HomeMy WebLinkAbout2005-10-20 MinutesPolicemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 1 of 11
Policemen's Pension and Relief Fund Board of Trustees
Meeting Minutes
October 20, 2005
A meeting of the Fayetteville Policemen's Pension and Relief Fund Board was held on
October 20, 2005 at 1:30 p.m. in Room 326 of the City Administration Building located
at 113 West Mountain Street, Fayetteville, Arkansas.
Eldon Roberts called the meeting to order.
Present: Eldon Roberts, Jerry Friend, Tim Helder, Dr Mashburn, Jerry Surles, City
Clerk Sondra Smith, City Attorney Kit Williams, Elaine Longer, Kim Cooper and
Kenneth Biesterveld with Longer Investments.
Absent: Mayor Coody
Eldon Roberts: What is the status of the hiring of the attorney for the TIF? We did hire
Jim Rose.
Kit Williams: I had to bring in the Department of Finance and Administration to argue
about the 25 mils. Everyone has agreed to the stipulated facts except for the Department
of Finance and Administration. I am going to have Sondra certify the ordinances that
were passed. After we do that we can file a Summary Judgment Motion. There is a
hearing date set for December. Hopefully by the end of the year we will have everything
before the Circuit Court then it will probably be appealed to the Supreme Court for a final
decision.
Approval of the July 21, 2005 Minutes
Jerry Friend moved to approve the minutes. Jerry Surles seconded the motion.
Upon roll call the motion carried 5-0. Dr. Mashburn was absent during the vote.
Mayor Coody was absent.
Approval of September, October and November 2005 Pension List
Doctor Mashburn moved to approve the Pension List for September, October and
November, 2005. Tim Helder seconded the motion. Upon roll call the motion
passed 6-0. Mayor Coody was absent.
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 2 of 11
Longer Investments - Investment Report
Elaine Longer introduced Kenneth Biesterveld with Longer Investments. Elaine handed
out an outlook report. She stated Katrina made a big difference. There are a number of
things that happened post -Katrina that are affecting the markets. Through September 30,
2005 all the stock markets were negative it is a year like last year. Last year, September
30, 2004 all the market averages were negative and then the whole return was made in
the final two months of the year once President Bush was reelected. We are having a
similar year where rising interest rates and high energy prices have kept a lid on the stock
market and then we hit Katrina that sort of accentuated both of those trends and threw
energy prices to a new high for the year. Because of the response from the government
throwing more physical stimulus into the pot the Fed has become even more vigilant.
They sent the Fed governors out to speak around the country and they are all talking
inflation. It looks like the Fed is going to rise two more times before the end of the year
which takes us to 4.25%. Depending on how high the inflation rates go they could keep
going after we lose Greenspan in January because technically they normally don't stop
until we reach 2% above the inflation rate. Even at 4.25% you are not as high as 2%
above the inflation rate. It has lengthened that time horizon, we were starting to see light
at the end of the tunnel because there were some indicators that the economy was going
to slow down a bit and now you have lengthened that time frame.
Jerry Friend: When does that affect home mortgages?
Elaine Longer: It has not at this point in time but a lot of the reason was because the
interest rate increases on the short end of the curve were not affecting the ten year
treasury. That is called a flattening of the yield curve as the short term rates came up to
close to 4% on the two year the ten year is out here at 4.5%. What we are seeing in the
past month, post Katrina, is the ten year yield is moving up. The mortgages key off the
ten year.
Jerry Surles: He is going to retire in January have they selected someone to fill his
position?
Elaine Longer: They have not, the names that I have seen them put out there I think any
one of them would be good. I don't think that Greenspan's replacement is going to cause
the market any kind of indigestion.
Eldon Roberts: Who appoints those people?
Elaine Longer: The President.
Basically economic growth has continued at about a 3.5% growth rate. This fourth
quarter will be the tenth consecutive quarter of plus 3% growth rate. So we have had a
good long economy economic recovery. Employment has strengthened through it; the
job creation is still lagging previous economic recoveries at this point in time so we have
had less job growth than we should have had for this length of an economic recovery.
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 3 of 11
Four of the last five years household inflation adjusted income has been down. That is
why it doesn't feel like to the average American that we are in a recovery plus they are
facing rising prices. Short term interest rates have risen to 3.75%; we expect it to go to
4.25% before the end of the year and then probably 4.5% to 4.75% after the first of the
year before the Fed pauses. Depending upon inflation that may not be the peak but I
think they will pause. Corporate capital spending and consumer spending have been very
healthy but some of the pre -cursors we watch to consumer spending lead us to believe
that the consumer really hit the wall in August. We have seen some disappointing retail
sales numbers especially among the electronic firms. The consumer in August really
started to feel the pinch from the rising energy prices and they have not received their
home heating bill yet. Christmas could be a little bit weak this year depending on how
much higher the price of natural gas goes and how much it affects the consumer. Home
heating bills will probably increase anywhere from 60% to 75% from the last time they
paid one so it is going to be more of a sticker shock.
Doctor Mashburn: Have you ever seen a time like this where heating and other
expenses have gone up that rapidly?
Elaine Longer: We have had higher inflation rates, what has happened is the inflation
that we have seen on the energy level has not set its way into consumer price inflation in
a big way until September. September's numbers looked worse and producer price index
also looked worse for September than what we have seen. It is becoming entrenched, by
that I mean you are starting to see the embedded inflation start to come about from these
increases. We have had price bites before but they have always been supply driven and
were resolved fairly quickly. This is demand driven so it is going on longer and will stay
with us longer than a supply shortage. This is difference this time and it is going to affect
the household sector more than the corporate sector. The corporation's profit margins
are strong and cash flow is strong because they have been able to cut cost elsewhere
largely through outsourcing labor and reducing payroll, that type of thing so their profit
margins haven't really been affected overall. There are some areas that are affected more
than others but as far as the S&P 500 overall earnings are still up about 15% this year.
You have the household sector that is fairly weakened by the debt accumulation that they
have done in the past few years now they are facing rising prices and they are not
prepared to handle it. Corporate America is in the best shape it has been in decades. So
you have a weak consumer and a strong corporate sector.
The dollar has been fairly strong since the first of the year. The positives going into the
end of the year are, moderate economic growth is supposed to continue. By all measures
that we have out there we are not seeing a lot of weakness, leading economic indicators
that were released today was a little bit weak and consumer confidence is coming down.
Some of those things portend for a slowing in the economy but we should still see about
3.5% in the fourth quarter. The continued earnings growth and strong corporate cash
flow our chart goes back to the fifties showing free cash flow of corporations and as you
can see we are at an all time high.
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 4 of 11
The next page shows what has happened to the cash the corporations are generating. We
have after tax profit margins as a percent of gross domestic product at an all time high,
free cash flow margin is at an all time high so where is the cash going. They have
increased cash reserves and paid down debt so the corporate balance sheet is in real good
shape. They have also increased dividends year to date dividends are up by 20%. They
are engaging in capital expenditure quite aggressively and then also repurchasing stock
and merging acquisition activity. So the cash flow at the corporate level is not going at
this time to increasing pay rates. They have repaired the balance sheet, they have
increased dividends, they are buying back stock, and they are buying other companies
and retiring debt.
Jerry Surles: So it is not helping anybody but them.
Elaine Longer: That is probably the reason that you have this slow employment growth
at this point of the economic cycle, they are very hesitate to add to payroll.
The price earnings multiple or the evaluation of the stock market takes the price of stocks
divided by the earnings. During the late 1990's before we popped the bubble the price
earnings multiple had reached a high of about 28 times earnings which is out of line with
the average 15 or so times earnings. We have since had a regression back to that average
and year to date since earnings are up about 15% and most of the market averages are
slightly negative or flat. The price earnings multiple has improved even more to a point
to where we are now at 15 time's forward earnings so there is a good strong valuation
floor under the stock market. We have been trying to write about this in the news letter,
if you look at valuation of stocks relative to ten year treasury it certainly favors stocks
over bonds but then you have all these other macro economic risks out there, that are
bothering everybody which is rising interest rates, rising energy prices, an over leveraged
consumer, etc. What is happening is the big shadow; the cloud is still over the market.
So the risk going into the end of the year are the rising energy prices, higher interest
rates, the over leveraged consumer is a risk because consumer spending makes up 70% of
GDP. So if you have a weakening consumer that is 70% of GDP the question is whether
or not the corporate sector will be strong enough and exports strong enough to offset the
weakness of the consumer. The consumer picture is dramatic, the household sector has
always operated with a net savings, a surplus and now if you look at what has happened
since 2000 basically they have fallen off into a net deficit to a point where if you took the
third quarter 2005 number it is minus $415 billion. This is a pretty dramatic turn of
events as far as the overall financial health of the household. What has happened is with
the slow job growth and earnings not keeping pace with inflation, the household sector
has started to consume assets to fund their spending habits.
Doctor Mashburn: Does this indicate that we are headed into a depression?
Elaine Longer: No. Greenspan is very concerned about the impact that consuming
asset like the house equity has on spending patterns of Americans. He has spoke about
the importance that the Fed is going to start placing on asset price inflation because of its
impact in consumption. So they are starting to target not just price inflation but asset
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 5 of 11
price inflation recognizing that this is an important source of liquidity for households
now to continue their consumption pattern. If you look at that and say that $600 billion
of consumer spending last year was from home equity extraction and we had the ten year
treasury going up and interest rates, if the ten year approaches 5% you are going to see
7% mortgages. That marginal pop from home refinancing and how much that frees up
for spending is going to come down dramatically. At the margin this is going to affect
home household spending, it is going to affect people's ability to continue to spend at the
rate that they have been spending. That is why I think you see numbers coming down as
far as expectations as to what Christmas is going to be and Walmart same store sales
growth rate and all of those types of things. We have been kind of negative on the
consumer side of the economy for some time and it is mostly because of this.
We have talked before about the trade deficit and the physical deficit post Katrina the
government is now talking about $200 billion in additional stimulus. Where is that going
to come from? At first you heard they were going to renegotiate the roads program and
the next thing you hear is maybe they will delay the onset of the Medicare prescription
drug program for a year to pay for it. I don't think you are going to ask the elderly and
the sick to pay for Katrina. We still haven't come up with how we are going to pay for it
and in the mean time the expectation is there that we are going to spend about $200
billion in reconstruction so that has caused the Fed to be even more vigilant. A lot of
things have changed since Katrina hit. President Bush's approval rating is sinking
typically the stock market does not do well when the President is in trouble because it
takes that vote of confidence to invest in stocks. When only 28% of the country thinks
we are heading in the right direction not many people are going to feel very good about
taking on risk. From the market standpoint it also pretty much moved social security
reform off the table because he just doesn't have the political capital to do what he
wanted to do. The 15% tax treatment of dividends and realized gains that tax law rolls
off in 2008, they are not going to redo a tax cut for the wealthy facing post Katrina cost
of $200 billion. With the midterm elections and Republicans kind of running scared they
may not do it in 2006 and could it be that they may be too much of a lame duck in 2007.
For the first time the question is coining out in the financial crest what if that is not
reinstated. A lot of corporate behavior has been brought about by the fact that dividend
return to share holder is now taxed at the same rate as capital gain. That is another thing
that relates to President Bush's approval rating that does have an affect on the stock
market.
The stock market has broken important technical support just recently and it has caused
us to move to a more defensive posture. When we break an important point like 1,200 on
the S&P and 10,300 on the DOW it is like a wake up call, these problems have become
more important in the market than the relative valuation of the earnings. So we are in
more of a defensive posture than we were in June.
Katrina's effects are basically higher energy cost, higher deficit spending; there is
increase credit risk because we don't know quite at this point in time what is going to
happen to all the people that hold municipal bonds. So we are watching the bids on
bonds to see if there becomes a widening of the spread. At this point in time the market
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
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does not seem to have many fears about being paid on those bonds because they are not
trading like junk bonds. It is something to watch because we have never had a situation
that just wiped out entire taxing entities like this so we are watching that as far as credit
risk is concerned. There are also questions about how will this affect consumer spending,
interest rates, the Feds actions, all of these questions are milling around in peoples minds
and it is too soon to tell what the ultimate outcome is going to be. The markets have
broken support; you can see that on here. The market is in a retrenchment mode so our
strategies in the midst of this are we currently still have a bond structure with shorter
average duration, we are still waiting for a better buying opportunity before we extend
maturities. We still have not felt comfortable especially since short term interest rates
have come up to the point where I can get 4.25% on a two year government agency why
go to ten at 4.55%. Now if the ten year gets to about 5% then we will become more
aggressive with stretching our maturities like we have before. I think 5%, you get to
those points, 7% mortgages then you start to put the hands around throat of the economy
and it is not going to be too long after that before you start to see the economic numbers
start to come back down. We have seen this before when we have extended maturities,
you get that pop up there but it has such a quick feedback into the economy that it is not
very long before the pressure from those higher interests starts to exert the force that
brings the interest rates back down. We are still waiting for that total return tray that we
like to put on where we time it right and we get the income plus the capital appreciation
but we are just not there yet. In equities we are still over weight the capital goods sector,
economically sensitive industries, we are still over weight energy. We have taken some
profits on our energy positions this year, some of our more volatile energy stocks that ran
the most in the up cycle, we have retained our major producers and on this pull back we
will look to put some more money on the energy side. We have been trimming the sails
as it went up now the energy stock a lot of them are off 20% from their high and I'm
starting to get interested again. That's where some of the cash will flow back into the
stock side of the portfolio.
Internationally Japan has been a great place to have some exposure the recent changes in
their government have really opened up the door to significant reform and that is why
you see Japan hitting multi year highs. We are keeping our Japan exposure that you have
in the portfolio.
The first page of your portfolio is September 30, 2005 and you can see that your domestic
equities were about 46% of total. On page two Japan is about 2.3% so you are close to
49% equity exposure at the end of September. Part of that is accomplished with the use of
the S&P 500 exchange traded fund that we have talked about before. That's a great lever
for that last five or so percent of equity exposure that takes you to fully invested when it
breaks critical support we have only about 1.25% downside risk on a trade like that. It is
very liquid we are back out and that goes to cash reserves and that is exactly what has
happened.
Page six that is an updated report of October 14, 2005 and you are back down to about
42% stocks. We have significant cash reserves in the account about 5.5%, about
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
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$600,000, so we are well positioned to be able to weather the storm and to be able to
capitalize on it.
Doctor Mashburn: Where are we in the overall now? Are we dropping?
Elaine Longer: We are still looking at plus 3% growth rate for the fourth quarter which
will be the tenth consecutive quarter of 3% plus growth. We haven't tapered out and
gone down at this point in time. The stock market is a discounting machine and that's
why it's one of the components of the leading economic indicators is because typically
the stock market will act six to nine months in advance of when you get the information.
The stock market has been performing poorly in a year when you have had 15% earnings
growth. That's one indicator that things might slow down. The other thing is the flat
yield curve, the flat yield curve typically indicates economic weakness ahead and if we
invert the yield curve every inversion of the yield curve has resulted in a recession. We
have not inverted yet but if we get to the point where it inverts then that would be another
signal that there is some economic weakness. We are starting to see the impact on the
consumer side with slowing consumer sales especially the high ticket items so we are
waiting and we will know more as we approach Christmas what the consumer is going to
do. There are those things that are starting to say caution ahead. You see companies
that are coming out with good earnings and they trade down two dollars and it is because
the market is totally focused on the future. It is not so much where we are at this point in
time but taking all these factors and looking at where we will be in March, 2006. It does
look like a lot of the indicators are weakening. I would be willing to bet the 3% growth
going into the second quarter of next year is probably not going to be there.
In 1994 the Feds raised rates six times and they raised them in bigger increments, they
were a little bit more aggressive and so they went from 3% to 6% in six increases. You
came into 1995 and of course stocks and bonds both performed poorly in 1994 but
coming into 1995 the stock market performed very well because they got to the end of the
tightening cycle. The economy slowed and the Feds actually had to start cutting rates by
the second half of 1995. On Page 20 in 1994 the stock return was minus 7.9% and bonds
were actually minus 5.7% because that was such a big increase in interest rates in a short
period of time that the price decline in bonds more than offset the interest income that
was earned by 5.7%. In 1995 stocks were up 27.7% and the total return on bonds was
14.7% and that is because by the second half of 1995 interest rates were declining again
so the Fed had to lighten up because they slowed the economy too much. You could be
facing the same thing in 2006 in that valuation has improved and as we move towards the
end of the tightening cycle that's when you get the pressure relieved in the stock market
and you can actually see price start to move because valuation is supportive and that's
what I think you will see I think we are still in a corrective mode but in 2006 we could
probably have more of a play out like what we have in 1995.
Page 11 is a summary of realized gains year to date they are about $179,000 and that is
just taking gains on some of the energy stocks that we have had. We have sold our real
estate investment trust and booked those gains this year because those are very sensitive
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 8 of 11
to interest rate increases and we wanted to go ahead and get those booked. Net income
has been about $187,000.
Page 12 is a summary of the fixed income holdings. Not much has changed since our last
meeting. You can see that about 35% of all the bonds in the portfolio are less than three
years in maturity which for us is as good as cash. We can convert anything that is in the
zero to three year maturity to cash to use to extend maturities as soon as we want to take
advantage of that.
The next page is a listing of your stock holdings none of them exceed 3.9% of equity
portfolio or 2% of total which is what your policy guidelines are calling for. Page 14 is
the energy and sector report not much has changed we are still over weight the capital
goods side of the economy and we are under weight the consumer side of the economy
and we are over weight energy. We are about equal weight on technology and mostly
holding the big players the core holdings in that area.
Page 19 is a summary of your contributions and distributions. The net distributions have
been about $500,000 this year. The final page shows the returns through September 30,
2005. Stocks are down about 2% bonds are up about 1.5% so the total is about
unchanged. Compound annual return stocks are about 5.9% bonds are about 6.4% and
the total has compounded at 6.6%. The reason the total is higher than either one of your
asset categories is because during the periods where you had negative equity returns we
were lighter weighted in equity so the impact on the total return was not as high as in
years where we had good returns in stock markets and were typically over weighted.
That's why your compounded annual return on the total portfolio is actually higher than
your asset category. It is the asset allocation we made between stocks and bonds.
Your total investment return inception to date has been about $5.1 million.
Doctor Mashburn: Since the economy kind of goes up and down do you see any red
flags that we are heading to a possible depression or at least a recession?
Elaine Longer: I think you could see a period where the economy slows down enough
like it did in 1995 that the Fed has to revert and become more accommodative. We are
just not there yet and we do not have any indication in what they are saying that they are
there. We are kind of defensive we have cash reserves both on the bond and the stock
side.
Eldon Roberts: Basically we are holding our own, times are tough and you are earning
your money.
Elaine Longer: When we get that clearing where you feel like you can really run we
generally know that and you are just not in the clear yet. A lot of it has to do with the
macro economic risk because that is what's creating the imbalance, what keeps people on
point. It's not just running the numbers on the price earnings multiple versus the ten year
treasury any more there are these other things that are exerting pressure on the investment
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 9 of 11
world because it's not easy to fit those factors into the equation but they do have an
impact. I wouldn't be surprised to see a pretty strong year end rally sort of like we had
last year but I think it will start from lower levels because of the technical breakdown we
have experienced in the market so I would be surprised if the market closed up on the
year probably flat to slightly lower would be my guess at this point in time.
Eldon Roberts: I have been seeing about credit card, their payments are going to about
double and the interest is going to go up on the credit cards also. I don't see how that
could be good because people are going to have to pay those or fall behind on them.
Elaine Longer: The fees attached, the service fees are doubling, and the interest charge
is going up also. The new bankruptcy law has kicked into effect and with that they
tightened up on the credit cards and you are right that is going to have an affect on
people. What one of the oil company's president said was what they are seeing that is
kind of alarming is more and more people are charging their gasoline. This is a trend that
looks like more people are charging it because that is how they can pay for it.
Jerry Friend: We own some oil companies?
Elaine Longer: Yes we are over weight on energy. Oil is great in a portfolio because
you have a dividend income that is close to a two year treasury yield, you have growth
potential and you have inflation hedge. It is a good core area of our portfolio. We will
probably be looking at opportunities to enhance that.
Jerry Friend: How do oil companies lose money?
Elaine Longer: During the 1980's and the 1990's before oil came up like this nobody
owned oil stocks.
Old Business
Benefit Increase
Letter to PRB requesting the increase was sent July 18, 2005
A copy of the letter was given to the Board.
Eldon Roberts: Did you send the letter and then they billed us?
Sondra Smith: Yes, they would not complete the study until we paid them.
Eldon Roberts: So was $2,000 the total amount, there is not going to be any more?
Sondra Smith: Evidently because that is all they billed us for.
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 10 of 11
Eldon Roberts: Did they give you a timeline?
Sondra Smith: No. Do you want me to call them and ask how long it will be?
Eldon Roberts: Well by the next meeting in January if we haven't heard something
prior to the next meeting let's give them a call.
Sondra Smith: Okay.
Check was sent to PRB for the study August 16, 2005.
A copy of the check that was sent to PRB for the actuarial study was given to the Board.
New Business
Harold Flowers
A copy of the letter that City Attorney Kit Williams sent to Margaret Edwards regarding
Harold Flowers benefits was given to the Board.
Eldon Roberts: Have we pretty much got that resolved at this point in time?
Sondra Smith: Margaret Edwards called again since our last meeting wanting to know
when she was going to start getting his benefits I explained to her that she did not qualify
for them. She stated she was left the beneficiary and I explained to her that she did not
qualify because they were not married. Therefore I asked Kit to write her a letter. I
haven't heard any more form her since Kit sent the letter.
Eldon Roberts: If a policeman remarried after he retired he has to be married to that
person for ten years before she is eligible to receive his benefits if he passed.
Kit Williams: It is my understanding that would be a separate benefit that this Board
would have to authorize but I would have to look at it and see.
Turn back Funds for 2005 $353,270.78
A copy of the turn back amount was given to the board.
Eldon Roberts: That just keeps going up. I was lead to believe that we were going to
receive less each year. It has been mentioned that as we get more financially sound the
way they compute that insurance turn back we would be entitled to less. I don't think we
are getting any more financially sound. That is our share to our plan?
Policemens Pension and Relief Fund
Board of Trustees Meeting Minutes
October 20, 2005
Page 11 of 11
Sondra Smith: Yes.
Jerry Surles: Do they calculate that on the number of officers in your pension plan?
Eldon Roberts: It has to do with insurance premiums that are paid, a certain percent of
that is set aside. The fire is different than police; they have a formula and divide it. Our
amount comes from automobile insurance.
A discussion followed on the insurance turn back funds and the possibility of the fund
being transferred to LOPFI in the future.
Supplement amount for 2005 $30,000.00
A copy of the supplemental amount was given to the Board.
Future Supplement Lump Sum Distribution was $984.60
A copy of the lump sum distribution was given to the Board.
Meeting Adjourned at 2:50 PM