HomeMy WebLinkAbout2002-09-26 MinutesMINUTES OF A MEETINGO
OF THE
FIREMEN'S PENSION AND RELIEF FUND BOARD
SEPTEMBER 26, 2002
A meeting of the Fayetteville Firemen's Pension and Relief Fund Board was held on
September 26, 2002, at 11:00 a.m. in Room 326 of the City Administration Building
located at 113 West Mountain Street, Fayetteville, Arkansas.
PRESENT: Mayor Coody, Ronnie Wood, Marion Doss, Danny Farrar, Pete Reagan,
Marsha Farthing, Kit Williams, and Heather Woodruff.
MINUTES
Mr. Reagan moved to approve the minutes. Mr. Wood seconded. The motion carried
unanimously.
PENSION LIST
Mr. Reagan moved to approve the pension list. Mr. Farrar seconded. The motion carried
unanimously.
INVESTMENT REPORT
Ms. Longer stated the transfer was completed on August 15, 2002. They had had to do
some sales prior to transfer, but on that date they had most everything in Northern Trust
and they could trade it. The market value of the fund was at 9.9 million on August 15.
Cash that transferred in was approximately four million, including the certificate of
deposit, so 3.8 million in money market. Stocks were down to 3.36 million, which was
34% of the total portfolio. In the Portfolio Appraisal was where they were right now.
The stock part of the portfolio has been moved even lower. They were at about 29%
equities. They did buy the S2Y, the proxy for the Standard and Poors Index, to hold their
equity positions while they went through transfer. Once they got everything they were
able to sell position that they did not consider core holdings. That had moved their
positions in their portfolio into an even more defensive posture. They had weathered the
storm well. Credit risk have continued to increase. They had hit four year lows. The
Dow had took out the July lows. The Nasdq was now at a new six year low. They have
been able to pick up some bonds. They have been buying some of the government
agencies in the short maturities to enhance the income. They were trying to move into
more of the government agency to give them a good component in the fixed income side.
There was still too much credit risk out there in the corporate market to really be able to
justify going corporate. They have check with Merrill Lynch and they have in writing
that all of the certificates of deposits are FDIC insured. They had a hard time researching
those because some brokerage CDs were not FDIC insured. They could not find out
anything that indicated at their CDs were FDIC insured, but according to Merrill Lynch
they were. The Market value was 9.71 million. On their remaining corporate bonds they
had a few that were below A rated, but they were not the low investment grade. BBB- is
the lowest investment grade. The lowest grade that they had was BBB+. All of the less
than investment grade bonds were out of the portfolio with the exception of Enron and
Sola, which they could not get rid of. She did not think they were going to be able to get
out of Enron and she did not believe they were going to get a competitive bid for Sola.
Their fixed income securities currently have a yield on book value of 6.3%. On the total
portfolio their income yield was $276,000 or 3% yield. They would like to see the total
portfolio yield get up over 4%. They did not have the opportunity to do that out there
right now because the interest rates were so low. They were being very conservative and
sticking to the short maturities on what they were buying so that they did not lock
themselves. They really needed to have more in the treasuries and agencies part of the
bond market. That was the area that every one was running to right now. They really
needed a better buying opportunity before they go out there farther. Since they have
begun managing the fund, the Dow is down 13%, the S&P 500 is down 12%, and the
Nasdq was off 12.1%. Their equities were down 9.9%. Their fixed income was up 2.5%,
so their total has dropped 3% since they came in. Their equity component is still going to
have the volatility that the stock market has on the down side, but they were trimmed
back to 29%-30% equities, so they had the purchasing power to go to 50%. They were in
a much better position. They had good core holdings. They will still experience negative
volatility, she was please to see that the equities did not perform as badly as any of the
indexes. She felt that all the bad stuff was out of the portfolio. With interest rates where
they were they could not advocate anyone being out of equities completely. This was a
three year bear market. They have not had three years of negative returns in the stock
market since the 1930's. They were still under weighted in their technology stocks.
They had asked Kathryn Henshaw what would be the assumed rate of return to
produced actuary soundness. The assumed investment return is 6%. If they were at the
level where their fund was actuary sound, to stay sound they would have to earn 6%.
Now there was a catch up to get to where they were sound. What they were looking for
is what is that return that they would have to get to to get to 6% begin the actuary return.
Jody Curio was not able to provide that to them. What he did was refer them to the
actuary report. They had page 4 and 7 of their last actuary. On page 7, the year end
valuation on 12/31/01 was 11.6 million. They were at 9.7 million at this time. What Ms.
Henshaw says in her e-mail is that as of 12/31/01 the fund needed 4.126 million more in
assets to cover the existing liability at that point in time. What ever the rate of return that
can make that addition amount of money was what they needed at the end of 2001. That
was a 33% return. The fund assets have dropped another 2 million since year end of
2001. That was present value. Whey they talk about future liability of 4.126 million, that
was future value. A present value decline in the portfolio could result in more than
adding 2 million to their unfunded liability. They could be more than 6.4 million
unfunded. She did not think that they should wait until the next acturary to have one
done.
Mr. Williams questioned the need for another study. What decision could the board
make to change things.
Mr. Reagan stated they were looking for a number figure to put into their investment
policy.
Ms. Longer stated the question had come up about the benefits. They could not answer
the question because they were not actuaries. The actuaries could run the assumption.
Ms. Henshaw was saying that they look at investment returns as the third stream in the
calculations of the actuary soundness. They were really looking at employee and
employer contributions to the plan as being the primary revenue stream. The investment
performance was really meant to give them a guide for how much return they had to
achieve once those revenue streams are sufficient to fund the future needs. There were
only four pieces to the puzzle: the employer contributions, the employee contributions,
the distributions or benefits, and the investment returns. If they end up finding out that
they were quiet a bit under funded, then they had those things to look at.
Mr. Reagan asked Ms. Longer what she would recommend that they set their rate of
return at.
Ms. Longer stated for their retirement plans they were using 6 to 8% on equity returns
going forward. The long term rate of return on stocks in good and bad markets is roughly
10%. If they look at that return, 4 to 4.5% of that component was dividend yield. The
current dividend yield was about 1.5%. If they look at 1.5% and say that earning should
track nominal GDP growth (5.5-6.5%). They could reasonably expect 6 to 8% on equity
returns. On the fixed income side they could not get 6% right now, unless they distort
their credit quality. She had wanted to know the actuaries return assumptions, what
would the portfolio have to do to get them out of unfunded. What ever that number is,
she did not think that it was achievable in this kind of environment. They did not want to
risk more of their assets. It came down to employee and employer funding and benefits
would have to be addressed. She did not believe that there was anything on the
investment side that will get them back to being fully funded. They would have to get to
16.6 million and be earning 6% on that. From 10 million, they were talking about a 60%
return to get back to earning 6%.
Mr. Reagan stated he had sat on this board for twenty years. The majority of that time
they had not been actuary sound. He was concerned about the amount that they were
actuary unsound by. He thought that Ms. Longer had done an excellent job in laying the
ground work.
Ms. Longer stated they had amended their policy to reflect their return assumptions. The
changes that had been made to their policy at the last meeting were in bold. The changes
that they were proposing were in italics.
Mr. Wood moved to approve the changes to the policy. Mr. Reagan seconded. The
motion carried unanimously.
Ms. Longer explained how they used options on stocks to help protect the fund. She
presented a list of securities that they had sold which had been in violation of their
investment policy and their realized lost on the securities. The realized loses of Merrill
Lynch prior to transfer of the assets were $591,000. She could not comment on what was
in that $591,000 lost and how much of that may have been in violation of their policy.
But, following the transfer of the assets, they had listed them according to stock. At the
time, their policy read, "stocks must be rated A or better." Their corporate bonds include
the bonds that had gone to less than investment grade and the unrealized lost. The
Merrill Lynch products that they sold that were out of line with their policy were listed.
Some of them they had a hard time getting description on them so that they could say
with any kind of certainty that they were at discrepancy with their policy. They were
footnoted. The Mutual fund Conseco they considered in violation of their policy,
because 38% of the portfolio was rated BBB and 9.5% was rated less than investment
grade. That again violated their investment grading rating on fixed income. Their
preferred debt securities that were in violation were Dillards and Motorola. The Tribune,
they did not know if it would be considered a violation of policy because it was rated A-,
but it was convertible to AOL stock which was rated B-. She thought that was why they
had experienced a loss on it. It was not just a straight bond, it had been convertible to
AOL and they had taken a loss. They had added the disclaimer that the report had been
complied from sources that they believe are reliable, but they could not guarantee it
completeness and accuracy. They had been going by cost bases that had been provided
by Merrill Lynch.
In response to questions, Mr. Williams stated they have been trying to find actual proof
that Merrill Lynch knew about an investment policy. If the board was looking to pursue
litigation against them, then they would need to find a specialist in this field. There were
many firms who might be willing to take the case. If the board wanted to pursue
retaining an attorney, then they would have to go through the city's procedures. It was
his recommendation that they consider hiring a lawyer and authorize the city to begin the
necessary process to select one.
Mr. Wood moved to follow Mr. Williams recommendations. Mr. Doss seconded. The
motion carried unanimously.
The meeting adjourned at 12:15 p.m.