HomeMy WebLinkAbout2006-10-26 MinutesFiremen's Pension and Relief Fund Board of Trustees
Meeting Minutes
October 26, 2006
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Firemen's Pension and Relief Fund
Meeting Minutes
October 26, 2006
A meeting of the Fayetteville Firemen's Pension and Relief Fund was held at 11:00 AM on
October 26, 2006 in Room 326 of the City Administration Building
Mayor Coody called the meeting to order
Present: Pete Reagan, Marion Doss, Dennis Ledbetter, Ronnie Wood, Ted O'Neal, Mayor
Dan Coody, City Clerk Sondra Smith, Deputy City Clerk Amber Wood, City Attorney Kit
Williams, and Trish Leach, Accounting, Elaine Longer and Kim Cooper.
Approval of the September 28, 2006 Meeting Minutes and October 2, 2006 Special Meeting
Minutes:
Pete Reagan moved to approve the September 28, 2006 Meeting Minutes and October 2,
2006 Special Meeting Minutes. Marion Doss seconded the motion. Upon roll call the
motion passed 7-0.
Approval of the Pension Lists:
Approval of the November, 2006 Pension List — No Changes
Pete Reagan moved to approve the November, 2006 Pension List. Ronnie Wood seconded
the motion. Upon roll call the motion passed 7-0.
New Business:
PRB Letter Regarding the 2005 Certified DROP Interest Rate
Sondra Smith: This is just an informational letter on the DROP money we pay interest on.
PRB tells us how much to pay. Trish gave me a copy of the letter, we will be paying interest or
we already have paid interest on Marion's check that he received last year.
Kit Williams: What was the rate?
Trish Leach: 6%.
Firemen's Pension and Relief Fund Board of Trustees
Meeting Minutes
October 26, 2006
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Discussion on Changing Meeting Date
Sondra Smith: You wanted this back on the agenda because we are approving the pension lists
before the checks actually go out and then there are changes. It doesn't matter to me I don't mind
bringing revised pension lists to you.
Mayor Coody: Doesn't matter to me. How ever you guys want to do it.
Pete Reagan: I just want it makes it easy for finance and Sondra so if you all are happy with it
we will just keep it like it is.
Kit Williams: There is some benefit to approving the list before they go out. You all are the
ones making the decisions although we are bound by law.
Pete Reagan: The only time we get a revised list is after we approve it and there is a death.
Sondra Smith: A death or when someone changes their taxes. We talked about taking the tax
amounts off the list.
Ted O'Neal: That seemed like a good idea because all we want is the total amount.
Kit Williams: Right the gross amount.
Sondra Smith: Accounting did that this time on the November pension list.
Marion Doss: When we discussed it at the last meeting we talked about keeping it on a
Thursday due to city department meetings being on Monday and we talked about any Thursday
was good, if it would help the finance department or anyone else to have it the first Thursday of
the month then I guess we would be open to doing that.
Sondra Smith: I think it will help with taking the three columns off that have the taxes because
we don't need to approve the taxes anyway.
Marion Doss: Right.
Sondra Smith: If they make changes then we have approved a list that was changed and I don't
like you doing that. Accounting has changed that and all we have is a regular monthly benefit
and the year to date amount now on the pension list. So the only changes we will have in the
future are if someone deceases.
Marion Doss: Okay.
Sondra Smith: So we should be cool.
Marion Doss: If it suits Trish and the finance department we are all for it.
Firemen's Pension and Relief Fund Board of Trustees
Meeting Minutes
October 26, 2006
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Trish Leach: It's really easier for us to meet this time of the month because the first week of the
month we are doing pension checks and payroll. This realty works well for us.
Kit Williams Memo — Revenue Supportine Pension
Kit Williams: Didn't I hand this out to you already and we discussed it I guess.
Marion Doss: I think there was something attached with the minutes.
Kit Williams: The millage is almost certainly to continue. It doesn't have to. It can be voted
out, but I don't see that happening any time in the near future. And so the millage money will
continue and that supports the pension at least many years into the future. The other stuff is of
course controlled by state law which is subject to change or being diverted. You never know
what the legislature is going to do. They might decide to divert that to the new plan or whatever
else. Those are the two revenues right now primarily that are supporting the pension plan.
We discussed what happens if we send it down to LOPFI where everything will be secure and
that can happen. That is a decision that the City Council is empowered to make under the statues
as they exist now. But if the City Council made that decision then they would be committing the
city tax payers to make up this almost $10 million deficit. That's why I think at this point in
time it would be very unlikely that the City Council would want to do that. Hopefully in the
future, the fund will be in better financial shape so it won't be as much of a hit on the city tax
payers and then they would be more inclined to do that for you and the Police pension fund. Both
of you are right below $10 million in actuarially unsoundness.
As I explained to the police and I think to you, that's a little bit misleading because the assumes
that there is not going to be any more money coming in. There is going to be more money
coming in. There will be more millage coming in, probably not enough, but at least it is not
going to be as bad as it looks like. They look at how much money you have on hand right now
according to what the benefits that are out there and obviously you are only about 50% funded
which is not a good position for the pension fund to be in. But with millage in the years to come
that percentage of unfunded liability should go down. I don't know if it will go down all the way
but it should go down and maybe in a few years if you don't increase benefits and you just leave
it the same that amount will come down low enough that it will be more amenable to the City
Council to go ahead and send it to LOPFI in the future. Maybe it will not cost as much for them
to do that in the future.
Marion Doss: Kit if this went to LOPFI would there be something in there that the millage will
continue for a certain number of years, maybe for what they estimated the life of the fund.
Would it continue going to LOPFI or would that millage end?
Kit Williams: I think the millage can continue even when it goes to LOPFL I don't think there
is a requirement that it has to continue but I think it will continue until and unless the plan is over
or the citizens vote it out.
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Meeting Minutes
October 26, 2006
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Ronnie Wood: Where does that millage go if we went to LOPFI?
Kit Williams: It would probably go to help pay what the city would owe. The city would owe
more on top of it but that would probably help the city pay. That would be part of what would be
presented to the City Council. In the future when it is less than $10 million lets say we get back
down to a $ 4 million level then you could make a pretty good argument that the millage is going
to be the lion's share of the burden on the city and so that would make it more likely that the City
Council would agree to it.
Dennis Ledbetter: When you send it to LOPFI and say what is it going to take for you to take
this fund does LOPFI consider that?
Kit Williams: No, they just look at what we are going to have to pay. They don't care about
where we are getting it. They are saying this is what you have to pay. We can look at that and
help share our burden. I think that what we need to do for the foreseeable future is kind of stand
pat and hopefully it will start evening out a little bit. I certainly don't recommend that you raise
benefits but I don't necessarily think you have to lower benefits at least not now but it might be
that sometime in the future you would have to. If you hold the line now then maybe the millage
will start turning the corner. After about four years or so we would have a better idea about
whether the millage is going to help bring the deficit down.
Ted O'Neal: How much does the millage bring in?
Mayor Coody: A four tenths of a mill brings in about $400,000 a year.
Kit Williams: It's not enough in itself but you are still getting interest. Hopefully we will
continue to get interest from your investments.
Dennis Ledbetter: So the bigger the city gets the more millage comes in?
Mayor Coody: You expand your millage base therefore even if the rate stays the same you're
taxing more and more property. The millage has been climbing every year forever in town I
don't think there has been a time the millage has dropped back.
Kit Williams: That's the reason it is 0.4 now rather than the 0.5 is that the property value went
up too fast and so they required a roll back. That's the only thing we don't want to happen again.
We don't want to have the property values go up so fast that you would be looking at 0.3 of a
mill.
Pete Reagan: We used to have one full mill.
Kit Williams: Divided between the two plans.
Mayor Coody: Fire and Police Pension.
Firemen's Pension and Relief Fund Board of Trustees
Meeting Minutes
October 26, 2006
Page 5 of 10
Dennis Ledbetter: So when the city annexes.
Mayor Coody: That helps.
Dennis Ledbetter: Well let's get this show on the road.
Sondra Smith: The west Fayetteville annexation helped your plan.
Old Business:
Martin & Kieklak Contract
Sondra Smith: That is a signed copy of the contract for them to do the class action lawsuit.
You authorized the Mayor to sign this contract.
Kit Williams: I have been in contact with them, they did get everything filed like they needed
to, and they think that the judge will allow you to be the lead plaintiff. I asked them to keep us
informed that we are the lead plaintiff and we have duties and one duty is to provide guidance to
them which we can't do unless they keep us informed of the progress of the suit. I can tell you
suits like these a very complicated and don't go real fast.
Sondra Smith: Accounting was very good to get the information the same day we had the
meeting so we forwarded the information to Martin & Kieklak.
COLA — Letter Regarding the Study
Sondra Smith: This was the information that I sent to PRB to ask for the cash flow study. I
called them they told me the study was $2000 but it was the secretary that I talk to. I talked to
Jody Carreiro he sent me an email that he thought it was still $2000 so we sent a check for
$2000. PRB called me back and said it had gone up to $2200 so we need to pay another $200 to
have this study done.
Pete Reagan: Do we need to approve that?
Kit Williams: The board would have to approve that. I told Sondra the board only approved
$2000 you are the ones that handle the money so you are the ones that need to make the approval
of that.
Sondra Smith: Just to let you know before they will even do the study you have to send the
resolution and the check so we have to request a check get it and send the resolution plus you
have to have the minutes completed and send the minutes with it. They will not even start the
study until they have everything. So when he called me and said we need an additional $200 I
Firemen's Pension and Relief Fund Board of Trustees
Meeting Minutes
October 26, 2006
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asked can you go ahead and start the study and I will get the check processed and he said "no"
not until we get the other $200.
Kit Williams: That is the only thing we like right now they have the resolution and everything.
Sondra Smith: They have everything else and I talked to accounting today and they are
processing the additional $200 check. We should have that in the next few days.
Pete Reagan moved to approve an additional $200 for the cash flow study. Ted O'Neal
seconded the motion. Upon roll call the motion passed 7-0.
COLA - PRB Invoice
Sondra Smith: That is the invoice for the $2200 showing that it was $2200.
Longer Investments:
Review of Investment Policy
Sondra Smith: They sent the Investment Policy and they would like for us to review it and see
if there are any changes that you would recommend.
Kit Williams: Is this the same policy that the Police have to? I think it is basically the same.
Sondra Smith: Yes, I think it is basically the same.
Kit Williams: This is where they have the right to go up a little bit 5% over with your approval.
Mayor Coody: Has there been a problem with the investment policy?
Marion Doss: No, I guess they just like for us to review it ever so often.
Pete Reagan: I think they do it every year. We had a good month last month.
Mayor Coody: Yes that is a fact and it is still happening.
Quarterly Report
Sondra Smith: The other thing I've attached is the quarterly report. You might want to review
that to.
Firemen's Pension and Relief Fund Board of Trustees
Meeting Minutes
October 26, 2006
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Pete Reagan: Look on page one of the portfolio and just look at the petroleum companies and
see what they're doing. That's amazing.
Monthly Report
Elaine Longer: The first page of the report is the September 30th update and a lot has changed
since September 30th On page 6 we have an update for yesterdays close. The stock market is up
strongly in the month of October and the stock part of the portfolio is up about another 4% just in
the month of October. Your domestic stocks represent about 47% of total portfolio and on page 7
the international stocks represent 6.6% so we over still over the 50% but within the 50% plus 5
and so we just need authorization.
Pete Reagan moved to approve the equity overage. Ted O'Neal seconded the motion. Upon
roll call the motion passed 7-0.
Page 10 you will see a summary of realized gains and net income year to date. Realized gains
are $287,000 which is higher than normal but it's not a taxed account. Part of the reason that is
so high this year we have had a lot of sector rotation, we came into the year over weight energy
we took profits early a lot of that is energy gains and then as energy backed off 20% into June
we came back into energy and we have trimmed the sales again. So it's just a very volatile
market this year but a good one to make money in.
Page 11 is a summary of the bond portfolio. The average yield to maturity on the bond
component has risen from at the end of last year it was 4.9% and with the rising interest rates
through June we were able to get the income on the bond part up to 5.4%. We did that by rolling
forward as we came into that last Fed meeting, where the Fed tightened, everything that we could
roll into higher coupons we were rolling. The income yield has come up to 5.4% but the good
news is the weighted average maturity has also declined from 8 years to 5.2 years. So you can
see that the coupon has gone up by 40/50 basis points but the risk factor which is the duration or
the length of maturity on your overall portfolio has come down. So you have a higher income
and less price risk. We still have a tot of flexibility in the portfolio because we have almost 40%
of all bond holdings maturing within 3 years so if interest rates should go back up say after the
elections going into next year, we don't anticipate that at this point in time, but even though we
have been able to increase the income yield we still have a lot of flexibility to continue to do that
if interest rates should go back up.
Page 12 is a list of your largest holdings mostly blue chip stocks. We are in the middle of
earning season and all the names on that top list have come out with very good earnings. It's a
year where the blue chips are out performing the smaller stocks it's the first one in the last seven
years that you have a relative out performance on these blue chips big cap companies. We think
there is still room to go as far as that is concerned because you're coming off of a seven year
cycle were they have basically done nothing relative to the small and mid caps. So this year you
are starting to see a shift into the large cap stocks.
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Meeting Minutes
October 26, 2006
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Page 13 is just a summary of the industry sections and how we are over weighted and under
weighted. We are still very optimistic on the corporate side of economy, corporate America is in
the best shape it has been in in years. We are very heavily weighted in capital goods, consumer
non cyclical would be companies like Coca Cola, Wal-Mart, energy, healthcare and technology.
We are under weight cyclical companies in the consumer cyclical in particular because we think
as housing slows and as the ability of households to take money out of their home in terms of
equity to spend continues to slow down then that is going to continue to impact consumer
spending. So we are still a little concerned about the consumer and what will happen to the
consumer as the economy slows.
Page 14 is a summary of contributions and withdraws and this is inception to date. You can see
that there has been $622,000 in additions to the portfolio and $4.2 million has gone out during
that time frame.
Page 15 this is your summary of performance through September 30th and at that time stocks
were up 10.8% year to date. That compares to about a 7% return year to date on the S&P 500.
The DOW was up 10.9%, the Salomon Brothers Treasury index was up 2.4% year to date, and
your fixed income is right around that amount at 2.2%. Now as of last night the equities are now
up 15.1% year to date. The total return with your bonds was at 6.7% year to date through
September 30th it's now at 8.7%. Compound annual returns inception to date has been 9.4% on
domestic stocks 9% on your foreign stocks and 6.5% over all. You have out performed the S&P
and you have also out performed the Salomon Brothers Treasury index. The 6.5% compound
annual rate is above your actuary assumption in your plan of 6% for the 4 almost 5 years that we
have been involved in your portfolio. On the bottom of the page you have a summary of the
beginning value, all contributions, distributions and the net investment return.
We always read your meeting minutes before we come and the question about the under funded
liability even though you've been able to achieve above the actuary assumption the net
investment is still behind the distribution rate inception to date. The performance on page 15
through September 30th is 10.8% on stocks and that compares to 7% on the S&P and 8.6% on the
S&P with dividends and then the equity mutual funds would be your foreign holdings, fixed
income and then the total at 6.7%. Through yesterday's close the stocks are now up 15.1% year
to date and the total is up 8.7%. So that's just the difference that a big month like this makes.
Now I think that the returns for the year are in. I think even if we go a little bit higher we will
probably back off as we head towards the election. I would be surprised if we closed the year
much higher than the 15.1 %.
Mayor Coody: What does next year look like?
Elaine Longer: We are still pretty optimistic. This is what we have prepared it is sort of our fall
review and even though the stock market through yesterday was up 15% year to date the
earnings are running at a plus 18%. When we came into this year we were talking about the
valuation of stocks relative to bonds being a very attractive valuation especially relative to the 10
year treasury. Even though the stock market has increased it hasn't increased as much as
earnings have increased so you are still at a very attractive valuation and the 10 year treasury is
Firemen's Pension and Relief Fund Board of Trustees
Meeting Minutes
October 26, 2006
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trading approximately were it started the year. Even though the Fed continued to raise interest
rates during the year the 10 year treasury yield fell off significantly after June. So what you have
is the valuation on the stocks is still very attractive relative to the 10 year treasury even though
we have had a strong year.
The 1st page just shows what has happened in the treasury markets. The treasury market the best
indicator of what the market expects future inflation to be is the spread on the 10 year treasury
relative to the Tiffs which is the inflation protective treasury and through the end of last month
that came down to 2.5%. So what the market is saying is that the market is discounting the
inflation rate going forward is 2.5% even though this year it did pop up to 3%. The chart below
shows that the decline that we have had in interest rates from 1990 is still intact even though we
had the 10 year treasury pop up to 5 3/4% in June. It has since come off to about 4.5%.
The next several pages are basically economic indicators that show the growth is slowing. We
expect the 3rd quarter GDP growth rate, which is going to be released probably Friday of this
week, will show that economic growth slowed from the 2"d quarter rate. We expect that slowing
to continue into the 4th quarter and 1 st quarter of 2007 before you start to see it pick up going into
the 2nd half of 2007. The bottom picture shows that the leading economic indicators have turned
down and that precedes the slow down in growth. You have seen the charts before on the
household sector, basically the house hold is running a deficit, and the way that they have been
able to spend more than they make is by using the home as an automatic teller machine. The
bottom chart shows the mortgage equity extractions that have taken place during these years
when the household was engaging in more spending than they were making. So we are at the end
of this game because now you have a leveling off in home prices and you have interest rates that
have come up a bit so that's why the mortgage equity extractions have really fallen off and that
will impact consumer spending.
Page 4 you will see that the debt service ratios for the household which are the red bars are at a
high going all the way back to the 1980's even though the price of carrying that dept which is the
interest rate is at a 40 year low. So what that means is households have taken on debt and
refinanced the house and taken on more mortgage debt quicker than interest rates have dropped.
So that is why we think that the consumer is still going to feel the bite as far as not being able to
tap into the home to finance the next car or the next cruise or whatever they have been spending
on. Then we see on the next chart shows that the number of housed for sale has really increased.
The activity of homes being sold is dropping and so when you have an increase in supply and a
decrease in demand inevitably you get a decrease in price. Yesterday actually we got an update
on home prices and they dropped another 2.2% and that is the biggest back to back price decline
in a 2 month basis that we have had in 35 years.
Page 7 why is the stock market up? Earnings continue to move higher and if you look at the top
chart this is just the earnings estimate on the S&P 500 and what it has done for the 2006 estimate
as we move through the year. You can see at one point in the first part of the year the estimate
was at 85/50 now it is up to 87/10 and after what we are seeing in the 3rd quarter earnings we are
looking at closer to 87/50, 87/80 and then the same thing has happened as we look at the 2007
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Meeting Minutes
October 26, 2006
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earnings. Right now we are looking at a 10% growth rate and that's where we expected this year
to be when we were looking at it in 2005. So the earnings picture is still very strong.
Page 8 you will see that the red bars are the cash flow return on investment or what corporate
America is making, this is 1,900 companies their cash flow has a return on their invested capital
is at an all time high, 9.93%. The spread over what their cost of capital is 4.5 percentage points,
so they are very flush with cash. What we have seen in the past 2 years is that has resulted in
corporations paying down debt, increasing dividends, buying back stock and engaging in merger
and equation activity.
The bottom chart show the relative valuation of large cap stocks relative to small cap stocks and
even though in this year we have seen this turn up a little bit as the large stock have started to out
perform the small and mid cap stocks you can see that it is just a small change in the past 7 year
trend for large cap stocks have under performed the small and mid cap. So we believe that this is
just the beginning of a trend that favors the large cap stocks.
Page 9 our equity strategy US markets in particular large cap US companies are under valued
relative to bonds. Our favorite sectors are energy, capital goods, technology and pharmaictals.
Large cap stocks offer more value than mid or small cap stocks and were still steering our
portfolios away from consumer durables and real estate investment trust because we feel that is
the most vaunarble sector in the economy as the slowing that we anticipate starts to take place.
Page 10 shows our out look for the international component and Europe has out performed Asia
this year. Asia out performed Europe last year but as of last night the international component of
your portfolio was up 14.4% not as much as domestic but still a good addition to the portfolio.
Were still more favorable over the 5 year term with Asia as opposed to Europe even though
Japan has sort of taken a second fiddle or back seat to Europe in this year but as we move
towards the 2008 Olympics in China and also look at the benefit of Japan in a recovery mode
after years of being in a deflationary or recessionary mode Asia should continue to out perform
on a growth rate what Europe is doing.
Mayor Coody: Very good news. Good job. Glad to have you.
Elaine Longer: Thank you we appreciate you. I think that we have had a lot since June. I
wouldn't be surprised if we held back a little bit going into the elections but the market still looks
like a good value especially relative to the 10 year treasury.
Pete Reagan: Thank you very much Elaine.
Elaine Longer: Thank you.
Meeting Adjourned at 11:55 PM