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HomeMy WebLinkAbout2009-10-29 MinutesBoard Members Mayor Jordan Chairman Sondra E. Smith Secretary Marion Doss Position 1/Retired Pete Reagan Position 2/Retired Gene Warford Position 3/Retired Ron Wood Position 4/Rctired Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 1 of 17 A meeting of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees was held at 3:00 PM on October 29, 2009 in Room 326 of the City Administration Building. Mayor Jordan called the meeting to order. Present: Mayor Jordan, Marion Doss, Ronnie Wood, Sondra Smith, Paul Becker Finance Director, Kim Cooper and Elaine Longer, Longer Investments, Audience and Press. Absent: Gene Warford and Pete Reagan. Approval of the Minutes: August 27, 2009 meeting minutes Ron Wood moved to approve the August 27, 2009 Firemen's Pension and Relief Fund Board of Trustees meeting minutes. Marion Doss seconded the motion. Upon roll call the motion passed 4-0. Gene Warford and Pete Reagan were absent. September 24, 2009 meeting minutes Sondra Smith: There was not a meeting because there was not a quorum. No motion necessary September meeting did not have a quorum. Approval of the Pension List: November, 2009 pension list Sondra Smith: Donald Miller deceased in October. He has been removed from the pension list and his wife has been added in his place. The pension list shows him removed. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 2 of 17 Marion Doss moved to approve the November, 2009 Pension List. Ronnie Wood seconded the motion. Upon roll call the motion passed 4-0. Gene Warford and Pete Reagan were absent. Old Business: Osborn, Carreiro & Associates, Inc. actuarial study Sondra Smith: I sent him an email and he hasn't responded. There's really nothing that I can present at this time. In August he thought he would have the scenarios we requested in less than two weeks. Ron Wood: Did he send you anything back? Sondra Smith: No. Marion Doss: That's frustrating, have we paid them yet? Sondra Smith: No. Marion Doss: That's kind of frustrating that we want this and they don't send anything back. The Attorney General's opinion is kind of frustrating too. Sondra Smith: It was frustrating to me when what they presented wasn't what we asked for. I hope they don't charge us for that presentation. Marion Doss: It wasn't what we asked for so I don't think they should. Jan Judy: I just can't imagine that they're not sending it back. Not even answering your emails? Sondra Smith: They've always been really slow. I think I emailed him Monday and I haven't received a response to that email. That's pretty normal they're really busy this time of the year. Jan Judy: Maybe if our Mayor would give him a call he might answer you. Mayor Jordan: The Attorney General? Sondra Smith: Jody Carreiro the actuary. Mayor Jordan: I can. Sondra Smith: I will remind you to do that. Mayor Jordan: I will give them a call. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 3 of 17 New Business: Donald Miller deceased Sondra Smith: There's a copy of his obituary and affidavit in the packet, that he signed when he was living, stating that his wife was to draw. I have not received a new affidavit from his wife yet but we will follow up on that and make sure she comes in and signs an affidavit also. Revenue/expense report Sondra Smith: Trish Leach has been doing this report for the board. It is a comparison of the revenues and expenses from 2004 forward. It gives the board an idea of where they were in 2004 and where they are at this point in time. The book value according to 9-30-09 is $5,493,000 and the market value is $5,752,000. In 2004 the book value was $8,545,000 and the market value was $9,369,000. Jan Judy: Does it say we are down even for 2008? Sondra Smith: Yes ma'am. Jan Judy: When she gave the report in August or July I got the impression that we were up instead of down. Sondra Smith: That fluctuates every month depending on the market. It depends on how the market is doing. Jan Judy: Have we dropped since March? She said in March we came in really good. Sondra Smith: I think it's pretty much the same since March. Jan Judy: She said it was low in March and then she said after March she saw a sizable increase and maybe that was just getting us back up to this point. Sondra Smith: I know Elaine said that in January they did really well. Then in February and March they did really badly and that brought them back down. It's going to fluctuate probably every month. Jan Judy: I remember her saying it was trending up since March. Mayor Jordan: At the Police Pension she said you're going to see this. Marion Doss: I think the market value came up a little bit. It was a little lower and then it came up a little bit but the market value is always going to do that it seems like. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 4 of 17 Sondra Smith: On 2-28-09 the book value was $5,670,000. Jan Judy: So we have picked up a million. Paul Becker: You're going to see volatility in this market. First it was going down then it was picking up. September was good and then October we were hit a little bit. You're going to see fluctuations up and down so I would be very careful concentrating on the market values because it all depends on exactly what happens when she makes the trade. Sondra Smith: On the 6-30-09 the report shows that the book value was $5,508,000 and the market value was $5,490,000. You have come up since June. Paul Becker: What is the current valuation? Sondra Smith: I'm looking at the expense revenue report that Trish does. 2008 actuarial valuation Sondra Smith: As you know they usually don't do a valuation every year but Jody told us that they were going to go ahead and do a valuation for 2008. Some of the pension funds have a poor market value right now because of the market. They did a 2008 valuation and that valuation is in the packet. That is from Osborn, Carreiro & Associates, Inc. Paul Becker: Did you notice by the tests it does indicate that the pension is not actuarial sound. Page five shows the unfunded actuarial liabilities at about $10,000,000. Page four you can see what would be necessary to fund it to an actuarial sound basis. At this point in time it would be $2.2 million per year and that would be over a five year period. Sondra Smith: Page 10 shows your funded percentage and it shows in 1995 you were 98% funded and how it has almost continued to drop every year since then so that as of 12-31-08 you were only 42.6% funded. Alliant fiduciary liability insurance letter Sondra Smith: I get a lot of different information from different people. When it is addressed to the board I give it to the board. It's an insurance company that wants to provide fiduciary liability insurance to the board. Ron Wood: How much does that cost? Sondra Smith: They didn't have a quote on it. Mayor Jordan: Do we need any action on it? 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 5 of 17 Sondra Smith: That's up to the board if they want to take out insurance. Marion Doss: It's probably just information. It makes you think about it at a time like this when people talk about lawsuits. Sondra Smith: I'm sure they are following the pension funds and they know that there are some issues. Longer Investments: Longer Investment — Investment Report A copy of the report was given to the Board. Kim Cooper: As of September 30th the domestic equities in your account were 42.7%. Your equity mutual funds were 7.2%. You were just under that 50% of account in equities so we don't need a motion this quarter to approve a variance. We are within the investment policy. It also lists all of your corporate bonds, government bonds, and fixed income. At the end of the quarter we had 8.7% in cash and the current yield on the portfolio is 3.3%. We also included for your information an updated portfolio appraisal as of October 23rd We have at that point throughout this month increased your equity exposure a little bit. You were at 49.2% domestic stocks and 7.1% for equity mutual funds in the foreign side. As of October 23`d your value was $5.665 million which is down slightly but there was a distribution that went out as of the first of October. The next report shows your income and realized gains year to date. You're realized gains are $24,000 and your income is $106,455. The next report is a fixed income distribution report. It shows the yield to maturity as of September 30th your yield to maturity was 4.5% compared to year end last year that's come down a little bit because interest rates have come down. Your average maturity is 7.1 years. The 4.5% yield compares to the current 10 year treasury which is a 3.5% yield. You have a shorter maturity in your account with a higher yield. Right now about 15% of your bonds in the account are going to mature within the next year. We have some flexibility if rates rise we can go ahead and roll those or if rates stay the same then we can let them mature as they come up. The next page is the performance report. This goes through the September 30th valuation. Returns year to date in equities are up 21%. Your equity mutual funds which are the foreign holdings are at 25.4%. Your bonds are up 4.9%. REITS which are the Real Estate Investment Trusts are up 17%. Cash is down slightly because of the allocation of fees and a very low percentage that's in cash and the low percentage rate that cash is earning right now. We have very little in cash. Your total account return year to date is 13.4%. The equity returns, the 21% that you've made this year compared to the index returns, which are listed right below the S&P 500 on a cash basis is up 17% and the DOW on a cash basis is up 10.7%. Your total return can kind of compare to that blended index that we are showing, the Lehman Government Corporate 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 6 of 17 Index, and 50% S&P 500 which is up 11%. Your total return of 13.4% is ahead of that blended index as well. Page 10 lists your contributions and withdraws since the inception of the account. So far this year you've had a few contributions come in that were from class action lawsuits and then you've had distributions total of $7.677 million and contributions of $940,000 since inception. The final report is your account reconciliation. It starts with you beginning value. It shows the contributions and distributions since the account started. The income, realized gains, unrealized gains, and goes back to your current ending value. Your net investment return has been $2.589 million dollars. Also attached is a copy of your current investment policy. Elaine Longer: The market today is up nearly 200 points and the reason for that is we got 3rd quarter GDP today that showed the 3rd quarter growth was 3.5%, as recently as yesterday Goldman Sacs had reduced their estimate on 3rd quarter GDP to about 2.5% so this was a good surprise. We are sort of at the tail end as far as the 3rd quarter earnings releases are concerned. 80% of the companies that have reported earnings in this quarter have beaten the street estimates. That provided support under the market as well that the earnings are still continuing to come through better than expected and the economy has shown growth in this 3rd quarter better than expected. There are some caveats in that 1% of that 3.5% was inventory restocking. That may not be a continuing benefit that we can look to for strength going forward. The contribution consumer spending was much higher than expected and part of that has to do with cash for clunkers which have now run off. There was a kick in there from the credit for the first time home buyers and that is set to expire at the end of November. However, congress is talking about extending that until June of next year. Some of that 3.5% is what we would consider not necessarily a continuing growth that we can count on but it surprised the market so that caused a lot of people that are sitting on cash to have to move the cash into the market. We're kind of toying with the area that we established, we got to 10,500, can back out to about 9,750, now we're back up to about 10,000. We're just kind of moving around in this range. We've moved to the point now where any further market advance is really dependant upon continued gains and earnings. We got through this point from the low in March, sort of a collective sigh of relief that it wasn't the end of the world, like we were looking at in March. Now it's at the show me stage and the market is awaiting further clarification and looking for proof that the earnings can support this level of valuation. As we get more cards turned up on the table like what we have had in the past couple of weeks and then an exclamation point this morning with the GDP numbers that's kind of helping the market to sustain these levels and move forward. Page eight shows the fixed income portfolio, the weighted average yield to maturity, and also the weighted average maturity, the average coupon. In your portfolio on the fixed income side you're still earning 4.5% in a maturity of bonds that is roughly seven years. To give you a comparison the current yield to maturity in a five year treasury is 2.4%. The current ten year yield is 3.4%. You have a maturity of seven years you're still earning 4.5%. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 7 of 17 I reviewed the minutes to the meeting that took place in August with Jody Carreiro and one of the concerns that I have, and I have expressed it before, is the 7% actuary rate of return assumption that they're using. They changed from 6% and we have managed the policemen's funds for over twenty years and it has always been 6% and it was bumped up to 7% at the end of last year. The problem is that the fixed income part of the portfolio which is around 50% true at this point in time it is yielding 4.5% but as those bonds roll off the reinvestment rate is roughly 3%. Three would be the average maturity of seven years. Your reinvestment rate in a seven year maturity is more like 3%. When you're looking at an expected return calculation and you assume that 50% of the portfolio in the next five years or ten years could be counted on to make 3% on a reinvestment rate then that puts the burden on the stock side of the portfolio would have to earn 12 a/4% compound annual to be able to hit the 7% target. I think that's too aggressive of an assumption and I have voiced that concern before. I haven't had the chance to really go through them, but when Jody was talking about the 7% he talked about various assumptions and all the rhythmus that they ran. There wasn't any definitive that I could pick up in his report that actually talked about the expected return assumptions that he was using both on fixed income and the equity returns. A lot of people are reducing their equity return outlook also because we're into a slow growth period going forward as we work through this crisis that we are coming out of. I just returned from the Northern Trust conference and their Chief Investment Strategist has moved their equity return assumptions down to 7%. We're using 7% in the retirement plans that we run for clients rather to be safe than sorry. When you're running long term compounded returns you don't want to be off by a few percent when people are compounding over long periods. We think that 7% is a more conservative assumption on the equity return. Bill Gross who is the Chief Investment Strategist for PIMCO which is the largest bond manager in the country came out and they are talking about in the new normal the expected returns for equities could be as low as 4% or 5%. Even at our 7% we are still not as conservative as some of the big investment strategist out there that are saying in this new environment as we work through and move from the crisis they're looking at expected returns of 4.5%. What I am saying is given the current expected return that you can achieve without distorting the risk profile of the bond portfolio 4% is very high, 3.5% is achievable but we have to jump through some hoops to do that. When you say 50% of portfolio runs that return then that puts too large a burden on the equity side to be able to meet the 7% assumption. Further reading his report when he was talking about benefit cuts of 20% to 25% and risk of ruin an important consideration is he said perhaps you should talk with your investment manager about a more conservative portfolio structure to reduce the risk of ruin. But in fact if you move to a 70% fixed income return which is what he was throwing out it would increase your risk of ruin because it moves you even further away from achieving the 7% actuary return assumption. Equities have a higher expected return than the fixed income side. If you move to even more on the fixed income, 70% was the number he threw out, that increases your risk of ruin. Marion Doss: Wonder why they changed that assumption from 6% to a 7%? It seems it's difficult to earn more right now. It seems like a strange time to make that change. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 8 of 17 Elaine Longer: I would welcome a meeting with both of us in a room to discuss that because I've asked the question before when we had the meeting in February. I was taken by surprise that they had increased it to 7%, at that time his answer was they took a look at what had been achieved and decided that would be what they would use going forward. As recently as 2002 when we started managing this pension the fixed income returns in a moderate maturity treasury was 6%. When you look at 50% of it earning 6%, then you've got 3% coming from that side of the portfolio, then you just need 3% from the other side and at the time we did the presentation and we were talking investment policy, we said that we thought the 6% was a reasonable assumption because we were using a 7% expected return on the equity side. At that point in time when you could get 6% on the bond side that was a reasonable assumption. 6% at this point in time I think is not unreasonable but it's harder to achieve then even it was when we were looking in 2002 because of the fact that you're so restricted on getting income return on the side of the portfolio that's fixed income. There are ways that you can go for higher yield and we incorporate some of those things into the portfolio using the preferred debt that we use, using some corporate bonds, but even in the corporate bonds if you're in investment grade corporate you can't get much higher yield than what you can get on the treasuries. That's my concern when we are talking benefit cuts of course that has to be something that is preceded with a lot of caution. I would just say that the 7% return assumption that they're using gives you actually a higher present value of portfolio needed to satisfy your obligation in the future. It assumes that what you have in today's evaluation will earn 7%. What ends up happening is your unfunded liability is actually lower than what it would be if you used a 6% assumption. As you are discussing benefit cuts and what might need to be done to bring the account into a better alignment with future benefit needs, I would say that operating under their 7% assumption gives you a better expectation of what the cuts would be than if you actually were to use a 6% assumption. I have to think there's something missing on the fixed income assumption that he's using because to go on in that meeting and to say that you could move to a more defensive portfolio structure of 70% bonds and reduce your risk of ruin is just absolutely not true. It would reduce your expected return and increase your risk of ruin because it would move you further away from that 7% you have to achieve to be whole. That is something that continues to concern me I don't know where the assumption is coming from. I think 6% is more reasonable but I do know that you can't move to a 70% fixed income portfolio and do anything but increase you risk of ruin. Between last year and this year we have recouped all but about 6% of that decline. In this year the fixed income return has been 4.9%. We've had a 17% return in Real Estate Investment Trust, 25% in the international markets, 21% in the domestic equities so on all of those levels you've out performed the bench marks. From an investment performance stand point it's not about your returns because if you look on the next page where your contributions and distributions are listed we are still seeing that in this year the return on the portfolio has given you a portfolio value increase of about $675,000. The net distributions that have gone out have still been $725,000. Even in the year where your total return is 13.4%, which really runs about double what we would think an annualized return would be, it's making up some of the loss from last year and that's why it's so big. Even in a year where you've got that kind of a return the distributions are still out running what the portfolio is able to return. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 9 of 17 Paul Becker: On page eight where we're talking about fixed income distribution 68% of the bonds are out between seven and ten years. You have between seven and ten years to earn 4.3%. I just thought I would point that out for everybody. That's how long you have to go out just to earn 4.3%. Elaine Longer: That 4.3% is what you have locked in the portfolio. It's not what you would earn today. Ina seven to ten maturity you would be between 3.1% and 3.4%. Paul Becker: Are these basically corporate bonds? Elaine Longer: No these are treasuries and agencies that we have bought at higher yields and they haven't matured yet. Paul Becker: Did they have call previsions in them? Elaine Longer: Some of them do have call previsions. When interest rates approach the 3.9 to 4.0 level in the ten year earlier this year we extended the maturities by buying the 4% treasury that matures in 2018. On page two we had a much higher percentage of the fixed income portfolio sitting in the short maturities, the one to three year and we moved a million out to the 4% to 2018 because we were able to achieve a 390 yield in about a nine year maturity. For us this is as good as cash because we can sell a treasury with virtually no transaction cost and its cash tomorrow. Besides the 3.9% current yield that we are earning on the bond we've made about three percentage points in price appreciation because after we purchase those bonds the interest rates went back down. Besides the yield that we've locked in that's out there that's higher than market yields when interest yields go back down you get the price appreciation as well. That's why the fixed income returns year to date is 490. It's not to say you can go out there in a seven to ten year at this point in time of current interest rates, if you went into the market today are about a seven year is 300 to 310 and then the ten year's at 340. That's the concern with the reinvestment because what you have earning in the portfolio at this point in time on the fixed income side will not be there forever as bonds roll off unless interest rates go significantly higher from where they are now. Paul Becker: That is what I wanted to point out to everybody that we invest in government bonds too and ours are callable. For about a five duration now they are down to about a 2.9% and they are getting called all the time because the interest rates are falling so this 4.3% you're looking at is very good. That's a good return. So when you look at the entire perspective, she is analyzing what you have to gain to get to the 7% that the actuary is using, your fund is getting very good investment returns on your fixed investments right now too. Elaine Longer: You don't have a lot of call risk in this portfolio because if you look on page two the government agencies are the ones that carry the call provisions and the only one that you have that's really callable in 2009 is the one that's 3.37 callable, November 18th and that makes up only .9% of the portfolio. We've been trying to be opportunistic and extend maturities and we have done that by purchasing some funds by also buying that 4% treasury when we had that opportunity to get close to 4% yield again. Even as attractive as that sounds, even if you could reinvest and say your reinvestment rate is 4% then that still only gives you in 50% of the 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 10 of 17 portfolio 2%. To make the 7% after expenses you would still be putting a burden on the equity side of the portfolio of about 11 % which I think is still too high to assume. Marion Doss: I thought that assumption changing the 6% to 7% seemed kind of strange because it's harder to earn more now. I don't know when they made that change but maybe they thought everything was rosy then. I don't know who made that change. Elaine Longer: I don't know because that was actually in February which the market was still heading down. We went down into a new low in March so they must have discussed the change of that in 2008. Could be because the year 2007, for instance on the Policemen's Pension we were at a compound annual of 7%, but what happens is you hit a year like last year and you can have that compound annual be affected pretty substantially and then you have to come back and make up. You are really looking at it over a long term period of time. I know that when the firemen and policemen were looking at the benefit increases in 1999 you asked for guidance on that before you went through and did that. The thing that is important to realize is we have been through a ten year period of returns in the market that are actually negative. The ten year average annual return in the stock market in February of this year was a minus 4%. This is the first time you can see in this long period of time that the 10 year return in the stock market has been so negative. The good news is the 10 year return coming out of these kinds of lows is a nice return. You don't know if we will have that immediately or if we will do some backing and filling because this is a situation with the banking crisis and a credit crisis that we haven't experienced. When you asked the question about the benefit increase in 1999 I wasn't managing back then for the firemen. I know that the policemen had reached a point where they were fully funded on their outstanding liability. In fact I think they were slightly over funded and so when they asked for approval to do that benefit increase probably the programs they were using didn't incorporate this kind of a perfect storm because it had never happened before. In our work what we say is its water under the dam where do we go from here because now it's a question of protecting the benefits as much as possible for the firemen and their families. When Jody talks about risk of ruin, that's a terrible word but I think it's an appropriate word. The most important thing to do is to figure out how we protect the families and ensure that nobody out there gets called one day that it's at zero. Once you've retired and you are dependant upon that for your budget it's very unlikely that you can go into the work force and recoup that income. I would urge that whatever the decision has to be to shore up the fund as much as possible, that this is a good time to do it. We've got a good year under our belt, their using a 7% return assumption, and if that gives you a 20% or 23% number I would say that things could be worse than that. Elaine explained what happened in the past with the Japanese market. We don't know yet because we have never been here before if we are facing a prolong period of digestion of this crisis that we have had. Other deflationary contraptions such as what Japan went through in the 1980 and what the United States went through in 1929 have resulted in multi year periods of where you do have these dramatic rallies but then they are followed by backing, and filling and digestion. The net effect is that it takes time to recoup those losses. We don't yet. We just don't have anyway of knowing if in 2010 we are going to face some backing as we 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 11 of 17 have to began to embrace the fact that the government stimulus has to have an exit strategy and so does the monetary stimulus from the federal reserve. We're facing 2010 knowing that their going to have to start taking away the punch bowl and we don't know how or what the steps will look like. We know that it's inevitable because if they don't then we will have a negative reaction in the currency market and the fixed income market. You will make higher interest rates on your bonds but the stock will not perform well. That's the catch 22 at this point in time. We are in a delicate situation as we go into 2010 but we have had a good recovery from the lows of March. Jan Judy: I really appreciate you. It's really helpful to kind of understand since I'm not a financially minded person. The one thing that we all as retirees are effected by is the social security issue and I keep bringing that up. We've got to figure out what to do with this fund because none of them can draw social security including the widows. We are severely penalized as a widow from drawing any of our own social security. I am dependant on my deceased husband's retirement because I've never going to be allowed to draw my social security and the guys are not going to allowed to draw theirs. I asked if the pension fund goes completely away and she said you can reapply and it might take up to a year to get the system to recognize that your situation has changed. We could be without any income at all. Elaine Longer: As I read the minutes to the meetings and especially with Jody present the thing I would like to see it is like any deficit the sooner you address the issue the smaller the cut. If you wait and we go through maybe another year of backing and filling, maybe 2010 has a negative return or a zero return, what is that going to do to the outlook for the fund with the current level of benefit pressure on the assets. I don't know what the social security comparison would be but I would think that even with a 20% cut to benefits it's still a lot more than what you would earn on social security. Jan Judy: Many of the retirees have very little social security even paid in. Elaine Longer: I wonder even if with the benefit cut are the benefits still greater than the social security would be. Jan Judy: Yes. Elaine Longer: What I'm saying is isn't this something to really fight to protect. It sounds to me that even if there is a benefit reduction it's still better to protect this than to think about social security as the option. Jan Judy: When I came out of the meeting after listening to Jody I got the feeling that the best thing to do was to hold off for a couple years. Now I'm hearing you say just the opposite. Elaine Longer: I'm one of those people I always air on the side of conservative. That's just my nature and I just think that it's a good point here coming off of a good year. When you look at 13.4% that's what we would expect to earn in a two year period. A lot of that is because of last year this is a recoup. I just think when you are dealing with compounding over long periods of time which in pension projections, foundation projections, these kinds of things that's what 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 12 of 17 you're doing, it's better to air on the side of being conservative. We always do. I tell people my assumptions are low, they're conservative, if we out perform there's no one that's going to be happier than I am that I was wrong. In the mean time I would like to be as conservative as possible because your dealing with peoples lives. Marion Doss: I appreciate everything that you've done for us on this. I think it's evident that we're going to have to have a benefit reduction. I think we need to look at consolidation with LOPFI whatever that takes. We got a directive from our members that said that the pension board start communications with LOPFI with the idea to consolidate and that the membership is directed to make cuts in benefits as necessary to keep the plan from going broke. They want to keep the widows benefits, same cuts as you would have for the retirees. That's kind of what I think we are going to have to do but on the other hand we have Jody making a remark suggesting that we have someone file a friendly suit if we reduce benefits. Suits to me aren't friendly. Also you are looking a member saying if the fund goes broke they are going to file suit. It's kind of like we can't win in this. Another thing, like you just mentioned we had advice before doing a benefit increase. Actually the way I look at it we had to get permission. When we went to do a benefit increase we had to write a request to the Pension Review Board in Little Rock and they did the special actuary that you had to pay for and they told us we could do those increases. I wonder if we should write them a letter and say can we do a benefit decrease. We requested the Attorney General's opinion and got one that said we can not do a benefit decrease. We sent another one with more information and we haven't heard back from that. How long has it been that we have been waiting for that reply? Audience: Three months. Sondra Smith: It's been since May. Marion Doss: I think we are going to have to do a benefit decrease but to do it when the Attorney General said you can't although I know that's just an opinion. It's kind of like we don't know where to go. Would it be a waste of time to do a letter to the Pension Review Board to see if we can do that? Sondra Smith: I don't mind doing whatever the board wants to do. I just don't think they are going to make a decision on that. I think they're in uncharted waters and they've never been in the situation before. I don't think they want to make a decision on that. We can try. They're the ones that approved all the benefit increases. I don't understand why they are not giving us direction. Marion Doss: I don't either. Elaine Longer: I don't know but as a board you've abided by your fiduciary responsibility. You asked for permission, you got permission, and I think that dealing with what you have on your plate at the current time you're doing the right thing to ask the Pension Board. Marion Doss: I think you have done a great job. I know if we consolidate with LOPFI that means it would be out of your hands and I hate to look at that. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 13 of 17 Elaine Longer: I have been pushing for you to go to LOPFI. It's certainly a lost account for us if you go but the concern from my stand point is for the firemen, policemen, and their families. As secure as it can be made that's the important thing. Ron Wood: Can you give us a recommendation of what you think or how much cut we should take? Elaine Longer: I don't have the actuary computer systems. Paul Becker: You have to run that through the actuarial model. A finance person can't do it and an accountant can't do. You have to run that through the actuarial table. Mayor Jordan: Didn't Jody go through that once before and we put it up for a vote and you all voted not to do the decrease. Marion Doss: Jody went with the 23%. The reason on that I think that an integral part of that needs to be to go to LOPFI. If we consolidate they do an actuary and come up with a figure which is going to be pretty close to Jody's but it may be different. I think that's the one that we need to find out about for sure. Paul Becker: That's not done unless a formal request is made. Sondra Smith: Right, to consolidate. Paul Becker: That's a formal of request probably by the City unless you care to engage that actuary independently. Mayor Jordan: What the City is trying to do is if we're going to send it to LOPFI we want it to go at zero. I may be wrong you can correct me he said it would take about a 23% decrease to get it to zero. Sondra Smith: That is the numbers we are waiting on that we have not received. Mayor Jordan: We wanted him to substantiate that which we have not received anything back yet. Is that a fair statement? Sondra Smith: Yes, he did say 20% would not do it. Marion Doss: He said 23% but the thing I'm looking at if you consolidate with LOPFI, if I understand this right LOPFI has to come up with that figure. I want to know the exact steps and I was thinking we had to get the information from LOPFI, and then we would know that we would have to decrease by a certain percent and if the City is not going to pay anything that is what we have to face. It looks like it should be about the same thing going to LOPFI at no cost as doing what Jody said reducing. It looks like about the same amount to me. He is trying to reduce it to make it sustainable. To go to LOPFI at no cost it would have to be sustainable. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 14 of 17 Sondra Smith: I don't think the City Council would approve it going to LOPFI at the current rates because the unknown of the future. It's going to be a cost to the City in the future and you don't know how much that cost is going to be. Even after you get the actuary report and LOPFI says it's going to cost this much, it could cost even a little bit more than that couldn't it if the market doesn't do well or is that set in stone? Paul Becker: After it's already sent down? Sondra Smith: After LOPFI gives you an estimated amount that it is going to cost the City every year. Jan Judy: I thought he said it would change every year? Sondra Smith: Jody said it would change by 4% every year. Paul Becker: Once you send it down to LOPFI they have an estimated rate that we would pay. If it was zero depending on market gains or losses it would vary. It depends on market gains or losses, it depends on the revenue stream coming in from the premium tax, and it depends on the property tax. That could vary but its set once it goes down for zero. The procedure would be first in this case Jody did an estimate for you based on the estimate if in fact the Mayor decided to take it to Council and the Council would approve going down then you would file. The City would fill out the paper work, send it down to LOPFI, and say we are interested in consolidation. They would run it through their actuary, which is a different actuary, and the number could be different and come back and say this is what you would have to agree to do to take it down. As I said before they accept applications in April and I believe and it has to be completed by October. We are outside that window now. Marion Doss: It looks to me like the Mayor couldn't go to the Council with anything unless he has figures. Mayor Jordan: That would be a good thing. Marion Doss: It looks like you're going to have to hear from LOPFI first to say this is what you are going to have to do. Sondra Smith: I think you would have to hear from Jody first. Mayor Jordan: We have to hear from the Attorney General to see if this is even legal before we can even start this conservation. The first opinion we got back from him he said no, so we go to all this work and do all this for him to send an opinion back saying no you can't do this and then we go back to square one again. Sondra Smith: The first Attorney General's opinion did not ask if we could do a benefit decrease. That was not the question that was asked. Mayor Jordan: You're right. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 15 of 17 Sondra Smith: That's what everyone needs to remember. The question was vague that was asked so that's the reason we didn't get a detailed answer. Mayor Jordan: Maybe this time we will. Marion Doss: That's what I'm hoping if we ever get that. I think Kit put enough back ground in there to explain why we are thinking about doing that. It's not because we want to do it's something we are going to have to do. Mayor Jordan: If and when we do take it to the Council the fust thing the Council is going to ask Sondra and myself is what do we think? We've got to have something that we say we think the City will be okay. You have to understand what we face here is a two million dollar revenue shortage in 2009 and 2 to 2.5 revenue shortage possibly in 2010. Paul Becker: 2.4 to 2.5. Mayor Jordan: If things do not improve by April we are going to make some other arrangements around here. Marion Doss: My concern is if we just do a benefit decrease as suggested by Jody's 23% and left the fund here as is that we might be back in a year or two saying the same thing. If we made the deal for consolidation with LOPFI and realized we're going to have to do a decrease then that should take care of the headache. The City shouldn't have to worry about it anymore and we shouldn't have to worry about it. Our checks would just come from a different place. Sondra Smith: The liability shifts to the City. Marion Doss: Yes but they're making the guess to where it's as even as possible. Mayor Jordan: Marion you have to understand if it goes to LOPFI and it's taken out of the City's hands, lets say LOPFI decides to give everybody a 4% cost of living increase, we have to come up with the money whether we have it or not. Marion Doss: We don't know what they will do. I don't know if they do that or not I have no idea. Mayor Jordan: They would manage the account. Marion Doss: I think the current LOPFI employees it is figured in that they have a COLA where this one doesn't. Jan Judy: Marion didn't we hear that it would depend on how they accepted us into the program to begin with. If we were accepted without a COLA that would be a different amount of decrease for us and we would be locked into that. We could get a 3% increase, a COLA, with LOPE but we would have to take a much larger decrease to begin with. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 16 of 17 Mayor Jordan: Don't get me wrong I'm not exactly opposed to it going to LOPFI but I need to know all the ends and outs because that's a pretty major decision. Marion Doss: We want to know the ends and outs of it too. Jan Judy: My understanding is that the amount that the City would be responsible for each year would be a maintenance fee plus the possibility of more if the fund was not actuarially sound. Is that what you heard Mayor? Mayor Jordan: Pretty much, I think that's an accurate statement. If the stock market continues to decrease, if we get another down turn, it's just not going to get any better for anybody. The issue again is that we've got to be sure that when we send that down there that in two or three years we don't have to come up with a million dollars a year which we don't have right now. Marion Doss: When they presented those figures I remember the 3% COLA, which sounded great, but it was pretty expensive. When you drop that off it reduced it quit a bit. We don't have a COLA on this fund now. We were able to do it for three years but that was the same thing as any benefit increase. We had to send the information down to the Pension Review Board and they were the ones that said we could do it. I think whatever is in your contract when you go there, and if you go there without a COLA that's more of a chance of keeping your benefits right now higher, or more in line not to reduce them as much. Sondra Smith: If I were in your shoes I would make a major push for going to LOPFI because I think you are more secure if you go to LOPFL I think the longer you put off the inevitable the more likely your fund is going to decrease. You don't know what the market it going to do. There may have to be a larger decrease in the benefit that you are now receiving to be able to get you to LOPFI. Mayor Jordan: What Sondra is saying it might go from 23% to 30%. Sondra Smith: Right. Marion Doss: I agree that we need to consolidate and go to LOPFI. I don't know the steps. Maybe it's going to Council first. Mayor Jordan: First we have to have figures on how much we have to decrease, we have to get the Attorney Generals' opinion, if we went to City Council next Tuesday what would we tell them? Marion Doss: We wouldn't know anything. We know what Jody Carreiro said he said a 23% reduction to make the fund sustain itself. I think it was David Clark or Jody that said if you make the fund sustainable then that should be able to go to LOPFI with no cost. It looks to me like we need to know from LOPFI what we would have to decrease to go to consolidate. Mayor Jordan: I don't disagree with you on that. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 29, 2009 Page 17 of 17 Sondra Smith: I don't think LOPFI will do a report until the City requests that it be sent down there. Mayor Jordan: Gives them something to work with. Jan Judy: The AG is what's holding this up. Let's just make a phone call and say get it done. Don't we have a senator and a few house members that live in the city? Mayor Jordan: We do. Jan Judy: That can make phone calls for you because they should have been involved in requesting it to begin with. Sondra Smith: City Attorney requested it through Senator Sue Madison. Jan Judy: Pick up the phone and call her and tell them to get this done. I've had one done almost over night when I was a legislature. Marion Doss: I think you are right first we need to get that opinion and see what it says. Then it looks like the next step is to find out. Mayor Jordan: Once we get that if they say it is okay then we need to get the figures back from Jody Carreiro which we don't have. Marion Doss: I would hate to do a benefit decrease and stay without consolidation because I think it's going to be much safer and more secure with consolidation. LOPFI is a big fund there's still people working and paying into it and going to work everyday. I think what happened is these funds started dwindling and they probably planned on consolidation back years ago when they formed it. Longer Investment — 3`d Quarter Report A copy of the report was given to the Board. Sondra Smith: Page three shows as of 9-30-09 the market value was $5,753,000 Meeting Adjourned at 4:15 PM 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316