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HomeMy WebLinkAbout2004-10-21 MinutesPolice Pension Meeting Minutes October 21, 2004 Page 1 of 11 Police Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2004 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board was held on October 21, 2004 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 Surtes City Clerk Sondra Smith, Assistant City Attorney David Whitaker, Marsha Farthing and Eldon Roberts. ABSENT: Mayor Coady, Jerry Friend and Dr. Mashburn. Randy Bradley called the meeting to order. Approval of the July 15, 2004 Meeting Minutes: Randy Bradley moved to approve the Minutes. Sondra Smith seconded the motion. The motion passed 4-0. Approval of Pension List for August, September and October 2004: Randy Bradley: J.R. Bowen died; his last check was in August. That is the difference between the September and October retirement list. Tim Helder moved to approve the Pension List. Jerry Surles seconded the motion. The motion passed 4-0. Investment Report, Longer Investments: Elaine Longer: We will start on the first page of the report. This is your overall portfolio as of September 30th. At September 30th you where about 44.5% equities and then we have about a 1% interest in the Japanese market so that brings it up to about 45%. As of yesterday you are about 50% which is your maximum. Page 5 shows your current market value which is about $10.67 million. The income yield, which is the income that comes in from dividends and interest, is about a 3.7% yield or $373,000 per year. The first tab breaks out the stock portion of the portfolio. We wanted to ask your approval to combine this accounting that we do because we started out years ago with this segmented on our computer. The custodian which is Northern Trust holds it Police Pension Meeting Minutes October 21, 2004 Page 2 of 11 all as one account and the City does all of their accounting as one account. We had it segmented because at the time it came in, a certain amount was suppose to be in stocks and a certain amount was suppose to be in bonds, as the relative performance of the different asset classes has changed that mix we always have to transfer cash from one to the other. At this point it is much easier to mange it as one whole portfolio. It is just an accounting change on our computers where we consolidate it and all of your reporting would be like what you see on the first report where it is all accounted for as one portfolio. If that is alright with you we will discontinue doing the separate bond account and stock account going forward. Tim Helder moved to approve the combination of the bond and stock accounts. Jerry Surles seconded the motion. The motion passed 4-0. Elaine Longer: I think it will make it easier for the City too because then we will all be on the same page. Page 9 lists your largest holdings, Johnson and Johnson, Union Pacific, MeadWestvaco, Kerr McGee and Citigroup. You can see that among the five largest holdings, still at the percent of equity, your largest holding is 2.2%. As a percent of total portfolio just 1.4% so you still have a very diversified portfolio without a lot of single issue stock risk. On page 10 is our industry report. Basically to summarize it we are over weigh, as we have been all year, in the capital goods area the cyclical industries and the energy industries. We are under weight in consumer, financial stocks and health care, unparticular the pharmaceutical stocks. We are about equal weight in technology. The over weigh in the energy has really helped this year. We have trimmed the sails a little bet, we got as high as 18% in energy stocks relative to about 7% on the S&P 500 and we have pulled back to about a 13% weigh in relative to the 7%. So we are still double weighted in energy but we have used those funds to apply to the technology and other companies that should do better as the economy continues to improve. So we have taken a little bit off the table in the energy, it has been a great place to be this year it has been a stabilizer in the portfolio when something goes boom overseas the energy stocks go up. But at this point I think that we have harvested the low hanging fruit and it is time to extend out the risk profile a little bit to get to some of these companies that are little bit more tied to the economy. Still at 13% that is a very good weighting in oils. We are very under weigh in the pharmaceuticals, in fact at this point you own Johnson and Johnson and Abbott Labs, both of those companies have other areas in healthcare besides strictly pharmaceuticals. Ms. Longer stated that they sold some pharmaceuticals due to some of the drugs that they produced. She also spoke of what could happen to the drug companies due to who is elected President. Page 18 summarizes the bond holdings. The weighted average yield to maturity is still 5.3% within a weighted average maturity of 7 years. We have extended maturities when interest rates popped up in the summer. We bought some of the long treasury bonds, the 5.25% that is due 2029, we bought it at 98 cents on the dollar which was about a 5.50% yield. Now that bond is trading at 1.05 and three quarters so we have made about 8% capital appreciation while you are also making 5.50% income yield. This is what we call a total return trade. Those of you that Police Pension Meeting Minutes October 21, 2004 Page 3 of 11 have served on this Board for a number of years you have seen that there maybe one sometimes two opportunities in a year where you can go in and extend maturities. We use both the long bond and then also what is called the I -Shares which is a closed end mutual fund that trades on the New York Stock Exchange that is a portfolio of 20 year plus maturity treasury bonds. By using those two tools we extend the maturities. We are going for that total return trade where we have the higher income yield but also the capital appreciation that we can experience as interest rates have backed off those highs. For instance at the peak the 10 year was trading about 4.9%, yesterday it is at 3.99%, so down almost a full percent in the 10 year yield since July. When you have a situation like that happen, anything that you have bought at those peak yields you get price appreciation because that bond is now worth more money in the market than it was back in July. Page 19 is the summary of your realized gains year to date which are about $179,000. That's just the gains that we have taken on securities as we have sold and harvested the gains on for instance, some of our energy stocks. Then your income which is just dividends and interest has been about $220,000. Page 20 shows your contributions and distributions. Contributions this year have been about $189,000. The withdraws have been about $578,000. Page 21 shows the performance history. Your average annualized return from inception to date is 7.1%. You can see the bottom line is the performance through September 30`h. The equities are only up 0.6%, most of the market averages through September 30`h where either flat in the S&P 500 up .2% or down 2% on the DOW, down 4.5% on the NASDAQ so it has been kind of a go nowhere year with a lot of volatility within the market. The overall price appreciation hasn't been much. However the bonds are up 2.3% so your total return year to date through September 30`h is 1.9%. This is a summary of cash flows from inception to date. It shows what the beginning value, all future deposits and withdraws have been versus your net investment return. Your investment return has been about $4.762 million and your withdraws have been $2.435 million. Elaine Longer gave a presentation on the economic outlook and the market outlook. She stated that the soft patch that was hit during the June and July period seems to be ending. Some of the earnings reports they are seeing especially among the manufacturing companies are very encouraging. Despite the rise in energy prices inflation and inflation expectations have remained moderate. Third quarter GDP growth is expected to come in around 4% - 4.5 % that is a pick up from 3% in the second quarter. Employment is strengthening but it is still at a very sluggish pace. Bond yields have declined, consumer spending and construction spending continue to show gains and inflation is tame. The dollar has been stable for nine months through October l" The positives going into the year include low bond yields, short term interest rates have been raised three times this year, the long term interest rates are at the same level that we entered the year. When an incumbent wins reelection the stock market performs better than when an incumbent loses the election. That is just a matter of historical accuracy because the stock Police Pension Meeting Minutes October 21, 2004 Page 4 of 11 market doesn't like the uncertainty. We have continued earnings growth so far. It looks good to me out there. The biggest risk is oil price rises, how high will we go and how quickly will we get there, Iraq, a terrorist attack and political turmoil. The S&P is trading around 1114 and ten year treasury is at 4%. The stock market has not gone up since 1997. A lot has changed since the first time that we were at 1100 in 1998 for the better, especially the relative evaluation between stocks and bonds. The S&P volatility has been very low this year on the historical bases, that's on the market overall. It hasn't been low within the market. However it breaks out of the trading range is going to be very dramatic because of the fact you have stops placed above and you have stops placed below. We feel the break will be to the upside. Stocks look like the asset of choice relative to a 4% ten-year. This is a look at the long term price earnings multiple. In 1999 we reached about 30 times earnings and the market has corrected to where we are really trading at about 15 times expected earnings for next year which is fairly close to the long term average of 14.4 times. We also have a 40 year low interest rate. We are emphasizing the large cap stocks in our portfolio posture because of the fact that the small caps and mid caps have out performed the large cap stocks for about the last five years. Typically that cycle runs about five years. So the relative valuation on the large stocks versus the small stocks is at the best level that it has been in five years. The S&P 500 has a higher dividend yield relative to the small cap stocks. We expect that the dividends will increase in the next couple of years. Cash flow is very strong among these large companies. The dividend payout ratio is only 33% and that is the percentage of earnings that are paid out in dividends to share holders. It is the lowest it has been going back to the 30's. We have a situation where corporations are sitting on rising cash flows, they are reluctant to hire, they haven't really opened up the coffers to engage in capital spending and they aren't paying it out in dividends. They can't go on like this for very long when cash yields 0.7%. We think if the president is elected for a second term that would almost ensure that the 15% tax treatment on dividends would remain in place, as it is it has to be voted on by Congress again in 2008. It comes at the end of the next president's term. The equity risk premium which is the measure of the relative valuation between stocks and bonds it measures the PE ratio versus the 10 year treasury yield is at the most attractive level that it has been at since 1980. At this point in time we are really positioned to participate if the stock market enters into a year end rally. I don't expect that we would see much more than a 10% rally going forward from here to where we hit the next level of resistance. A lot of people are waiting for the election to be over so there is more certainty. The market never gives you that luxury of planning when you are going to make a decision. I think it will happen before the election takes place. We think it looks good out there at this point in time. Police Pension Meeting Minutes October 21, 2004 Page 5 of 11 Randy Bradley: We have been through some pretty rocky times and the bottom line has stayed pretty constant. 2003 Actuarial Valuation Report: Randy Bradley: I think as you can see we have made no, on every category as far as being actuarially sound. Sondra Smith: I have that in electronic format if any of you would like it that way. Randy Bradley: Am I interpreting this correctly that we need $1,678,000 more dollars to be actuarially sound? Marsha Farthing: Yes, that is what they are saying, Eldon Roberts: I was always taught that on page 11 the very last column on the right, the more near 100% that column is the better off we are financially. In December of 1997 we were 110% and then we granted our benefit increase to 90% of salary and some of the investments took a turn to the south at that point in time. Since that time we have really been going down. Bear in mind that actuarial soundness is not what we used to grant our benefit increase. There is another method that the State allows that is called a cash flow evaluation. They say there is plenty coming in and going to continue to be plenty coming in to meet the needs of what is going out. The actuarial soundness test I have always been taught is a lot tougher to meet and to pass than the cash flow evaluation. Randy Bradley: They have strict procedures that they go by. Eldon Roberts: State law that they have adopted it is hard to meet actuarial soundness standards by the State. Tim Helder: What is the valuation of our current assets? Eldon Roberts: We just received a balance sheet, and it is about $10.9 million. We are staying right in that range. The most that we have ever had in that plan was $11.8 million or $11.9 million. I thought we were going to break $12 million but we didn't quite get to $12 million and then everything went south on investments. We got down in to the $9 million range, but we have worked our way back up. Policemen's Pension Board Term End Date Change: Randy Bradley: We had mentioned changing this to May 31" from April 30th. There is no conflict with that the way it is set up under State Statue right now is there. Police Pension Meeting Minutes October 21, 2004 Page 6 of 11 Sondra Smith: No, that is the reason that we probably need to change it because it says in the Statue that the election is to be held in May of each year. Right now your term end dates are April but you do not have elections until May. Jerry Surles moved to change the term end dates to May 30. Tim Helder seconded the motion. The motion passed 4-0. Procedure for Notification of Deaths: Sondra Smith: Accounting has requested in the past that we secure a death certificate for pensioners that have deceased and sometimes that is a problem if they do not have a widow that is still living and sometimes even if they do have a widow it is kind of hard to get the death certificate. Currently we rely on Eldon to call and tell us when someone has deceased. We need to set up a procedure of how the Board wants us to handle that because when Eldon retires we need some way of notification. What we set up for the Fire pension is that we would watch the obituary and get a copy of the obituary. The Board needs to vote whether or not an obituary will be sufficient as notification of death or if we will need to pursue getting a death certificate. Randy Bradley: I guess we can get them through Little Rock if we have to. Sondra Smith: Yes, we can get them through Little Rock. The problem with that is there is a fee and also the time frame. They stated it takes usually 30 to 60 days to get one through Little Rock. We need to give Accounting notification as soon as possible so they can stop the benefit. Randy Bradley: Usually we find out by word of mouth. Someone will hear it and pass the word along. Eldon Roberts: Absolutely. Randy Bradley: We need to get the word to you. Sondra Smith: Right, if someone knows they need to get the word to us. We need direction from the Board, do you want us to pursue a death certificate or will the obituary be sufficient. Jerry Surles: You are saying it would be easier to obtain the obituary. Sondra Smith: Yes. I don't mind getting a death certificate. I can get those if there is a widow usually because they want the benefits, but if there is no surviving spouse it is hard to get a death certificate from the family. Jerry Surles: Maybe we should make that part of it, if there is a widow they furnish a death certificate. Police Pension Meeting Minutes October 21, 2004 Page 7 of 11 Sondra Smith: That has not been a problem if there is a widow. They have to come in and sign an affidavit and change everything over into their name. But if there is no surviving spouse will an obituary suffice? Jerry Surles: I don't see where it would be a problem to use an obituary. Randy Bradley: Maybe we should get a death certificate if there is a surviving spouse and if there is not a surviving spouse we use the obituary. Sondra Smith: It takes the widow a little bit of time to bring that in, can Accounting go ahead and stop the benefit check and issue the $200 death benefit check with just a copy of the obituary and then we will try to get a death certificate. Accounting wants some kind of process in place so they will know how to handle a death. Jerry Surles: What did the Fire Pension do? Sondra Smith: They went ahead and voted to accept obituaries and not worry about the death certificate. If we can get them, and I will make every effort to get a death certificate, but if we can't get one, they said the obituary will be fine. Eldon Roberts: I really don't see a problem with an obituary. This is kind of a family of people and there are only so many people in it and everyone knows everyone. Once someone passes away within this family it is pretty much common knowledge, most everyone lives in this area. It looks like an obituary should suffice. Jerry Surles: I think an obituary should be sufficient. Sondra Smith: It takes 10 days or so for a funeral home to get a certificate, I can not call and request one from the funeral home. They are not allowed to tell me if someone deceased or the names of their family members. Jerry Surles moved to accept an obituary as notification of death. Tim Helder seconded the motion. The motion passed 4-0. Fire & Police Academy Conference: Notification of the Police and Fire Academy Conference was given to the Board. Widow's Benefits: Randy Bradley: Do we want to talk about increasing the widow's benefit? Police Pension Meeting Minutes October 21, 2004 Page 8 of 11 Jerry Surles: I think it should be done with the entire Board here. I really thought that we had talked about this before. I am like Jerry Friend, I think I went home and told my wife that she would have 90%. Randy Bradley: I don't recall ever approving that. Sondra Smith: You haven't done it since I have been here. Tim Helder: I don't remember it. Randy Bradley: I know we addressed it several times but we have never really taken any action that I can recall. We talked about it at the last meeting that when we submitted our request for our last benefit increase, correct me if I am wrong Eldon, did we not exclude the widows in our request? What my point is do you think they are covered now under that request that we had prior or will be have to resubmit? Eldon Roberts: This is all cloudy and it has been clouded up even more so with the last legislative session in Little Rock. I think the means are there for this Board to increase the widow's benefits to 90% of salary of what their spouse is drawing. It takes Board action possibly to do that. One of our cash flow evaluations that we had done, in an effort to raise benefits, we where wondering if they had counted widows in that at the 90% level because obviously it makes a difference. We wrote a letter to them asking them and they said yes, we took into consideration your widows being moved to 90% of salary. I also understood that it has to do with the widows whose husbands were drawing 90% of salary and whenever they died they continued drawing that 90% of salary. I don't know if it addressed going back to the widows whose husbands never drew the 90% because they deceased before the 90% benefit was implemented. I don't know, I am really at a loss for this. Kit mentioned that he doesn't think we can do this. It is something we do need to address and find out what we can do. I am not sure what we can do. Randy Bradley: How about having Kit check into that. Eldon Roberts: I think we are going to need someone to walk us through this alright. Sondra Smith: What was the Attorney General's opinion that Kit got, I thought that was why he got an Attorney's General opinion. Eldon Roberts: I remember that. I think that was prior to the change in the legislation two years ago. That had to do with whether we should pay the widows 50% of salary or 90% and we pretty much were doing it right according to that Attorney General's ruling. Since that time I think there has been some legislation passed at the last session that changed all of that. I want to think that this Board has the right to raise those widows to 90% of salary. I don't know if you have the right to go back and raise the ones whose husbands were deceased and never even drew 90% or not but the ones that are currently living and their husbands are living and drawing 90% of salary when they pass away their spouses could remain at that 90%. Police Pension Meeting Minutes October 21, 2004 Page 9 of 11 Tim Helder: That is kind of odd that they would prohibit them because if their husband was still alive they would be getting 90%. Randy Bradley: Couldn't we, if we choose to do it, from this day forward and not be retroactive to the day we went to 90%, would that be up to the Board? Sondra Smith: Wouldn't you have to have another study completed to see if you could qualify for raising those benefits? Eldon Roberts: Possibly. Sondra Smith: I would think that you would have to have another study done. I don't know that we would pass the test to have a benefit increase if they did another study, from the looks of this report. Eldon Roberts: We probably couldn't actuarially but if we went with cash flow evaluation, which is an easier test to pass. I think the Board does need to take some sort of action to get this started. Let's try to work our way through this to see what we have to do, what we can do and what we want to do. I don't know how to go about it other than the Pension Review Board in Little Rock can possibly give us some guidance on that and explain the current law to us so that we can maybe understand it, what our options are out there. I do know for sure at one time that we were concerned if the actuarial evaluation figures that were turned in that they used to compute our benefit increases, if they were done counting widows to continue to receive what their husbands drew. We wrote a separate letter to them and it came back yes, they were counted in there to continue to receive the level of benefit that their spouse was when they passed away. Obviously we have never done that because we are still at 50% of salary for all widows that are drawing benefits. Randy Bradley: Are you looking at giving them the benefits retroactive to the point that we went to 90% or from this day forward. Eldon Roberts: I would say from this day forward. If the deal was that the widows were allowed to continue drawing 90% of salary if their husband was in fact alive and drew that, maybe retroactive back to that point. That wouldn't be that many people back. I think we have had 3 or 4 die since we were doing 90% of benefits. Randy Bradley: You are still talking about quite a bit of money. Eldon Roberts: I didn't mean go back and pay them. Just go back and have them start drawing from this day forward. Not go back and pay them a big lump sum of money. Randy Bradley: Retroactive would be a large sum of money. Eldon Roberts: I don't know if the Board is out on a limb here or not, if we should be doing this and we are not paying those people what they have coming. I am kind of loss on this too, I try to keep up with this about as well as anybody does, but this has me confused. I do think the Police Pension Meeting Minutes October 21, 2004 Page 10 of 11 Board does need to take some kind of action to get something started that will tell the Board where we are at in this and where our options are and if there are any mandates. Randy Bradley: I suggest we start the procedure by going through the Pension Relief Board and see what we have to do down there and if we have done everything we need to do. Eldon Roberts: That might be good to draft a letter to them and tell them we are concerned about what options are available to us or what mandates regarding the payment of benefits to widows. Randy Bradley: Maybe Kit could explore the new statue and stuff that you are talking about that has been passed recently and bring us up to date on that at the next meeting. Eldon Roberts: I don't think that new statue gives this Board the authority to vote to increase the widow's benefits to 90% of salary. David Whitaker: Was that the 2003 session? Tim Helder: I wonder if we could vote it in as a Board whenever the study indicates we are able to provide that benefit. That it is our intent to provide that benefit if the fund will support it. I think it is important that they get it but you also don't want to do it if it is a detriment of the entire fund. Eldon Roberts: That's right. You might point out in the letter do we need to have this costed again, do we need to do another actuarial evaluation or is the one that we have already had done suffice because I know that we were told that they computed all of their numbers on widows staying at the same level that the husbands were drawing. Tim Helder: Where are we at now compared to when they did that study as far as dollar wise? Eldon Roberts: I don't remember that would have been back in 1997 or 1998. Sondra Smith: I don't see how you can increase the benefit when you have a necessary employer contribution of $1,678,000. Eldon Roberts: Well on the actuarial evaluation, but there are other methods that are acceptable through State law to determine benefit levels. Sondra Smith: But if you increase the benefits this number is going to go up. Eldon Roberts: Absolutely. Except for the fact that maybe widow's are already figured in that number. Because the actuaries told us in a letter that they had computed that widows would remain at the same level that their husbands were at. So they could already be figured in that number right there. Police Pension Meeting Minutes October 21, 2004 Page 11 of 11 Randy Bradley: Would you be willing to have someone draft a letter and request information from them. Sondra Smith: I think David made some notes and I will get with Kit on the law. Eldon Roberts: Ask if we are mandated to do anything and do we have an option as a Board to do anything. Other: Jerry Surles: I get my check sometimes before the 15th but the check is dated the 15th. Is there any reason we put the 15th on the check when we get it before that date? Marsha Farthing: That is the date that we have chosen as the date of the checks. We mail them early so they will be there in time. David Whitaker: The check is on an operative legal. The date line is not an operative legal requirement. A check is known as a demand instrument. So if you have a signed check it is cashable. Sondra Smith: The money is there, there is no transferring that has to be completed on a certain day? Marsha Farthing: We always make sure the money is there before we write the checks. Meeting Adjourned at 2:35 pm