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HomeMy WebLinkAbout1989-04-06 MinutesMINUTES OF A FIRE PENSION BOARD MEETING A regular meeting of the Fayetteville Fire Pension and Relief Fund Board of Trustees was held on Thursday, April 6, 1989 at 1:30 p.m. in Room 313 of City Hall. PRESENT: Chairman James Pennington, Secretary Suzanne McWethy, Ex - Officio Treasurer Scott Linebaugh, Fire Chief Mickey Jackson, Firemen Bonaduce, Dill and Reagan. Also present were Accounting Supervisor Zelda Parson and Curtis Williams and Richard Yada of Merrill Lynch ABSENT: Retiree Carl Springston CALL TO ORDER The meeting was called to order by Chairman Pennington. MINUTES It was moved by Reagan, seconded by Dill and unanimous to approve the minutes of the last meeting. PENSION LIST It was moved by Dill, seconded by Reagan and unanimous to approve the pension list for the month of April. OLD BUSINESS STATUTES REGARDING INVESTMENTS The Chairman noted the Board was to discuss the proposed investment policy based on information they were to have received from Merrill Lynch. Linebaugh reported on a question which had been raised at the last meeting regarding the law as it relates to investments and management of assets. He distributed copies of excerpts from the State statutes (attached as a part of these minutes). He said the City Attorney's opinion was that the Board was subject to the same laws as those which apply to the State public employee retirement plans, and therefore is required to follow the rules which Cathyrn Hinshaw had outlined in a letter about a year ago, stating we are required to take proposals on trades at least once a year. Fire Pension Board Minutes April 6, 1989 Page 2 REVIEW OF DISABILITY CASES Dill brought up the policy which was adopted at the last meeting, to establish a semi-annual review of disability cases. He asked when the review should take place. McWethy suggested this might be done every January and June. It was moved by Jackson, seconded by Dill and unanimous, to do a review of all disability cases twice a year. Reagan asked if we were going to ask for a doctor's report twice a year. Jackson said we would just see if anybody knows anything which would change our position. NEW ACCOUNTING REQUIREMENT Zelda Parson reported that the new General Accounting Standards Guidebook contains a new requirement, effective June 15, 1987. She said the first year affected by this was 1988. She said we were required to have a biannual actuarial update prepared, and during the off year, we are required to have an update of the actuarial report from the year before. She said we had received an update from the 1988 year which cost $600. INVESTMENT POLICY DISCUSSION Pennington remarked that Merrill -Lynch had some questions about the proposed investment policy and were going to provide some comments to the Board. Pennington said he was expecting something which could have been reviewed prior to the meeting. Williams said they were prepared to make a presentation. Pennington asked if Williams would be leaving any materials with the Board. Yada said they intended to discuss the proposed draft of an investment policy but did not bring any written comments on the draft. In answer to a question from Dill, Linebaugh said it was only necessary to have a vote of the majority of the Board to make changes to an adopted investment policy. RNC PORTFOLIO REPORT Yada reported the Equity Account value was $515,579. He reported that on December 31 it was $504,491, making that account up 2% for the first quarter of the year. Yada reported the Income account value was $2,025,375. He reported this account was worth $1,922,756 on December 31, and was up $100,000 or 5%. Fire Pension Board Minutes April 6, 1989 Page 3 Pennington said he would be interested in seeing (in the portfolio evaluations) the accrued interest and dividends for each of the stocks. Yada said Merrill Lynch's monthly statement and RNC's quarterly report includes that information. 1987 PENSION FUND ACTUARIAL VALUATION Yada reviewed the 1987 Pension Fund actuarial evaluation. (Since Yada made this report at the March 2 meeting, it is not repeated in these minutes. Material distributed by Yada on March 2 in reference to the report he made is attached to these minutes). ASSET ALLOCATION Yada said the current asset allocation as of about 1 1/2 months ago, and Merrill Lynch's recommended asset allocation, was as follows: Portfolio Merrill -Lynch Recommendation Stocks 23.4% 45% Bonds 46.3% 45% Cash 30.3% 10% Yada said the question of asset allocation ought to be addressed in the investment policy. MERRILL-LYNCH PRESENTATION Williams said from Merrill Lynch's point of view, the putting together of an investment policy/guidelines is something that should be done after the Board decides what it wants to accomplish. He said the asset allocation is going to determine what you earn in the pension fund. Williams said a study done in 1975 to 1985 found that 7% of the return you get will come from selection of a manager, showed that timing added about 7%, and 86% comes from asset allocation. Williams showed a slide of what the historical return has been on various asset classes over different time periods ranging from five to 60 years. He said the asset allocation in the proposed policy can't exceed the inflation rate by 5% on the long term, although he said that could be done in a given five-year period. Williams showed a slide of alternative asset classes which he said were principally funded by pension funds. In answer to a question from Jackson, Williams said we needed to substantially alter our asset allocation away from cash and short term fixed income and into equities, venture capital, real estate, or convertibles, for example. He said, however, that he thought in the next few years bond yields would rival stock yields. Williams showed a slide of a portfolio allocation showing the performance of various asset classes over a ten- year period of time. Williams discussed negative and positive "correlation" Fire Pension Board Minutes April 6, 1989 Page 4 which he said was the tendency asset classes have to move in relationship to each other in a given market or a given period of time. Williams said adding an extra asset class, even if it's riskier, makes a portfolio more conservative. He said the more asset classes you add, the less risk you assume. Williams showed a diagram showing the probability of achieving the target yield (5% above inflation) in any given period of time. He said in the first year the probability of achieving it is very slim. He said that it was more likely as time goes on. Williams said Merrill Lynch brought the M L Lee investment to the Board because they recognized it had a 100% negative correlation to the stock market - it was in investment that would do well if the stock market backed off. He said when the stock market crashed our potential rate of return went 5% in that investment. Jackson asked if it was not the job of RNC to make decisions about how our portfolio is going to be diversified. Williams said RNC "hasn't the foggiest notion what your overall goal is," commenting that they were designed to manage the money. He said it was the Board's job to pick the managers to manage the way we want them to. He said we needed two equity managers with two varying styles - and two different fixed income managers, one to manage the cash and one to manage the bond portfolio. He said, depending on the exposure we want to give to equities, we will have to determine whether we want an aggressive or passive bond manager. Jackson asked Williams if he was saying our objective (of earning 5% above inflation) was unrealistic. Williams said it was okay to stick with 5%. He said the Little Rock Police Department had a projected rate of return of 5%. He said, based on the draft policy, and the historical performance of those assets, we can't achieve 5%. Yada said we can't do it with our asset allocation. Jackson asked if we were not correct in assuming we could set up a growth objective and present it to a company like RNC. Williams said that would not be good management. RECESS The meeting was recessed at 3:00 p.m. and reconvened at about 3:10 p.m., with Linebaugh and Pennington absent. INVESTMENT POLICY DISCUSSION Discussing the proposed long-term goal to realize a rate of return of 5% above inflation, Williams said he had no problem with 5% but advised the Board should have a rate of return that will increase the fund at a rate that will provide enough growth to continue to have benefit increases. Williams said it might be better to have a goal and tailor the rate of return to it, rather than the other way around. Fire Pension Board Minutes April 6, 1989 Page 5 Jackson said it might be wiser to set a goal that has to do with growth of the fund, and then consider benefit increases that fit within that part of the goal we achieve. Jackson asked if a manager would realize what he needed to do to meet the goal we set. Williams said RNC wouldn't know or care what our goals were, that it would be Merrill Lynch's and the Board's job to come up with an asset mix. He said we would have to have 45% in stocks, with some of that being aggressively managed, and would have to establish an asset allocation that can conceivably achieve that goal. He said then we should select specific managers to fit specific niches within the investment guidelines. Jackson asked if Merrill Lynch was going to provide all those services for free. Williams said they thought they had been paid for that. He said they hoped the service they have provided in lieu of payment has been of true value. Jackson asked if Merrill Lynch would continue to provide their services on the same basis. Williams said they would. Dill asked if the investment advisor would bring money managers for the Board to select, or if the investment advisor would choose the money managers. Williams recommended a review process whereby Merrill Lynch would submit two or three choices for each niche. Dill said, if the Board goes under total management with a firm which charges 1% or less, he thought the firm should select the managers. Williams said Merrill Lynch would 'do'that, if the Board is comfortable with that process. Reagan said he would rather do that than bring in a bunch of money managers. Williams displayed an organizational chart indicating Merrill Lynch as investment advisor, to work with the Board on asset allocation, and obtaining two equity managers and two fixed income managers. Williams said Merrill Lynch would like to be one of the fixed income managers. He said, if Merrill Lynch manages the cash, they can eliminate one management fee, because they will get paid from CDs. Williams said Merrill Lynch would charge 1% or less for a total fee, and would hire the other managers. He said Merrill Lynch would also bring before the Board other investments such as M -L Lee. Zelda Parson told the Board the Police Pension Board passed an investment policy as it was proposed, with goals included and brought in four or five asset monitors who they asked to bring money managers before the Board who could accomplish the goals set out in the policy. She said each asset monitor brought in their money manager selections and brought in their past history and asset mixes, and the Board then chose an asset monitor who charged an all-inclusive fee of a little bit less than 1%. She said they ended up with two money managers through an investment advisor who will report monthly on their performance. Yada said he took exception to that, because Shearson is tied to Oppenheimer and he didn't think Shearson would ever come to the Board and say that Oppenheimer was doing something wrong. Parson said she thought that would always be a risk that the Board would have to be aware of. She said she thought, if the Board was unhappy with Oppenheimer, they would go to Shearson and ask them to find them a different money manager. Fire Pension Board Minutes April 6, 1989 Page 6 In answer to a question from Jackson, Williams suggested the goal could be restated as follows: "To maintain actuarial soundness in light of PRB Rule 4 and attain full funding within "X" number of years." In answer to a question from Dill, Williams said the Board had to select the asset mix before selecting an investment advisor. Jackson said he thought we shouldn't make that decision without the advice of Linebaugh and Pennington. He said he thought they should both be actively involved. Bonaduce said he wanted their input too, but pointed out that everyone had the option to be present for this meeting. Jackson suggested changes could be made to the proposal and presented to Linebaugh and Pennington. McWethy said she thought the Board should not vote on the policy at this meeting. Jackson agreed. It was decided that proposed changes could be made for Linebaugh and Pennington to review. Reviewing page 1 of the draft investment policy, Williams suggested that, in the last paragraph, "market cycle" be changed to read "time frame." He suggested that the second sentence in the last paragraph be changed to read "Short run results will also be monitored and evaluated on a yearly basis and performance expected to be within the top one-third of managers with similar management philosophies." Parson said she thought that sentence was originally drafted to leave it open so managers would be aware that at any given time you are going be reviewing their performance. Williams suggested that in the last sentence of that paragraph the word "will" be changed to "may". Dill suggested the review be postponed until the next meeting and that, if Linebaugh and Pennington or any other member can't make the next meeting, the Board vote without them. McWethy suggested Merrill Lynch provide the Board with their suggested changes to each page of the draft, before the Board meets again to consider any changes, commenting that this would give each member an opportunity to review it before voting. At this point Linebaugh and Pennington returned to the meeting. Jackson reviewed proposed changes for their benefit. In reference to paragraph II. A., Volatility and Liquidity, Williams commented that if the portfolio were limited to 40% stocks and so many bonds, and has to achieve a historical rate of return, we're going to have an equity manager "that carries a very big gun." He said that could restrain Merrill Lynch to the point that they would have an impossible goal. He said when interest rates are going up, no fixed income manager is going to outperform the market by 5% above inflation. He recommended a more realistic objective over the long haul, or changing the asset allocation to something more in line with what the market is going to be expected to achieve. In reference to III., Asset Allocation/Diversification, Williams suggested in paragraph A, it might be appropriate to differentiate between fixed income and cash. Fire Pension Board Minutes April 6, 1989 Page 7 Williams suggested adding asset classes, stating the three classes in the draft were much too restrictive from a diversification point of view. Bonaduce suggested the following: 45% Equity, 5% Cash, 10% Other Investments, and 40% Income Account. Williams suggested the following: up to 60% Equity, up to 70% Fixed Income, and 25% Other Income to include real estate, enhanced yield investments and foreign equities. Linebaugh asked Williams if he was aware of any major funds in Arkansas which have invested above 40% in equities. He said, of the policies from other cities which Merrill Lynch gave the Board, none have above 40% of their fund invested in equities. Williams agreed but said none of them had a goal of 5% above CPI. Linebaugh said Little Rock set a goal of 3% above CPI, North Little Rock an absolute return of CPI + 10%, Fort Smith CPI + 2%, and West Helena CPI + 3%. In answer to a question from Linebaugh, Williams said Merrill Lynch works with Little Rock Police and Fire Pension Funds but that, when North Little Rock fired RNC, they fired Merrill Lynch. He said they worked for West Helena and the Fire Pension Fund for Ft. Smith. Jackson asked what other asset classes Merrill Lynch was recommending. Williams recommended the addition of venture capital, foreign equities and convertibles, among others. Linebaugh stated he did not think the Board had any reason to be investing in real estate or the other asset classes suggested. He said he thought the investments should be conservative and the Board had no right to be involved in speculative investments. Williams said he thought if other investments were incorporated into the fund in a conservative and organized way, they actually make a fund more conservative. Dill said he thought 25% in other investments was too high. Williams said at least 10% would have to be invested to impact the fund. Williams said the Little Rock Police Department has a fixed income manager, two equity managers, and is open to foreign equity and real estate. Linebaugh said he had no problem dropping the goal from 5% to 3% but had a problem allocating up to 70% in equities and adding the "other investments" category. Linebaugh asked Merrill Lynch if they could draw up their proposed changes to the draft policy. Pennington said he would still like to see Merrill Lynch's suggestions in writing so that he could compare them with what had already been proposed. Yada said Merrill Lynch wanted to keep the draft policy intact as much as possible. Williams said Merrill Lynch would work with whatever asset allocation the Board decided upon. Yada said Merrill Lynch was trying to determine what the Board's objectives were. Linebaugh said he would like to see the goals used by cities of Fort Smith, North Little Rock, Little Rock and West Helena. Williams said he thought in all those cases, their goal was simply to get actuarily sound within a 10 -15 -year time period. Jackson asked Merrill Lynch to make some suggestions and said the Board would discuss them. Dill asked if the goal of 5% above inflation could be reached with an asset allocation of 10% cash, up to 70% in fixed income, up to 55% in stocks, and 10% Fire Pension Board Minutes April 6, 1989 Page 8 in other investments. Linebaugh pointed out that when the Police Department heard presentations, several firms felt it was completely realistic that the goal was achievable. (Scott Linebaugh left at this point in the meeting). Jackson asked about the possibility of gearing our goals to a shorter term. Williams advised the Board would be setting itself up for more risk, and said he would rather the Board think in terms of 30 years. Williams said, based on a thirty-year time frame, the way the portfolio is invested now, inflation will be outdone by 2.7%. Dill asked Merrill Lynch to give the Board the asset mix they recommend in writing. Jackson said he thought we would have an in-house controversy if we discuss placing any percentage of the fund in "special investments." Reagan said he didn't want to go too much higher than 10% in the "special investment" category. Williams said Merrill Lynch would put in writing that they recommend 10% in other investments, around 50% maximum in equities, two equity managers and aggressive bond management. In answer to a question from Dill, Williams said Merrill Lynch would get something in writing to the Board before the next meeting. Yada said he would try to get suggestions to the Board no later than April 20, so that the Board would have a week to disseminate the information. NEXT MEETING It was clarified that the next meeting was scheduled for April 27 at 1:30 p.m. Jackson announced that Tim Reuling of RNC would be in Fayetteville next Tuesday and wanted to meet with any Board members who can meet at 2:30 p.m. Pennington stated he would be in Atlanta at that time and would be unable to attend. AFFIDAVIT FORM It was clarified that Suzanne McWethy should draft an affidavit form to be sent to pension members annually, possibly when pension checks are sent out. Zelda Parson asked that a place be provided on the form for members to fill in their social security numbers. There being no further business, the meeting adjourned at about 4:40 p.m.