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HomeMy WebLinkAbout2007-10-18 MinutesBoard Members Mayor Coody Chairman Sondra E. Smith Treasure Eldon Roberts Secretary/ Retired Position 1 Jerry Friend Retired Position 2 Tim Helder Retired Position 3 Melvin Stanley Retired Position 4 Frank Johnson Retired Position 5 ale evit e ARKANSAS Policemen's Pension and Relief Fund Meeting Minutes October 18, 2007 Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 18, 2007 Page t of 7 A meeting of the Fayetteville Policemen's Pension and Relief Fund was held at 1:30 PM on October 18, 2007 in Room 326 of the City Administration Building Mayor Coody called the meeting to order. Present: Mayor Coody, Melvin Stanley, Tim Helder, Eldon Roberts, Sondra Smith, Kit Williams, Amber Wood, Chief Greg Tabor, Marsha Farthing, Accounting, Elaine Longer and Kim Cooper of Longer Investments. Absent: Frank Johnson and Jerry Friend. Approval of the Minutes: Approval of the July 19, 2007 Meeting Minutes Tim Helder moved to approve the minutes. Eldon Roberts seconded the motion. Upon roll call the motion carried 5-0. Frank Johnson and Jerry Friend were absent. Approval of the Pension List: Approval of the September, October and November 2007 Pension Lists Mayor Coody: Any changes to the pension lists? Sondra Smith: Yes. Mr. Preston passed away so the only change is that his pension amount is now going to his wife Norma. Tim Helder moved to approve the Pension Lists. Eldon Roberts seconded the motion. Upon roll call the motion carried 5-0. Frank Johnson and Jerry Friend were absent. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 18, 2007 Page 2 of 7 Old Business: There was n Old Business. New Business: David Preston — Deceased A copy of David Preston's obituary was given to the Board Supplemental Funds Distribution (Turnback) Sondra Smith: That is just an informational item. This is a copy of the information that we received from the State on the turn back fees. There's a spreadsheet that Trish in Accounting calculates that shows what you received in 2004, 2005, 2006 and 2007 so you can see the decline in the tumback. Eldon Roberts: That is the insurance tumback? Sondra Smith: Yes. Eldon Roberts: Right, that's the part that comes to the old plan? Sondra Smith: Yes. The spreadsheet shows the amounts for 2004, 2005, 2006 and 2007 and the difference in the amounts. There's a letter from PRB that explains that at one point in time they were holding back 10% of that tumback and it was going into a fund. This year they released that 10% so they are not holding any back thus this year might be a little bit more than what we will get next year. Mayor Coody: Any questions on that? Sondra Smith: There are copies of the checks that we received and how it was calculated. Act 218 — Pension Protection Act Sondra Smith: Eldon called and asked me to put this on the agenda so we could discuss it. Mayor Coody: Is this the same situation as the Fire Board? Sondra Smith: Yes. It's Act 218. Marsha it is my understanding that we can only pay insurance premiums? Marsha Farthing: There's one other type of thing that we can pay. I will have to look it up but it has something to do with long term care policies. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 18, 2007 Page 3 of 7 Sondra Smith: The Fire Pension thought it was like a health savings account. I told them it was not. They wanted me to get clarification on that. Marsha Farthing: They can have a health savings account with their carrier. It could go to a health saving account through the carrier but our checks go to the carrier. Sondra Smith: That is what I thought. It would be up to the carrier to set up the health savings account. They had been told we would be set up the health savings account here at the City and I did not think that was the situation. Mayor Coody: Eldon do you have any questions on this? Eldon Roberts: No, I talked to Sondra about it on the phone the other day and I pretty much understand where the City stands on it. I agree with her and I think the City's stand on it is it's too complicated of an accounting procedure right now the way its set up. Whoever proposed this to the legislative session needs to take it back and get it a little more clarified because it's to complex for the cities to ever try to keep up with. Sondra Smith: Just so the rest of the board will know what the Pension Protection Act is, if we decided to do this at the City the first $3,000 of insurance premiums could be pre taxed but it is only the first $3,000 of your insurance premiums. The concern is if the Fire Pension and Police Pension decided to do this and we have approximately hundred members on both plans, then we could be paying out a hundred different insurance checks to hundred different insurance companies. It's not like our insurance here at the City to where we pay just one insurance company. The City is concerned about the liability issue, if you forget to tell us that you have changed your insurance and we pay your old insurance and then your new insurance doesn't get paid and you have a claim then who is liable? Are you liable for not telling us or are we liable for not getting the check to the correct insurance company? That a concern of the City. Kit Williams: And the fact that it would take more staff at a time when we can't add any staff. Eldon Roberts: You're dealing with a multitude of insurance companies. Whereas in the City doing the pretax thing there is only one insurance company you're dealing with for every employee. Sondra Smith: I agree with you Eldon that what they should have done is let you take it off your tax return on an individual basis instead of the City having to govern it. Mayor Coody: Thanks for being so understanding on this. Eldon Roberts: That is just the way it is. There is no need to go there the way this is written. Longer Investments: Monthly Investment Report Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 18, 2007 Page 4 of 7 Elaine Longer: Page one is the September 30"' portfolio appraisal. The quarter actually closed up from June to September. You closed at about 55% equities when you look at your equities plus international stocks which are 7.1%. You are just above the 55%. Equity Overase Eldon Roberts moved to approve the equity overage. Melvin Stanley seconded the motion. Upon roll call the motion passed 5-0. Frank Johnson and Jerry Friend were absent. On page four the ending portfolio value was $10.938 million. The income on your bonds, which are government agency bonds, is 5.4%, that's on your total fixed income portfolio. Your total income yield which is dividends plus interest that's earned on a portfolio regardless of what the stock market does is 3.5% income yield. Page five is an update through yesterdays close and you're still right around the 55% equity exposure. Not much else has happened except that the stocks are up another 2% month to date in the month of October. A distribution went out of about $122,000 so the closing value as of yesterday is still at about $10.926 million. Page nine is your realized gains year to date which are just the gains on stocks we sold, that gain is $306,000. Income which is dividends and interest is $170,000. Page 10 is the break down of the bond portfolio. The yield to maturity is 5.4%. The average maturity is only 4.6 years and that compares to a 4.25% on a five year treasury. So your income yield is about 120 basis points higher than a comparable five year treasury. In the category of securities that mature within three years or less we still have about 34% of the fixed income securities mature in the next three years or less. I think at this point it is better to be structured defensively. At times I am willing to extend maturities and go out to the long end of the yield curve. The Fed is lowering short term interest rates but the dollar has gone to new lows. We have talked about the dollar index at 80 where it is at 77 today. That goes back to the 1960's as far as a new low on the dollar index. The euro is at a new high today and gold is up. The currency situation keeps me from going out to five years or ten years, the yields are not all that attractive when you are looking at a ten year yield at 4 '/2% and we are still buying government agencies with a one year call feature and a three year maturity over 5%. At this point we are not giving up any income to be safe. Gold is going to a new high; crude oil is up another $1.50 today to yet another new high. Those things that look inflationary on my screen keep me from being brave enough to go out the yield curve to five and ten years. We are being very conservative at this point. Page 11 is the top equity weightings. General Electric is the largest position, Johnson & Johnson, Microsoft, Kraft Foods, Inc. and Teva Pharmaceuticals. Page 12 you will see the sectors that we are overweight and underweight. We have been preaching about the weak consumer and the problems with the housing market for a little over a year and now you see what has happened in the past three months. It is affecting consumer spending. The consumer really has not come to grips with higher energy prices for heating this winter and the higher energy prices. Crude oil has moved about 15% higher from where the price at the pump is. The reason you are not seeing it at the pump yet is because the refiners Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 18, 2007 Page 5 of 7 have enough supply that they have not hit the gas stations with the increase price but that is coming. We are still very light the consumer. The industrial stocks are knocking the cover off the ball as far as earnings reports especially the multi -national corporations that are tapped into the international growth. They are capitalizing on the growth in the emerging economies in China and that is offsetting the weakness in the US economy. The whole story this year has been to be in the big multi -national blue chip companies that are positioned internally. That is the only place that you are seeing real consistent earnings growth and margin improvements. They benefit from the dollar declining because they become more competitive internationally as the dollar declines. We are still overweight energy, healthcare and technology. We are equal weight in capital goods. We are underweight financial and utilities. Kit Williams: I thought utilities were generally a safe thing because they have dividends. Elaine Longer: The electric utilities, the dividend yield, is just not high enough to go away from growth. They don't have enough of an income yield to be called an income security compared to fixed income rates at this point. That's because they have had price appreciation which reduces the current yield on the stocks. They don't have enough growth to be called a growth stock. Page 13 we have contributions and distributions year to date. Contributions have been about $120,000 and distributions have been about $810,000. Page 14 you have your returns. Your stocks were up 11.4% year to date. International up 7.1%, bonds are up 4.3% so the total is up 7.7%, to compare the 11.4%, S&P is up 7.7% during that time period. The S&P with compounded dividends is up 9.2%. NASDAQ is about the same 11.9%, the DOW 11.5%. The smaller companies like Russell 2000 which is the small cap index are only up 2.3% year to date. The small caps are really lagging with what the big international companies are doing this year. Through the end of trading with the equities up another 2.4% month to date that puts your year to date gains at about 14% and total is now up over 8% year to date. In the Investment Policy we address the only change I would recommend last time which was to give us that little bit of wiggle room at the 55% level. To give you an update on where the market is, the whole sub prime thing started to surface in June. The Bear Stearns funds were the first ones you really heard about in the newspaper. To give you an idea of what these funds were doing, these mortgage brokers, that came up in the last couple of years that were originating mortgages they are not tied to a bank, they are independent mortgage brokers. They are not regulated by the Feds. They lay outside of the regulation of the FDIC and the controller of the currency. They just basically originate mortgages and get a fee for that. Then they take the mortgage and they off load it to whatever their up stream financial institutional is that they are selling these things to. That financial institutional puts them together into a pool and then divides the pool into different risk categories depending on the risk rating of each individual mortgage and then off loads that to financial institutions all over the world. So hedge funds own these, banking institutions, pension funds and international funds own these sub prime mortgage pools. They are not priced every day like a stock is or like a corporate bond or government agency bond. They are priced based on model pricing and until there is a big Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 18, 2007 Page 6 of 7 bunch of them that come to market the model prices get by the scrutiny of the regulators because that is all they have to go on. When something moves to market and there is a fire sale, the documentation of that market price, then everybody else who is holding this stuff has to mark down to market. So you have a whole world out there with a vested interest of not marking to market. You have all kinds of stuff going on. Bear Stearns put up $3 billion into these funds to try and hold off so that they could pay investors who wanted to get out without having to throw all these things onto the market. That lasted about three weeks. Then you have had many more sort of come up all over the world. One of the biggest European Banks had to shut several funds to investors they couldn't get out. That started a run on the banks in Britain. The Central Banks around the world have had to come in and supply liquidity because this has such huge repercussions; it froze up a lot of the financial markets as far as commercial paper and things like that. That is why you have seen the European Central Bank, Bank of Japan and the Fed so active since August. Kit Williams: Is there still a risk? Elaine Longer: It's still not functioning normally. Over the weekend we got news that Treasury Secretary Paulson has been meeting with officials from Citibank, Bank of America and JP Morgan to try and put together this super fund that would be a billion dollars, it would be non governmental money, but it would provide some liquidity for some of these structured investment vehicles to at least have a market if they have to sell something. It kind of back fired on them and this week we have seen Citi Group take out the lows that they had reached in August. Bank of America reported earnings this morning that were a disappointment it's down 5%. So a number of the banks are actually taking out the lows of August even though this plan was suppose to help support them. We are not out of the woods yet but I think we will probably have another quarter point discount rate and Fed rate cut before January although they may pass in October. I really thought they would only do 25 basis points in September and they did 50 so if they pass in October I really think it's a good thing especially with where the currency is. Your earnings reports are coming out just fine with the exception of consumer stocks, housing and financials. At this point the earnings seem to be on track with the exception of those places where there is obvious weakness there is still quite a bit of strength with International growth. Kit Williams: We used to carry the other economies with us and now we are hoping they carry us. Elaine Longer: That's true, China will contribute more to world growth this year than any other economy and that is the first time that China has actually moved to the top of the heap. Elaine Longer: You're in at 55% and very well diversified. A lot of times I go in with 1.5% of equity exposure and I might take it to 2% or 2.5%. Our biggest position is GE which is 4% of equity exposure. We do everything incrementally. Nothing is really over exposed, nothing can sink the ship. We are broadly diversified across sectors and individual stocks. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 18, 2007 Page 7 of 7 Quarterly Report A copy of Longer Investments Quarterly report was given to the Board. Longer Investment Letter A copy of the letter from Longer Investments dated August 16, 2007 was given to the Board. Meeting Adjourned at 2:10 PM