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HomeMy WebLinkAbout2009-02-11 Minutes (3)Board Members Mayor Jordan Chairman Sondra E. Smith Secretary/ Treasurer Marion Doss Position l/Retired Pete Reagan Position 2/Retired Gene Warford Position 3/Retired Ron Wood Position 4/Retired 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 Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page l of 24 Special Firemen's & Policemen's Pension and Relief Fund Meeting Minutes February 11, 2009 A special joint meeting of the Fayetteville Firemen's & Policemen's Pension and Relief Fund was held at 10:00 AM on February 11, 2009 in Room 219 of the City Administration Building. Mayor Jordan called the meeting to order. Present: Mayor Jordan, Ronnie Wood, Marion Doss, Pete Reagan, Gene Warford, Frank Johnson, Melvin Stanley, Eldon Roberts, Tim Helder, Jerry Friend, Sondra Smith, Trish Leach, Accounting, Assistant City Attorney David Whitaker, Paul Becker, Finance and Internal Services Director, Elaine Longer and Kim Cooper, Longer Investments, Jody Carreiro, Osborn, Carreiro & Associates, Inc., Actuary, and David Clark, Arkansas Fire & Police Pension Review Board Executive Director. Paul Becker: Mayor and members of the board I would like to introduce the individuals who are going to give us presentations, Jody Carreiro of Osborn, Carreiro & Associates, Inc. who is the actuary, and David Clark, Executive Director of LOPFI. What they are going to do is give us a run down of the conditions of both pension plans as they currently exist. Jody Carreiro: Let me outline what we want to try to accomplish this morning and make sure that we are all heading in the same direction. Then I will let David talk for just a minute and then we will get into the body of what we've got. I am Jody Carreiro, I'm the actuary for the old plans and we have been doing this for twenty years. We are the ones that do the every other year actuarial valuations and the benefit increase valuations when those come up. What I have to share today is some additional information that kind of expands on what's in the valuations. That's my role today is to try to break down all the technical things and translate those to English as best as possible, give you that information, and be able to answer your questions. Then I will ask you some of your thoughts and the things you want to hear before I start getting into the meat of it. David Clark: I'm the Director of LOPFI. Basely my role today is to be able to provide answers to questions about consolidation of either one or both of the pension funds with LOPFI. That's a more common event as the years have rolled by. Right now LOPFI administers 103 local Fire Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 2 of 24 and Police Pension Funds and there are still 176 local Fire and Police Funds in the state, obliviously Fayetteville has two of those funds. Last year we had 32 plans turn their administration over to LOPFI so as I mentioned it's becoming more and more common for plans to make that type of decision. I can certainly fill in any other type of details later in the Q&A portion. Jody Carreiro: I know that we have a lot of folks that have interest in this. I know the things that I want to cover but I want to ask the boards and the folks here what items in general that you hope that I cover. What are some of your expectations? What are some of the things you hope that we are going to cover in the next few minutes? What are some of the big things that you hope that we accomplish in the next few minutes board members? I know Pete has a list. Pete Reagan, Fire Pension: Jody, for our members sake and for the Police Pension members sake could you give us a readers digest version of the actuary that was done for 2007. I think we all have copies. Give us a basic overview of it and we will go from there because we are using that as our guide. Jody Carreiro: That was the first thing I was going to do. What other concerns do you want to make sure that I address today? Eldon Roberts, Police Pension: When and if a benefit cut is necessary. That's something we want to hear from you because we pretty much take our lead from you. I think that's the question that's in everybody's mind that we would like to hear addressed. Jody Carreiro: I understand and we are headed there. We've got to lay some ground work so that I can do a good job of explaining that but that's clearly the big question that we want to answer. Any other things that you want to mention that you want to make sure that I'm going to do in the next few minutes. Tim Helder: I'm interested to see if LOPFI is something you all are going to recommend or if you think that would be the future for our plans. Maybe discuss that a little bit. Jody Carreiro: Okay and we will. Paul Becker: With the economic conditions that the country is facing now, what is the general effect of the stock market and the losses that we have taken and how does that affect the 2007 actuarial study? More or less give us an update on what it looks like today. Jody Carreiro: Elaine has provided me with some more up to date numbers from December 31, 2008. As we get into this I'm going to share with you some of those numbers and how that has affected the projections going forward. This is your meeting too. This is different than a regular board meeting. Anyone else have something that you want to make sure that I hit as I'm going through? Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 3 of 24 Kathleen Doss: I want to know what it will take for the old pension fund to go with LOPFI. What exactly has to occur? Jody Carreiro: I'm going to let David cover those steps in a few minutes. I think those are all things that are on my list. I am glad to hear that the questions I came ready to answer are the questions that you want to know the answers to. Every two years we do an actuarial valuation of the plan and those valuations that are required by law are intended to do a couple of things. One they are intended to show kind of where the plan is. What the current financial condition is, the terminology that's been developed over the years, is the plan actuarially sound, and what does that mean. That's one of the things that that does. The other thing that the valuations does is they calculate how much money the city would have to put in to get the plan fully funded over a period of time. Since they are closed to new folks that period of time that's calculated is pretty short, it's five years. The reason why is because everybody is retired and we should be closing in on full funding if everything was a perfect world. That's what the Pension Review Board does for the whole state. Now the valuation is kind of a snapshot view. It's what the value of the Plan is today. What is the present value of all those liabilities? We have benefit commitments to pay these liabilities over a number of years, what's the value today of that, and compare that to my assets? Snapshots are real good but they don't show everything. I'm going to share some details about what we call a cash flow projection which shows the ebb and flow of the fund over a period of time as opposed to saying on this date where we are. First let me talk about each of the valuations since that was one of the questions that was produced and sent to the city last year. On page five of the Police Pension report is a summary of what are the liabilities of the Plan. Those are not liabilities like we think about at our household that's a payable that we have to pay today, but it's a long term liability. It's more like a mortgage it's how big is our mortgage, what is it that we have to pay off in the next several years? On the Police Plan you will notice the total liabilities or the total present value of all those future benefits that we have to pay out is $19.2 million compared to assets at that point in time of $10.2 million, so there was a $9.1 million unfunded liability. You have probably talked about that in your previous meetings. On the Fire Pension report there is $18.5 million in total liabilities and $8.7 million in assets at that point in time so $9.8 million is the unfunded liability. To help me understand it and I think it helps other folks understand it too, that's kind of our mortgage. An unfunded liability is not a bad thing per say because it's not a bad thing to have a mortgage. In fact most of us wouldn't have a house if we didn't have a mortgage right? What we have to be very concerned about is if we don't have money to pay our mortgage payment. If we are not making the payment we need to make to pay it off in a reasonable amount of time. That's kind of the analogy that I think helps us to understand that a little bit better. Those numbers turn into a funded percentage and those are reported in the valuation report and you've probably heard them talked about already. They are on page 10 of the valuation reports. The Police Pension Fund, the funded percent was 53% and the Fire Pension Fund was 47%. That means that using our analogy from a minute ago we have about 50% equity in our pension houses. Our mortgage is about half of that total value of our pension house so to speak. That's not necessarily bad unless we have trouble making our Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 4 of 24 house payments. Those are the funded percentages and those are talked about. The thing that's concerning about a funded percent that's in the 50% range is this, as we have already discussed these are closed plans, there's not new members, there is new money that comes in but it's now only the millage and premium tax mostly. When we're retired we want a much smaller mortgage sticking with our house analogy. So by the time we retire we would like to have our house paid for or almost paid for and we still have a good sized mortgage in both plans. That's an area of concern that we need to think about as we address this. That's just a real quick over view of what these valuations say. They are snapshots, they give us a good idea of where we are in the scheme of things, but they don't tell us everything that we want to know. They don't answer all the questions that we have and so there are other things that we want to look. Let me mention one other thing about the valuation reports. The numbers that Mr. Becker reported to you was based on a different report that I did which is public information and David has handed out. We presented this to the Pension Review Board and this is a report of all the old pension funds in the state. It has a lot of different information in it. One thing that we have done for the State Board, over the last several years, is we do a very quick and dirty projection of if the plans continue to earn this rate of interest, if the funding sources are about the same, if the benefits stay about the same, how long can these funds last? They are not a plan by plan cash flow study, which I will explain what that means in just a minute. They are kind of a quick cash flow study and that report is where some of the numbers came from that said the two funds were within ten to fifteen years to prorate. If you look at that full report it explains what we did and we have just grouped it in categories. It is not meant to be a predictor to say that this plan runs out of money here but it is for the State Board to kind of categorize, how many plans are in real good shape, how many are okay shape, and how many need to be a little bit concerned. Those are good numbers but again it doesn't answer all the questions that we have as you have already eluted to. That's why we have done a cash flow study. This is stuff that I mess with everyday and I will confuse myself sometimes so I'm kind of building up to it so we don't get there to quickly. I do want to talk about what the cash flow study is before we actually look at the results. I mentioned that the valuation reports are snapshots. They are a picture of a point in time. What we do with a cash flow study it is really a projection. We look at it, talk to the City, and look at their historical information to see what the Millage is doing. Whatever Millage that you get that's dedicated to the two funds we can reasonably expect that to grow over a period of time. We know what premium tax does. We do all the calculations for the premium tax. It's a real convoluted, complicated formula that we don't want to talk about right now but we have a pretty good idea of where that's going based on the current rules for premium tax and we project that forward. It's calculated on a percent of the calculated contribution. We can project the premium tax into the future. We can also look at the benefits. The Police Fund has 51-52 folks that are drawing a benefit. The Fire Pension Fund has 61, but that has a dozen volunteers from days gone by that are still drawing benefits. The two plans have several people that are drawing benefits and we know who they are and we know the ages. It's a big enough group that we can statically project and say we expect these folks to remain alive and here's what the benefits are, not person by person, but in a general statically method to say we are paying out, for example from the Police Fund this last year almost $1.6 million in benefits. We can project out what that $1.6 is Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 5 of 24 going be in a year, two years, and three years; on down the line based on the mortality that we have studied that is a pretty good match for what these funds experience. Then we put all that together with an assumed investment result. We can then project and say the assets of the plan were at this point and next year we expect them to be here etc. We get a good idea as to will the plan run out of money, when will it run out of money if that does happen, what are the bumps in the road as we go along. Now that I have said all of that I have introduced what I've got that is a hand out to you. This is a series of graphs and charts of numbers. I looked at these projections two different ways. We projected it based on all the information that went with the valuation of January 1, 2008. As we all know the world is not the same as it was January 1, 2008, especially the financial world. I've got some information for December 31, 2008 that shows what jarring we took on that and kind of melted that into this projection. To explain what I've got let's just look at page one of the first Police projection and tell you what that is and then we can look at the difference and then we will look at Fire. On this Police projection there's a green line on the graph that's the best estimate line and that is the line of the projected assets. After we do all the things that I mentioned a minute ago we come up with a projected asset level every year and at the 7% assumed rate if that stays level every year you see what happens. There's a little bit of a dip but the assets never get very low and there's more than enough there to pay the benefits all the way through. Now what we have done over the years and some people joke about my hurricane cones because I use that analogy. In the late summer and fall when we see the hurricanes coming we always look and if we have any family anywhere within that cone we are a little bit concerned. That is kind of what these yellow lines around that are. That's kind of a range of reasonable results and the reason it's become called the hurricane is because we don't want to know that just the basic straight projection stays above zero. We want to know within a reasonable range bouncing around that we stay above zero. We don't want the hurricane cone to hit the coast line we want it to stay off shore away from zero. If you look at this first projection here you see that the bottom of the range of reasonable results is a lot lower than the main projection but it stays above zero in all years. As of January 1, 2008 we are not too concerned about the Police Plan in the long run it would be fine, but as we said we are not at January 1, 2008. Let me point out just a couple of things on page two before we look at the graph on page three. This is kind of the numbers that are the basis of what you have of the graph that we just looked at to disclose all these numbers to you. The two things I want to point out about these numbers are this, if you look at the employer contribution column and compare that to the benefit payment column you will notice that the current contributions to the plan are just under half of the benefit payments. That's not necessarily bad but what that means is that we are at a point in time in the life of these plans that we are dependent on investment income. It's not all contributions coming in from the City that is making our benefit payments anymore. We have to have the contributions that are coming in and investment income to do that. The point that brings up, that's worth discussing for just a moment, is why what has happened in the financial markets is so difficult on your plans as opposed to say the big LOPFI system, APERS, or Teachers. Their concerned about the financial markets, everyone is, but it doesn't cause them great concern. One Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 6 of 24 reason is that they have other income, because they have active members and people contributing and cities contributing, they have income that pays most of the benefits so while the assets are down in this down market they do not have to sell those depreciated assets to make benefit payments. We are not that lucky with either of these plans. We are in a situation where we've got to make $1.6 million on the Police side of benefits payments this year. We've got $700.000 of income the other $900,000 has got to come from somewhere. Where that's going to come from is that we are going to have to sell depreciated assets. For a closed plan it makes the financial crisis doubly sever. That's why this is so difficult to deal with and why it's so important to take a deep breath and kind of go through this because it does make it harder because we have to sell assets while they are down. We can't wait for the market to pop back up or come back up. We can't wait for that to happen because we have to pay our benefits now. The other thing I think that is important on this page to point out, if you look at the benefit payment column you will notice on the Police Plan the benefit payments are almost $1.6 million for 2008. Look at thirty years from now, it's over $800,000. Sometimes we tend to think that it's a closed plan, we have all retirees, all these guys are going to die off, and we are not going to have to pay benefits for very long. Thirty years from now benefits under the current benefit structure are still half of what you are paying out now in the Police Plan and they are similar in the Fire Plan. Thirty years because of the good spousal benefits that these plans have, because of the improved mortality over the years, for those reasons in thirty years we still expect to be paying out over half of the benefits. I think that's an important point. As an actuary I'm concerned that those people in thirty years are still getting their benefits and doing well. I think that is an important point to make off of this. Pete Reagan: On page two on the employer contribution can you tell us what that is because the Police Plan is closed and the Fire Plan is officially closed now. Jody Carreiro: That is about $400,000 from millage. Paul Becker: It's Millage and premium tax. In the case of the Police Pension Fund it's forfeits that are directed there. That's what they call employer supplement. Jody Carreiro: Right, those three pieces, about $400,000 millage, $180,000 premium tax, and about $120,000 on the Police side that is fine and fees etc. Page three is the same graph we looked at a moment ago with one big addition. I put in the December 31, 2008 real market losses that happened. I don't know if Elaine has had a chance to give you a full December 31 report yet. I guess you will have that later today and get all the details. You all know about what happened to the assets in the Plan during the last year. Everybody took significant losses and you can see where the losses for December 31, 2008 ended up. That changes the complexion of things because if you take this one time big drop and still earn 7% every year, if you look at the police graph they still remain above zero but the range of reasonable results, one side of the hurricane cone hits the shore line. That's not good, that's bad. We know that 7% every year it is not that smooth, it's going to be bouncing up and down, it's going to be bouncing somewhere in that zone we hope. The event that happened this last year was certainly not in the zone. It was a hopefully a once in a lifetime event that we are going Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 7 of 24 to have to deal with. We see how this changed what happened and that gives us fewer assets to earn on. We are going to have to sell some of those assets to make benefit payments the next couple of years while the markets recover and that's why it makes things take such a dramatic dip going forward. On the Police Plan of things if the market recovers fairly well in the next few years and things kind of stabilize and we get back some of the losses of 2008 and get on a little more steady track, the Police Plan looking at the numbers should survive but it's going to be a very difficult for the next several years. The next several years is going to be very important to that. The news isn't as good on the Fire Pension. Page five has got the basic chart based on January 1, 2008 for the Fire Pension Plan. Please don't take any remarks that I make as being a commentary on investments and investment strategies. That's not my job. I am an actuary I'm not an investment advisory. You guys work that stuff out with Ms. Longer. Any remarks that I make about allocation and all of that is in a general stand point as far as what I see with other pension plans that helps me predict going forward. That's kind of the frame work of anything that I say about investments and how you invested. Now that I have said that both pension funds looking back historically, from my view point, have worked to be a little bit more conservative. Everybody has retired in both funds, it's just like an individual, an individual's portfolio typically when they retire is more conservative than the guy that's still working. As a plan we've kind of retired now so we want our portfolio to recognize that. Your portfolio does recognize that. What that means is it appears to me, from my point of view, that in the last few years when the market did well you guys didn't participate in all of the doing well as much as some plans that were more aggressive. That was okay if we hadn't taking such a bath in 2008. That was what you wanted to do and evidently that's what you all had talked about and came to that conclusion. That wasn't a bad conclusion but the results have not been good either. I'm not commenting on the choices that you made I'm just saying because of them and what happened this year it makes it difficult. Elaine may what to add to that later. I'm not faulting the choices that have been made just to make that perfectly clear. You needed to be more conservative. We have some pension funds in these old plans that are way too aggressive to be at this point in their life. I don't like it and their investment managers don't like it but the boards push it to be more aggressive. The things that you have done are very logical and make very good sense but because of what has happened in the market it has been a hurt. Since the benefit increase about ten years ago if you look back at the valuation you will see that the funding percentage went down some at that time, which you would expect, because it was a significant benefit increase. Instead of building back up, due to a combination of being pretty conservative with your investments, and the fact that the city made what it had to make but nothing more into the plan the funded percentages have continued to slip. Then 2008 happened and your funded percentage wasn't that good to began with and you get a big market crunch like this, it becomes a bad deal. You can see from the projection what the projection is. The more detailed projection shows that the Fire Pension Plan, unless we find something else to do based on the current portfolio, and all of those things has got about fifteen years left. With the 2008 assets that reduces that fifteen years down to ten years, and we have issues that you have to deal with. The question I ask myself when I had all my projections pulled up is can we earn our way Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 8 of 24 out of these problems? Can the fund maybe be a little more aggressive? Can the fund find a way to earn its way out of the current issues? The Police side the issues are bad but they are probably sustainable, so you probably can earn your way out, a portfolio that earns 7% or is shooting for 7.5% can probably earn its way out of problems. The trouble on the Fire Pension side is now because of what has happened this last year you're behind the eight ball even more and to earn your way out of it. You would have to earn 15% to 16% a year over the next ten years, that's a problem. You can't just earn your way out of it. We can't just hide and say the market is going to come back and we know that we will earn our way of it. It is a more difficult problem than that. The Police Plan probably can earn its way out of that and proceed along. The Fire Pension Plan you may want to think about more difficult choices. I don't know what they are. We will talk about some of those in the next few minutes. Melvin Stanley: Just a little bit of clarification on your analogy about our house mortgage and our pension mortgage. Your house mortgage you intend when your mortgage is paid that your house is worth a considerable amount of money and if I understand the pension right we want our pension to be worth very little when the last pensioner draws his check. Jody Carreiro: You're right. Our mortgages that we are paying off would be a house with a declining value instead of an increasing value. I think one of those columns is the accrued liability. If we wanted to say our house analogy the value of our house right now is $18.9 million but it's going down every year because everybody's already retired we've already committed all the benefits we are going to commit, now it's a matter of mortality taking over. Your right the house is not a perfect analogy but we do want to get close to as fully funded but the fully funded that we are shooting for is kind of a declining balance. Melvin Stanley: We want a reverse mortgage. Jody Carreiro: Almost. A fully funded plan would be a reverse mortgage. You are right. It is a declining balance. Like any analogy it's not perfect. It does a pretty good job but it's not perfect. Jerry Friend: You said if we can get 7% growth that we might scrap by. Is that considering the same amount of liability as we have now? Jody Carreiro: Everything I have done is a current benefit structure. Yes sir. Gene Warford: On the Fire Pension, just from looking at the graph, which it doesn't look good, I don't think Elaine can bring in 15% or 17%. With a projected 7%, if we took a 10% reduction in benefits, would that be about the same as an investment type deal? Jody Carreiro: I haven't plugged in to figure out what reduction in benefits that a 7% long term projection would balance it out. I looked at a couple of examples, because we don't have a proposal on the table right now. I looked at a 20% decrease in benefits and at a 20% decrease in benefits and 7% to 7.5% will maintain the fund going forward. I was trying think to think of Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 9 of 24 something to suggest that if you did have to look at a benefit decrease something that would work in the long term. I'm not sure I know what that is. You have to come to an agreement that's what you want to look at before I jump off any cliffs. There are a lot of issues. I'm not a lawyer but the law says the 50% of pay, the minimum benefits, is what's set in the law. David and I have had several long discussions about this and neither of us have a final brilliant conclusion. Once a benefit increase has been given, we've always assumed that it's permanent. There's nothing in the law that says that it is or it isn't. From what little research we've done so far I think that legally you could probably look at that. I think you would want to do that very carefully and work with your City Attorney and the contact in the Attorney Generals office that David's board works with and have them work together to come up with a legal solution. I think there's legal hurtles that will have to be hurtled that are important. I don't think that they are hurtles that are too high to get over but again I am not a lawyer. I think they will have to be very carefully dealt with. You would have to have something that the membership can swallow. I understand that I don't want anybody's benefit to be cut but if that's what you have to do to pay that benefit in thirty years and pay everybody I know that you are willing to look at that. I would think that a solution that kind of dings everybody a little bit, that might be worth looking at, the best thing right now might be a reduction of some amount that would be coupled with the City agreeing to consolidate with LOPE with a COLA. That way when you try to sell a benefit reduction to the membership at the same time you can say you are going to come back to that in a few years depending on the size of the reduction. The issue with that is when there is a consolidation the City has to sign on the dotted line that they are going to pay the required contribution. In the old plan law we do valuations and we calculate a contribution that should be done to get the Plan where it needs to be but that's not what the City is required to pay. The City is required to pay those dedicated things that are set out in the law which for Police and Fire Plans is millage, premium tax, and employee and employer match but that's gone away now. For the Police Pension it's fines and fees so the City only puts in what it has to put in. They were doing exactly what they where suppose to do. I'm not getting on to them I'm just saying that's what is outlined in the law that they have to do. If they sign on the dotted line with LOPFI, under whatever scenario, they would have to sign on the dotted line that they are going to pay the calculated contribution. That calculated contribution, even if we did some combination like I just mentioned, would increase therefore they would have to have more money from the City to go into LOPFI. If everybody says we don't like this but we are going to have to look at it then we will look more at the numbers and come back with a detail for you as to how much that will be depending on how much of a cut, COLA, and all of those pieces. We can find out those answers, but at this point we are still just talking, so I don't have an exact answer. To me the only way that you get something that is sellable to the membership that would some how jump the legal hurtles and at the same time get everybody whole in the long run is going to be some kind of combination of those things. I don't know if that is the right combination but that's the best thought that I have at this point in time. That's not a recommendation as of yet but that's kind of a talking discussion point right now. Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 10 of 24 Let me take a break for a second while you are thinking of some more questions and let David talk about what the process is to consolidate with LOPFI and how that works and what all that entails. David Clark: The process for consolidation is LOPFI will perform a separate valuation from the one that Jody has talked about this morning. It will determine the cost for the City's portion of the contribution to fund the promised benefits for the remainder of the lifetime of the pension fund itself. It will be a combination of the pension fund liabilities and the on going LOPFI liabilities because obliviously LOPFI has members coming in and leaving the fund all the time because it is an active open fund. To do the valuation the pension fund Board of Trustees would need to tell us that it is ok to go ahead with the valuation and provide the payment for the valuation fee. We would then calculate what that contribution cost would be based on the current plan provisions and also what the current position of LOPFI is. We have to close out the LOPFI valuation cycle first before we can do a consolidation valuation. We are on the calendar year just like you guys are so we have to close out 2008 first before we can do a consolidation valuation which means that is going to be around April 1st before we can even proceed with that type of valuation for you all. When we get the valuation results back we will forward those on to the Board of Trustees along with the additional documents that in the event that you want to proceed with a consolidation then you have those documents before you make that discussion to do so. The valuation does not obligate you to proceed. It just simply communicates what the cost would be to be able to proceed with the consolidation. If the Board and the City ultimately says yes we want to do this then the City does have to sign off on an agreement with the LOPFI Board of Trustees saying that they will in fact make the monthly contributions that are required to help fund all those promised benefits. The way that we do consolidations now is that the whole pension fund costs are amortized over a closed fifteen year period. What that does is stretches out the payment period which under a stand alone or old plan is five years. All of the valuations that Jody produces uses an assumption that the PRB has built in that's a five year cycle. LOPFI has allowed it to be stretched out to fifteen years but a closed period. The idea behind that is that it actually gives a little bit of relief to the city officials but it makes a little bit of an enticement for a more of an attractive option for the cities and the pension funds if they want to consolidate. It kind of ease's those monthly contributions. You get to the fifteen year cycle and at the end of that cycle all the cost or the unfunded liabilities are now satisfied for the pension fund and that leaves the City with just the on going LOPFI contribution cost so in other words there is an end point. It makes sure there are enough assets available for the remainder of the pension member's life times to pay those benefits. That is just a really quick fly over about how consolidation works. Pete Reagan: How many of these plans do you now manage in the State of Arkansas? David Clark: We have 103 plans that we currently administer the benefits for and there's 176 plans remaining that are stand alone plans like the Fayetteville plans. Pate Reagan: So 103 cities in the State of Arkansas have taken on that liability. Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 11 of 24 David Clark: That's correct they have already entered in that type of agreement and turned the administration over to LOPFI. Eldon Roberts: David what was the underlying reason that most of the cities decided to merge with LOPFI? David Clark: There's a mandatory provision if the number of pension fund members drops below five the city has to consolidate, but actually this last year the majority of the plans that come into LOPFI's Administration were the product of the boards and the city officials seeing what the market conditions are and what was going on in 2008 and what probably is going to happen over the next couple of years in the market. They have decided to go ahead and turn the administration over to LOPFI. We had 17 of the 32 plans that made a voluntary decision to do so. Years ago, for the most part, it was a voluntary decision as well for the plans to go ahead and consolidate with LOPFI. Eldon Roberts: Most of the reason being kind of like what we are facing here with the old Fire and Police Plans. David Clark: That's exactly right, because there is a significant unfunded liability and they wanted to make sure that the ability to pay the benefits remains. There's a discussion about one could walk into the moral obligation that City's have for the people that have rendered service all these years. Many of the City's have recognized that and decided to go ahead and step up and do quite frankly what we feel is the correct thing to do and that is to make sure that the benefits are available for all the retirees. We have one large location that meet with me a couple weeks ago and they are going to proceed with the valuation after April 1. They are actually looking at it for both of their plans, Fire and Police. The Mayor made the same statement that he felt that it was like a duty for them to go ahead and step up and see what the costs are and make sure that they can absorb that with their on going budgets. Eldon Roberts: A LOPFI member today in the Police or Fire, after they serve the timeframe they have to serve to retire, what is the percentage of salary that they would retire at? David Clark: Well there's a benefit cap of 85% of final average pay. Depending on Police or Fire and the number of years that a person has and if they are benefit program one or benefit program two, that number of years is going to vary. The main thing is that a person could actually accrue up to 85% of their salary for a benefit. Eldon Roberts: Okay, their not that far from what we are drawing. We are drawing 90% of salary. LOPFI has a built in guaranteed 3% cost of living every year? David Clark: It is a 3% compound COLA, that's correct. Eldon Roberts: So in four or five years they are going to be at roughly 100% of salary and going to go right on. Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 12 of 24 David Clark: That's right. The premium tax that's currently allocated separately to the old pension funds that still goes to the City but they just use that on a monthly basis to make their contributions or help defray part of that contribution cost. Dennis Ledbetter: The benefits that we have now will it change, if they come back with a proposal and they say for us to do this these are the rules we are going to go by now. David Clark: When we do the valuation hopefully we're going to do it as the benefit structure is currently for both plans. That's going to be a directive that you guys are going to have to tell us. If there happens to be a roll back of benefits quite frankly we are going to have our legal council get involved to find out if that's something that we need our Board of Trustees to sign off on. One thing that Jody and I visited about is if that happens to be the directive that you guys issue, you probably should consider having each one of the pension fund or the benefit recipients sign off on their approval before you go too far down that path, if you have to have that discussion, and again that's a decision for you guys to make not for Jody or me. The point being is that if there is an agreement and if the benefits are changed from something from what they are right now then when the agreement is signed by the City and the LOPFI Board of Trustees that's the benefit structure that will be in place and remain unless it's amended to something higher. It won't go lower but it could be something higher. By way of example say that there is a roll back of benefits and the City and the Board of Trustees decides that this isn't the best time to go ahead and implement a cost of living adjustment at this point but they may review it at some point in the future two, three, or four years down the road. At that point then a COLA could be implemented so that would actually be considered a benefit increase so there would be an up tick in the benefits but the benefits would not be reduced. Dennis Ledbetter: The same we have for the widows and stuff they would remain the same? David Clark: That's exactly right. The reason why the survivor benefits remain the same is that's a product of the section of code that the pension fund members are under. It's actually Arkansas law. The benefit structure for survivors does not move to what the survivor benefits are for the LOPE members because while you are administered by LOPE you are still a pension fund member. Rick Holt: What is the unfunded liabilities percentage on the LOPFI over all? Do you do a valuation of the state wide plan? David Clark: We do and that is on an annual basis and we have to go back to 2007. LOPFI only and not looking at any of the old plan liabilities was at 91% funded. We have to factor in what the liabilities are for the old pension funds and that dropped down to 78%. Rick Hoyt: Mr. Becker this might not be fair because you might not be familiar with this but your predecessor was Steve Davis, right? Paul Becker: That's correct. Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 13 of 24 Rick Hoyt: I'm a member of the Police Pension Fund. I retired after 28 '/2 years with the City. I've always been a proponent behind the scenes of wanting our plan to go to LOPFI just because it is such a bigger plan and because it has a COLA and it is kind of a sure thing to me. Now I can't speak for the other members on the Police Plan but that has just been my personal feeling over the years. I will tell you that in discussions several years ago with your predecessor I kind of made that know and Mr. Davis kind of discouraged us from going back then. He said you know there's a lot of money coming in from the insurance tum back and right now you need to gather all the money you can to put in that plan because it's going to get healthier and then at some point in the future you may want to go to LOPFI because it will be a more attractive package because the assets will be at a greater level and the City won't have to pay as much. I remember Mr. Davis talking about this several times. He said it was very attractive from the City's stand point to have the Plan go to LOPFI because of some of the liabilities that are on the books of the City. He said that having those liabilities off the books of the City made the ability of the City to sell bonds and do other financial instruments more attractive for the City's financial picture. Are you aware of that, do you agree with that, do you have any view on that? If this went to LOPFI would it be better for the City in the long run for other reasons. Paul Becker: I can't speak for Steve Davis. I understand that at one time he discussed that with people about sending it to LOPFI and my opinion is no, it would not be financially in the City's best interest to send it from a liability stand point or anything like that. These pensions are trusts. They are not a liability of the City so it does not have a benefit to the City as far as issuing bonds or anything of that nature. Rick Hoyt: That's what I was getting at because he eluded to the fact that issuance of bonds and so forth could be negatively affected by carrying this pension system on their local books. Paul Becker: That would not be my opinion. Rick Hoyt: Thank you. Marion Doss: David from what was said here I guess all these 103 plans that LOPFI now administer they all have maintained there current benefits. David Clark: That's correct several of them have added a COLA on the way in as well. Eldon Roberts: I heard you mention something about mandatory reasons that City's merge with LOPFI. I'm not familiar if there is anything mandatory. David Clark: The mandatory provision for consolidation comes into play when the number of pension fund participants falls below five. Eldon Roberts: Not just active people also the beneficiaries. Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 14 of 24 David Clark: No not beneficiaries, participants only include the actual members of the pension fund themselves, which doesn't have to be an active member it could be a retired member, that when that number drops below five then the fund has to consolidate with LOPFI. Eldon Roberts: You mentioned if we merged with LOPFI that the COLA might be a possibility to look at two or three years down the road. Who makes the final decision on whether that occurs or not. David Clark: The City makes that decision because at that point it's now a relationship between the LOPFI Board and the City. Eldon Roberts: Thank you. Pete Reagan: David do you know of any current legislation in the pipe line that we might could get $15 to $20 million out of for our fund? David Clark: I'm not aware of anything that has any real possibility of passing out of the legislature this session. The reason I say that is earlier last year we had a meeting with the Governor and the only way that money could be attracted would be to pull it out of the general revenue portion. The Governor made it very clear to us that anything that would adversely affect general revenue he wouldn't be able to support. While there are a couple proposals that would touch the general revenue it would have to be in a very minor sense, the $15 to $20 million range quite frankly that would be something that we would probably have a lot of resistance against. The first thing is we have to get it out of Joint Retirement Committee and then both Houses before it gets to the Governor's desk. At this point there are a lot of bills out there that are still waiting to have some type of action but I haven't seen anything that specifically addresses that topic. Pete Reagan: Thank you. Jimmy Vineyard: Of those 103 City's that have been brought in is their monthly bill during that fifteen year time frame computed against current payroll? David Clark: That's exactly how we have to do that because we have to use the total payroll dollars to be able to charge the monthly contributions against. Jimmy Vineyard: In that 103 what is the percentage against payroll that you are seeing in some of the hard case situations? David Clark: What are the variations of the quarter rates? It goes all over the map I've seen I think 47%. We have to do individual valuations. We have 454 separate groups so that's why I've drawn a little blank here but we do have some in the 40% range for employer contributions. Jimmy Vineyard: Thank you. Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 15 of 24 Paul Becker: I asked Jody if he would have any ball park of what the cost to the City would be if consolidation was considered. Jody Carreiro: We talked very generally about consolidation and I had set my spreadsheet up to do a quick calculation. The Fire Plan has about $550,000 in Millage and premium tax. The City already has those dedicated sources that could still be used to pay a LOPFI bill if it consolidated. With the current assets and the current benefit structure, and again this is very rough, but the cost to the City would be about $1 million without a COLA which means when you take the $550,000 out the City would have an additional obligation of $450,000. If the current benefit structure was consolidated the City would have an additional benefit amount of close to $1 million. If you looked at a 10% reduction and no COLA it would be $850,000 minus the $550,000 so it would be $300,000 additional from the City to make the LOPFI payment. If you did a 10% reduction with the COLA so folks would get back to the same level in just a few years there would be an additional about $800,000 from the City. Paul Becker: Everyone understands that is per year and that is just for Fire Pension, right? Jody Carreiro: That's just for Fire Pension and that is per year numbers yes sir. Mayor Jordan: You are telling me that it would cost us a $1 million a year. Give me a real good straight answer here. Jody Carreiro: Yes sir, I can do that. The current benefit structure would cost the City an additional million dollars per year with a COLA. Eldon Roberts: You're talking about Fire Pension only. Jody Carreiro: That's Fire Pension. Sondra Smith: Under contributions it has members for 2008 12, 2009 10 etc. Some people may question what that means. Jody Carreiro: As of January 1, 2008 there were two members that were on DROP. That were still active and on DROP and that's an estimate of their member contribution. Sondra Smith: We now have zero. Jody Carreiro: Okay, you can just scratch that out then. Pete Reagan: What are you currently using as a mortality rate for both the active member and the widow for the both Fire and Police? Jody Carreiro: We changed just this last year to "The 1983 Group Annuity Mortality Table". It was based on a study that started in 1983. Last year we looked at mortality over five or six years previous to this last valuation and what had happened in all the plans as a whole. We Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 16 of 24 matched that up to several pension mortality tables to find the one that was the closest match to what was really happening, the rate that folks were passing away at and that was the table that was the closest. It's not the newest mortality table but it was the one that was the closest to real experience. Pete Reagan: Do you know right off the top of your head what the average age is? Jody Carreiro: No I don't. I don't know your average age. In the valuation report on page 14 shows all of the members and their benefits broken down in quinquenal slots, five year age slots. There are five members that are over 85 and seven members that are over 80 and five more members that are over 75 so in the Fire Pension Plan you've got 17 of your 61 members that are over 75. Pete Reagan: I believe it was in September or October of last year you gave a presentation in Little Rock on the history of the old fund and how it was funded both by the employer and employee. Could you give us a readers digest version of how that funding took place? Jody Carreiro: Are you talking about the premium tax? Pete Reagan: No, the actually percentage of payroll that the employee and employer contributed. Jody Carreiro: For several years there was not an employee or employer contribution rate. In the late seventies maybe early eighties it went to 3% and then stair stepped up to 6% employee and 6% employer matching that was required of everyone. The premium tax was added for Fire Pension Plans in the twenties and the Police Plans didn't start getting a piece of premium tax until much later. I think right at the advent of LOPFI which was 1982. Somewhere in between that the millage was allowed and a lot of cities had a full dedicated mill and then the millage roll back in the late eighties where everything rolled back to .4 mills and some cities went back to their folks and got it back up to a full mill and some folks stayed at the .4 mills when that happened. Those have always been the sources. There have been some minor tweaks but in general those have been the sources of funding over the years. One of big things why the LOPFI system was brought into existence in 1982 was that there never was in the old plans a requirement for the cities to pay the cost of the benefits as in the actuarial calculated contribution. What the cities were required to pay by law was always less than that. That goes back to what I said earlier that the cities did nothing wrong but the cities did what they were suppose to but it was less than the actuarial calculated contribution. Even if you earned exactly 6% or 7% every year you still were falling behind because the contribution was less than the actuarial calculated contribution. If all other assumptions meet you still weren't making the contribution and fell behind because of that. Pete Reagan: I think it was 1987 that the Arkansas Legislature saw fit to allow us to invest in the stock market. Before that we were limited to only savings and loan. Jody Carreiro: And government bonds. Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 17 of 24 Pete Reagan: That as you know was part of the demise of this. Jody Carreiro: Yes, the funds were very limited and the smallest funds are still very limited. That limit is still there for them. I think it was 1987 or 1989 before that was opened up. At first it was only opened up for the largest funds but now it goes down to over a million that they can invest in the broader markets. You are right they were limited on their choices of assets for many years. Pete Reagan: Thank you. Jerry Friend: Back in the late seventies and eighties do you know what the employer contribution to social security was? Jody Carreiro: For Firemen and Policemen in Arkansas it was for the most part zero as it still is. Jerry Friend: I thought they pay it now. Jody Carreiro: No. I think your Fire Pension and Police Pension here are not covered by social security. David Clark: That is correct. Jody Carreiro: The Firemen and Policemen even the current ones are not covered by social security. Jerry Friend: I wondered if the employee contribution matched what they would have paid in social security. Jody Carreiro: Since the 1982 amendments to the Social Security Act the rates have been 7.65% which is 6.2% into social security, a little bit into the disability, and 1.45% is Medicare. Everybody pays the Medicaid part so it's 6.2% to 6.5% is what is going in for an employer that's paying into social security. Paul Becker: Mayor, can we recognize Elaine Longer who does the investments for the funds? One of the things that we need to consider, when we are looking at the graphs, is that is predicated on 7% annual smoothing of the stock market increases and I think Elaine should address how realistic we think that is. Elaine Longer, Longer Investments: Longer Investments is the money manger for both the Firemen and Policemen's pension. Our tenure with the Policemen's Pension goes back to 1990 but we've only been involved with the Firemen's Pension since 2002. I will separate the two if I can and just talk first about the Policemen's Pension. If you look at the past year this has been a disaster in the markets and there's not a pension plan in America that has been unscathed by Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 18 of 24 what is happening in the credit markets. Last year every asset class whether you were in foreign stock, domestic stocks, real estate, or high yield bonds, whatever you had out side of treasuries went down. It was one of those perfect storms and so what I would like to do is look at the period that goes up to December 31, 2007 which corresponds with the actuary report that we are discussing and then we can talk about 2008. The actuary report for December 31, 2007 shows the unfunded liability, where they are. The Policemen's Pension fund has delivered a 7.1% compound annual return from 1990 through 2007. That compares to the actuary rate of return of 6%. I wanted to make it real clear that from an investment stand point the fund has out performed by 1.1% on a long term basis what the actuary's assumed the performance would have to be to keep the funds whole. When you hear so much bad news about investment performance I think it is real important for the public to know and for the people in this room to know that the investment performance has been more than what they actuaries wanted us to produce. Last year the funds were down about 19% and that's pretty much in line with what the market was down about 40% and you're in a 50% balanced fund. So being down about 19% is about what most funds experienced. How does that compare to the past? Well prior to last year the worst year that we experienced in the Policemen's Pension Fund was minus 5.7% in 1993. However there have been three years during that time period that the return has been over 19% a year and that was 28% in 1991, 19.6% in 1995, and 19.2% in 1997. As we have discussed, what has happened this year, it is important for people to realize that this is the worst year on the down side. I don't believe that it is not recoverable, it may take time, but the history has shown that when the market does bounce back you can have an upside year correspondingly as big as what this down side year has been. I think that's something that as I go into meetings this year that I am trying to reinforce to people. As bad as this feels, it feels so bad because we haven't been here before, but we have been here before on the upside. So that's important. From the stand point of the Fire Pension we have been involved with the Firemen's Pension since 2002 and at the time that we started managing we thought that the expected return of 6% was a realistic expectation of return because at that point in time the fixed income market was delivering a 6% return. We thought with the expectations of equity returns of 8% to 10% that a 6% actuary rate of return was achievable. In fact we've been able to deliver 7.1% compound annual through December 31, 2007. Now similar to the Policemen's Pension Fund in this year they are down about 19% and we don't have the long term history with the Firemen to know how that equates to their long term performance. Just looking at what we have been able to achieve from where the fund came in through the cut off date of the actuary report that we are discussing that's been compound annual 7.1% as well. When we talk about risk adjusts to return what people need to realize is that we operate as a fiduciary. We are held by rules with the SEC and with the States Security Commissioner. We're bound by the prudent expert rule when handling pension funds which is even a higher level fiduciary responsibility than the prudent investor rule. From our stand point what we have done is to treat these funds as a fiduciary and we invest only in investment grade bonds, government securities, and government agency securities. The highest quality of credit is in these funds and so these funds have escaped everything that has happened in high yield and real Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 19 of 24 estate investment trust this year. The fixed income side of the portfolio which has really stabilized the down side remains intact without risk. On the equity side the returns have out performed our bench marks and have really delivered what you would consider to be the historical expected return in equity markets. Going forward the returns through December 31, 2007 in the actuary report assumed a 6% expected return. We were comfortable with that and as a fiduciary we have to sign off on those expected returns because it becomes part of the investment policy that governs the investment of the accounts. To jump it up to 7% when fixed income returns have dropped to 2.8% from 6% a few years ago we are down to 2.8% on government bonds. We still have 5% returns locked in on the fixed income side of the portfolios but as those roll off we will be looking at a lower reinvestment rate. The question that I have for the actuaries that are here today, and it's so wonderful to have all of us in the same room and be able to answer each others questions, looking forward when we do investment plans we are actually lowering expected returns going forward because of the fact that the fixed income side of the portfolio is going to be generating lower expected returns than the past five years. My question would be how did the 7% bump up in expected returns take place this year giving that fact that 50% of the portfolios are really tied to fixed income returns which have dropped. What it does is it puts the burden even higher on the stock side of the portfolio by my calculations up to 12% annual return to be able to achieve the 7% which is now the new benchmark. I express this concern because I think it's important for all of the pensioners because it changes the unfunded liability but it also changes the contribution from the City. That would be my question going forward where did the 7% expected return come from and whether or not that is really a realistic assumed rate of return given what is happening in the fixed income market, the fact that you can't go far away from the 2.5% or 3% return in the fixed income market without subjecting the portfolio either to credit risk or maturity risk. That would be my main concern to bring to the meeting while we have the actuary's here. I am open for any questions that anyone has. Pete Reagan: Elaine I hope that we have not put you in the hot seat here. I want to say to the general public that you have done us an excellent job and I don't feel like any of this is a down fall of you or your firm. I think you all have done an excellent job and we appreciate everything you have done for us. Elaine Longer: Thank you we appreciate that. Eldon Roberts: I will echo that from the Police Department's side from my stand point of view. I can't speak for the rest of the board members. I feel very comfortable and very confident in your ability in what you have done for us. Because we were up in the up years so high is the reason we are in the good shape we are in today. I think you have done a fantastic job and none of this is your fault the way I see it. Elaine Longer: I appreciate that. In a year like this where you have so much bad press about money managers and the markets it is important for us to be able to reinforce the fact that through the actuary report the benchmarks have been made and we appreciate your support. Eldon Roberts: Elaine did you want Jody to address the question that you we're asking of the actuary about how they arrived at the 7% figure? Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 20 of 24 Elaine Longer: I think it would be very helpful because in our return assumptions for the retirement plans that we are running for clients we've reduced the expected return on the fixed income side to 3%. We are still assuming an average annual return of 8% on the equities side. In a fund that is 50/50 then you are really looking at that would give you an expected return of about 5.5% to 6% but to get to a 7% expected return in a balanced fund where we don't have any control over what the treasury markets and the government agency markets returns are. Those returns are stated and we have to play in that market because we can't take you into junk bonds and stuff like that. Not that I would want to but that's a fact and so if you assume that that half of the portfolio is locked into 2.5% to 3% and we have to get tricky to even get that in this market. The other half the portfolio must achieve 12% compound annual return on the equity which I think is overly optimistic and it's certainly not the returns that we are using in our planning. Jody Carreiro: Let me see what I can do here real quickly. These are excellent questions and part of this is going to be discussed at the next State Pension Review Board meeting in March. Because what happened last year, when we did the study on the mortality that I explained to you a few minutes ago everybody asked about the other assumptions, the State Board did. Assumptions are the purview of the actuary but it's kind of in discussion with the board. There's some give and take there and one thing that they said was a concern of several of the board members was there are a lot of funds that are earning very low. A lot of small funds that are just in CD's, that have been earning 2% and 3% over the years. Then there are funds like the Fayetteville funds, the bigger city funds that have professional management, that have earned a higher rate of return and they said we need to reflect that. They came up with something and said can you live with this, that something was looking at the past five year rate of return. We broke it into three strata's as far as the assumed rate of return going forward. Everything under 4% got assumed 3%, everything from 4% to 6% assumed 5%, and everybody that had a five year rate of return of over 6% got a 7%. Now the practicalities of it are honestly that there was a lot of pressure because the new mortality table was going to push liabilities up and so some folks weren't comfortable with that and they wanted to reflect the good side also, not just the bad side. Going forward the big question is is that sustainable and no I don't think it is sustainable. When we are older we want a more conservative portfolio and the plans are mature and they need a portfolio that's probably around 50/50 in that terminology. A 50/50 portfolio to say that it is going to earn 7% or 8% is not practical. The practicalities come in. The other thing that comes in is what the board gave us last year to deal with was that it was based on the most recent five year average. Well clearly if everybody lost 20% divide that by five that's going to reduce their average by 4%. Unless you are averaging something crazy over the last five years everybody is going to go to a 3% assumption going forward if the State Board wants to continue with that line of logic. That's something that David and I have talked about that the board's got to be brought up to speed on that and think through that and say was this really the best thing that we want to do going forward. We are paying attention to that and we do understand that that's probably not a sustainable 7% as far as a long term investment return. Mayor Jordan: Are you saying that 3% would be reality? If we are not talking about 7% what are we talking about? Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 21 of 24 Jody Carreiro: Reality is probably around that 6% number. The current board policy that they have or the agreement that they have with the actuary right now, with us, is this strata based on the most recent five years. Now the most recent five years includes 2008 which is going to keep that number down for the next few years. What the board does with that I don't know yet Mayor. Whether they want to continue that or recognize that this is a significant shifting event and kind of change their thought process I don't know. Elaine Longer: I think that the 6% is still reasonable even though the fixed income side has come down. When you look at the ten year history, that have been as negative as the last ten years, which in fact was the first ten year period closing December 31, 2008, in the last two hundred years of our nations history where large cap stocks delivered a negative return. In prior ten periods where the return was as low as 1.25% or 2% compound annual the next ten year returns estimated came in anywhere at the low end of 111% and at the high end of 350%. So the average returns coming out of a decade as bad as this one are about 14%. We're still not willing to use that in projections but I think that if you do an assume the 2.5% or 3% on the fixed income side then it bumps the burden on stocks to get to 6% up to 9%. Even though we are using 8% in our planning purposes, I still think 6% is reasonable but 7% seems too optimistic. Rick Hoyt: Since this is being filmed I guess for later showing on the government channel, we have news media present, and we have a new Mayor who hasn't been a party to pension board meetings in the past, I would like Mr. Clark if he would to explain what the process is for plans who have increased their benefits over the years. I kind of get the feeling that there's an under tone that these pension funds have been over aggressive or self indulgent or something in granting a benefit increase that now seems like the bill is coming due and we don't have the money. That's not the way it occurred. I would like Mr. Clark to explain the mechanisms under state law and the procedures that the pension board takes before a benefit increase can even come into place. I don't want the public and members of the plans to think that people just got together and said lets just increase and increase our benefits without some type of an examination. I would like Mr. Clark to explain how that was done and why it was declared prudent at that time to grant those increases. David Clark: I think that is a very fair question to bring up. How benefit increases are handled and how they have been handled for many years is that first a board trustees have to ask for a benefit increase from the Pension Review Board (PRB). It takes six of the seven board members to enact that resolution to request a benefit increase. It takes three fourths of the board to even be able to proceed forward with asking for valuation to cost the value of a benefit increase. Once that resolution is signed off and the minutes are received by PRB then the pension fund is invoiced with a valuation fee, then the actuary, Jody's office, values the requested benefit increase and looks at where the pension fund is at currently and where it has been at historically. They also look at what the actuarial assumptions are that the PRB says that Jody's office must use. If the numbers come back and show that the pension fund can remain actuarially sound to cost or afford that benefit increase then the pension fund is able to proceed with that benefit increase. The PRB issues a letter back to the board of trustees saying that the requested increase is either approved or it's not approved, if it is not approved then sometimes a fund will have asked for some other amount of increase and that's also valued. If that is able to be afforded then Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 22 of 24 that letter will also advise whether that increase can be afforded and then passed through to the benefit recipients. Then it's up to the pension fund to go ahead and enact that approved benefit increase and make notice to the City and County Clerks about that increase. It's a lengthy process to be able to go through and have a benefit increase occur. It's not something that just happens within a week or two or over night. It has to be methodically evaluated, it all starts with the board of trustees and it takes six of the seven members to actually have a benefit increase even pass to the point that the PRB can act on it. Eldon Roberts: David how many votes would it take of the same pension board to vote for a benefit decrease before it would pass? David Clark: That's the big question because there is not a provision of law that discusses that is even available. Now my own option, and as Jody and I were saying neither one of us are attorney's, by having said that disclaimer, under pension law it's commonly understood that if the law is silent that does not mean that it's okay to go ahead and go with whatever the desired event is. In this case if it happens to be a benefit reduction, because we are not talking about the proration of benefits, we are actually talking about an actual benefit reduction, since the law is silent it would seem that that's not an available option. So earlier when I was talking about consolidation I was polite when I said that if you proceed with a consolidation hopefully it's going to be using the current benefit structure. Eldon Roberts: The pension board has seven and it would take six to enact a benefit increase so on the Police Pension Board what would it take to enact a benefit decrease? David Clark: Because the law is silent on that I don't know that you have that ability to do that so I don't know what the number would be. My option is that the provision is not available so therefore there is not a magic number of board of trustees. If I happen to be wrong on that then the next question would have to be what the number of votes that would be required is and it would seem that it would take six or seven in that case. Mayor Jordan: David do you have anything on that? David Whitaker: I do not at this time but we will get you an answer. Sondra Smith: On the study for a benefit increase is there more than one way a study can be prepared and what is the difference in the studies? David Clark: There's multiple ways to do benefit increase requests. Typically Fayetteville has used the cash flow. A cash flow study is a way that a pension fund who has more than fifty members can ask for a benefit increase. What that does is it looks at all streams of income that come into the pension not only premium tax, employer contributions, and employee contributions, but under the Police Fund the fines and forfeitures and also millage that would come in as well. The actuary looks at all those streams of income, what the projected investment income earnings are suppose to be as well, and then couples those numbers with what the Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 23 of 24 requested benefit increase cost is going to be to determine whether the fund can afford the increase. Sondra Smith: Which is the most favorable way to do a benefit increase? David Clark: Cash flow or alternate? Jody Carreiro: Cash flow. David Clark: It would probably be the cash flow. Favorable to the fund you mean in order to be able to enact an increase. Yes, it would be a cash flow. Paul Becker: You could pass a cash flow study and still be judged actuarially unsound. Is that not true? Jody Carreiro: Yes. We have. David Clark: On the regular biannual valuations that's correct. That would actually show what the regular assumptions are and show the pension fund is now in an unsound position. That's correct. Jody Carreiro: That goes back to what I had said earlier about the snapshot verses the long view. The snapshot says what assets do we have now. The cash flow looks at what income stream we have to go with that. The cash flows in that since are more generous to the funds than the snapshot valuations are. Sondra Smith: Thank you. David Clark: Is that it Mayor? Pete Reagan: Are you and Jody going to be around for the board meetings or are you planning on going back? David Clark: We will be here for as long as you need us here. Mayor Jordan: I would like for you to stay for those too. Paul Becker: Mayor I would like to make a couple of comments if I could, that I feel duty bound as Finance Director to make. Everybody needs to understand that whether or not a local pension fund is sent down for consolidation is the responsibility of the City Council. That's the power of the City Council, not the pension over sight board, the Mayor, or anybody else. The City Council must make that decision. You have heard some of the numbers here. We are talking a high side of a million dollars a year for fifteen years which would have to come out of the General Fund and that's just for Fire. Everybody needs to understand the size of the numbers we are talking about. It's difficult enough for us to fund a $35.4 million budget now and adding Special Firemen's & Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes February 11, 2009 Page 24 of 24 an additional million dollars would be very difficult to finance. As a matter of fact at this point in time I don't know how I would do it. I feel duty bound to say that as the Finance Director of the City. Mayor Jordan: Thank you Paul. Eldon Roberts: What time is your meeting scheduled? Pete Reagan: 1:00 p.m. is that correct Sondra? Sondra Smith: Firemen's Pension regular board meeting is at 1:00 p.m. and the Policemen's Pension regular board meeting at 2:00 p.m. in this same room. Mayor Jordan: Thanks to everyone that came. David, Jody, and Elaine I appreciate you all for being here and staying with us. Meeting Adjourned at 11:50 AM