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HomeMy WebLinkAbout2005-01-20 MinutesPolice Pension Meeting Minutes January 20, 2005 Page 1 of 10 Police Pension and Relief Fund Board of Trustees Meeting Minutes January 20, 2005 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held on January 20, 2005 at 1:30 p.m. in Room 326 of the City Administration Building located at 113 West Mountain Street, Fayetteville, Arkansas. PRESENT: Randy Bradley, Tim Helder, Jerry Surles, Jerry Friend, Dr. Mashburn City Clerk Sondra Smith, City Attorney Kit Williams, Marsha Farthing, Trish Leach, Eldon Roberts, Elaine Longer and Kim Cooper. ABSENT: Mayor Coody Randy Bradley called the meeting to order. Approval of the October 21, 2004 Meeting Minutes: Tim Helder moved to approve the Minutes. Jerry Surles seconded the motion. The motion passed 6-0. Approval of Pension List for November and December 2004 and January 2005: Sondra Smith: The December Pension List shows that Eldon Roberts's gross amount is different than his year to date amount. Trish was nice enough to explain that to me today. The amount is different due to the fact that his year to date amount is a prorated amount for the month of December. The gross amount is the amount he would have received if he had been on the Pension List the entire month of December. The January list does have the 3% COLA added to the amount. Jerry Friend moved to approve the Pension List. Jerry Surles seconded the motion. The motion passed 6-0. Approval of Eldon Roberts Retirement: Sondra Smith moved to approve Eldon Roberts retirement. Tim Helder seconded the motion. The motion passed 6-0. Police Pension Meeting Minutes January 20, 2005 Page 2 of 10 Investment Report, Longer Investments: Elaine Longer: Just as a review for the year it was kind of a topsy turvy year following a big year last year. We were up about 28% in the markets last year coming off a three year bear market. For last year because of the Iraq war situation and the uncertainty about the election outcome and everything that was going on with rising energy prices, the Federal Reserve raising interest rates, the market just stayed in a holding pattern all the way through October 315t. As recently as October 31st there was no return in the stock market indices on any of them. Then President Bush won reelection, crude oil prices broke from $55 a barrel back down to about $42 and with that the market did a year end rally. It is interesting that stocks did out perform bonds in the other asset classes last year as we had expected going into the year but we had to wait until the bottom of the ninth inning before it actually happened. Given the fact that no one had made any money going into that that kind of caused a lot of money to come off the side lines and go into the stock market. What we are seeing in January is that some of that return that we had in November and December really borrowed from the first quarter return in 2005. January the market indices are down any where from 2% to 2.5% to 4% on the NASDAQ. That is basically a little bit of giving up the part that we had in November and December. President Bush getting reelected did elevate some of the concern about whether or not the dividend tax treatment would change in 2008. That will become permanent law most likely because he has a Republican House and Senate as well. That has really spurred a lot of dividend increases; we are seeing it affect corporate behavior. A lot of the stocks that we can buy right now yield 3% and 4%. I still think coming into this year that stock will be the asset of choice. It is going to be bumpy again; I don't think it is going to be another 28% or 30% year. I think it is going to be like last year where you work for every percentage point that you get. Stocks should out perform bonds this year given the currently available information. The last meeting that I attended we did mention that we were up to the limit on your asset allocation equity wise at 50% and you are still hovering right there at the 50% range. We went into the election thinking that with the increase in earnings that we had seen last year of over 20% and the fact that the market did nothing the valuation in the stock market had improved to the point that we thought it would go higher rather than lower. On Page 5 you will see that the year end valuation on the total portfolio is about $10.9 million. The income yield which is just the dividends and the interest income that comes in on the bonds is at 3.6%. So you have a 50% growth component on the portfolio but your overall income yield is the equivalent of a five year treasury. That is a real good balance still between growth and income. Page 6 has your largest holdings, Minnesota Mining & Mfg., Citigroup, Walmart Stores, General Electric and Johnson & Johnson On Page 7 we show the industry breakdown. We had been overweight on capital goods and energy and underweight in consumer, finance and technology most of last year. We have changed our weighting a little bit coming into this year taking some profits on some of our cyclicals and adding to some of our more defensive stocks out there like Clorox, Sara Lee, Kraft Foods, Colgate Palmolive, and names like that that you haven't seen in the portfolio in a while. We are really trying to emphasize some of the dividend yield that is available out there thinking Police Pension Meeting Minutes January 20, 2005 Page 3 of 10 that this year, if it is a year like last year, a good part of your total return is going to be the dividend income. We have changed our industry allocation a little bit but nothing dramatic. Page 12 shows the breakdown on the fixed income part of the portfolio. On the bonds the weighted average yield to maturity is still a 5.2% and the weighted average maturity is six and a half years. By comparison the 10 year treasury yields about a 4.1%. We still have a real good income yield without having a lot of maturity risk. This is the number that we watch to really look at the flexibility that we have in the portfolio should interest rates rise. Although the Federal Reserve increased interest rates last year in short maturities the longer maturity bonds did not increase in yield in fact the ten year treasury closed the year at close to the same interest rate as it had traded at on December 31, 2003. So, we haven't had an increase in the 10-30 year yield but we do have a lot of maturities in the one to three year area, in fact 33% of the bond portfolio. So if we have the chance this year where interest rates do increase we are structured to be able to capitalize on it roll some of our maturities forward and capture higher rates. Page 13 summarizes your realized gains and losses and income and expenses. The realized gains last year which is just the portion of stock appreciation that we realized by selling the stock is $251,000. Your net income, which is just dividends and interest net of your expenses, is $312,000. Those two are the components of total return that go into increasing your book value on your portfolio which is what the State looks at in their actuarial study. That increases your historical cost or your book value on the portfolio by about $560,000. Page 14 shows your contributions and distributions for the year. The equity return for the year on Page 15 was 7.4%, fixed income was 2.7%. That's because of the slight decline similar to 2003 in the price of bonds in a rising interest rate environment. It doesn't take away from the fact that the income earned was still 5.2%. Bonds do have price fluxions given the changing interest rates so the total return was 5.5%. Your compounded return on total portfolio inception to date is still a 7.2%. To give you a comparison on the indices for that year, the S&P was up over 8% the DOW Industrials were up 5.3%. We were in the middle between the DOW and the S&P. I would just like to briefly review the important parts of the investment policy as it pertains to the asset allocation and also the individual securities. We monitor everything in your policy in terms of credit quality on the bonds. The credit quality of the stocks that we own and then the percentage of the portfolio invested in an individual stock or an individual corporate bond. Everything that is in your policy we monitor to make sure that your portfolio is in compliance. The only thing that we like to review annually in particular is the asset allocation. Right now equities are 35% to 50% in your policy; we are currently at 50%. At this point in time I don't see any reason myself to change that. Jerry Friend: Did you say our current policy is 50%? Elaine Longer: 50% is the maximum, 35% on the low end and 50% on the high end. Randy Bradley: What is your opinion on it? Elaine Longer: I like being at 50% we have had a couple of situations where market appreciation pushed us up to about 53%. The only thing that I would say is in the minutes if we Police Pension Meeting Minutes January 20, 2005 Page 4 of 10 could maybe have the flexibility during the bear market to go under 35% for a while. There seemed to be no reason to be in a hurry to buy just to meet that 35% low water mark so we dipped under the 35% for a while. I would just say if we could have some flexibly as appreciation takes place if we go over 50% not to exceed 50% plus 5% or something like that. That keeps us form having to sell when we would otherwise be buying. That would be the only thing. Kit Williams: So you would like 25% to 55%? Elaine Longer: I think the 35% to 50% is okay but maybe we could say with a plus or minus 5% at either end. Where 50% is our target but if market appreciation takes us over that target rather than having to sell and sit with cash balances when I think that is not the place to be. It gives us just a little bit more flexibility. Jerry Friend: Is the 35% to 50% cost? Elaine Longer: No that's market. We use market because that is the indicator of what your true risk is. Jerry Friend: We need to move to give 5% lead way on the top and the bottom so that we don't lose money trying to stay in the game. Kit Williams: That is just in the Equities, Number 3? Elaine Longer: Yes, I would say 35% to 50% plus or minus 5% on each end. We are still going to shoot for 50% but it helps when it creeps up to 53% and I don't really particularly like cash then I don't have to sell to get back to 50%. Kit Williams: A temporary increase or decrease of not more than 5% will be allowed with reports to the Board at the next quarterly meeting. Elaine Longer: That would be great. Jerry Friend: Are you sure we need to say approval because there is really nothing we can do. A discussion followed on how the wording of the change should read. Kit Williams: When she reports to you it is still your responsibility and your duty. If she is just reporting to you she has the absolute power to do it. I want you to either approve it or else say no go back to 50%. Jerry Friend: Okay. I like that. Jerry Friend moved to change the policy in the Equity Portion to read the Manager can operate outside the Equity guidelines by not more that 5% with a report on the variance to the Board at their next quarterly meeting. The Board will then authorize or reject the variance for the next quarter. Tim Helder seconded the motion. Upon roll call the motion passed 6-0. Mayor Coody was absent. Police Pension Meeting Minutes January 20, 2005 Page 5 of 10 Jerry Friend: You don't bump up against the same thing in bonds? Elaine Longer: We did during the bear market. We received the temporary waiver to go below the 35% on equities which bumped us higher on the fixed income but we got out of that. Jerry Friend: So you don't need to do that for the bonds? Elaine Longer: No. Jerry Friend: It sounds like every company is becoming foreign or global or something. Are we running into any problems there at all? Elaine Longer: No. The only thing that is restricted in your portfolio on the foreign side would be stocks that are not traded in American depository. A lot of the big foreign stocks trade on the US market, on the US Stock Exchange. I think the reason your policy was written that way was to keep away from any kind of liquidity risk in buying a foreign that is not easily traded. That probably dates back 20 year I would guess because that is almost nonexistent. I would have a hard time finding a stock like that at this point. Widows Benefits: Kit Williams: I wrote you a letter on October 20, 2003 and enclosed the Attorney General's opinion about this new act that did authorize this for the first time. When the title of the act said clarifying the law it made it sound like this had always been the law and that is not the way we had interpreted it. We had interpreted the law for a long time as saying 50% that was the limit a surviving spouse could get period, that was it and it couldn't be more. The legislative changed the law in 2003 and now you have to go back through the regular process like you do for any benefit increase but you can grant them a percentage of what your benefits are now. I would guess that they would be entitled to the 3% COLA too. That would probably come into play also. I did see the letter the former director of the Arkansas Police and Fire Pension Review Board wrote in 2003 based upon a study that was done in 2001. I think that is too long ago now, that was four years ago and you have had a number of people retire and you only have one person paying in now so on a cash flow basis that might make some difference. There have been changes in the portfolio fortunately because of Elaine Longer's good work; we haven't had the big losses that some portfolios have seen. You have also increased benefits for 5 years with the 3% temporary COLA so that is another significant change that was not done before this study was completed. This needs to have an actuarial study completed before any kind of benefit increase should be completed including the widow benefits. You do have the right under State law now if you want to initiate the procedure if you want to increase the widow's benefits above 50%. Eldon Roberts: You're saying we need to do a valuation by Little Rock to raise the benefits? Kit Williams: I think you would have to do that. I think you would have to go by State Statue 24-11-102. That is what the Attorney General said and I agree with him. Police Pension Meeting Minutes January 20, 2005 Page 6 of 10 Sondra Smith: I have enclosed a copy of that State statue with your agenda. Jerry Friend: When is the next time that we are to have an actuarial study completed? Randy Bradley: We have it completed every two years. We did not have it done last year. Tim Helder: When they do an actuarial study do they also do a cash flow analysis or is that something we have to request? Randy Bradley: You have to request it. Kit Williams: If you ever want to increase you have to specifically ask for that and state what you are proposing to increase. Eldon Roberts: The cost is $1,500 to $1,600 to have the cash flow evaluation completed about benefit increases. Randy Bradley: We were approved at one time to go to 100% of benefits for the pensioners but we elected to go to 90%. That was in 2001. Eldon Roberts: That also included widows. Jerry Friend: At that time the 50% law was in effect. Eldon Roberts: But we asked them if that 100% that they were allowing us to go to did that cover widows because it did not specifically spell that out in their letter. They wrote back and said it did include the widows. Kit Williams: Which is pretty strange because the law did not allow it at that point in time. Jerry Friend: We evidently did not increase the widow's benefits. Kit Williams: I don't think you did. I think now when we do a resolution everyone has to sign it. Sondra Smith: I found the resolution that was completed in 2003 to increase the benefits with the temporary COLA. If there was a resolution before that point in time I can search our records. Kit Williams: I don't think there was. We didn't even know this until October 20, 2003. Eldon Roberts: Even though we thought we could grant benefit increase to widows, I think the law still stated that if you add all the benefits together for widows at that time they could not be more than 50%. So we stayed at that level. To my knowledge no widow has received more than 50% of what her husband had drawn. Sondra Smith: So there was not a resolution passed to increase the widows? Eldon Roberts: Not other than the 3% COLA. Police Pension Meeting Minutes January 20, 2005 Page 7 of 10 Kit Williams: If you want to do it you can pass the motion and we will draft a resolution and you will have to appropriate the money to do it. Sondra Smith: Kit, we don't actually pass a resolution until we have a cash flow study completed. Kit Williams: Is that right? So we just ask for the actuarial study is that what we do first? Sondra Smith: We ask for the study, see if we qualify and then do the resolution. Kit Williams: Okay so you just need to pass a motion to pay for an actuarial study I guess. Sondra Smith: Cash flow evaluation. Jerry Friend: I would not mind us asking for a cash flow study but I would really like to see our actuarial study before we actually move to change any thing. Randy Bradley: I am almost positive it is due this year. Sondra Smith: They will do one after the end of the 2005 year. We will not get a copy of the report until about mid year 2006. Marsha Farthing: I may have to have one done anyway, I am going to talk to the auditors because of our new GASB 34 accounting rules and how we will have to book your unfunded liability or asset which ever way it comes out. Sondra Smith: There was a copy of the last actuarial report in your October packet. It was completed at year end December 31, 2003. The next one will not be completed until after December 31, 2005. This one states we are not sound in any of the areas. A cash flow could be a different result. Eldon Roberts: Jerry you might not be drawing your 90% of salary benefit right now if we used the actuarial evaluation to determine that we could do that. The State has allowed this second method which is called a cash flow evaluation. To me that just means the money coming in will pay for the money going out. If you are going to tie all this to actuarial soundness there is no need to spend $1,600 to have a new study. Jerry Friend: But, if we are getting one anyway is what I am saying. I would like to see what the actuary has to say in their report. Sondra Smith: I don't think it will be much different than the 2003 report if you are doing an actuarial study. The only concern I have on the 2003 report, which I mentioned before, is the necessary employer's contribution of $1,678,182.00. That scares me. Jerry Friend: That is what shows on the accounting end. Sondra Smith: Yes. Police Pension Meeting Minutes January 20, 2005 Page 8 of 10 Jerry Friend: Well it doesn't make be comfortable. Sondra Smith: If you increase the widow's benefits that number will go up. Jerry Friend: Yes it will go up. Eldon Roberts: Any benefit increase makes that number go up. Sondra Smith: The City has to book from the actuarial study not the cash flow study. Eldon Roberts: What I would like to see this Board do is to go ahead and ask that a cash flow evaluation be completed now. It will cost $1,500 to $1,600. That would allow a benefit increase to the widows. While we are asking also ask if we can we go to 100% of salary for current and future retirees. Once you get the answer that is when you need to decide if you want to do it or not. Just because you get the answer that says you can doesn't mean that it happens. We will have a couple of questions answered that we want to know the answers to. Then this Board can decide. Dr. Mashburn: Did they say we could have a 100% before? Eldon Roberts: Yes they did, yes they sure did. We didn't do it and I have no problem with that. The actuaries in the first sentence said you can go to 100% of salary but however to practice financial responsibility if you do 90% the fund will be sound for a number of years. I was on the Board then and we opted to take the 90%. We could have gone to 100% then but we didn't. Tim Helder: Have there been any other benefit issues other than the widows and the amount of percentage that retirees get through the years? Randy Bradley: The COLA. Sondra Smith: With that 3% temporary COLA, correct me if I am wrong Eldon that does put some people at over 100% of benefit. Tim Helder: Not yet. Jerry Friend: Some people are already over. Eldon Roberts: That's not an issue any longer because that cap has been removed. That 100% of salary cap has been removed. So that is not an issue if someone is lucky enough to get 105% of their salary. I also studied this spousal benefit increase before I left and I think in there somewhere it says that if a widow's husband was never alive to draw the 90% benefit she can't either. It is only for the widows whose husbands have been elevated to the 90% of salary. There is no widow on the books right now whose husband was drawing 90% of salary when they deceased. They were all drawing less than 90%. The way I read that it would be from here forward. To my knowledge Police Pension Meeting Minutes January 20, 2005 Page 9 of 10 there has not been a police officer die that was drawing 90% of salary that left a widow. We might need to get Kit to look at that. Jerry Friend: Those would not amount to much anyway if we raised them to 100%. Tim Helder moved to pay for a cash flow study. Jerry Surles seconded the motion. Upon roll call the motion passed 6-0. Mayor Coody was absent. Sondra Smith: I will ask them the following: 1. Can we increase widow's benefits to 90% of the deceased pensioner's salary amount and will it apply to all widow's or to only the widow's whose husbands were receiving 90% of salary when they deceased. 2. Can we increase benefits to 100% of salary for all future and current retirees? 3. Can we do both increase the widow's benefits to 90% of the deceased pensioner's salary amount and increase benefits to 100% for all future and current retirees. 4. Can we increase benefits to 100% of salary for future and current retirees and can we also increase the widow's benefits to 100% of salary and will it apply to all widow's or to only the widow's whose husbands were receiving 100% of salary when they deceased. 5. Can we do any of the above and if so which ones can we do. I will have a Cash Flow study completed. Dr. Mashburn: We have just reached the point during the past three years to where we have leveled off and are not gaining at the rate we had been gaining. If it goes on up, which probably it will, if we should take a big hit and our fund becomes less then the cash flow might not cover the retirement. I think we should be careful and not crowd the edges. Jerry Friend: I agree with Dr. Mashburn that whatever we do we need to be financially responsible. Randy Bradley: We need to get this study completed and then decide. Eldon Roberts: That's right. That's when you need to make a decision is after we get the information back from Little Rock. They may say no you can't do either one of those two things. Jerry Friend: If they say yes go for it I am not going to automatically vote for it. I will tell you that up front. I want them to explain to me the difference between the actuary and cash flow and why one is okay and the other one is not before I vote. Sondra Smith: Would you like for me to put that in the letter too. Jerry Friend: No. Police Pension Meeting Minutes January 20, 2005 Page 10 of 10 Jerry Surles: I enjoyed getting that 90% raise; I couldn't believe it to tell you're the truth. I was glad that I received it and if I am going to get it, then I think my wife should get it. 2005 Meeting Schedule: A copy of the 2005 meeting scheduled was handed out to the Board. Parking Permits: Parking has ordered the hang tags they are not here yet. When they come in I will mail them to you. Jerry Friend: I really don't mind putting a couple of quarters in the meter. Other: Kit Williams: Since you are a taxing and leveling entity the Mayor being the Chairman of this Board was notified that the tax increment financing district if that is passed will limit the growth of the millage within that district. The growth of the millage within that district will go to whatever public work is being done in that district. Right now there has been only one district approved and that is the Highway 71 East Square Redevelopment District and that includes most of the square down to Sixth Street and up to Maple. There is a thought that that district might be increased to include the entire downtown master plan area which takes it almost to the university. If they do that then any of the increase in value from the property over 25 years would be going to the TIF district and not to this pension plan. There will be a hearing on amending the plan next Tuesday night at 5:30 at the City Council chambers if anyone would like to come and speak for or against this. You just need to know this as a taxing entity. Sondra Smith: I show Randy Bradley, Tim Helder, and Dr. Mashburn's terms end at the end of May, 2005. We need to do elections in May. Jerry Friend: Doesn't the Board elect the doctor? Sondra Smith: Yes the Board elects the doctor. Jerry Friend and Jerry Surles terms end May 31, 2006. Meeting Adjourned at 2:50 pm