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HomeMy WebLinkAbout1994-10-27 MinutesI!' MINUTES OF A POLICE PENSION BOARD MEETING A meeting of the Police Pension Board was held on October 27, 1994, at 2:30 p.m. in Room 326 of the City Administration Building, 113 W. Mountain, Fayetteville, Arkansas. PRESENT: Eldon Roberts, Jerry Friend, Clint Hutchens, Mayor Fred Hanna, City Clerk Traci Paul, City Treasurer Glyndon Bunton, and Administrative Services Director Ben Mayes. ABSENT: Hollis Spencer, Dr. James Mashburn CALL TO ORDER The meeting was called to order by Mayor Hanna. MINUTES Roberts, seconded by Hutchens, made a motion to approve the minutes of the July 21, 1994 meeting. The motion passed unanimously. NEW BUSINESS LONGER INVESTMENTS REPORT Elaine Longer, Longer Investments, explained that the bond market is down. She stated earnings in the stock market are up about 18% year-to-date versus last year. The strong economy that is creating good earnings is causing higher interest rates. In the past, when there was a bad stock market, you usually made money on the bond side. This year bonds are down in price. We have tried to build flexibility into the portfolios this year. There is liquidity both in the bond portfolio and the stock portfolio. There needs to be a more favorable interest rate environment. If the interest rate had been raised in September, the investment situation might be better. Rates will probably be raised in November. At that time, maybe the long term interest rates will stabilize. Longer stated in the Combined Portfolio, stocks, as a percentage of the total, are about 44.5%. The largest holdings are Emerson Electric, Philip Morris, General Electric and Bristol Myers. Philip Morris has increased their dividend by 25% this quarter. Corporate bonds make up about 11% of the portfolio. The current yield on the corporate bonds is about 7.5%. Treasuries are about 34%. Treasuries and agencies, together, are about 40%. There is also a CD that matures in a little over a year. The total portfolio value is approximately $3,048,000 and the current income on the portfolio is about $148,000 per year. That has moved the overall portfolio income yield up to 5%. The income yield on the portfolio has come up this year by about 25%. •" t October 27, 1994 In the Stock Account, 70% is invested in stocks. The amount in the Treasuries is considered purchasing power. By the time the two year that was purchased in June is sold and converted to cash, the interest income that we have received will do better than if it had been a money market fund. The 30 year bond has been rolled to a 10 year maturity. We realized the loss on the 30 year bond, but we have gold stocks in the portfolio as an edge against inflation. We just realized a gain on one of the gold stocks. The two offset each other and there is no change to realized gains. In the report that breaks down the categories of the stocks, 15.5% of the stock portfolio is invested in Large Capitalization Growth stocks. The Industrial Goods stocks have done well, even in a bad market. The Value segment of the portfolio shows stocks with a high asset value or a high dividend yield. The Bond Fund has $1.1 million and the current yield on market value is about 7.3%. In the Performance Summary, the stock account, including the bond reserves, is still off about 5.9% with a combined account based on market value off 5.3%. There has been improvement since June 30. The stock account is up about 2.7% and the total portfolio up about 1.6%. The bond part of the portfolio, since June 30, is still off one tenth of one percent because interest rates have continued to rise. The bond portfolio has not dropped much because we have so much in short maturities. On a combined account basis, based on book value, the interest income, dividend income, and realized gain year-to-date, are a positive 4.6% and then with interest income for the next two months it will boost up. It will still show a positive return. In the indices year-to-date, S & P is off about 0.8% and the Salomon Bros. Treasury Index is down 3.7%. We are at about 6.5% for the year. That is why the bond portfolio is down 4.2%. The mutual fund index is down about 3.5%. Nothing has really changed with the Portfolio Parameters. The earnings reports that are coming out are excellent. The Price/Earnings Multiple on the portfolio is now at 18.2 times earnings. The return on equity is 22.4%. It was 16.8% a year ago. You have a very high quality portfolio and yet the price/earnings multiple is in line with the market. The Debt to Capital Ratio is 23.2%. That compares to 32% on the S & P 500. The Standard & Poor's Rating is still between an A and an A-. The quality of the portfolio is still the same. The market price flucuations are what give negative return year-to-date. Most of the Large Cap. and Mid Cap. companies have a little growth componenent. There is 16.9% in -Small Cap. stocks. Realized gains year-to-date are about $76,000. • October 27, 1994 The way that the weighted average debt to capital and return on equity is calculated is that we take every company that is in the portfolio and look at each one of their specific investment criteria. Then, weight them by how much they represent within the account. With increased exposure to some companies, the weighted average debt to capital is shifted. On the Portfolio Income and Yield report, the annual income in fixed income securities only is $113,019 with a yield of 6.8%. That compares to $80,000 with a yield of 6.0% at the end of 1993. We have gradually increased the allocation and increased the income yield on the portfolio so that the total portfolio income yield now is 5.0%. The income return on the portfolio is up by 24%. The Weighted Average Maturity is 6.45 years. That has been a fairly conservative allocation. Weighted Average Duration is 4.2. The longer you go out on maturities the more volatility you have with interest rates. The fixed income part of the portfolio matures within three years. Those bonds can be converted to cash. In the Stock Portfolio, we have about 15.5% that can be used for purchasing power. In the Bond Portfolio, there is almost 45% that can be used to increase the income yield further. In answer to a question from Friend regarding the Income Summary Statement, Longer stated it was dividends and interest on bonds. The Economic Outlook presented in July has not really changed. For 1994, the S & P earnings estimates have now been increased to about $32.00. On Friday, we will get the first look at what the third quarter GDP growth rate is. It may have slowed to about 2.5% growth rate in the first half of the year. That would start to alleviate some of the pressure on the Bond Market. In answer to a question presented at the last meeting, Longer stated she had spoken to Katherine Henshaw regarding the South Africa Statute. The law is still in effect. The only thing that can be done about it is perhaps to petition our representatives up here to change the law in the next legislative session. DEAN WITTER INVESTMENT REPORT Mike Kirkland, Dean Witter, stated both accounts are effected by interest rates. We have run into one of the worst bond market declines since 1931. • October 27, 1994 The long bond is down 20% in the last twelve months. The Fed Fund Rate is up 77% in the last year. The Prime rate is up 30%, the three month CD rate is up 44%, thirty year treasury is up 34%, the seven year treasury note is up 58% and the three month T -Bill is up 61%. The ten year treasury, over the last twelve months, is down about 12%. Kirkland reviewed the Madison Report which lists what the bonds have done in the last year. In updating the portfolio, we are down. The value as of the end of September is 1.47%. We are down less than a percent for the year. In reviewing the Portfolio Appraisal, Kirkland stated two Government Bonds would mature within the next three months. There is $575,000 available in the next three months. There is almost $50,000 in the money market fund. The portfolio positioning is stable right now. Bunton asked what would happen short term as we get a change and people start reinvesting in the longer term bonds. Kirkland stated they still think there is more on the other side. • Rates may tick up a little more over the next three to six months. When rates begin to come back down then bond values will go back up. We might be able to lock in a pretty good yield and get capital appreciation as rates begin to come back down. That is what is happening with the bonds now, you have locked in a decent yield but in the meantime, the bond value has gone down. If you hold the maturity, your o.k., but in the meantime, the total return is going to be flat to down. • Roberts asked if the performances listed on the footnotes page are just referring to their fund. Kirkland agreed. Roberts stated we are in the negative column. Kirkland stated for this year, yes. On the short term, this may not look too good. Even as you stagger maturities, you miss out on some of those 10% - 12% years. Bunton asked which range of the bonds will the turn -around start. Would eight be the average maturity? Kirkland stated if we knew for most attractive. The longer volatile it is going to be. sure, the thirty year would be the the maturity of the bond, the more • • • • October 27, 1994 The Stock Market has done what the Bond Market has allowed it to do. In October of 1993, the S & P 500 was on the index of 460. As of the close just in the last few days, it was around 460. It did run up. The Dow and the S & P were at all time highs back at the first of February, 1994. That is when the Fed began to tighten. The S & P Index went form 482 to 435 in about two months. It has recouped since then, but since the first of the year the Dow is a little bit above where it is., The Equity portion of the account has done about the same. Referring to the Comparative Performance Summary of the TCW Account, Kirkland stated that in the current quarter section, the gross return is up about 3.3% and the S & P is up about 5%. In the year-to-date section, the total portfolio is down about 2% and the S & P is up about 1.3%. In the other indices section, the balanced indices is a 60/30/10 mix. A couple longer term bonds were really effected by rates going up. Based on where we were earlier in the year, it is basically flat. The bond market is a big part of that. We have got good holdings. We have got to hold on and take the long term view. We probably will not have the returns like we had in the 1980's. Rates may come down the first of the year. The risk there is that since the Fed had tightened this year, it may be too much and choke off earnings next year. We may be sitting still for another quarter or two. JERRY SURLES - ADDITIONAL BENEFITS A letter from Jerry Surles, requesting additional benefits, was distributed. Roberts stated the request seems legitimate. There was a law passed that allowed police officers in the old police pension plans to purchase military time to allow them to retire early. Two years was the maximum amount of time that could be purchased. The original intent was to allow a person with 18 years in the Police Dept to buy time. Then a law was passed which added $20 per month to a police officer's pension for every year he stays past his twenty. For example, if a police officer has in twenty years and is ready to retire, he may buy two more years of military time and receive an additional $40 in benefits per month. Friend asked if there was a cap? Roberts stated the years a person can stay after their twenty is capped at 5 years. Roberts stated Surles has been retired since about 1986. Hutchins asked if the law was amended in 1991. • • October 27, 1994 Robert stated yes. Roberts suggested that the requested be submitted to Jerry Rose for his review. In answer to a question from Hutchins, Roberts stated the first part of the law addresses who can and who can't purchase military service. In answer to a question from Friend, Roberts stated with Jerry's purchased military time, he would have 22 years. That would be an additional $40 per month on his pension check. He did not work here twenty years but he did have some Sheriff's Office time. He did have to pay to use the time from the Sheriff's Department. Roberts stated he retired using the Sheriff's Office time on our pension plan without paying anything into our plan. Since then, the Sunset Policy was established. The policy requires anyone who uses that time now to .contribute to the pension plan. Surles explained in his letter how many months he was short. He did participate in our plan for twenty years with the 17 months we let him buy. He would like to buy two more years now. In answer to a question from Bunton, Roberts stated others have the right to ask to buy two more years also, as long as they meet the criteria. Friend asked when the law allowing an extra $20 per month came into effect. Roberts stated the intention was to entice people to stay past their twenty years. A twenty year program is hard to fund. In the past, $5 extra was given per month for every year a person stayed over twenty. That was increased to $20. The law was amended around 1985. The law that allows military time to be purchased was passed around 1981. The Finance Department is looking into what Jerry Surles may have to pay. He may have to pay about $300 to start drawing the extra $40 per month. In answer to a question from Roberts, Friend stated he had to pay $268 for his two years. It is very expensive if you buy time before twenty years. Bunton stated the original intent was to entice police officers to work longer than twenty years. • October 27, 1994 Roberts stated there are two laws. One law was going to give a guy $20 per month to stay for every year past twenty. The other law is for purchasing military time. When they are put together, it is advantageous to purchase the two years of military to get the additional $20. A person could buy,two years instead of working two years. Bunton stated Surles is asking for equal treatment. , Jerry Rose should review this request and advise the Board. Friend expressed concern about laws that get turned around. Hutchins read the law pertaining to increasing benefits for service beyond twenty years. Friend, seconded by Hutchins, made a motion to submit the request to Jerry Rose for his review. The motion passed unanimously. STATE INSURANCE TURNBACK FUNDS Administrative Services Director Ben Mayes stated there is about $173,000 that the City invested in a treasury. ,It is up to about $185,000 now. Based on the cash flow situation, $160,000 of that money could be sent to Mike or Elaine for investing. In answer to a question from Roberts, Mayes stated the majority of the money is the insurance turnback check. Friend, seconded by Bunton, made a motion to send the money to Elaine Longer of Longer Investments. The motion passed unanimously. ADJOURNMENT The meeting adjourned at 4:00 p.m.