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HomeMy WebLinkAbout2002-07-18 MinutesPolice Pension Minutes July 18, 2002 Page 1 of 4 REVISED MINUTES OF A MEETING OF THE POLICE PENSION AND RELIEF FUND JULY 18, 2002 A meeting of the Police Pension and Relief Fund Board was held on July 18, 2002 at 1:30p.m. in Room 326 of the City Administration Building located at 113 West Mountain Street, Fayetteville, Arkansas. PRESENT: Mayor Coody, Eldon Roberts, Hollis Spencer, Jerry Friend, Randy Bradley, Heather Woodruff, Kit Williams and Marsha Farthing. MINUTES Mr. Bradley moved to approve the minutes. Mr. Roberts seconded. The motion carried unanimously. PENSION LIST Ms. Woodruff stated Chief Watson had been added to the retirement list. OTHER BUSINESS Mr. Roberts stated there had been some miscommunication on how the widows are being treated on the fund. In 1999 when they went for a benefit increase, they had opted to make the benefit increase a non -spousal benefit because of the cost. When the benefit increase was granted in 1999 they moved everyone to 90% of salary. They had all been under the assumption that the widows would revert back to 50% of salary. The actuaries had been counting the widows at the same benefit level that they were after the police officer passed away. The law had two parts to it. The actuaries were operating off the one premise of the law that says that a spouse that becomes a widow after the raise in benefits she would continue to draw the same amount. There was one person that they had not treated that way. The actuary was telling them that if her husband and been alive and received the 90% benefit, then she should receive that too. Mr. Williams stated he will ask the Attorney General for an opinion. Dr. Mashburn moved to have Mr. Williams ask the Attorney General for an opinion on 24-11-425. Mr. Roberts seconded. The motion carried unanimously. INVESTMENT REPORT Ms. Elaine Longer, Longer Investment, stated the S&P and the NASDQ was down and the Dow was off about fifty. She thought a lot of companies that were coming under increased scrutiny would be restating earnings. She had been concerned about some of the actuary assumption behind some the defined benefit plans, were really to high. During the ten years where the bull market was getting 20% the pension plans became over funded based on their actuary assumption of 10%. The companies recaptured those overfunded pension gains back into their corporate earnings. Now that they were sitting Police Pension Minutes July 18, 2002 Page 2 of 4 there with 9 to 10% return assumption and the market analysts are projecting 6% is a more reasonable return assumption. The corporations that did not adjust downward are going to be accused of not being honest with their shareholding public. She thought they were going to see the push to adjust these pension assumptions downward, so that would work in reverse on the earning side because of the unfunded pension liability. Mr. Friend asked how some retirements have become over funded. Ms. Longer stated they could recapture that back into their earnings because their liability is the discounted present value of their future obligations. When they were using a discount rate of 10% and the market was clicking along at 20% they can get over funded. They technically can bring that back in and recapture it in earning because their only liability was what they were obligated for. Conversely, when they get the 10% discount rate that gave them a lower present value. If they take the discount rate to 6%then it really pushes up what their present value is under future liability. She had talked with Eldon earlier this month because they had dropped below the weighting range of equity. They had been holding at 35% to 33%, trying to hold that lower range. They had been using options and hedgings. They had a very strict sale discipline, which has really helped them to get through this bear market. Technically, they were under their policy guidelines at this time of 35-50% equities. They had the opportunity to sell right and they felt that the reserves are prudent at this time. As conditions improve they could go back up to policy range. It would take a motion by the board to allow them to be in violation of the policy on the equity side until they feel that the condition is right. Their second option, if they wanted to stay within their policy range, would be to use the S&P Index Fund to get them back up into range. There was a lot of single issue stock risk out there right now, that she thought it was best to accomplish it through an index fund. Their equity range was 35% to 50%. They were currently at 20%. Approximately 15% under weighted. The money was currently mostly in bonds. They had 5% in cash reserves. They were earning about a 6.2% income rate of return. They felt that as long as they could keep putting it into bonds, they could always pull back out of bonds. She thought there would be a time to go back in and start rebuilding the equity side, but right now the equity markets were off 9% on the S&P and about 9% on the NASDQ, so they were not loosing anything by not being in there. Mr. Friend moved to allow Longer Investment to be in violation of their investment policy until Longer Investment felt that the environment was conducive to increasing the equity weighting. Mr. Roberts seconded. The motion carried unanimously. Ms. Longer stated looking at their account from where the bear market started, 12/31/99 through June 30 of this year. During that time the S&P was down about 33%, the NASDAQ was off about 64%. Their stocks have gone down about as much as the S&P stocks about 36%, but the asset allocation has held the portfolio together. From that point through June 30, 2002 their total portfolio was down 4.4%. When they look at their historical returns, in the good times they had 29%, 19.6%, 19.6%. A 4% decline in a terrible market like this is not unrecoverable. When they get through this, they had every bit of flexibility in this portfolio to run again. At this point they had the defensive team Police Pension Minutes July 18, 2002 Page 3 of 4 on the field. Their income that came in on just interest and dividends off bonds and stocks was their cash flow that comes in regardless of the market is about $481,000 on the total portfolio. That represented an income yield of 5%. That was on the whole account, including stocks, which was approximately $40,000 per month. That did not include the turnback and the matching funds etc. Mr. Roberts stated he doubted that they were bringing in what they were spending. Ms. Longer stated their distribution ran between $55,000 and $65,000 per month. Their income cash flow on their bond part of the portfolio was approximately $40,000 per month. To satisfy their actuary assumption they had to achieve a 6% rate of return. Their historical rate of return has run about 7.5%. Their combined portfolio was at 20% equities. Their corporate bonds represented about 15% of the portfolio and the yield on the corporate bonds was about 6.5%. They had been very cautious on the corporate bond market. They had seen an increase tide of corporate credit risk. Everything that was in the bond portfolio is high investment grade. Government bonds and government agencies. The treasuries represented about 15% of the portfolio with a 6.2% yield on treasuries. Government agencies which was a combination of federal home loans, federal national mortgage, represented about 42% of the portfolio with a yield of about 6%. They had a very good yield. The way that they had been able to manage that was by a ladder approach. The income yield on their bonds has not changed over the last three years. The stock portfolio, there was a lot of reserves in there. they were yielding 6%, with very few exception all of their bonds that had been purchased are trading above the purchase price. So they had earned not just the fixed 6.2% coupons, but also a capital appreciation while they wait out the storm. Realized losses year to date, was at $81,000, net income was at $171,000. In the bond portfolio, in the fixed income side of the account their yield was at 6.1%. The weighted average maturity is 6.5 years, yield on cost was 6.2%. The average annual return has been about 9% on equities, and 7.1% on fixed income and 7.5% on total portfolio. This three year period that they were going through was a once in a generation type of an event. The last time that they had three years back to back of negative market was in the 30's. The equity return year to date was -18%. That compares to the S&P of -14.5%. NASDQ was down 25%. Total was -2.3%. The stock part of the portfolio where they had allocated reserves to the actual stock component of the portfolio was down 8.5%. In response to questions, Ms Longer stated that a couple of years ago they had asked for an update on the cash flow analysis that lead to the increase of benefits, there were two way in which the fund can be evaluated. One was the actuary report, which is done by the State, it was more of a static picture. The other was a cash flow analysis which takes in more of the cash flows coming in from all the various sources and by that valuation model, they actually had 5 million dollar over funding. Mr. Roberts stated the actuary evaluation showed them to be in a sad state of affairs. Carrio had refigured all of figures using the cash flow method and Carrio had stated that they were alright. There was two different ways of doing this. Police Pension Minutes July 18, 2002 Page 4 of 4 Ms. Farthing stated she would like to know if they would be making up the short fall. To her it looked like they were going to be taking out money than they were putting in. Ms. Longer stated she was not involved in their projections. She did not know all of the assumptions or projections. Meeting adjourned at 2:15