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HomeMy WebLinkAbout2010-01-21 MinutesBoard Members Policemen's Pension and Relief Fund Mayor Jordan Chairman Board of Trustees Meeting Minutes Sondra E. Smith Treasurer TayeVI January e I of 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 January 21, 2010 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held at 1:30 PM on January 21, 2010 in Room 326 of the City Administration Building Mayor Jordan called the meeting to order. Present: Jerry Friend, Tim Helder, Frank Johnson, Melvin Stanley, Eldon Roberts, Mayor Jordan, Sondra Smith, City Clerk, Paul Becker, Finance and Internal Services Director, Trish Leach, Accounting, Press and Audience. Approval of the Minutes: Approval of October 15, 2009 Meetine Minutes: Eldon Roberts moved to approve the October 15, 2009 meeting minutes. Tim Helder seconded the motion. Upon roll call the motion passed 6-0. Frank Johnson was absent during the vote. Approval of the December 3, 2009 Special Meeting Minutes Eldon Roberts moved to approve the December 3, 2009 special meeting minutes. Melvin Stanley seconded the motion. Upon roll call the motion passed 6-0. Frank Johnson was absent during the vote. Approval of the Pension List: January, 2010 Revised Pension List: Sondra Smith: We have already approved the January Pension List and approved a revised one. Now we need to approve another revised one because Forrest Lawson has deceased. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 2 of 18 Jerry Friend moved to approve the January, 2010 Revised Pension List. Eldon Roberts seconded the motion. Upon roll call the motion passed 6-0. Frank Johnson was absent during the vote. February, March and April, 2010 Pension List Sondra Smith: There are no changes at this time on February, March and April. You approve them in advance so if something changes you will have to re -approve them. Jerry Friend: Have we always done that? Sondra Smith: Yes, you don't meet again until April so you want the pension lists approved before the payments go out. Then if there are any changes we go back and do a revised list. Melvin Stanley moved to approve the February, March and April, 2010 Pension List. Jerry Friend seconded the motion. Upon roll call the motion passed 6-0. Frank Johnson was absent during the vote. Old Business: None New Business: Forrest Lawson deceased Sondra Smith: A copy of the obituary and affidavit is in the packet. He did not have a spouse so his benefits stop. Eldon Roberts: Did we pay the funeral expense that we normally pay? Sondra Smith: Yes, we sent a check. Eldon Roberts: Is that $200? Sondra Smith: I think it is $200. Jerry Friend: I thought it was $250. Sondra Smith: When there is no spouse we send it to the estate of That is how accounting made out the check. I sent a letter and mailed the check. Revenue Expense Report Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 3 of 18 Sondra Smith: This is the report that Trish in Accounting has been doing for you. It shows a comparison from 2004 forward of your revenues and expenses. Local Pension Fund Report 2009 Sondra Smith: This report is required by state statutes. Our Mayor is required to give it in open session to the Council. That is what he read at the Council meeting. Jerry Friend: You sent us a copy of that email didn't you? Sondra Smith: If I email you something I normally put it in your packet. Eldon Roberts: In the third paragraph third sentence based on these evaluations the unfunded pension obligations of police and fire were $3.6 million and $5.5 million respectively, what is that for one year? Paul Becker: That is called the unfunded pension obligation. What that is is if you would catch it up now. What you were behind in the previous years plus what you were behind in this year. This would be how much you have to come up with right now. Eldon Roberts: Not what we are going to behind on down the road. Paul Becker: Your total liability is approximately $10 million. If you were to fund it now that amount would be $3 million. Jerry Friend: Did you send us two of these? Sondra Smith: No, I don't think so. Jerry Friend: The first one I swear the police were higher than the fire and I thought I needed to ask you about that. Then I got another one that was fixed. Sondra Smith: There was only one report done for both plans. Eldon Roberts: Have you read this to the Council? Was there any comment? Mayor Jordan: I don't remember any public comment. Sondra Smith: No there wasn't. Mayor Jordan: It is what it is. Eldon Roberts: It's been that way for three or four years. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 4 of 18 Paul Becker: Essentially what this is is an abstract of the information that comes out in your annual actuarial study. The numbers are consistent with what you have seen. Sondra Smith: We do it because it is state statute. Mayor Jordan: It's probably not necessary that we do it but by law we need to do that. Discussion Items: LOPFI Sondra Smith: The way I understand it you wanted that to stay on the agenda each meeting from now on. You may not have anything to discuss but I'm leaving it on there until you tell me to take it off. Jerry Friend: I don't. I think Kit's advice was to lay low for awhile and let some of it wash out. Eldon Roberts: I would like to see us to begin to make some effort to determine what it was going to cost. Then the City would know and we would know and it could either go forward or not go forward. I didn't remember Kit saying that he didn't think we ought to do that but maybe he did. Jerry Friend: No, I'm not saying that. Eldon Roberts: You're right at the special meeting he did say what you said. That was cutting benefits or making any action. Jerry Friend: An actual vote to do that. Eldon Roberts: Paul and I were both in Little Rock at the last Pension Review Board meeting and each of us spoke to David Clark, Executive Director about the criteria and any forms or anything we need to do. We don't have any consensus from this Board yet. I would like to at least pursue what the options are because you have to do it in a timely manner. It may be when the results come out when we look into it that we don't want to go any further with this and if the City doesn't want to go any further with it we don't either. I don't know how we are ever going to know that if we don't pursue some kind of detailed information about what it's going to cost to do that. It may cost us some to have the actuarial evaluations done. It's up to this Board. Either we do or we don't and I can live with it either way. Sondra Smith: Paul was able to get information on consolidation of a local pension fund from LOPFI and it summarizes what needs to be done. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 5 of 18 Informational: Consolidation of Local Pension Fund Mayor Jordan: I sent a letter to David Clark he basically did not think we could reduce benefits. Sondra Smith: That's the one you sent in December. We talked about that at our special meeting in December. They said there is nothing in the state statutes that says you can reduce benefits. . Paul Becker: Eldon and I were there when they read it in the Pension Review Board meeting and their response was in a form of a letter back. Sondra Smith: That was sent on behalf of the Fire Pension Fund. At the last meeting you asked for information on how to go about consolidating and this is what Paul gave me. I looked at the PRB rules and the LOPFI rules and there is nothing that I could find about consolidation in any of their rules. It's not information that is readily available. Eldon Roberts: Is this all the information that you got from David. Paul Becker: That's what they sent me. They will not take an application before April. That has to be from the city for them to do it... They have to have their actuary do a study and it has to be completed by October. That is essentially your window. Eldon Roberts: I understand the situation but I was thinking that if we decide we want to do try to do that even if the City is on board we've already got past our window of opportunity. I was just trying to get some numbers for everybody to look at and then we could make a decision. That's what I was trying to bring forward but it's up to this Board to decide if they want to go any further with that or not. Mayor Jordan: What are you all going to do? Eldon Roberts: I see the cost is $600 matter but that's with fewer than twenty participates. Paul Becker: That's for filing. What you were talking about is an information gathering situation similar to what the Fire Pension Board did which means you would separately engage the actuary. Jerry Friend: Do you know what it cost them? Paul Becker: It was in the $2,000 range. Sondra Smith: It was suppose to be $2,200 but it ended up being around $3,000. Mayor Jordan: It will cost you anywhere from $2,200 to $3,000 to do that. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 6 of 18 Sondra Smith: It will take you anywhere from four to six months to get a report back from him. Jerry Friend: It would tell what the liability to the City would be if we went to LOPFI. Mayor Jordan: He will run some figures for you. Paul Becker: He will run some numbers. You formulate your question. For example the Fire had four or five scenarios. Your scenario would be if you send that down at no cost to the City what in fact would you need to do. You would frame your question and contract him to do it. Sondra Smith: The more questions you ask the more expensive the study. The last one they based it on the number of questions. Paul Becker: They run it through a model and every time you change the model he has to reconstruct the model and run the scenario. Eldon Roberts: We possibly could postpone this for another year. It's been discussed several times here. We are not behind the eight ball like other funds may be. Sooner or later there might come a time when it's at no cost to the City that we can merge with LOPFI. Then we would be guaranteed our funds and the City would be off the hook about anything that might be coming down the line for you all. We had some numbers when Jody was up here for the joint Fire and Police meeting but that was off the top of his head. At that time he was projecting $150,000 a year to the City to receive the police department into LOPFI. That was no benefit reduction to our people and no COLA. That may even be better now. The market may be considerable better than it was in February of last year when we had that meeting. At some time or another that number may go down and I was trying to get into a matter to where we could find out what that number might be but I don't know if this is the right time maybe we can postpone it for another year. Paul Becker: Your assets are deteriorating so I wouldn't have a guarantee and the size of your assets is going down. Eldon Roberts: We have until April of this year to decide if we want to do this. Paul Becker: April would be the first time that a city could file an application on behalf of the City. Sondra Smith: You have to have everything else done before you file that application. Correct Paul. Paul Becker: That's correct. That would mean the Mayor on behalf of the Council would send a request down. Mayor Jordan: That will have to be run through the Council. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 7 of 18 Paul Becker: April is not a deadline that is the first they will accept them. Everything has to be completed by October but it takes awhile to run it through the system. Frank Johnson: Would there be any reason why we couldn't develop a very robust resolution to some degree that would encompass all the things we are considering here, in the interest of the timeline, and what you would need to move forward with the City Council. Is that a possibility? It sounds like that resolution would include a lot of what if scenarios. Is there something we can pursue right now? Mayor Jordan: I'm afraid I don't know how to answer that. That would be a question for Kit or maybe Sondra might know. Sondra Smith: The first step in moving forward is for the Board to make a decision that you want to move forward. Eldon Roberts: Does this Board have to have Council approval just to move forward with seeing what our options are? Sondra Smith: No, not to do your research. That is all you are doing is research. Eldon Roberts: I fully understand that in the end the Council has to approve whatever is going to be done with us about going to LOPFI or not going. I thought the way I understand it here we've got to have Council approval just to even make this application or just to try to start arriving at numbers. Sondra Smith: When you make the application to LOPFI you do have to have Council approval at that point. Paul Becker: The application would be an application completed by the City. Eldon Roberts: Meaning we want to join LOPFI. Sondra Smith: Right. Paul Becker: That would be what you are looking at, and what they have responded to, what are the procedures to do that. That's not saying anything about any fact finding that you want to do before that. That would have to come from the City through the Council. Sondra Smith: That application is months down the road. First you would want to get your actuarial study done, look at the numbers and then move forward in that direction. Frank Johnson: The purpose of doing that is to provide City Council with information on the decision they will make one way or the other? Paul Becker: First you want to formulate a strategy. You may or my not want to solicit information to formulate that strategy and then implement that strategy. If you are going to do Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 8 of 18 that, as Sondra is suggesting you would get some type of actuarial study to get the numbers for you to look at to formulate your strategy. Either that or if their strategy is to wait and see that's a strategy available to you. First you want to formulate your strategy or design your plan to see what direction you want to go. What we are looking at here this is what LOPFI says a City has to do. The City has to make the petition, pay the money, and have another actuarial study done by the actuary for LOPFI. The actuary you have been dealing with now is the actuary for the Pension Review Board. Sondra Smith: In essence there are two actuaries that you will have done. You would want to have the one done with your current actuary which is Osborn, Carreiro & Associates. After you get that and you look at everything and you decide as a Board that you want to move forward to consolidation then that is when it would have to go before the Council and be approved. We would have to submit an application to LOPFI then they would have an actuarial study done by their actuary. You are talking about two different studies that have to be done. The first one is by our actuary. The second actuary study tells you what LOPFI says the City or you are going to have to pay. Melvin Stanley: Why would we just not pay the bill one time and pay for the one for the City and not do our own? That is the one the City is going to take anyway. Paul Becker: They do that as part of the application process. Jerry Friend: We might not be sure we want to do it. Frank Johnson: This is all clear in the last meeting here. I'm just wondering if we just need to move forward with whatever is necessary as a next step for the City's application and make an application for LOPFL They require their own set of numbers and their own study regardless of what we have. It seems like the next step to me would be to move forward with that application. Eldon Roberts: Who pays for the second one? Paul Becker: The City. The City would be the one to file the application and then their actuary is going to come back and say this is what your bill is, this is your commitment, do you agree to that? The first study we are talking about is a feasibility study and where would it put you. What would you have to do and would it be acceptable to you. Would it be acceptable to be presented to the Council? The first is an estimate. The second study they are talking about is the actual and they are going to say this is actually what the City has to agree with. Sondra Smith: The Fire Pension had the first one done so they could see, because the City has said to send it to LOPFI, they feel the Council would want no cost burden to the City. What the first study is doing is trying to determine what kind of cost burden there might be to the City. That is the reason the Fire Pension did the first one and it came back if they did not reduce benefits it was going to cost the City quite a bit money to send them to LOPFI. That's where they are now on the level of trying to decide whether to reduce benefits to get it to zero cost to the City so it can be sent to LOPFI or whether to just let it hang on. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 9 of 18 Frank Johnson: They being who? Sondra Smith: The Fire Pension. Frank Johnson: There has never been a formal vote or discussion with Council. Melvin Stanley: The City has not had their study done. Sondra Smith: No. Melvin Stanley: If there's another study done that may come back different then what the Fire Department had done. Sondra Smith: Right, it could come back different then the study that the Fire Pension had done. The Fire Pension Board hasn't even voted to move forward on the application process or to move forward to see if the City Council would approve sending it down. If the City Council says no where not sending it to LOPFI then I think you're stuck aren't they Paul. Paul Becker: The City Council makes the application. Sondra Smith: Right, so if the City doesn't approve doing that you're stuck. Melvin Stanley: The City is not committed to anything by making the application. Paul Becker: No. Melvin Stanley: After they get the study back they can say yes or no. Paul Becker: Yes. Frank Johnson: Does this need to be in a form of resolution for the City to consider? Paul Becker: Absolutely. Eldon Roberts: The first part of the actuarial evaluation that our local actuaries do in Little Rock we can ask for that any time we want without anyone's approval. Sondra Smith: Right. Eldon Roberts: And we just pay the bill. Melvin Stanley: $2,000. Eldon Roberts: They do one of those every other year. Paul Becker: They will do one this year. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 10 of 18 Eldon Roberts: It will be for the end of 2009. Paul Becker: Yes, when will the information be sent? Trish Leach: It has to be there by the end of March. We normally mail it at the end of February. Paul Becker: They will have the most current information at the end of February. Trish is very prompt about getting it down there. Eldon Roberts: I know she is. Paul Becker: At that point in time they will have the latest information but you would be asking them for something special. You would be asking them for a special study. Eldon Roberts: We would be asking them what kind of money it would cost the City or what would the number be for us to merge with LOPFI. Do you feel like, and I know you are not a Council member, but if we had a zero cost to the City and we understand on our side there's no benefit increases, no benefit decreases and no COLA' s, at a zero cost to the City what do you think? Paul Becker: I won't speculate on that. That depends on the Council. Sondra Smith: I think there will have to be two actions from the Council. I think there will be the action to request the study and the action after they get the study back and see the cost. Paul Becker: They approve the filing of the application. Sondra Smith: To me filing the application is requesting the study from LOPFI. After that comes back they will have to look at that and see what the cost is going to be because that is the one we have to go by. At that point in time there will have to be another decision as to whether or not they want to go ahead and send it to LOPFL I'm not sure but that's the way it looks like to me. Eldon Roberts: That sounds right. Paul Becker: That's correct because the last one is where the liability is undertaken. That is where you sign a contract with them. That is where they would commit to a contract and say we agree to pay that. Sondra Smith: That happens quit often. Jerry Friend: If we go forward and ask the City to apply and they go through all of that and get their answer back and we don't like the answer the City doesn't have to back to us to ask if they Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 11 of 18 can go ahead. Once we've turned it over to them they can accept whatever deal they and LOPFI makes without consulting us. Sondra Smith: I think they would communicate. Paul Becker: I guess that's possible I doubt that would happen. Why would they if you didn't want to send it down there. Eldon Roberts: They have always told me in Little Rock they have never taken anybody and merged an old plan with LOPFI unless both sides are in agreement. Paul Becker: If you were opposed to that I'm sure the Pension Review Board could intercede. If you care to withdraw and not be a part of it I don't see that anybody would oppose that. Jerry Friend: If the City Council felt like it was a good deal and as good a deal as it was going to get and it might get worse if they didn't accept it, down the line somewhere they might want to go ahead and do it without us agreeing to it. Paul Becker: I guess it is possible but I wouldn't see why they would do that. Jerry Friend: I'm detecting the wave length Melvin is on. Why spend our money if we can just ask the City to apply and then reject it if we don't like it. Eldon Roberts: I think we still have to have ours done too. Frank Johnson: I like would like to do something to engage the City at another level. Tim Helder: Has the Council been involved in the discussions about the Fire Pension? Paul Becker: No. Eldon Roberts: We've got the luxury of just watching what goes on down the road, not just with Fayetteville Fire but I think the Little Rock Police is in bad financial standings too, maybe worse than Fayetteville Fire. The opinion from the Attorney General is he is waiting on lawsuits to be filed and the courts to make a decision to know which way we go. Is the City responsible for these pension funds or not? We have the luxury of watching all of that unfold and seeing what is determined to be the way everybody is going to go on it, and then make our decisions from there. If you understand what I'm saying we don't have to do anything. Kit Williams said in our last meeting we don't have to make any decisions about reducing benefits at this point in time because there are plans across the state that are a lot worse off financially. Ours is going to have to arrive at some kind of solution and then we can see what that is and move forward from there. Melvin Stanley: Depending on the out come of one of the worst ones maybe there might be some more interest shown from either the pension boards or City Council. I agree with Eldon. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 12 of 18 Eldon Roberts: The State is being told up front what is going on with all of this because they are receiving a lot of the insurance turn back fund into the state general fund that is not being used in the Fire and Police plans. Something may change but like Paul mentioned everybody including the State, City, and everyone else is facing financial dilemma. I don't know what the answer to that will be. Do you have anything you would like to put in the form of a motion Frank? I'm going to back out of what I brought up earlier and just sit back and watch, unless there is some motion here by the Board to go further with it. Sondra Smith: I do have one thing that's not on the agenda that I would like ask the Board about. Right now it's very difficult for Elaine Longer to get here by 1:30 p.m. if the markets doing its thing back and forth. Would you all feel comfortable changing the meeting time to 3:00 p.m. or would that not work for everybody? Tim Helder: It's fine with me. Melvin Stanley: Doesn't matter to me. Eldon Roberts: That's fine with me. Sondra Smith: What about you Frank? Frank Johnson: I'm good with it. Eldon Roberts: Would 3:00 p.m. be better for you all? Kim Cooper: That would be wonderful. The market closes at three. I appreciate Sondra making the suggestion. Eldon Roberts: I have no problem with that. I think it might be a benefit to everybody. Kim Cooper: It's not often that we ask to be last but I appreciate the offer. Sondra Smith: We did that with the Fire Pension and it seems to work better for them. If that's the case I would like for someone to make that motion and a second and we will do a roll call on that. Tim Helder made a motion to move the meeting times to 3:00 p.m. Eldon Roberts seconded the motion. Upon roll call the motion passed 6-0. Mayor Jordan was absent during the vote. 2010 MeetinE Schedule A copy was given to the Board. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 13 of 18 Longer Investments: The Longer View A copy was given to the Board. Longer Investments 4th Quarter 2009 Report: A copy was given to the Board. Longer Investments Monthly Report: A copy was given to the Board. Elaine Longer: Thank you for letting us show up at the tail end of the meeting. Happy New Year, we did have a good year last year. Page one of your report is the year end statement of the assets. You will see that going into the end of the year we had a fairly full equity allocation. Stocks were 51 % of total portfolio. Page two the International holdings were at 7%. You were at 58% equity exposure and that is above the 50% that requires a motion to approve. Jerry Friend made a motion to approve the equity overage. Tim Helder seconded the motion. Upon roll call the motion passed 6-0. Mayor Jordan was absent during the vote. Page three shows the year end value of the portfolio at $8.286 million. At year end we had about 2.3% of the portfolio in cash reserves. The over all income yield on the total portfolio is 3.6%, which is a higher income yield than what you can achieve if you have the whole portfolio invested in the 10 year treasury. What we have done, and what I've talked about in meetings prior to this one is, we have increased the income yield that we are getting in stocks by buying companies that have a good strong dividend yield. By doing that we have been able to maintain the over all portfolio income yield at the level that you would be getting off of a bond portfolio but you still have a 57% growth component. That has been pretty important in the past years as we will see on the performance report. I think even more importantly, as we go into the New Year with some concerns about the outlook, we have moved to a more defensive position in the equity market. Even though we still have a good equity exposure we have moved to a position to where we have about a 3% income yield on stocks. Page four is an update as of yesterday because we have moved to a little bit more defensive as I said in the stock market and raised some cash reserves. The equity part of the portfolio is 45% with the International at 7.5%. You are now at 52%. We have moved about 5% or 6% away from the equity market into cash reserves coming into the New Year. Income for last year was $200,000. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 14 of 18 Page eight is a summary of your fixed income portfolio. The yield to maturity is about 4.7%. The weighted average maturity is 6.9 years. To give you an idea of the yields currently available in the bond market, the 10 year is trading at about a 3.5% and that is within a 10 year maturity. The five year treasury is trading about 2.5%. With this kind of maturity in the treasury market you would be looking at close to a 3% yield on a reinvestment rate as opposed to a 4.7%. You don't have much reinvestment risk in the portfolio because last year throughout the year we keep moving out every time we got a chance to extend maturities and to roll bonds that were soon to mature or were callable. You don't have nearly as much reinvestment risk as you did a year ago. The bonds that you hold that mature under one year are now only 4% of total bond holdings. That's a good stable income on the bond portfolio within a moderate maturity structure and without a reinvestment risk. Right now because the outlook is so uncertain it's kind of like if you listen to the news you will get very confused because you will have someone on the news saying that interest rates are going higher and someone one saying they are going lower. The fact of the matter is we are still working through a lot as far as the after math of this financial crisis. If you read the newsletter the world is still in flux. We have to try to apply a course that is conservative but still can achieve the income returns that we won't on the fixed income side of the portfolio. It's a bit of a balancing act. Last year, even though interest rates that the Fed controlled stayed at zero to .25%, the ten year treasury yield rose from about 2.5% to the end of the year 3.5%. As a result what happened was the bond actually gave its worst performance since 1926 with a minus 9.6%. You think how can a bond give a minus 9.6%, as interest rates rise bond prices decline, this is one of the reasons we have to be careful in this environment. You had a positive return on your bonds even though you have a good income and even though you have a weighted average maturity of seven years. It took a lot of being very agile and being able to be opportunistic at times during the year when the interest rates did increase for us to extend those maturities. From the first of the year to the end of the year you actually had a positive return even though the 10 year treasury last year gave a negative return. Does that make sense? That's something as you look at the bond portfolio what I'm trying to say is that it is a balancing act between risk and return. The risk being if interest rates do rise this year, then we don't want to have a long term maturity because the price can decline. Page nine shows the contributions for last year were $114,000 largely coming from a transfer from the City of $110,000 into the portfolio and distributions were $924,000. Page 10 summaries the performance report and for 2009 your equity return on the domestic equities was 28.2%. That compares to an 18% on the DOW. DOW reinvested dividends was 22 the S&P was 23. That was a very good year performance wise even though we have maintained a fairly conservative equity type investment structure. On your foreign equities 24%, the bonds returned about 2%, you are still earning that 4.8% income yield but the price fluctuation was against the 4.8% income yield so that your total income return was closer to 2%. That gave you a total return for the year of 15.7%. The important thing about this year is that it made up a lot of the decline of 2008 and if you look at your compounding returns even though at the end of last year we had dipped below the 6% compound annual return, which was the actuary rate of Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 15 of 18 assumption, now with this year you have caught back up to where you are back to your 6.0% compound annual rate of return. That satisfies your actuary rate of return assumption from beginning. They did turn that into a 7% return at the end of 2008 but I still have concerns about that because of the fixed income side being so low in the return category. That is 50% of the portfolio. You have bounced back up to the 6% compound annual inception to date. Jerry Friend: Sounds like you worked your magic again on the bonds. Thank you. Elaine Longer: Thank you, I managed fixed income for the bank before I left the bank and started my own firm. I have always had the fixed income side as well as the equity side. This past year I was happy that I had that experience. We are dealing with a lot of variables and it's very much in flux. Today with the market down 200 some points it brings back to the front of the trading screens the risk that are out there for various foreign economies. It's not just our economy but in the past two days you've had China sort of tightening financial policy, tightening their bank lending, and reporting their GDP numbers. This has negatively affected some of the companies in our markets that are so tied to the growth in China. The whole world is interacting at internet speed so whatever happens over seas affects our markets. It's not going to be like 2008 but I think we will have some volatility in the markets as we continue to move through getting the exit plan of the Federal Reserve and also the Federal Government. We wrote about this in the newsletter, where we have to transfer the patient from ICU still hooked up to all the support systems to a hospital bed breathing on his own. The transition could be bumpy and that is one of the reasons we have gone ahead and taken off some of our positions that reached our return objectives or have more volatility for a change in the market and are a little bit more aggressive. Just so we can protect what we achieved last year and have some cash to use if we do get a pretty good pull back year. Eldon Roberts: What is the market right now? Elaine Longer: No, it's not below 10,000. It's at 10,390. We hit a high just days ago 10,720. We are about 350 points off the high which that's barely 3%. Melvin Stanley: Down today to what? Elaine Longer: It's down to about 208 points to 10,394. In the newsletter on page two you can see the charts from the peak which was in November of 2007 to the lows which was March 2009. Now we have retraced about 50% of that drop. From the lows in March to where we closed the year that rally off that low was over 60%. There were very few periods of backing and filling as we made that assent off that climatic low. It's not out of the realm of the possibility that we could start to retrace some of that or spend some time backing and filling to sort of digest that advance until we get more clarification on what earnings are going to look like and what the exit strategies are going to be. I anticipate and I wrote this in the newsletter that in this past year with a 28% or 29% return dividend income might have only made 10% of total return. In this year we anticipate that the dividend income which is what you get paid as a share holder will be more of the total return in stocks and could be as high as 50%. If we end up with a more moderate year of 7% or 7.5% it Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 16 of 18 helps a lot if you are getting half of that return just in cash flow from your dividend income. It's a little bit different strategy than coming out of that low that you saw take more of an aggressive position coming off that low in March. The market is not over valued on price earnings multiple on dividend yield relative to the available interest rates in the bond market. That's a large part because earnings have keep up with the advance we have had in the stock market. We ended the year at a price earnings of about 15.5 times earnings. That is not out of line with historical evaluations. We have a situation here where stocks are still not what you would call exuberantly priced and bonds are not a good alternative to stock investment. Who wants 2.5% fully taxable for a five year treasury, you only get that if you lock it up for five years. If you are in a two year treasury you get .89% per year. There are not a lot of attractive alternatives to owning stocks and stocks are not terribly over valued. We are not saying we are leaving the market or anything we have just raised a little bit of cash so if this does pull back and move to digest some of these gains that we can take advantage of it. Paul Becker: Elaine is your strategy still in producing equities? Elaine Longer: We have an over all income yield of the total equity portfolio at about 3% but a lot of the companies that you need to also incorporate into the portfolio, for instance text stocks, don't pay a dividend yield, like EMC, Cisco, Amgen and Cephalon which is bio tech. To get an over all income yield of 3% knowing that you are going to have some stocks in there that pay no income yield but you have to have the growth. Then you have to fill it out with stocks like the drug companies, oil companies, the AT&T's of the world that give you a high dividend income. It's a bit of a barbell approach to be able to get the income and the growth but overall we have been able to achieve a 3% income yield. Paul Becker: What about foreign equities? Do you anticipate anymore in the foreign equities? Elaine Longer: Right now foreign is about 15% or total because the total is 45% on domestic and 7.5% on foreign. We have fluctuated between 15% and 20%. At this point in time we don't have any exposure to the emerging markets, China, or Brazil. Before the end of the year we harvested gains on the more aggressive exposures in the international. We still hold the major economies, the European, Japanese, and the Asian that are not as aggressive as China, Taiwan, Hong Kong, and Singapore. It's similar to what we have been doing with domestic equities whereby we've taken a step away from the more aggressive players in that equity field and gotten a little bit more conservative but maintaining our exposure. Eldon Roberts: What has attributed to the decline the last four days? You mentioned China has tightened their monetary policies. Is that all or is there something else going on out here in your opinion that is affecting the stock market. Elaine Longer: The market is always six to nine months down the road. That's why it's a member of the leading economic indicators because the market discounts the future six to nine months down the road. If you remember when the markets starting coming off the low in March, I kept getting asked by people why would it be running up, the market was in September to December when it was coming off those lows in March and really responding to what the stimulus and liquidity would mean in terms of economic growth in the third and fourth quarter. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 17 of 18 Now you are seeing estimates for fourth quarter GDP are as high as 4.5% and 5.5%. Here we are and everything looks good and the market is looking a little bit shaky but the market is out there in June to September. It's real interesting because Intel reported good earnings and the stock hasn't been able to go through to a new high. IBM reported good numbers yesterday it was down $4 or $5 a share. Goldman Sachs today reported $8.20 a share. The street estimates were $5.20 and the stock's down $6 or $7 a share. One of my mentors that was the head of Northern Trust for years doing their investments always said don't pay attention to the earnings so much as the response to the earnings. What we are seeing this week, I think is telling us, that a lot of these good earnings are priced into the market at these levels. The market is really looking at the second half of the year and what that looks like and at this point everybody's crystal ball is pretty foggy as far as the second half of the year because so much of what we have seen in the third and fourth quarter has been attributed to the government's response to the financial crisis. Now we have to see what happens as we go into the second half of the year and how much can the real economy take over as the baton is passed from the government. They have to exit the markets will force them to exit even if they don't want to. The way that happens is the dollar goes down in value or gold prices spike. You start to see that kind of nervousness in the International markets or the ten year treasury yield starts to go higher. Then what happens is the policy makers have to respond to the pressure from the foreign markets because of the fact that we have to sell our debt. We don't have the luxury of not paying attention. We are not worrying about what is happening out there in the foreign markets, we have to worry about it a lot. Again it's that Internationalization of all of the markets is very important. Eldon Roberts: The very last page of the report is a copy of what we have all signed for the investment policy guidelines. Does that have to be redone every year? This is for 2009. Elaine Longer: I think it's just if something has changed. If there is a new Board member and the other times that we've changed is if we changed something in the policy. Eldon Roberts: Otherwise this would be fine. Elaine Longer: Yes, the only thing that I would point out is that this policy was written when the return assumption that was enforced at the time, of 6% compound annual, I believe that is specified in the policy. We have not changed that even though there are new assumptions from Little Rock. Mostly because of the fact that I still have questions about how they arrived at that and whether or not that is achievable in this kind of a market environment. When this was set out on the fixed income side you could get 6% or 6.5% return, which meant that the stock side to be able to achieve 6% after expenses would need to be about 9% or 10% return. That was a safe assumption to make on both side of the equation at the time that we were starring I had no problems with it. Even in 2002 when the Firemen came in it was still a valid assumption, but now to jump it up to 7% when the fixed income side on your reinvestment is down to 3.5% or 4% that places too heavy a burden on the equity side of the portfolio to say that this is a reasonable expectation. Paul Becker: That was brought up at the last Pension Review Board meeting. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 21, 2010 Page 18 of 18 Eldon Roberts: I don't believe we've ever got a good answer from the Pension Review Board. Paul Becker: I think we got that they were going to look at it. Eldon Roberts: That's right. Paul Becker: We will keep pushing them. Eldon Roberts: I don't see anything in here. Elaine Longer: Is it on page one of the policy under investment objectives. Eldon Roberts: Item C, do we need to address that or are we okay? I don't think the Pension Review Board is sure. They may be going to stay with that. Elaine Longer: I think that they need to really look at and specify where that number came from. I know in the joint meeting that we had last year at the start of the year we asked about that. Basically going into 2008 and 2009 decline the compound annual return had been over 7% even though the actuary return assumption was 6% so they just bumped it up to 7%. It didn't have anything to do with valid assumptions of return going forward based on what the market rates of interest are. In this kind of an account there's not a lot you can get over the 10 year rate of return unless you are either distorting the maturity structure of the portfolio or the credit quality of the portfolio. We could be creative like we have been in the past to where we opportunistically pick our times to buy or to extend our maturities. I can't tell you I can get you 6.5% when the 10 year treasury is at 3.5%. I think they need to be very specific about where that number came from because the thing about the policy is I sign it so I have to believe in it. At this point I believe that 6% is still a reasonable rate of return assumption but I'm not willing to sign on to 7%. Eldon Roberts: I think Paul asked to be addressed at the last Pension Review Board and ask them this very question again. I still don't think they give us a very clear answer on where this 7% came from. As long as you are comfortable with the 6% that is in our investment policy now then we can go forward. Elaine Longer: Yes, I would think so. That would be a question for the City probably because the policy specifications are at odds with the assumptions that we are getting from Little Rock. Eldon Roberts: Any questions for Elaine? Elaine Longer: Thank you. Meeting Adjourned at 2:50 PM