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could be made for an officer to retire whether or not he had paid back withdrawn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Hanna, they will have to pay back withdrawn funds if they want to be members of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.