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HomeMy WebLinkAbout2009-08-27 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 August 27, 2009 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes August 27, 2009 Page l of 19 A meeting of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees was held at 1:00 PM on August 27, 2009 in Room 326 of the City Administration Building. Mayor Jordan called the meeting to order. Present: Mayor Jordan, Marion Doss, Gene Warford, Pete Reagan, Ronnie Wood, Sondra Smith, City Attorney Kit Williams, Paul Becker Finance Director, Jody Carreiro, Audience and Press. Approval of the Minutes: July 16, 2009 Firemen's Pension and Relief Fund Board of Trustees meeting minutes Pete Reagan moved to approve the July 16, 2009 Firemen's Pension and Relief Fund Board of Trustees meeting minutes. Gene Warford seconded the motion. Upon roll call the motion passed unanimously. Old Business: Osborn, Carreiro & Associates, Inc. letter and report dated Aueust 27, 2009. Jody Carreiro: There's a lot of ground work we have to lay before we talk about breaking down two or three possible solutions. If you will allow me to trudge through some of that we will get our ground work laid and then I've got two or three solutions for us to talk through what the pros and cons are and then see if I need to fill in some more blanks for you. Everything is similar to what we discussed in February. A lot of the things are the same. At that point in time we were using December 31, 2007 participant data and we had the un -compiled not complete financials. The asset number is slightly different from then because after all the receivables and payables that were added in we have all of that balanced and settled now. The participant data is up to date. As of a year ago January there was still one member that was on DROP and as of this January everyone is a retired member and there are no DROP balances to consider in that. That might make some of the consideration a little easier. 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 August 27, 2009 Page 2 of 19 Mayor Jordan: In other words it's closed. Jody Carreiro: It is closed. Everybody is a retiree now. That may make some things a little easier to digest but we still have hard things to digest. I did the cash flow model that we've done in the past, similar to what we have given you six months ago. The step that I took beyond that was all of this information I put it into a simulation which instead of saying here's the interest rate we are assuming, we talked a lot about that in February that the assumption right now is 7% and is 7% a good assumption. We really don't have to talk about that with a simulation because what the simulation did, and the basis for some of my comments in the next few minutes, is that it said here is your asset allocation. We have assets in money market, government bonds, corporate bonds, a couple kinds of stocks, and international stocks. From the reports that I have received I wrote that down and looked at your asset allocation and then used some formulas that simulate what those things do and how they act and react to each other and then did that 2,000 times. It's not something where I'm assuming here is the route that the market is going to take. I'm going to look at thousands of variations on the market and then instead of talking about here's where we think the fund is going to go we can look at ranges, 50% of the time it is going to be here, and 90% of the time it's going to be between here and etc. It gives us a better way of trying to digest what we are looking at and what our issues are. That takes out the discussion about what's the right discount assumption because we are looking at all of them. The charts that I included in this report use the simulation. The good news is when you compare the two things the portfolio that you have which is roughly 50150 stocks and bonds at the beginning of the year and the way that all that was divvied up has an expected return of between 6% and 7% under all the rules the investment guys thought applied back before the last year. We are still seeing how those rules are going to play out as we move forward. Using the old fashion and I did my old cash flow type study, if that's right and the stimulation is right if they go together, then my main line where I assume 7% every year should be close to the median of all the results of the simulation forecast and they are. We are not doing something that's new that doesn't match what we have done before. It adds another layer of interesting information but they are shaped the same, they follow the same path, the median of the simulation is very close to the 7% per year type of projection that we have done in the past. The results aren't any better and aren't any different than what we talked about in February. We have to start where we are at and where we are at is, that based on current interest assumptions the plan is projected to run out of money in about ten years if everything stays as is, premium tax behaves roughly the way that it is, and if millage behaves the way it has that is where we would be in about ten years. The simulation produced similar results. I didn't print a graph of the simulation results of absolutely no change because I did a graph similar to that for February and it's so depressing to watch all those lines dive in the river. We know what that looks like. Right now all of those things are going the wrong direction. There's a 90% chance in the simulation 90% of the time it goes broke in the ninth or tenth year. The two ways of looking at it look the same. If everything followed the absolute best path all the way through the fund still runs out of money in the twentieth year. We have a severe situation. A discussion followed regarding the graphs that were handed out by Jody Carreiro. 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 August 27, 2009 Page 3 of 19 This is a 15% reduction and we will talk about why I looked at 15% and why this may or may not be a good solution. This reduces everybody except the volunteers. If we did go into a reduction discussion would we reduce the volunteers? All my projections ignored the volunteers. They stayed the same. The reductions are only for the paid guys. In reality you are paying out $1,440,000 a year to retirees in total and it's a $1,420,000 if you exclude the volunteers. For all practical purposes there is no difference. One thing you will see is a straight 15% reduction and 50% of the result line still runs out of money. It runs out of money several years later but it still runs out of money. It is going to take something more drastic or it is going to take a combination. The next graph takes a step up to a 20% benefit reduction. With this benefit reduction between 50% and 80% of the time we stay in good territory. I may say risk of ruin and that means risk of running completely out of money. Some people do not like for me to say risk of ruin. I don't know a better term for that because if we run completely out of money that's the ruin. Clearly under our current situation the risk of running completely out of money is close to the 100% level, it's over 90%. The 15% reduction still has a pretty high risk of ruin. It's 43% to 44% as a risk of ruin, when we move up to the 20% benefit reduction that drops down but it is still a 14% risk of ruin. The next question is what risk of ruin would we really want to have? The answer is there is not a text book somewhere that I can go to and say if you are running a projection on a closed plan you want a risk of ruin of this. My answer is when we are looking at funds and cash flowing funds out there's always some terrible scenarios that are out there. Most everything that we have done, and seen other people do, most everything that we have seen in the text books, is when you are looking at some long term cash flow projection that if your probability of ruin is 5% or less then you don't get excited. Between 5% and 10% you take a good hard look at it and look at your other circumstances before you decide whether or not to get excited. You certainly don't want to go over 10%. The 20% reduction just breaks that 10% at 14%. It's really out of bounds of what I would really be comfortable with as far as a suggestion. This is still going to take some combination of ideas to get where we need to be because really a 14% risk of failure is still probably too high to make everybody comfortable. Since the 20% reduction doesn't get rid of enough risk of ruin to make us happy a legitimate question to ask, and you can discuss this with Elaine later in detail if you want to, and I'm not trying to be the investment advisor, from an actuarial stand point a legitimate question to ask is with those portfolio constraints would we reduce the risk of ruin some if we more immediately moved to a more conservative portfolio. It is a legitimate question for you to ask and discuss with Elaine. It is a legitimate question to run through the simulation to see what it says. That is the three graphs that are in the report. As you look at that the thing to do is compare it with your other 20% graph. At the bottom end there is a little bit better. When you look at the percents every thing is held the same except your asset allocation. It gets to a 70/30 bond/stock portfolio in a big hurry. Yes it does reduce the risk of ruin but only by about 2%. 50% of the results are pretty much higher and the risk is only reduced a little bit. So you reduce your risk by getting more conservative with your portfolio, yes. Do you reduce your risk enough to get excited about 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 August 27, 2009 Page 4 of 19 moving to a very conservative portfolio, probably not. If that would reduce the risk down to 7% I would say have a serious discussion with your investment advisor about getting more conservative sooner. Her long term plan is now that everyone is retired to slowly move the portfolio more toward bonds. Is there a good reason to do that faster? According to the simulation it does reduce risk a little bit but not enough o make that something that gets you very excited. Pete Reagan: On the 30/70 allocation with a 20% reduction, what are you using for the income amount? What percentage are you looking there? Jody Carreiro I did not make that calculation. The last time I made that type of calculation instead of a long term average return of about 7% I think that type of portfolio would have a long term average return of closer to 6% with a lower standard deviation. If we had a fund that was growing, we had lots of actives, several income sources, and our other income sources were greater than the benefits than we were paying out I wouldn't be that concerned about standard deviation because I wouldn't be touching my corpus as much. Since we are now completely closed our income sources, other than investment income, are only about $575,000 a year and we are paying out a $1,400,000. The reason standard deviation is important for you guys to keep in mind is since you are taking a little bit of money out of the corpus every year when it goes down you still have to take money out and when it goes back up you never have a chance to recover anything on that. When the market goes up and you take money out and you don't have a chance to earn more. In a wasting trust type situation you want to watch your standard deviation very closely for that reason. That is part of what we are facing right now. We have all these benefits that we are paying that are coming out and we've had the most horrible year since the great depression. It comes at a bad time in the life of the fund so to speak. Mayor Jordan: I'm familiar with a retirement system that I was under at the University. All my money was in high risk stock. There was also a much more conservative one, like a money market account. Is that what you are talking about here? You didn't get as big a payout and you didn't earn as much money but there wasn't as much risk involved. Is that sort of what you're saying? Jody Carreiro: That's exactly what I'm saying. The current portfolio of the plan as of the beginning of the year was about 11% money market, 32% government bonds, 5% corporate bonds, 45% various types of stocks, and 7% international. That in total is about 50/50 stock and bond. What I was talking about is if you moved quickly to something like a 70/30 more conservative side. It would reduce your average rate of return but reducing the risk might be worth it. It helps some but it didn't help enough. That is not one of the solutions to the problem. Paul Becker: When you talked about how you did your projections you talked about member contributions and city contributions. You are aware that they no longer exist and that is not factored into their study is it. Jody Carreiro: That's correct. I'm taking 6% of all salaries paid into the plan which is zero. 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 August 27, 2009 Page 5 of 19 Sondra Smith: On page 11 under employer contributions you have 10% of all fines and forfeitures collected by the Police Department. We do not collect fines and forfeitures. Jody Carreiro: Ever solution apparently from the background we have laid so far, long term solution that will work across the board, is going to have to be a combination of things. It's pretty safe to say that just a benefit reduction is going to have to be more than 20% to get us completely comfortable and once we go north of 20% we are getting into something that you guys would have a real hard time with. There's a reasonable level that you can sell to the membership not even discussing the legal issues. What LOPFI does when you consolidate the LOPFI actuary values, the liabilities, basically the same way we do for a regular actuarial evaluation, they use their same assumptions that they use for the LOPFI system. Our mortality tables are almost exactly the same. The one difference that is significant is our interest assumption. The last valuation and the valuation for this year we discounted all the liabilities and valued those at a 7% discount rate. The LOPFI system since it is a big state wide on going system they have justified a long term discount rate of 8%. One difference is that the value of your liabilities from the evaluation that I do and the valuation that LOPFI would do is that 1%. That lowers the values of your liabilities by 8% to 10%. It reduces the value that's put on the liabilities and then to calculate the contribution to do that they amortize that unfunded. They take the value of the liabilities minus the assets on hand at the time and that's your unfunded then they amortize that over fifteen years. It use to be thirty and it was thirty ever year. They re -amortized it every year and that actually has caused problems for people because there are some cities that merged years ago that have an unfunded liability that's almost twice what it was at the point that they merged. They changed their methodology for the better I think so that it's a fifteen year close. The one thing that's a little odd where the mortgage analogy doesn't quit fit is that they amortize that on a level percent of payroll. We don't have payroll but they're doing it to combine with the LOPFI and make it a percent of the overall payroll. With a consolidated plan you get the consolidated numbers and they send Paul a bill instead of 16% or whatever for the Fire Department it becomes 36%. What that is, is the regular cost for the guys that are working right now, plus this amortization piece that we are talking about and they convert it all to a percent of payroll. When you convert it to a percent of payroll you do the math a little differently so that if your first year payment is $900,000, like in this case for the current plan without a COLA, if it consolidated, it doesn't stay $900,000 for fifteen years because it's a level percent of pay not a level dollar. Kit Williams: If we hired additional firefighters or we raised the firefighters pay then we would be sending more money in to the plan. Jody Carreiro: Yes, but ever year when they revalue they would say here's this cost and here's what is left of this unfunded piece and they would adjust it and come up with a new percent of payroll. There could be a short term disconnect. Long term in reality what happens is you would pay $900,000 this year and about a 4% increase each year. Paul Becker: The percent of payroll is nothing more than an easier way to do the calculation. Jody Carreiro: It's supposed to be put in a way that everybody understands. 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 August 27, 2009 Page 6 of 19 Kit Williams: It would only go up about 4% a year. Jody Carreiro: Right, when it's all said and done it would start at $900,000 and grow 4% per year during that fifteen year period. Kit Williams: Is there a guarantee that after fifteen years that's it? Jody Carreiro Yes, because what they are doing now is they are not re -amortizing, they are paying that off, so at the end of the first year, if there where gains and losses on that piece, they re -amortize it over fourteen years. The result is that in fifteen years you will pay that stream of payments and you will be done. Pete Reagan: At the end when everybody is dead and gone from the old plan, if we consolidated with LOPFI, what happens to the money that's left in the old plans account? Jody Carreiro: It's accounted separately within the LOPFI system. They do still keep the two separate for accounting purposes and when the last member dies if there's something left in that piece it would be merged into the LOPFI piece. If everybody died earlier than expected and there was money left in that piece than it would help reduce the cost in years ahead for the rest of the Fayetteville Fire Department. Pete Reagan: For the employee and the employer? Jody Carreiro: No, the employee amount is set. It would be the employer. Pete Reagan: The employer would be the one to benefit if that happened. Jody Carreiro: Right and the other would be true too. Kit Williams: The City takes a risk either way. Jody Carreiro: Right, the way LOPE works once everybody is in the retired part of it, the mortality risk is kind of shared by the whole pool of the state. There is a certain gain or loss that can come from that but for the most part that mortality risk is shared by the pool. If you have enough people they tend to die on schedule, when you have a very small pool that doesn't happen. Audience: Are we a small pool or a large pool? Jody Carreiro: From the standpoint of mortality you would be small. For mortality to be pooled and be nice and smooth you need thousands of lives. Let's talk about a few variations or combinations and what the long term costs of those are. Audience: On the net City out of pocket is that a life time cost for the city. 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 August 27, 2009 Page 7 of 19 Mayor Jordan: That's yearly. Jody Carreiro: For fifteen years. Audience: The current plan would be $325,000 for fifteen years or yearly for fifteen years. Mayor Jordan: Every year. Jody Carreiro: Let's first talk about an option that none of us wants to talk about but for comparison purposes we need to because it's a legitimate option and that is the fund is allowed to be depleted. All the assets are paid out we don't have some miraculous market turn around that saves the fund, based on the median of all the projections that's in about ten years. Let's say the City says we can't let that happen we need to fill in the blank. We are not going to prorate benefits, we are going to fill in the blank of what there is no income to cover. What would happen is in about ten years the City would be on the hook for about $350,000 in the tenth year. In years eleven through twenty five it would be a varying amount. You will still have millage and premium tax. Based on the projections the city would need an amount that would be about $350,000 and it would jump up to $600,000 for a few years. Many years it would be around $300,000 and by year 2025 it's less than $100,000 then in 25 years with the number of people expected to be around the millage and premium tax would pay for those benefits. Pete Reagan: Why the increase in the millage? Jody Carreiro: This the year the plan ran out of money Kit Williams: There was some money left. Jody Carreiro: The biggest short fall is the year after. Pete Reagan: Did you not say a couple years would be $600,000. Jody Carreiro: Yes, it would jump up to $600,000 and then start creeping back down. Pete Reagan: When would it jump? Jody Carreiro: The 11th year. The $350,000 would be what the remainder is in the year it ran out of money. Then the City would have to come up with another $600,000 for a few years then $500,000, $400,000 and eventually zero after 25 years. Marion Doss: That would be if they wanted too. Jody Carreiro: If they wanted to and we all know that by law they don't have to do anything and the plan would have to pro rate benefits. Kit Williams: Do you have a total cost of what the City would be spending 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 August 27, 2009 Page 8 of 19 Jody Carreiro: I have a total present value. In today's dollars that about a $1.7 million dollar cost. Kit Williams: If we pulled $1.7 million dollars out and let it sit and then start paying it off that's what would be projected to be able to pay that off. Jody Carreiro: Right, another way to look at that is that on average if there was $1.7 million that Paul had hidden in a drawer somewhere that could just be injected into today's dollars into the plan then on average it would be okay. That stream is worth $1.7 million in today's dollars. To get apples to apples I did the present value of this stream of income versus that stream of income. The present value of the stream of income if we just let the plan run out of money and the City puts more money in it is about $1.7 million. The stream of income of what the City would additionally have to put in above and beyond their income sources is about $4.3 million. Kit Williams: Are you using approximately 7% as the discount? Jody Carreiro: Yes, I used 7% for all of them. Jan Judy: Are you saying if the plan ran out and we didn't consolidate, we left it like it is it would run out in ten years. At that point in order to continue to pay out the benefits to the firefighters that were left it would cost $1.7 million but if we try to consolidate with LOPFI then the City ends up paying out $4 million. Jody Carreiro: Yes, all in today's dollars. Jan Judy: We are a lot better off staying with the old plan? Jody Carreiro: The City is a lot better off staying with the old plan because it's less money to the City. I don't know if the City could even guarantee or step up and say we are going to guarantee those benefits. You would have to talk to the City Attorney about that. I don't even know if that is a possibility. From a numbers discussion possibility I thought it was important to address what the short fall is going to be over that period and how much would the City have to come up with. Gene Warford: If the City says they're not going to pay out zero and for us to go to LOPFI we have to be sound, it is not going to cost the City nothing is the only way they are going to want to take it, then it looks like to me that our cost is going to be about three times. We are going to have to reduce a lot bigger percentage on that basis. Jody Carreiro: Yes sir and the only combination that is somewhat close, if you look at page three of the letter, is the 20% benefit reduction and then consolidate with LOPFI without a COLA. Right now the projected cost of that is about $50,000 the first year. I know that is not zero but that is as close to zero as we have gotten as far as a combination of things. Pete Reagan: This is using December 31, 2008 numbers correct? 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 August 27, 2009 Page 9 of 19 Jody Carreiro: Yes sir. Pete Reagan: $50,000 the first year and a possible 4% increase the next year? Jody Carreiro: Well, actually the $625 number in the first column is what would go up 4% a year. The $575 we don't know how much it will go up. A big hunk of that will depend on how much millage goes up. Millage in the ten years leading up to last year probably increased 4% to 5% a year on average. Kit Williams: I think it went from 5% to 6% and it's having a little pause now. Paul Becker: A little more than that, we were generating about 6% on millage. Jody Carreiro: Okay 6%? This year is probably not as good and in the next several years I don't know what you're forecasting. Paul Becker: Well the assessed value is still going up but collections you don't know about. Jody Carreiro: Right, collections could be an issue. There's probably some pent up valuations that won't come through that will hold the City off for a few. Paul Becker: But putting this into perspective we would have to pay a minimum of $50,000 per year for 15 years. Sondra Smith: And that is reducing the benefits. Jody Carreiro: That is reducing the benefits by 20%. To me the best of all possible worlds, if you had to do a reduction, would be to do a reduction and consolidate with a COLA so that the reduction can be made up over a period of time. Paul Becker: Did you take the simulation to zero? Did you take the simulation to what the net cost to the City would be to zero? Were you able to do that? Jody Carreiro: It would be 20% to 25%. Mayor Jordan: That is what I figured too. Jody Carreiro: Yeah, I did some numbers with 25% and that reduced it to less than zero. So it is between 20% and 25%. Mayor Jordan: So we could split the difference and say 23%. Jody Carreiro: Okay, roughly yes. To me if you went down that road the best of all possible worlds would be to go down that road with a COLA so that if you asked members to reduce benefits they can make it up with a COLA over a period of time but that is without a COLA. 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 August 27, 2009 Page 10 of 19 Kit Williams: How much would you have to reduce it if you are going to leave a COLA in because with a COLA it is $425,000? Sondra Smith: Right. Jody Carreiro: Yes sir. Kit Williams: So if that was down to zero how low would it have to be if you wanted to leave a COLA? Jody Carreiro: I didn't calculate that. I can try to punch it in in a minute. It would be painful. Paul Becker: That would be a huge percentage. Marion Doss: Even a 1% or 2% COLA would be something where it would build and you could look at it building back in time. I notice everything is shown on a 3% COLA. I am assuming that is because that's what LOPFI gets. Jody Carreiro: My understanding is they would look at any COLA up to 3%. I think a couple people have merged with a COLA that is less than 3%. I think they would accept that from an old plan. Paul Becker: But the inclusion of the COLA is what is driving up these total costs if you send it down. Jody Carreiro: The inclusion of any type of COLA drives up the cost. Jan Judy: Jody, I have another question that is not quite on this. All of the guys that were on this retirement plan their Social Security is very much jeopardized. They can basically draw no Social Security. If our plan fails do they then get to draw Social Security? The City made them sign a contract that if they worked and got this pension fund then they could not have Social Security and so they agreed to that. Now the City says they have no responsibilities so all these guys who now are getting $124 to $138 per month Social Security and that is ridiculous. Jody Carreiro: The way the old Social Security rules do, this was a Fire Department that did not participate in Social Security. If a Firefighter had a job outside the Fire Department that paid into Social Security they may have some Social Security but it can be subject to a reduction. I would assume, but there is absolutely no documentation because I have never seen this, that if you no longer were drawing your firefighter pension that if you did have a reduction because of that goofy rule that the reduction would go away because the reduction is predicated on what they are getting, but I don't know that. Jan Judy: Some of our guys went to Social Security and asked them and they told them no. Jody Carreiro: Social Security doesn't know. I don't know that this has happened before so I don't know that anyone knows but you are right. That is my guess and their guess is no. Of 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 August 27, 2009 Page 11 of 19 course they are the ones that are writing the checks so you would have to appeal their decision. That is a good question. Let me mention another item. Everything takes money. I stated looking at a couple of combinations to survive the next few years hopefully the markets catch up. I heard earlier this week that when we finish this year it is going to be the first ten year period since the depression where for ten years the markets are down over that entire period. The bond markets have earned 6% and the stock market is going to earn about negative I% over a ten year period. That is not very good and that has never happened twice in a row. We can certainly hope that the next ten years will be at least some better although no one knows what the ultimate result is going to be. One thing that could be a combination and this might be something you want to send me back to the drawing board to work on some more. Here is where I started as far as my thought process. Is there a stream of income that is roughly in a present value basis about the same as this number that would keep the fund from going broke on the current basis without any type of reduction? There is and it's about $150,000 per year and it is actually $1.8 million. In other words the City says we know that you are in trouble and we want to keep it from running out of money so we are going to put in an extra $150,000 per year for the next several years, the next thirty years and that would do that. That gets the median back above zero. It keeps the fund as it is on average, and out of bad areas. The value of it is roughly the same as that. It is level, spread out over time; and it avoids the fund going down. Kit Williams: You said thirty but you meant fifteen years. Jody Carreiro: I meant over thirty because the projection was thirty years. I know the City doesn't have $150,000 or $300,000 lying around but you probably can say it is $250,000 for maybe fifteen years. I don't know that but that is probably about right. You can front some of it and do something and it was also valued at about $1.8 million that would keep the plan afloat. Now is it possible to do that with some smaller benefit decrease to get through the next five to ten years and then be in a place to consolidate with LOPFI where either the City is better off financially or the fund is better off financially and it becomes better to consolidate to LOPFL I don't know what everyone's attitude is about that I just want to kind of say here is another way to think about this that may be of value and may not be of value. Frankly you may not like any of the ideas I have thrown out so far and that is alright. I don't particularly like any of them. You could extend the life of the fund with some City input somewhere in this range to keep the fund afloat over this next ten year period and work hard with the markets to try and rehabilitate the fund to the point that it might be able to be merged. Everyone gets older every year so the value of the liabilities now go down, the liabilities aren't going to go up anymore, everyone is retired. So the liabilities are going to go down every year and of course as people pass away the liabilities go down. So if there was some in between thing like this where there could be some help to the fund to rehabilitate it over the next several years to the point that maybe it would be affordable, that is less than the cost of going to LOPFI as it is but it is still a cost that is not anticipated and you may want me not to talk about that anymore. Jan Judy: Jody, I have one more question. Are you keeping up with nationally the cities where there are big court cases? I have seen at least three. St. Louis I believe was the one I saw that was the big city that was ordered by the courts to maintain their firefighter's pensions. This is 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 August 27, 2009 Page 12 of 19 happening nationally and I have heard several states are doing this and requiring cities to pay it up front. Is there any place where it has failed when there has actually been a lawsuit that you are familiar with or have the firefighters prevailed everywhere? Jody Carreiro: I haven't followed everyone but I have seen several of the same ones and of course their state laws are different and all those kind of things so they may or may not be a good benchmark to look at. I have to say before I make my next couple of remarks I am not a lawyer and I am not trying to be a lawyer. I will leave that for the people that went to law school. I hang around pension law everyday and I see a lot of things so I think I can speak intelligently about certain things. No one knows what would happen if anything goes to court, you never know for sure. The courts in general in benefit cases tend to have a tendency to favor the member over the plan sponsor, I can say that. If there is any basis in law they will favor the member over the sponsor. Having said that we get into the question and I put a caveat in the report, I don't know if a benefit reduction would stand up or not whatever it was. I don't purport to know that. I also don't know for sure what the court would do if a plan did run out of money and a city refused to make that up. Especially since these are contributory plans there is history where courts have upheld especially contributory plans and said the sponsor had to make up the difference. That is not legal opinion that is actuarial observation as to what has happened. If I was in this situation and you guys decided you wanted to seriously consider a benefit reduction and I know you have talked about that and you have talked about getting all the members that would be affected to sign off and all of those things. Frankly I would find one of the members that would be willing to file a friendly lawsuit the day you voted to do it simply to find out because eventually it will probably end up in court. Again that is just my observation. I don't know if I will get a disagreement on that or not. Sondra Smith: Jody, those court cases, were those plans enriched by the board or were those plans at the level they were promised when they retired? That is the whole big issue. Jody Carreiro: That's another complication with this plan that I don't think there is good precedent in Arkansas or outside of Arkansas to stomp your foot one way or the other about that. The additional benefits are the part that we would actually be talking about reducing and would those have the same level of guarantee as the state based benefit, probably not, but to what level that would be looked at we would all be guessing at this point. Gene Warford: Didn't you say something about guaranteed in your statement there? Sondra Smith: On the plans that have gone to court. The guaranteed amount of only 50%. Gene Warford: Where was that guarantee at? Sondra Smith: In the state statutes, the guaranteed amount that you were supposed to retire at is 50%. The way you got to this higher level that has caused this problem is by the benefit increases that have been done. My next question is when those benefit increases were done it was before I was employed here at the City was there any warning to the board that those benefit increases could be a risk to the plan and that the plan could be in this shape in the future? 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 August 27, 2009 Page 13 of 19 Jody Carreiro: I could go back and get those and we could look and see what the exact wording was but ever since the pension review board put in what we call the cash flow evaluations in one version or another there has always been an explicit caveat that these projections will vary and they are not going to match this. If any of these assumptions are met it could have a very significant effect on what that looked like. As those cash flows evolved over the years and I don't know if this plan ever did an alternate cash flow or not but when it got to the point to where we had an alternate cash flow five, six, or seven years ago, there was a second disclosure beyond the report where the city board, not the plan board, but the city board also signed off that they understood that there was additional risks and they were willing to take on that risk. Kit Williams: I talked with another city that has done that and they clearly are liable. I guess you did this state wide for all these plans don't you? You do a bi-annual report? Jody Carreiro: Yes sir. Kit Williams: Approximately what kind of percentage of plans throughout the state are in the kind of situation like we are that are projected to reach ruin within a decade? Jody Carreiro: I am working on that right now. 2008 was not supposed to be an evaluation year. In visiting with the board about it I said this has been a significant event we need to value everybody. In June they said yes do evaluations for everybody this year also. We are about two thirds of the way through that process. I don't that answer today but I will know that answer in the next few weeks. Kit Williams: Are the majority of plans in significant problems? Jody Carreiro: There is more than a couple. There is a significant number that are going to have some issues. This is not the only place and several people have either asked me directly or indirectly about tell me about how the conversation goes in Fayetteville because we are going to have a similar conversation soon. I'm meeting with the Little Rock police plan in a couple weeks to have similar conversations. Their so optimistic they want to talk about benefit increases, even though their funded percentage is as bad as yours. Sondra Smith: Are those plans as rich as this plan. Jody Carreiro: It's worse. Theirs maybe close. Sondra Smith: They've received benefit increases. Jody Carreiro: They didn't receive one big one like this plan did but they received eight smaller ones. This isn't their discussion, but not telling their business, but it's all public information. There are several plans and without going down the list I can think of five or six that I will probably be having these types of difficult discussions with in the second half of this year. This is not my first hard discussion and this is certainly not going to be the last. 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 August 27, 2009 Page 14 of 19 Certainly one of the options and this depends on the board as a group and what their view point is and you can talk about shapes of recoveries and I will leave that to the investment professionals, part of it may be our view point on recovery. I will say this I did look at the projection and say we earn 20% the next three years, we have a gang busters recovery for the next three years, and then settle back into 7% a year, that's not enough. We have taken a very significant hit. If your view point is that over the next five years we will see significant recovery and get back up to those levels a certainly viable option is to keep a very close eye and wait and see for another year or two. I don't know if I would vote to do that or not or if I would vote to try to follow one of these combination plans. Kit Williams: If they wait and there is not a large recovery would that mean they would have to consider an even higher reduction to get down to zero cost to the City? Jody Carreiro: That's certainly the risk. When you get close to a 40% reduction then you get into the next level of legal argument of whether you can even do a reduction. Could you go below 50%? Paul Becker: To put things in prospective so far this year and I mean this is with 18.2% increase on equities, our increase on our portfolio is about 11.3% so I don't think anybody should be talking about 20% increases because this is a very good year. In prospective we are talking about 7% rate of return or discount which ever terminology. To gain a 7% rate of return, which is what was used on the actuarial study, based on our allocation of the current portfolio we would have to achieve returns in the equity market, in stocks, of 11.75%. You're talking about pretty good returns simply to meet the rate of return that we talked about that's factored into this already. I think we should be careful before we get too optimistic of what may or may not happen in the equity section certainly within the next few years. Jan Judy: If we took a decrease in our percentage rate and left it here and kept it a private plan would that work because I don't think we have really discussed that. The discussion has been at what percent would we have to decrease to go to LOPFI? Would we be better off keeping control of it? If we did that in the future without a COLA and say the fund did really well they could actually raise our percentage back if we had not consolidated with LOPFI. Is that even an option? Jody Carreiro: The graph results were with the plan remaining stand alone. We didn't talk about it in those terms but that's what the graphs were of was of the plan remaining stand alone and doing it. Once you consolidate with LOPFI you have that level of guarantee. All those benefits are guaranteed and in a sense it doesn't matter what the market does because it all flows through in contribution rates to the City again so there is a guarantee but the City pays for that guarantee. I think my favorite combination solution right now and as I said I don't really have a great one that I would like to say here's the solution, here's what I suggest professionally that you should take, basically I have laid out several and said here's the pros and cons to all of them. I think possibly the best solution right now would be a smaller decrease and a possible either putting aside money by the City of some funds or into the plan of some funds to work up to trying to get the plan in better shape and maybe either having a side pot of money or adding money to the plan to get in better shape so that the cost of the merger would be better. Then 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 August 27, 2009 Page 15 of 19 possibly you could merge with a cost of living in a couple of years. That depends on a lot of things and that's a solution that makes everybody hurt because the City doesn't have and doesn't want to put in additional money. None of the members want to take a benefit cut. It's one of those things that cuts everybody to some extent. It's kind of a combo situation that may have a little bit better chance of working no matter what the variation of results is. Sondra Smith: Mayor Jordan does the City have any extra money because I know this year I have had to cut my staff and next year my budget has been reduced drastically from this year in order for us to even try to meet our budget. Are there any pots of money sitting around that I don't know about? Mayor Jordan: The only thing I can tell you is what we are facing is any where from a $2.2 to a $3 million deficit by the end of the year. We are doing salary freezes right now and there is a possibility we will be doing a staffing freeze in the next couple of months. We're scrapping for $50,000, $75,000 and $100,000 to keep the City afloat right now. Sondra Smith: Do the City employees get a COLA? Mayor Jordan: No they don't. It's a very perilous time right now. I will just give you my personal opinion I think the $150,000 or whatever it would be would have to be of Council approval. Is that correct? Paul Becker: Absolutely. Mayor Jordan: I do not see at this point in time the Council doing it. I may be wrong. Jody Carreiro: The only other source that might even be out there and I believe the millage that goes into this plan is four tenths instead of the full millage. Kit Williams: That's correct. Jody Carreiro: You could go to the voters for that but I didn't even mention that because previous discussion about going to the voters for a group of guys that are already retired just on the voters good will especially with everybody's pocket book hurting is probably not politically possible probably less politically possible than what the Mayor just talked about. I know it is tough there is not a good solution out there. Mayor Jordan: I wish I had the answer to all of this. I know that in our departments we have cut most of the departments 10% this year. Paul Becker: Not that drastically but were cutting them down and we are looking at selective areas as much as possible. We already did not grant a COLA this year and we didn't grant a COLA last year. We are struggling with budgets for next year right now and how we are going to have to reduce them. Mayor Jordan: We have cut departments. 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 August 27, 2009 Page 16 of 19 Paul Becker: That's correct. Jan Judy: Jody you were talking about the millage and at one of the meetings they were talking about when benefits could be decreased and if there was a state law that would kick in but the City had to have a certain millage rate. Kit Williams: That's a statute. Jan Judy: Okay, what is that and how much do we lack. Would that be something the citizens would have to pass to raise our rate? Kit Williams: There are two requirements for that in order to get to that guarantee fund. One is that the millage has to be at one and the second that your benefits have to be at 50%. There is no reason to even look at that because you don't have to go down to 50% in order to make your plan work without any additional millage. So why would you cut it to 50% when you don't have to cut it that much. Jody Carreiro: That's why I haven't talked about a guarantee fund in terms of the millage. Pete Reagan: I have a question for you on page seven top line total market value of the fund as of December 31, 2008 is $5,823,185 is that the number you are using to base the projections off of? Jody Carreiro: Yes sir. I used the December 31, 2008 market rate. I started to call and get an update but every other plan I work on the first quarter was horrible the second quarter was great so they are back about where they were at December 31, 2008 for the most part. I wish I had a good solution to all of these things. I want to make sure that I have provided you everything that you need. Are there some of these combinations that we have discussed that you want me to write down and follow up with you on? What do you want me to do to complete what I promised you I would do? Kit Williams: The letter presented four scenarios that the board had voted on to ask you to do including not a uniform reduction for everybody that is getting a pension now. Jody Carreiro: Yes sir and I looked at some of those but not all of them and I need to follow up and address each of those. Kit Williams: If the board still wants you to do that it's their decision. Jody Carreiro: I got so busy trying to find some overriding combination that I didn't specifically address each of these in the report in what we have talked about today. That's what I promised to do. I will follow up with that in writing. Mayor Jordan: We want to wait on that information before we make any decisions. Pete Reagan: Those were the ones that we voted on. 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 August 27, 2009 Page 17 of 19 Mayor Jordan: That's what I remember too. Jody Carreiro: We've talked about several of those in one form or fashion today but let me follow that up in writing. I'm sorry I will do that. Pete Reagan: Jody do you think there is any possibility of any money coming out of the Governors discretionary fund or some other type of insurance fund to assist these old plans? Jody Carreiro: I talked to David Clark on the way up here about two or three subjects and one of those subjects was there are a couple different groups that are trying to get together to approach the Governor again and you know that I have thrown out a different idea ever session for the last five sessions and bits and pieces of those have come through but not all of them. I don't know if the tough economic times will make the Governor bite or not. I really don't have a feel. I have thrown some many things against the wall and very few have stuck. You have watched this so you already know that answer but I really don't have a feel as to whether we can get enough foot hold to make something happen to not. I think we certainly have good cause and I think we have a couple good ideas that are brewing to do that as part of the over all premium tax picture but getting someone to bite on them has been very difficult as you have watched. Pete Reagan: If we can get Don Zimmerman on board it will help tremendously. Jody Carreiro: That doesn't mean I'm quitting having ideas. I have a couple back at the office that I'm going to throw out and see if they stick. We may get some more help but I wouldn't bank on it because every other idea I have thrown out there hasn't gone very far. Marion Doss: All of the things we have talked about here it looks like a 23% reduction in current benefits would get us to go to LOPFI at no cost. Is that correct? Jody Carreiro: Yes, roughly. I will get it down to a real number that I can say. Kit Williams: The other guys will look at it too. Jody Carreiro: They would have to look at it. Kit Williams: That's approximately. Jody Carreiro: That's approximately, right. Their number will be different. Maybe a little more or less but it will be different. Pete Reagan: But we know it's some where between twenty and twenty five. Gene Warford: And that is with on COLA. Pete Reagan: 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 August 27, 2009 Page 18 of 19 Jody Carreiro: Yes sir. Marion Doss: Is there a possibility of plugging just a 1% COLA into that 23% figure? Jody Carreiro: I can stick that in the model pretty easily and put that in a follow up. Mayor Jordan: I think we can work on any combination you all are interested in. I don't think we have to make a hard fast decision today but I am just saying we need to get the information and probably make a call on this. Is anybody in disagreement with that? Gene Warford: Any time you put a COLA in that's going to raise that percentage up more, right? Jody Carreiro: Yes. Gene Warford: Any time you put a COLA in you are taking away down here. Mayor Jordan: Jody do you have enough direction to know what they are looking for? Jody Carreiro: Yes sir. I need to legitimately address all these things in writing and then show a combination with a partial COLA. I wish I had given you all good news but you all knew kind of what the news was and I hope I have given you good information. Pete Reagan: Thank you Jody I appreciate it. Kit Williams: Thanks for coming. Letter requesting actuarial study A copy of the letter was given to the Board. City Attorney letter dated July 16, 2009 regarding Attorney General's Opinion No. 2009- 049. Kit Williams: Senator Madison has sent a little bit broader request. When the Attorney General had their initial statement I sent them a letter and pointed out a few items that they had not addressed in their original opinion and gave them a little bit more information part of which is the fact that your plan is in fairly dire straights, not as bad as it was projected in February where it looked like 2016. Risk of ruin is still out there. I thought the Attorney General needed to know that as part of their analysis. I have not heard from the Attorney General and I don't think Senator Sue Madison has either with the second request. I did request the Attorney General to use Senator Madison's request to reconsider and to look at the other factors, cases, and statutes that I had used when I made my opinion that you do have the power to reduce rates. 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 August 27, 2009 Page 19 of 19 Marion Doss: You haven't got an answer to yours? Kit Williams: I have not received anything yet from Senators Madison's second request which she made in response to my request. Mayor Jordan: I think that would be a huge piece of information that we need. Kit Williams: As Jody said we really won't know one way or the other until the court has decided so it's not lawyer's giving opinions but the judge giving the ruling is what makes the final decision on any legal dispute. Longer Investments: Longer Investment — Investment Report — July 31, 2009 A copy of the report was given to the Board. Sondra Smith: The monthly report shows the total cost of the plan is now at $5.5 million and the market value as of July 31st was about $5.7 million. In light of the report today I would like to make a motion to reduce benefits for everyone except the volunteers by 23%. Pete Reagan: We don't have the questions back from Jody Carreiro that we originally asked for and that was one of the things that we were looking for. Jody when do you think you can have the answers to this? Jody Carreiro: I went through tons of scenarios including these and didn't write them down. I will do that and send something back in the next week or ten days. I will get that turned right back around to you. Pete Reagan: For the record I will plan on voting against the motion to reduce benefits. Sondra Smith made a motion to reduce the benefits for everyone except for the volunteers by 23%. Mayor Jordan seconded the motion. Upon roll call the motion failed 2-4. Mayor Jordan and Sondra Smith voting yes. Marion Doss, Gene Warford, Pete Regan, and Ronnie Wood voting no. Meeting Adjourned at 2:40 PM 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316