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HomeMy WebLinkAbout2001-07-19 Minutes• • MINUTES OF A MEETING OF THE FAYETTEVILLE POLICE PENSION AND RELIEF FUND BOARD JULY 19, 2001 A meeting of the Fayetteville Police Pension and Relief Fund Board was held on July 19, 2001 at 1:30 p.m. in Room 326 of the City Administration Building located at 113 West Mountain Street, Fayetteville, Arkansas. PRESENT: Randy Bradley, Hollis Spencer, Eldon Roberts, Jerry Friend, Dr. Mashburn, Heather Woodruff, and Kit Williams. ABSENT: Mayor Coody. MINUTES Dr. Mashburn moved to approve the minutes from April 19, 2001. Mr. Spencer seconded the motion. Upon roll call the motion carried unanimously. Mr. Roberts stated the meeting on May 17, 2001 was not a regular meeting and they did not have a quorum, but they did discuss the information regarding the Amendment 59 law suite. Mr. Spencer moved to approve the minutes from May 17, 2001. Alderman Roberts seconded the motion. The motion carried unanimously. Mr. Friend noted he was not present at the May 17, 2001 meeting and did not second the motion regarding the taxpayer refunds. Mr. Friend moved to approve the minutes amending his attendance and replacing his name with Mr. Bradley who seconded the motion and addition of the exact amount of the payment. Mr. Bradley seconded the motion. The motion carried unanimously. PENSION LIST Mr. Roberts stated the State supplemental money had not come in and the retirees did not receive it on their July check. A letter had been sent out with the July checks explaining the shortage. There had been a law passed this last session which increased the State Supplemental benefit to fifty dollars per person. It was fifteen dollars for everyone except for those drawing less than four hundred dollars, who received fifty dollars. RON HASKINS Mr. Roberts stated when he heard Mr. Haskins had passed away he had called accounting and asked them to send a check the estate of Ron Haskins. They needed to formalize the expenditure of $200.00. Mr. Friend moved to approve the $200.00 funeral expense for Ron Haskins. Mr. Bradley seconded the motion. The motion carried unanimously. Police Pension July 19, 2001 Page 2 ELECTION OF BOARD MEMBERS Mr. Roberts stated there were three retired representatives on the board, Jerry Friend, Hollis Spencer, and Randy Bradley. Randy's term had expired. Mr. Spencer stated a telephone poll had been taken to reappoint Randy Bradley. Mr. Roberts stated his term had also expired. The law did not define how the elections were to be held. He presented a letter from the remaining seven active members with signatures supporting his reappointment. AMENDMENT 59 Mr. Roberts stated an invoice had been presented regarding the administrative cost for the refund. Dr. Mashburn moved to approve the payment in the amount of $1,257.02 to Washington County. Mr. Spencer seconded the motion. The motion carried unanimously. INVESTMENT REPORT Ms. Longer stated that they had received copies of their actuarial reports from 1997 and 1999. She had gone through them and looked at the differences. She had not be successful in getting a hold of Kathryn Hinshaw. However she had contacted Jody Cario. She stated they could go over what she had found out and they could formalize some questions then she could come back with more information. Their first report showed the portfolio appraisal for the equity and fixed income portfolio as of June 30, 2001. Their equity weighing was approximately 38.55 with stocks plus their equity mutual funds. That was a little above the lower range of 35-50% that was in their policy. The portfolio value went up this quarter by about 2%. The cash balance was about $100,000. The market value was approximately $10,821,000. The market was down in July. In the Stock Account there were ample reserves. They had maintained their core holdings. They had been able to hold onto cash reserves, looking for better buying opportunities. They were close to 40% stocks. They had the potential to go up to 50%, which would be adding another million dollars to the stock side of the portfolio. They had the cash reserves and the short term bonds in order to do that. They were trying to keep the buying power in their pocket. General Motors was one of their best performers this year. This was the first year in eighteen years that she had bought General Motors. There were a lot of reasons for them to be purchased this year. General Motors was capturing market share from Ford, because of all of Ford's problems. They had received about a 20% return on GM this year. Their Realized Gains year to date were about $62,000. Their Net Income, dividends and interest, was $791,000. In the Bond Account, they had continued to extend maturity and take advantage of the higher interest rates. The short term rates had dropped, but the long term rates were back up. They had • • • Police Pension July 19, 2001 Page 3 been able to buy some of the 6% long term bonds. They had been able to buy some very attractive government agency with above a 6% coupon with some call features. The yield on book value, fixed income securities has gone up from 331, the yield on book value is about a 6.3%. They had been able to increase that to 6.5% yield. They had extended the maturity from 3 5 years, average maturity, to 4.3 years. They had been able to take advantage of the yield curve that they had to move some money out into the longer maturities and to increase their yields on income yield. Yesterday, the thirty year bond was at 5.5%. The three year treasury was at 4% or a little lower They had 6.5% locked in treasuries going from agencies and high grade corporate. They did not have a lot of price risk in there because their weighted average maturity was 4 5 years. They always had enough the short maturities to use that for purchasing power for when the opportunity is there to increase yield and to extend maturity, which is what they had done. Contributions and Distributions, the withdraws, year-to-date, were approximately$295,000. In the Performance Report, the Equity and Fixed Income at the end oflast year, their average annual return for the pnor ten years was about 12.5% on stock, 6.6% on fixed income, and about 9% over all Last year, their total account was about unchanged. That was because of the mix between the bonds and the stocks. Basically, the stocks were down in-line with the S&P500, which was minus 10%. With their bonds up 9%, their total account value held its value really well in the midst of a terrible market. The same kind of thing was happening this year to date. Their stocks were down 11.6%, but their stock portfolio was just down 7.4%because they had so much of it sitting in cash reserves and short term bonds. Their total account was down about 2.4% thru June 30 It was still holding its value. It compared to year-to-date, the S&P500 was down 7.5%percent. The NASDQ was down about 12.6%. They still had a lot of purchasing power and flexibility in the portfolio. Fixed Income had done well year-to-date it was up about 3.5%. Yesterday, the bonds dropped and the bonds performed very well yesterday. The Equity Portfolio which showed their industry weighing. They had just started stepping back into some of the tech stocks. A lot of these companies were down about 70-80% off their highs. They had been able to do some shopping a little at a time. They had added Dell Computer to the portfolio, at 27.5 she felt that was a good value. With Microsoft announcing that their revenue this quarter was running ahead of expectations, that was good news for Dell. They were so dominate in the industry now. Microsoft had a new plat form coming out. It was a completely new operating system, Microsoft Window ST, it was support to leap frog the Windows 95, 98, 2000 upgrade. They were looking at another upgrade cycle. The last time every one upgraded in mass was going into Y2K. She knew they had done it in their office. They had to buy all new computers. They had to go the Windows 98 because Windows 95 was not compliant. That took more speed and more memory, so they had to buy new computers. To go into the SP cycle, which was suppost to be revolutionary compared to 95,98, 2000 platform. She thought Dell would be the beneficiary of another upgrade cycle. They had also be able to add a few other tech names in there. She was very comfortable with the ones that they had were strong. A summary of their investment policy was also included in the report. They had the balanced investment approach. Even though the growth side over the last two years had not done much, it has help supplement what the income return would have been in a straight bond portfolio. They were Police Pension July 19, 2001 Page 4 starting to see indications where the bad news does not cause the stocks to go down any more People were starting to look past this quarter and look into next year. Dr. Mashburn stated Walmart would probably benefit more from the tax cut than anyone. Ms. Longer stated they had increased their Walmart, because he was right. There would be billions of dollars coming into consumers hands right at back -to -school time. The tax cut would not be enough to make a car payment or to buy something big. 1997 and 1999 actuaries were distnbuted to compare. Mr. Roberts asked what had caused them to go from over funded to under funded. Ms. Longer replied it was just taking the benefit from 50% of paid to 90% of paid. There was nothing else changed. Their portfolio value had not gone down. The only thing that had changed was the liability to the current beneficiaries and the future. On page four the contributions were listed. The big difference was the necessary employer contributions, the amount needed in addition to the investment income In 1997 the amount was $74,000. In 1999 the amount was $847,000. That was because they went from over funded to under funded. This contribution assume that the dollar contribution grows at a rate of 4% per year and that they are made continuously throughout the year. The actual contribution from the employer has not changed that much In 1997 the employer contributed was $588,261. In 1999 the employer contributed $618,023, so they could see that the difference was the contribution rate. It had remained fairly constant. The major differences were listed on page five. The liabilities in 1997 were $8,870,530. Their assets were $9,126,449. Their unfunded liabilities was a positive credit of $255,946. In 1999 the liabilities for the total inactive lives jumped from 5.9 million to 10.5 million. The liability for the total asset jumped from 2.9 to 5 2 million. Their total liability jumped from 8.8 million to 15.36 million. It was all just the change in the formula, from 50% of pay to 90% of pay. What that did when it was factored mto the liability of going forward the whole difference between the two reports was the difference in the liabilities. Their liabilities go from 8.8 million to 15.3 million. Their asset value still improved by about 15% during that time from 9.1 million to 10.5 million. But, their unfunded liability, even though their asset grew by 15%, their unfunded liability when up to 4.78 million. Mr. Roberts noted most every thing had doubled, but then the benefits had doubled. Ms. Longer stated it was all in the liability equation, because their assets had grown. Their actuary assumption was 6% a year asset growth. They had been growing at 9%. During this two year penod their growth had been 15%. Their employer contribution was keeping up with what it was doing before. Factoring out everything, the only thing that she could come up with in this report was the liability side. • • • • • Police Pension July 19, 2001 Page 5 Mr. Williams asked how they could get back in order, because they would get to the point that they could not pay. Ms. Longer stated that was why they needed to talk to the actuary about. She wanted to see the age of the work force and how they had attrition the retired people. There was a hump there were they were facing the maximum payout, then the attrition would start to take the payout down. Mr. Roberts stated all of this was done through the actuary in Little Rock, which was the state law. They had come back in 1999, they could pay their benefit to the retired people at 100% of pay. Dr. Mashbum stated they had ordered a special study in 1999. The study had come back say they could pay up to 100% of salary. They did not think that was wise and went with 90% of salary. Mr. Roberts stated there were two methods which the State allowed the actuaries to use to determine if a fund could increase benefits. One of them was an actuary evaluation, the second one was called a cash flow evaluation. They had to have at least fifty participants on the pension plan to do that. That was the route they had taken. It passed with flying colors and that was why they and received a letter back from them stating they go to 100% of salary. He had called the actuary and talked to them. They had advised him to do 90%, because that was more conservative and more safe. He then came to the board and told them what he had leamed In August of 1999, the board raised everyone to 90% of salary. Then they received their actuary evaluation, which was done every two years, that was when they found out they were in sad actuarial standing. Everyone was wondering why this had done so much damage to their plan, when they had been told they could do 100% of salary and they only did 90% of salary. He had expected it to affect the plan adversely, but not this bad. He questioned what the actuanes were taking into account. They were suppose to take everything into consideration. They knew everything about everyone on the pension plan. They factored in salary increases, the economy. They were normally very conservative. If they erred it was on the side of conservation. The State would really be concerned if they knew that the fund had lost some of their funding. They had lost one-fifth of a mil on real estate property tax. They had lost nearly $70,000 in pay out. Another thing to consider was new formula they used in figuring their insurance turnback check which they received every year. They were not sure how that was going to effect them. The fire department had gone down considerably. He did not know where they were at. Last year they had recieved $364,000. That was to be divided between them and LOPFI. Their share had been around $150,000. The check was due in anytime. The third thing was that when people retired from the force, 18% of their salary no longer came into the pension plan. When those seven people retire, that money would not be coming in and that money would be taken out. They should have factored that into the equation. But they probably factored in that the millage would stay the same and they probably figured the turn back check would stay the same. They may get more, he did not know, but it was still up in the air. They had received information from the actuaries several years ago stating they had to average 6% annual rate ofretum on their investments to satisfy their actuarial projects, but what they Police Pension July 19, 2001 Page 6 were talking about was 50% of salary, they were not talking about what the benefits were today. He had assumed Ms. Longer knew what was going on, but he could tell by her reaction at the last meeting that she was surprised what happening. She had replied investments alone would not support the 90% of salary to the end of time. The other things were changing. That was why he wanted her to review the actuary reports. He did not know where they were to go from here. He was concerned about this. Ms. Longer stated she was glad he had brought it up. Dr. Mashburn stated the seven that were still down there were on very high salaries. When they went off that would make a big change to the fund, plus the ones they were losing through attrition were at the low end of the pay scale. It would take eight or ten to make up for their salaries. Ms. Longer stated on page ten, 1989, which was where they started, they could see that their unfunded liability was 2.175 million of which represented about 36% of their total requirement. They were only funded at 64% of their liability. That was when they got involved in doing the investment policy and strategy. As their 6% acturary assumptions, but then their returns had come in higher than that 6%. By 1997, they were 100% funded. What has happened now, was that increased benefit has brought them back down to 68% funded. Which is about where they were in 1989. Going forward if they had a situation where the returns exceeded that 6% assumption, then they were going to be closer to fully funded. That was where the 6% to 9% came in and that was what moved it from 68% funded to 102% funded. Now with the benefit increase what that did to the actuanal computer program when they ran that forward and the back dated it to the present value and liabihties. What it had done was put them back where they were in 1989 as far as their funding. Mr. Roberts stated he did not know how the cash flow evaluation that they had done compared to the actuary study. He did not know if they looked at the actuary study or not. Coupled with their current returns lately he did not know where they stood. He questioned if they send something to Little Rock asking them where they were and where they needed to go. They had told them they could do 100% of salary and they only did 90% and now they were in trouble. Ms. Longer stated from 1997 to 1999 their returns were an average of 8.5% which exceeded their expected return. It was not a return issue, it was more of coming future liabilities. Their liabilities were coming up faster than their asset side could accommodate. She stated it was a dramatic change. She questioned what their factors were that they were putting mto the computer. Ms. Longer stated she would contact Osborn, Carreiro and Associates and ask some questions. She suggested having someone from their fine come to their next meeting. Mr. Roberts did not know if they would be able to, but maybe they could send a letter. He did not believe that they had factored in everything. Currently, they were paying out approximately $80,000 • • • i • • • • Police Pension July 19, 2001 Page 7 per month, approximately one million dollars a year and that was without the seven people still working. Ms. Longer stated that was 8 7% of principle value, if there was no money coming in to off set the outgo. With an asset allocation which was 50% bonds, yielding 6.5%, it would require a 12.5% annual yield per year consistently on stock to get to 8% of weighed average retum. How this effected investment policy, they had a situation where their capital needed to be protected, but at the same time it needed to be protected, because without it they could not possibly make it. She thought that they needed some clarification and then see how it effected their investment policy. At the present time she felt the balanced approach was still very valid. They could not go fully into stock and risk a lot. They can't really go more into bonds. If they were to take money off their stocks to put into bonds they would be lucky to get 5%. The more they went over there they pretty much guaranteed they could not get to where they needed to be. At this point the policy was still very valid, but it was real important to get the questions answered and what were their assumptions Was it really as bad as it looked on paper. They might have put some assumptions that they did not show. There was a missing link. - Dr. Mashburn stated they had not received large returns in 2000 and 2001. It was no fault of Ms. Longer. Mr. Roberts stated he would not be so concerned but other things had taken a turn for the south too. Ms. Longer stated the two year return period between the 1997 and the 1999 report, the returns had actually exceeded the actuary assumption by 8.5% per year. Mr. Roberts stated they had been under the assumption that 6% was all that they needed to turn on their money every year, however, that was talking about 50% of salary. And that was all that was ever promised to people. They have done better than that. Ms. Longer stated she would call the actuary and go through the two reports, then they would see if they needed to come to the next meeting. Mr. Roberts stated he would like to know what assumptions they had made in the cash flow study, because the actuary report did not support what the evaluation and supported. Now there was more going out and less coming in than when they did the report and it was going to get worse. Mr. Fn end stated that they hired Ms. Longer to manage their portfolio and they had asked her to do this extra stuff, when would she be billing them for this additional work. Ms. Longer replied they did this for their clients. They were involved in estate planning for their clients. Police Pension July 19, 2001 Page 8 OTHER BUSINESS Mr. Roberts stated a retired member had asked if they could start receiving the minutes of the meeting. Dr. Mashburn asked if they wanted to mail them to everyone or if they wanted to mail a letter stating they were available in the City Clerk's office and not to be out of the expense. Mr. Spencer suggested sending a notice of the meetings to the retirees. If they wanted to know what was going on then they could come. Mr. Williams stated that it did not make sense since they were looking over the benefits that they were letting them know why. Since they might be having to go the other direction that they let them know what was going on. Dr. Mashburn suggested a slip be put into their check inviting them to come the meetings. If anyone was unable to attend the meeting then they could receive the minutes of the meeting. That way the ones that were interested then they could come. Mr. Williams stated he was concerned because they were heading toward a decision where they might have to lower the benefits. The more notice you could give people the better. Mr. Friend asked if Ms. Woodruff could also send out a list of the pension members and their phone numbers. Ms. Woodruff clarified that they wanted a letter sent out listing all the meetings for the remainder of the year. She asked if they wanted her to send the minutes from this agenda along with this meeting minutes and an invitation to come to the meetings. Mr. Roberts added they could do the same for next year. Mr. Roberts stated he hoped people understood that when they did something like this it was not this board doing it. When they raised the benefits to 90% it was not this board, the people in Little Rock allowed them to do it. It was their responsibility to act on what those people told them. It was their responsibility to do what was right and correct for the pension fund. If the report came back gloom and doom and hoped most people would understand that. Meeting adjourned at 3:05 p.m. • • • •