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HomeMy WebLinkAbout2009-10-15 MinutesBoard Members Policemen's Pension and Relief Fund Mayor Jordan Chairman Board of Trustees Meeting Minutes Sondra E. Smith Treasurer TayeVI October I of 09 18Eldon Roberts Retired Positioed Position 1 Pagc l of 18Jeny Friend Retired Position 2Tim Helder Retired Position 3Melvin Stanley Retired Position 4 K A N S A S Frank Johnson Retired Position 5 Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held at 1:30 PM on October 15, 2009 in Room 326 of the City Administration Building Mayor Jordan called the meeting to order. Present: Frank Johnson, Melvin Stanley, Eldon Roberts, Mayor Jordan, Sondra Smith, City Clerk, Kit Williams, City Attorney, Paul Becker, Finance and Internal Services Director, Trish Leach, Accounting, Elaine Longer and Kim Cooper, Longer Investments, Press, Audience, and Staff. Absent: Tim Helder and Jerry Friend. Approval of the Minutes: Approval of July 16, 2009 Meeting Minutes: Eldon Roberts moved to approve the July 16, 2009 meeting minutes. Melvin Stanley seconded the motion. Upon roll call the motion passed 5-0. Tim Helder and Jerry Friend were absent Approval of the Pension List: November and December 2009 Pension List and January 2010 Pension List: Eldon Roberts: There haven't been any changes since those widows' passed away. Sondra Smith: No changes at all. Eldon Roberts moved to approve the November and December 2009 and the January, 2010 Pension List. Melvin Stanley seconded the motion. Upon roll call the motion passed 5-0. Tim Helder and Jerry Friend were absent. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 2 of 18 Old Business: None New Business: 2008 Actuarial Valuation Report: Sondra Smith: I emailed that report to everyone. Paul Becker: Page 10 is the telling figure. The unfunded actuary liability went from $8.5 million to $9.6 million in a single year. To summarize what Elaine was saying that's based on an aggressive 7%. It could be worse and it could be more difficult to achieve but that's what it did in one year. If you look elsewhere in the report it will tell you that you need about a $2.1 million in contributions or earnings to fund this plan over the next five years. If you compare that with past even maximum earnings you were earning maybe $1.4 to $1.6. The unfunded liability and the actuarial cost those are the biggest figures to concentrate on. The amount that would have to be contributed to make this pension sound over the next five years is about $2.1 million. When you extend that out your unfunded liabilities are about $9.6 million. Mayor Jordan: In a closed plan and nobody is contributing anymore. Kit Williams: That's true. Mayor Jordan: Then you said that they would have to do some really good investments. Is that the jest of that? Eldon Roberts: We get other things the millage and insurance turnback but it won't add up to that. Frank Johnson: Excluding the LOPFI considerations can we actually reduce the percentage of our benefits to actually close that gap to sustain the program? Mayor Jordan: That's kind of what I was getting at too. I don't really understand all the ends and outs. Frank Johnson: I don't think so. It seems like you can stop the bleeding. Paul Becker: You could you would have to go through an actuarial study to tell you what you would have to do to get there. They would have to manipulate the expenses to the point that you broke even. Kit Williams: I believe that the board has the power to reduce the benefits if you need to to preserve the fund from bankruptcy. The Attorney General has issued one opinion which seems to call that into question that you would have that power. There is a second question that we have before the Attorney General to look at a couple of the statutes that maybe they didn't look Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 3 of 18 at the first time and some case law. We have not gotten the second Attorney General opinion back about whether or not you have that power. I believe you do, the Attorney General seemed to imply that you did not so we are giving the Attorney General another shot. It's kind of an open question about whether or not you can reduce benefits. It's painful to reduce benefits but if you want to undergo that pain there is some issue about where you can or not. Eldon Roberts: The Fire Department sent several scenarios to the actuaries and they got those back. I wasn't able to make some of those meetings. Sondra Smith: We haven't got those back yet. Eldon Roberts: You haven't I thought they came back. Kit Williams: He came back and spoke to us but he had not actually answered the questions that they had asked. Eldon Roberts: As far as a percentage of their benefit that they might need to take to go to LOPFI or break even they don't know the answer to that. Kit Williams: No he didn't give them a precise answer but he did say it looked like it would be in the 20% or 25% range. It wasn't going to be down to 50% the initial starting point. It would be half way in between where they are now and where they started at 50. Paul Becker: There were some very specific scenarios they were asking. He came back keeping everything just the way it was. At that point in time he didn't get to the zero point but he got down to 20%. It probably would be a reasonable estimate of somewhere between 20% and 25%. That's what they would do now. Remember your pension fund is in sounder shape than the fire pension plan. Frank if your question is could that gap be closed, is it possible to close that gap with a pension reduction, I would think the answer to that is yes. Exactly how or what I can't tell you without an actuary study being done. Eldon Roberts: I think any percentage of reduction in our benefits would close it and start moving in the right direction but to get to where you want to get to I don't know what the percentage would be. He mentioned 20% or 25% for the fire department it may not be quite that bad since we are a little more financially sound than they are. Paul Becker: When we had the combined meeting and we were talking about both pension plans the actuaries scenarios at that point was that the fire pension program was going to have a problem in roughly seven years and that you might squeak by. The might squeak by you need to take into context of what Elaine has just said and the difficulty of achieving 7% discount which would mean consistent earnings in equities of what she has estimated to be 12% to 13%. Mayor Jordan: She is saying you have to hit no less than 12.5% to hit the 7%, right? Kit Williams: Out of the stock returns. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 4 of 18 Mayor Jordan: When you're looking at a negative 4%, if you look at that pattern it is just like we keep losing ground. Frank Johnson: Accelerate it just with the percentage of benefit structure. That's obliviously the key question here in terms of our fiduciary responsibilities. Mayor Jordan: Right and now it's kind of turned and went back up but it doesn't seem very stable to me. If you've got to average around 12.5% there's got to be some stability there. LOPFI Discussion: Melvin Stanley: What do you think our chance would be if we did spend the money out of our pension fund to have another actuarial study done? What would our chances be if we got our unfunded liability down to zero to be able to be send it to LOPFI? Would we just be throwing money out the window? Kit Williams: I don't think you would. I think there is interest for the City to do that for two reasons, even though they are using that 7% figure so it probably will cost the City money in the future. One of the reasons obliviously is that if they can vote on something that is not going to cost the City any money this year and not much money if anything the next year or two and they can protect you all and your pension at a rate that they can afford then I think there is some incentive for them to try to do that. If you do the right thing and reduce your benefits down for them to go ahead and send you to LOPFI, which will protect you, it will protect you at the City's cost. The second thing is there's always risk for the City. The law could be changed, something could happen and this could be a city liability, which it is not now, but it could be in the future. It will become a city liability if they sent you down to LOPFI. I think it would probably be in the City Council's best interest, if they initially did not have to spend money for the first few years, to go ahead and consolidate you with LOPFI. I think it wouldn't be throwing money away but I think you should wait until we get more word from the Attorney General. What if the Attorney General says there's no way you can't lower benefits you've got to drive your plan into the dirt. Eldon Roberts: Then we are through. Kit Williams: You still have an option there because I think that's incorrect. The board could reduce the rates and then let some beneficiary complain and then we can get a court decision. The good thing about that is if you reduce the rates and we're wrong then the fund will pay the money back that should have been paid. If you wait and drive it into the dirt and then they say you should have reduced the rates, then it's the board that didn't make the right mistake and there are no monies to support you to pay these guys what they are claiming they should be receiving. It is better I think to test it now when there's money in the bank to pay if you happen to be on the wrong side of what the judge says. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 5 of 18 Eldon Roberts: When we had the joint meeting Jody came out with some numbers of different scenarios for the Police Department for no benefit increases in the pensions from here on out and no COLA's from here on out, which neither one of those things are apt to happen anyway, it was $150,000 to the City to take us on to LOPFI. To me that is not that bad of a deal. Paul Becker: It was in that range. That's about right. Eldon Roberts: It should be better now with the stock market where it's at. We've gained in our financial assets, it should be even less. That was with no more benefit increases for our members and no more cost of living increases. Kit Williams: If you do an actuarial study it might come up with zero right now, who knows? Eldon Roberts: I don't think anyone in our membership would argue, because I think everyone understands now that we are down to about where the rubber is meeting the road here, if the City was agreeable. Kit Williams: The City would then be assuming your risk. Eldon Roberts: I'm talking about the Police Department plan only here. Melvin Stanley: Is that ever going to happen? Kit Williams: I don't know. First there would have to be an actuarial study performed so that there could be some idea of what it would be. Would it be zero or would it be something else. The other thing is I think you can only do this every so often and it's probably too late to do it this year. Paul Becker: It has to be submitted and approved in October. There's no way it could be done this year. Mayor Jordan: Some of the statements that I made during that time are if we could get it to zero at no cost to the City to send it to LOPFI, that I would entertainment. When some of the stuff came back for the Fire Department, if I remember correctly, they would almost have to reduce some of the benefits to get it where you all wouldn't have to. City Attorney Kit Williams: They would have to reduce benefits. Eldon Roberts: If the City was agreeable, it looks like a pretty good way to fix this maybe forever. I understand the City is still on the hook for the market risk and legislatures mandate this and that. Kit Williams: They might give you a cost of living. Eldon Roberts: That's just the unknowns. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 6 of 18 Mayor Jordan: Right now when you are looking at a city budget where you are down $2,000,000 in 2009 and you are looking at a $2,000,000 short fall in 2010. Kit Williams: With salaries frozen. Eldon Roberts: I understand. It is like there is $10 out there and everybody in the world is after that same $10. Frank Johnson: Paul from a city government's perspective there's inherent risk for a city to have a pension plan. Would that be a fair statement? Paul Becker: Absolutely. Frank Johnson: Not now, 10 years or even 20 years ago, somewhere a long time ago if the City had a vision for its fire and police department and if offering the pension plan was part of an effort to attract more candidates for those services, then I suspect that the conversation we are having now was a consideration then in regards to the risk that would be assumed in doing this as opposed to us drawing social security. Paul Becker: There's always a risk in any pension plan certainly. Kit Williams: It was structured in such a way that it was really the voters that voted in the millage. They made the decision for the pension plan. It had to be submitted to them, but they made the decision to tax themselves to establish this pension plan for you. That was along with your salaries and then the equal match by the City and turn back funds is how this plan went forward. The actual risk to the City of having to make up short falls was not suppose to be there, and hasn't been there, and is still not in the law. I am not saying that the legislature cannot change the law. Frank Johnson: It's this uncomfortable blend of financial risk or the City's ability to sustain that commitment and really no legal risk. Kit Williams: There's not a legal risk at this point I don't think but the legislature can always change the law. There have been bills submitted in the last two legislative sessions that would change the law and would require cities to send you all to LOPFI period. Obliviously that's not something Municipal League was in favor of because several cities around the state are in much worse shape than us with their plans. We are not in terrible shape with your plan but we are when it comes to the fire fighters it would cost dramatic money. Other cities would be in even worse shape and so those bills were defeated, either withdrawn, or not supported. There is always a risk that at one point or another legislature will in fact place that responsibility upon the tax payers of the cities. Frank Johnson: Is there a time line with Attorney General's opinion? Kit Williams: It has been down there a few months so we are expecting it anytime. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 7 of 18 Frank Johnson: If the opinion is that we have the authority in this board to reduce our benefits will there be flexibility in how we do that? I'm not sure as far as our policy goes but will that give us an opportunity, not just a percentage against the whole plan, but if there are other opportunities to arrive at that number with variances as to how it is applied. Kit Williams: It might be possible. We would have to look at what your options are when you increased benefits and I think you can use those options in reverse possibly. The easiest way would be a straight percentage but if you want to do something besides that then you would probably need to look at some of the increases you made in past and say that you are going to roll back that particular increase. I don't know if you could go beyond reversing what you have done and say we are going to go a whole different tack now. That would make me more nervous as your attorney than just rolling back some of the increases one type or another. You've done one for spouses, you did a cost of living, although those are done with so that would just be a percentage. You have some other things to look at. The fire fighters asked about what it would be if they reduced the spousal benefit only. They look at things that were not just uniform and they haven't got the answer to that yet. Frank Johnson: That is part of the consideration? Kit Williams: They had four scenarios and that was one of the scenarios. Eldon Roberts: I came up with that scenario myself but I thought you said we couldn't reduce just the spousal benefits only because we would be discriminating between groups of people. Kit Williams: I would prefer that you not do that. You as a board have been given the right to increase spousal benefits. Eldon Roberts: Spousal benefits only so that is a discriminatory thing too. Kit Williams: It's not sexual discrimination because it works whether it's male or female. I think that because of that it might be possible to do that. Spouses might object, who knows what would happen. I would be more nervous about doing that but I don't think it's necessarily clearly illegal. Frank Johnson: Just for the record I never said spouses Kit Williams: No, I'm talking about that's one of the things that you did. The other things have been percentage increases. Eldon Roberts: Was the spousal increase not percentage too? Kit Williams: Yes but it wasn't a percentage increase for everybody. Eldon Roberts: Right. Every increase we have ever given was a percentage across the board. Everybody got the same because a lot of people complained that was only making $1,000 or Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 8 of 18 $1,400 a month that their 3% wasn't near what the guy got that was drawing $6,000 or $8,000 a month. I understand that. Frank Johnson: You're not going to find too many arguments to support that reasoning. Eldon Roberts: That works in reverse too when we go to reduce benefits. Three percent of my salary is going to be a lot larger reduction than three percent of those persons at the lower end of the scale. Frank Johnson: With that being said, just in our capacity as trustees on the fund, I feel that we should give some consideration, contingent on what the Attorney General's opinion is, on how to meet that number without creating disparity. We would have to defer to your legal advice on that. I think we have a responsibility to see what that number is for all the individuals on our list. Eldon you and I can say that 3% against what we draw is a big number but I think that we would hear someone that would say the same against drawing a third of what you and I draw on it. I don't know how you can create a parity type of situation in this but I think it is a discussion that needs to be had soon after we identify what that number is. No one wants to give up their earnings. A lot of people retired from that police department only making $20,000 a year less. Eldon Roberts: Then you have the argument that compared to what I paid into the pension plan compared to what that person paid into the pension plan there is a huge difference. Frank Johnson: Yes. Eldon Roberts: I got it back the first year I understand that but so did they. Some of them paid in $1,500 or $2,000 for the whole twenty years they worked there and mine was close to $80,000. I don't know that there is any way to do what you are suggesting and treat every person that you apply that formula to that is fair. Across the board percentage, like it or not it is fair, everybody would get the same percentage cut or increase. It made a difference on how it was on their benefit but I don't know how you would work it out any other way and be for sure that you were fair. You're going to start taking each person on an individual amounts and trying to figure something and I'm afraid we will get in trouble there. Frank Johnson: Our role here on this board and hearing the financial analyst. Eldon Roberts: We are fortunate that we are in a position we are compared to the fire department. I'm sorry for the fire department but we can watch and see how they fair. We can watch and see what the Attorney General's opinion is on can these boards even reduce benefits or not. If it comes back and says we can't, I understand an Attorney Generals opinion is just that it's an opinion, so who is the next person or body that could tell you different if the Attorney General comes back and says no these local boards cannot reduce benefits? Kit Williams: Judges. Eldon Roberts: It would take a law suit? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 9 of 18 Kit Williams: Someone would have to file a suit, probably against the board, if the board reduced the benefits. I would defend the board. Eldon Roberts: When the opinion from the Attorney General said we couldn't. Kit Williams: Right, then even when the Circuit Judge would make a decision it would probably need to go to the Supreme Court to get a real decision that we know is going to be the law. Eldon Roberts: Is that not happening anywhere in the United States that we can look at? Kit Williams: Unfortunately these sorts of issues are probably pretty much controlled by the exact state law as being interpreted. I have not seen anything in relation to ours that has gone to court. Eldon Roberts: Every state law is different. Frank Johnson: When this is considered by the City Council does this originate in your department Paul or is it a policy discussion? Paul Becker: As far as the policies? Frank Johnson: Yes, as far as LOPFI. Paul Becker: The Council would have to approve that that is in fact what the City would want to do. Kit Williams: It would have to be a resolution by City Council. Paul Becker: We would complete an application. That application would go in and I believe they start taking applications in LOPFI in April. I think the period is between April and October. At that point they have an actuarial study done by their own actuaries who are different then the Pension Review Board actuaries. They come back to the City and say this is the number, do you agree with that, and at that point that would be delegated by the Council to the Mayor to go ahead and sign and push ahead any contracts possible and we would send it down there. Mayor Jordan: It would be a decision of the legislative branch. Frank Johnson: In terms of time lines and the discussions that need to be had and making sure these discussions are happening within the laws as far as public notification. It just seems like we have some work to be done that we may not be able to accomplish in a timely manner if we are relying on the meetings to construct what we need to do. Kit Williams: Do you want to call a meeting after we hear from the Attorney General and the second opinion? We need to have two factors that really should be looked at one is the Attorney Generals second opinion and the second will be when Jody Carreiro finally comes back with the Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 10 of 18 actual questions that were answered for the fire department so we have a little bit better understanding even though it won't directly apply to you. I think we will have a better understanding about whether or not you all will need to and how much possibly it would be. Eldon Roberts: No more time constraints than we are facing I think once those all come back we can address those at our regular scheduled meeting because we are not under the gun for time. Kit Williams: When is the next meeting? Eldon Roberts: January. Frank Johnson: We're not but it seems if we want to indicate a dialogue, keeping in mind the notification requirements for this board, we would want to give the City Council or Paul enough time to factor in how this is going to be. In the end it becomes an allocation of your budget. Paul Becker: Essentially when it goes down there yes but if it goes down as zero it's no allocation out of the budget. Essentially we would have to get the paperwork together, sent it down and make sure that their actuary said there is no actuarial cost associated with it and then we would go from there. Then it becomes an allocation to the budget when we come back and get what our LOPFI contribution has to be. We will get it back just like we would for anyone else in LOPFI even though that fund would stay separate that's where the cost would start coming in. Frank Johnson: Would it be for fiscal year 2010? Paul Becker: In all reality it would 2011. Remember you're four tenths of a mill, premium tax, and your fees and forfeitures that would go down with it. What we are saying is that stream is going to be equal to your expenditures stream for starters. If it is agreed to the City would take the market risk from there but your benefits would be secure. Eldon Roberts: Let's just say we decide that we want to attempt to move this pension to LOPFI. What is the earliest date that we could start the process to see if it's feasible for the City? Kit Williams: There are two things you are going to need to do, just like the fire pension board you're going to need to have an actuarial study to see what it takes to get to zero. Once you have done that then you know what you have to do about if you have to reduce benefits or can you go as is. That's when you go with actuarial people that work for LOPFI and start the ball rolling in that direction. There are two studies that have to be done before it finally gets to the City Council. Paul Becker: Not before it gets to City Council. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 11 of 18 Mayor Jordan: Sondra and I serve on this board and if you all bring something forward that we are not agreeable to then they're going to ask our opinion and we're going to give it to them. We all have to work together on this thing, Sondra would you agree with that? Sondra Smith: Yes. We have never got an actuary study done in less than six months. I don't know how the LOPFI Board is on their actuary studies, but it will be a long time from the point you ask for a study that you get it back. Kit Williams: Maybe only the initial study has to be done to determine what the benefits would be. Sondra Smith: The LOPFI study. Paul Becker: The initial study by Jody Carreiro that would be a preliminary study, which would be for you to make a decision. Once we go to the Council and the Council approves it and we send it down they do another actuarial study. They will come back and let us know if it is the same or whatever it is. Then the final decision is made and we send the paperwork down. That's the sequence. The original actuarial study would be for an estimate to tell you approximately what it would be. Kit Williams: You would probably want to order that in January, at the latest, in order to get it done in time to make the October deadline. Paul Becker: You can call a meeting as soon as we get back the Attorney General's opinion and at that point in time you can meet and decide what direction you want to go unless you want to contract for an actuarial study. You might get the study and can't do anything with it but that would speed it up. I think you would have sufficient time if you wait for the Attorney General's opinion to come back. If it's not here in January then you make the decision whether to go ahead or not. That would be my suggestion. Kit Williams: In January they might be able to use the end of this years numbers instead of the end of last years numbers which would be getting better. Eldon Roberts: That's what I'm hoping for. Kit Williams: It can't be as bad as it was last year. Eldon Roberts: I have got to hope for this whether it happens or not. I've got to hope that with zero benefit decrease and with no cost of living increase from here on we can move to LOPFI. If it is zero for the City that's a win win situation. I do want to explore that and if it won't work it won't work. Longer Investments: Page one shows the portfolio appraisal for September 30th and then we have an update as of yesterday's close. On September 30th the equity holdings were about 42% of portfolio. The Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 12 of 18 preferred debt is about 3.3%. The International holdings on the equity side are equivalent to 6.8% so the total equity exposure is below the 50% limit. For this meeting we do not need to request a variance. Page three the total portfolio value is $8,283,000 and the income yield on the over all portfolio which is your dividends and interest income is 3.35%. The important thing about the dividend yield is that the over all income yield, the current yield on the 10 year treasury, is about 3.35%. The over all portfolio has an income yield equivalent to what you would have if you were 100% invested in bonds even though you have a 50% growth component because we have really emphasized high dividend income paying stocks. Page four shows the update through October 14th. The portfolio value has remained about the same. There were some distributions that took place but it is at $8,223,000 as of yesterday. Page seven shows the realized gains year to date and the income and expenses. You can see the realized gains are $136,000. At the end of the second quarter we were probably still roughly break even or maybe even realized losses year to date. We have been able to take some of the profits on stocks that have over achieved what we thought they would achieve in this year. When we came into the end of summer we harvested some of the low hanging fruits, some of the stocks that are not necessarily core positions like a Microsoft, Wal-Mart, or GE but had really out performed our targets. We went ahead and booked some of those gains. You have realized gains year to date now. Page eight shows the fixed income portfolio holdings. The average yield to maturity is 4.6% and that's down from 5.2% at year end. To give you an example the average maturity is 6.4 years. The current five year is a 2.3% yield. Even though the income has dropped, as we have had some higher coupon bonds roll off, and the reinvestment rate has declined so much you still have enough in the longer maturities that you're over all income yield has stayed pretty high 4.6% verses current market yields. This is something that I would like to discuss when we get to the end of this report as it pertains to the actuary assumption that has been changed from 6% to 7% in the new actuary studies. With the fixed income returns coming down so dramatically, with a portfolio that is 50% invested in bonds, that part of the portfolio as we have to reinvest maturing and called bonds, this part of the portfolio return will continue to go down unless interest rates turn around dramatically and start rising. That's part of the concern that I have with the 7% actuary assumption that they have started to use as of the end of last year. I think that given the change in the interest rate environment and in a portfolio where you have 50% invested in interest earning assets that that is hard to explain. Page nine the contributions and distributions we've had $114,000 that have come in contributions year to date and that's compared to distributions of $726,000. In this year the portfolio value investment return is up by about a million dollars from year end but that's netted against a distribution net of about $610,000. The net increase in the portfolio is only about $400,000 net of distributions. Page 10 gives you the returns through September 30th. The equity returns are 20.3% and that compares to Dow Jones of 10.7%, S&P 500 of 17% and the International Stocks that you hold Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 13 of 18 are up 25.9%. The international markets have out performed the US markets almost 2 to 1 when you look at the index return of the DOW and the S&P 500. The fixed income year to date is 3.2% so the total return through September 30tb is 12.9%. Looking at the decline the year before of minus 19 we are about to where we are within six percentage points or so of recovering that whole decline. The beginning account values, additions to the account, the net distributions inception to date, and the invest return you can see the withdraw rate of $6,800,000 has pretty much been covered by the investment return. There is a little bit of a miss because of last year still not being totally recovered. The actuary rate of return during this time frame has been 6% and before last years big decline you were running about 6.8% or 6.7%. Now with this year's recovery we are getting back to where we're close to that 6% again which was the actuary rate of return assumption but now the return assumption has been moved to 7%. The investment policy is part of our legal contract with the City to manage both the Policemen's account and the Firemen's account. It sets out the objectives of the fund and then we sign on that. My concern has to do with the fact that in the actuary assumptions now that they have gone to a 7% rate of return assumption going forward. I was at the joint meeting earlier this year and I had the opportunity to ask Jody Carreiro where that came from. Basically it was an arbitrary number that they assigned to the accounts going forward that really had nothing to do with market conditions that are out there that we have to deal with when we are investing the funds. I have been concerned about that and I still haven't got a good explanation about where the 7% came from except that, I think he said that the accounts had achieved close to that, so they bumped it up. Back in the early nineties when we start investing, and in fact in 2002 when we started managing the Firemen's Pension plan, we felt that 6% was an achievable rate of return because the way you get to that expected return is the fixed income side was still earning 6%. So 50% of the portfolio earning 6% gives you 3% of that 6%. To get over the hurtle rate of 6% return required the stock part of the portfolio needed to generate between 8% and 9%. That's inline with historical averages and at the time that was not out of line with valuations in the market so we felt very comfortable signing on to a 6% actuary rate of return assumption. Now the difference is if you look at a 7% return assumption and you say the reinvest rate on the fixed income side is between 2% and 3%, unless you go out there and you bring in risk either related to credit risk, maturity risk, or international currency risk, we can get higher yields if we buy Australian bonds but then you have currency risk, so unless you subject the portfolio to risk that we have not ever subjected it to, it is hard to be able to achieve more than a 3% to a 3.5% rate of return on the fixed income side of the portfolio. Even though your current return is higher than that we have to look at these projections going forward because they are using this 7% from this evaluation forward. When you have 50% of the portfolio and even if you say okay we can say 3% then what you are saying is that the other 50% that is invested in stocks has to achieve an average annual return between 12% and 123/4% to make the 7%. I cannot sign on to that. Those are not the assumptions that we are using when we run retirement plans. It's not the assumptions that I'm using when I run projections for foundations. This has been my concern. When you look at your retirement, your actuary assumptions, and you look at what they are forecasting as your unfunded liability, the difference between using a 6% number and using a 7% Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 14 of 18 number, I don't have the systems to run it, but all I can tell you is the unfunded liability would be higher if you used a 6% assumption. The numbers that you see in front of you with your actuary packet includes the 7% return assumption. I wasn't at the meeting where benefits were discussed and where the discussion was starting to take place about what to do to move to LOPFI. I would say that the benefit to the Firemen and the Policemen at this point in time is that they are giving you a 7% return assumption. If you need to make decisions to move to LOPFI on the benefit side, what I'm saying is it's better to do it while they are using a 7% return assumption. They're giving you a lower unfunded liability than if they used my return assumption which would be 6%. The higher the discount rate that they apply to that future liability the less you have to have in assets right now to satisfy it. That's why a 7% assumption gives you less of an unfunded liability. Paul Becker: That's set by the Pension Review Board in Little Rock. The actuary who prepares the report bases that on what is set. What I had been told is that was based on anyone who the previous five years gained more than I think it was 6%, they increased it to 7%. What Elaine is saying is that is pretty aggressive so when you look at your actuarial study it's probably worse than that because it would be very difficult to achieve. Elaine Longer: I'm talking from the stand point for the Policemen and Firemen. I'm talking myself out of your account because I want to see what's best for the Firemen and Policemen. We've had this big year and stocks are up over 20% and there are reasons to think that we could be into a period of backing and filling off that dramatic decline that we had and then we've had this recovery which is not out of line with past historical declines of similar proportions. Now that we've had this dramatic bounce back we could be in a period of reduced returns in the stock market going forward. I was just at a Northern Trust conference last week and most of the projections they are using for equity returns, they had several people not just Northern Trust Strategists but other people from the investment community who are world renowned, everyone is using a pretty conservative 6% to 8% expected return going forward because we are probably facing a lower growth environment as we digest all of the excesses and the change in the credit markets and the change in access to capital. No one is projecting 12 3/4 % compound annual for the next 10 years. That is the assumption that would have to take place for you to really be able to rely upon the 7% return assumption. Kit Williams: Correct me if I'm wrong, if the City went ahead and sent them to LOPFI using the 7% figure, which seems like its unsupportable, would the City then have to pick up the difference if in fact the funds did not generate the 7% return. Would it then fall on the city tax payers to make up the difference for their plan? Paul Becker: First the actuarial study is done by the Pension Review Board if we ask them if they wanted to send the pension down there would be another actuarial study prepared by the LOPFI actuaries. Kit Williams: Still using the 7% figure. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 15 of 18 Paul Becker: If they use the 7% figure then that would be what they would base the unfunded pension liability on which they would arrive to the unfunded liability and then you would have to amortize that across 15 years. Yes that would have to be picked up, any differential. Kit Williams: My question is a little different than that. The Fire Pension has talked about going down to where there would be no unfunded liability for the City to pick up initially. It would go down at zero. Benefits would be reduced to where it would be zero but if they are using the 7% figure even if we didn't have to pay money up front would it be likely that we would have to pay money on the back end back because in fact that they are too optimistic and there would not be enough money in LOPFI to actually fund it because they were using the 7% figure. Paul Becker: Again that's the figure they would amortize it on. Then of course it is going to be funded based on what the actual is in the future. You are going to have to pick up that unfunded liability of whatever it is calculated to be. Kit Williams: Let's say its zero. We send it down at zero but if in fact it didn't perform at the 7% rate. Paul Becker: We would have to make up the difference. That's true. Once it's transferred down the City has the liability. Eldon Roberts: It's just like you mentioned before in the same scenario if the City signed on to take Fire and Police to LOPFI, if the market didn't hold up and it didn't yield what we thought it would, then the City has got to make it up. It's not that attractive for the City I'm sure and I understand that. Paul Becker: We have the market risk. The market risk does transfer to us if it goes down to LOPFI. Kit Williams: I think what Elaine was saying too is that it would be an easier for you all to get to zero cost to the City if they are using that 7% figure than if they use the 6%. Melvin Stanley: You don't think if we made a run at the City that the Mayor or Paul would make sure that the Council members knew about that. I hope they would. Kit Williams: They would but still if the initial cost was zero to the City it would be much more likely. It would be true that it would be incumbent upon the Mayor and Paul to point out that in fact it would be very difficult to meet that 7% figure. Mayor Jordan: Short answer yes I would. I would be neglecting my duty if I didn't. Kit Williams: I think as Elaine says it is a more attractive environment for you because if they were using the 6% figure you would have to cut down more in order to get to zero. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 16 of 18 Elaine Longer: The benefit reduction to get to where you show a zero unfunded liability is much lower. I don't know the numbers because I can't run the actuary assumptions but if you are looking at what is the benefit reduction that gets us to the point where we can transfer without a liability it is much lower using that assumption. Kit Williams: If you use 6% instead of 7%. Sondra Smith: Paul is there a possibility that they may change that 7% discount number, after they see the actuarial evaluations that they have done, and see that the plans aren't doing as well as they were doing in 2008. Paul Becker: I would certainly hope they would revisit that. When I was there, I did tell the actuary my uncertainty about that and that we would like to see that changed. Hopefully that will push forward and they will review that and reset it but there is no guarantee to that. Right now they are using the 7%. Hopefully they will look at that and take into consideration what's happened and lower that for all the reasons that Elaine has told you. That certainly would be my hope and if I'm there I will certainly transmit that to them. Elaine Longer: If you look at where your benefit increase went in 1999 you were fully funded and I know you did all the homework and got the expert opinions. What's happened is you've experienced a historic ten year period where the stock market has had a negative return and even though your portfolio didn't have a negative return the assumptions that they were running were based upon 1999, when they told you yes the assets can support the increased distribution, we've never experienced this kind of a ten year return in the history of the stock market. Elaine Longer passed out a chart that showed the 200 year average return history by ten year periods. The red dots on the chart indicate those ten year return periods that approached the zero line. Back in the 1930's you will see that there was a period during the depression and following in 1937 where the ten year return actually did go to negative, but past that point there has not been a time when the ten year return on the stock market was a negative return, well now we have to rewrite that. In February of this year we actually reached a ten year average annual return of minus 4%. In fact now that we have hit 10,000, the first time we hit 10,000 was ten years ago. What happened in 1999 you were fully funded, you asked the right questions, and you got the right response but then you got hit by a perfect storm that historically we have not had. Now the question is how best to go forward. You did all the right things. This was not in anyone's computer system because it had not happened before. The next chart is the chart of the Japanese Stock Market where they peaked in 1989 and the first drop was by 63%, our decline from top to bottom in March was 58%. Then the first rally that they experienced off that climatic low was a 51% increase and ours has been about 50% to 55% depending on which index you are looking at. They came back down to test that low. We still do not know what kind of recovery we will have. The jury is still out. What is giving us the recovery so far this year has been the combination of fiscal stimulus, which has been at the Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 17 of 18 treasury level, the tarp program, the flooding of the banking system with cash, and the FDIC. Then you have monetary policy expansion also which is the Federal Reserve in their lowering interest rates to zero percent and expanding the Feds balance sheet. You don't just have this going on here you have it going it internationally. All the central banks of the world including China are in expansion mode. You have a lot of liquidity in the system and there is a lot of stimulus in the system. Right now by default it has one place to go that is real attractive and that is the stock market. The bonds at 2.3% in a five year treasury is not particularly attractive, you have 3.3% is you are willing to lock it for ten years and that is not very attractive. You have still excess capacity on commercial real estate and housing so it is not flowing into new construction. You have plant capacity at 68% so no one has to spend a lot of capital to expand plant so by default there are not a lot of places for this capital to flow right now so you have asset inflation in the stock market. The question becomes when you get into 2010 how do we give up the punch bowl without crashing the party. When you look at this chart and you look at the chart in the 1930's for the US market it is very similar. It is because you have this spike off that climatic low but then as you can see in Japan's case they went on for 10 to 20 years just consolidating that loss. Another concern I have when we are talking about that expected concern going forward, it is not just the fixed income side of the market that has changed but it is also the outlook for the equity side. In terms of magnitude and duration of bear markets throughout our history the decline from the high in 07 to the low in March of 09 was roughly a 57% decline. The duration has been 509 trading days. So you look at the other two 1929 and 1937 of sizable magnitude you can see that the duration is longer. It takes time to digest an event like that. We have had a great run off those lows by approximately 50% but we are going to get in a digestion process out there. We are not just going to continue to go back to new highs we are going to do backing and filling. I anticipate that will happen more towards 2010 mid year than imminently. Right now we still do have the momentum going for us. The earnings are coming through better than expected and there is a lack of alternatives as far as capital. I can get a higher yield on the stock market than I can get in the fixed income market. We are still in a very good position as far as the equity market is concerned so I do not have any concerns in the near term. My concern is in 2010 as we have to move away from government support system. That is another reason that I would not feel comfortable running out 12 3/4 % on top of what has been a 21 % return year to date. The one big risk is the deficit. What we have to use in terms of fiscal stimulus and what that means in terms of growing our domestic debt. In the mean time the average maturity of our outstanding debt has fallen to about 50 months. So of all the trillions that we have in outstanding debt right now we have to roll that over roughly every four years. We are at the benefit right now of the fact that we have very low interest rates, but if interest rates go higher because we end up with inflation kicking in next year then the cost of that debt is going to increase dramatically because of the fact that we are funding long term liabilities with short term debt. Of all the risk that I see out there and the one that makes me concerned as we go into 2010 is there is a limit to how much of this we can do. Gold has gone through a $1,000 an ounce and the dollar has gone down to new lows relative to the euro and that tells you that our banker's, which is the international banking system that takes our debt, is getting nervous. We are at the point where the banker is giving us a warning that this is not going to go on forever. For that reason I think Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 15, 2009 Page 18 of 18 that next year is when we have to see government pull back and become less able to issue so much debt in particular debt as a percent of our gross domestic product. What we have going on in the international markets is the banker is willing to lend money to us but they are keeping it short in maturity. They do not want exposure to our long term what we are going to do in terms of inflation and the currency. The banker is on alert and next year we have to figure out how to move the patient off the support system and that will be the big challenge for next year. So we proceed with caution. I think we are really in a sweet spot here going through year end. I do not anticipate any problems before year end but as we face next year, keep in mind the market is six to nine months ahead of the economy. So when the market starting elevating in March and everything looked so horrible, people where saying why is the market going up and the reason is because the market was out there in September to December. That is why the stock market is a member of the leading economic indicators because it is always discounting the future. Now we are seeing great earnings and the market is at 10,000 and everyone is thinking we dodged that bullet but soon the market will be discounting mid 2010. Those are my concerns when I review your actuary report and the minutes from the meeting that was held about the discussion of benefits. I think that the sooner a decision is made on benefits because it's not going to be solved by the investment side. In fact in 2002 when we were trying to be hired by the Firemen's Pension I was quoted as saying that you would have to earn 60% on the capital to get to the point where you earn 6% to stay whole. You can't get there from an investment stand point. I know that it's a very hard decision. We were there when you were exploring this and I know that you've had the actuaries run the numbers. I just think this perfect storm was not in their computers at that time because you have out performed the actuary return assumption before last year and you've out performed on the investment side. It's just a question of that ten year period of returns in the market that has never been seen before. Longer Investments Monthly Report: A copy was given to the board. Longer Investments 3rd Quarter 2009 Report: A copy was given to the board. Meeting Adjourned at 2:50 PM