selections for the Board. He said Merrill Lynch never calls them to give them investment advice. Yada said RNC has the funds at about 80% invested and about 20% in cash. Yada referred to a report which showed the account balance on December 31, 1987 was $417,724 and last Friday was $442,000. Reporting on asset allocation as of April, Yada said 28.4% was in stocks, 41% in bonds and 30.6% in cash. He said Merrill Lynch recommends a model portfolio has 40% in stocks, 45% in bonds and 15% in cash. Yada referred to a chart which showed investments in stocks, bonds and t -bills for a period from 1926 to 1986. The chart showed the average annual return on t - bills, for the 66 -year period, to be 3.5%, with the Consumer Price Index at 3%, bonds at 5.1% and stocks at 10%. Police Pension Board Minutes July 26, 1988 Page 7 Yada referred to a copy of the Board's actuarial valuation from 1986. He said after that report, the 1987 legislative session passed some bills which will affect pension plans, and will affect the payroll about 3.2%. He said in this situation it would affect it by about $20,000 per year. He said one thing that should be taken into consideration in an investment policy is that each time someone retires the fund loses the 6% the member contributes, the 6% the city matches, and the percentage of the insurance turnback. Yada referred the Board to a list of all the retirees and their monthly benefit amount (as of December 31, 1986) and a list of the active members under the Plan (as of December 31, 1986). He said this showed most members will retire in the next ten years. Yada said that means there is ten years to get growth in the Plan after which time investments should be made which will produce income to pay benefits. Yada said in 1977 the fund was almost actuarially sound. He said to be considered actuarially sound right now, 25% of accrued liabilities should be covered by assets. According to Yada, it was 3.9% as of 12-31-86. He said in 1977 it was 14.9%, in 1982 it was 15.6%, in 1984 it was 12%. Yada said, if inflation is projected at 6%, the portfolio has to get a return of 8% just to break even. Linebaugh asked if the portfolio would really have to earn 8% if there was increased payroll and increased taxes. Yada said there has to be a two-point spread between the rate of return and the rate of inflation. He said the rate of return is based only on investments. Yada said he would be more than happy to help with an investment policy. Yada said, when everybody retires, and assuming payroll increases over the next ten years, he thought the Board would be looking towards payments of $45-50,000 per month. Yada recommended the use of an investment policy and an attempt to get the rate of return in excess of 2% over inflation. He said the alternative was for the City to guarantee 50% of pay, 3% cost of living increase and fund the difference through the LOPFI system. There being no questions, Pennington thanked Yada for his presentation. Hoyt said he would rather meet at 2:00 p.m. instead of 4:00 p.m. With none of the members objecting to that suggestion, it was so moved by Hoyt, seconded by Spencer, and passed unanimously. Zelda Parson asked if the Board wished to hold off on investing the $712,000 which will mature next Thursday, until the Board adopts an investment policy. • • Police Pension Board Minutes July 26, 1988 Page 8 The Board was in agreement. Pennington said a special meeting would be called in a few weeks to discuss an investment policy. ADJOURNMENT The meeting was adjourned at 5:15 p.m.