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HomeMy WebLinkAbout2010-07-15 MinutesBoard Members Mayor Jordan Chairman Sondra E. Smith Treasurer Eldon Roberts Secretary/Retired Position 1 Jerry Friend Retired Position 2 Tim Helder Retired Position 3 Melvin Stanley Retired Position 4 Frank Johnson Retired Position 5 Taye evi le / ARKANSAS Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page l of 10 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held at 3:00 PM on July 15, 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, Kit Williams, City Attorney, Sondra Smith, City Clerk, Lisa Branson, Deputy City Clerk, Paul Becker, Finance and Internal Services Director, Trish Leach, Accounting, Elaine Longer & Kim Cooper, Longer Investments, Press and Audience. Approval of the Minutes: Approval of April 15, 2010 Meeting Minutes: Eldon Roberts moved to approve the April 15, 2010 meeting minutes. Melvin Stanley seconded the motion. Upon roll call the motion passed 4-0. Jerry Friend, Tim Helder, and Frank Johnson were absent during the vote. Pension List Changes: Anna Mary Dennis deceased in May John Paul Wood deceased in May — Surviving spouse — Ruthie Wood Eldon Roberts — QDRO Jerry Friend — Revised QDRO Approval of the Pension Lists: Re -approval of the May, June, and July 2010 Pension List Changes to May, 2010 Pension List includes: 1. Eldon Roberts pension amount changed due to QDRO 2. Carolyn Roberts was added due to QDRO 3. Jerry Friend's pension amount changed due to QDRO 4. Michele Friend was added due to QDRO Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 2 of 10 Changes to the June, 2010 pension list are due to: 1. Eldon Roberts pension amount changed due to QDRO 2. Carolyn Roberts was added due to QDRO 3. Jerry Friend's pension amount changed due to QDRO 4. Michele Friend was added due to QDRO 5. Anna Mary Dennis was removed 6. John Paul Wood was removed 7. Ruthie Wood was added — John Paul Wood's spouse Changes to the July, 2010 pension list are due to: 1. Eldon Roberts pension amount changed due to QDRO 2. Carolyn Roberts was added due to QDRO 3. Jerry Friend's pension amount changed due to QDRO 4. Michele Friend was added due to QDRO 5. Anna Mary Dennis was removed 6. John Paul Wood was removed 7. Ruthie Wood was added — John Paul Wood's spouse 8. Jerry Friend's pension amount increased due to a revised QDRO 9. Michele Friend's pension amount decreased due to a revised QDRO Sondra Smith: There are several changes to the pension list. I have listed the changes. You pre -approve the Pension list therefore we have to revise the Pension lists for May, June and July. I have listed the changes that have happened on each report and why those had to be re- approved. Eldon Roberts moved to approve the Revised May, June, and July 2010 Pension List. Melvin Stanley seconded the motion. Upon roll call the motion passed 5-0. Jerry Friend and Tim Helder were absent during the vote. Approval of the Aueust, September, and October Pension List Eldon Roberts moved to approve the August, September, and October 2010 Pension List. Melvin Stanley seconded the motion. Upon roll call the motion passed 5-0. Jerry Friend and Tim Helder were absent during the vote. New Business: Revenue Expense Report Paul Becker: That is the report that Trish does. Sondra Smith: There is one for 4-30-2010 and an updated one for 6-30-2010. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 3 of 10 Eldon Roberts: The further in the year we go the uglier it gets. Kit Williams: That reflects the market going down. 2010 Election Results: Jerry Friend and Frank Johnson were reelected Mayor Jordan: Congratulations. Qualified Domestic Relations Order (ODRO) — Eldon Roberts Sondra Smith: That's just informational. We received it and it is on file. That's the reason there are changes in the pension list. Revised Qualified Domestic Relations Order (ODRO) — Jerry Friend Sondra Smith: We received a revised QDRO for Jerry Friend. That is on file and that changed the pension list too. We received an affidavit for Michelle Friend. Carolyn Roberts affidavit was received Sondra Smith: We received her affidavit. Ruthie Wood's affidavit and Power of Attorney was received Sondra Smith: We received Ruthie Wood's affidavit and power of attorney because her husband deceased. Sent funeral expense check to John Paul Wood's estate Sondra Smith: When a pensioner deceases we send a pension check to his estate. 2010 Turnback Distribution Paul Becker: The Police Pension plan distribution was $213,357 which is about $1,000 less than last year. Little Rock had a major decrease in their distribution. The distribution here was just about flat with what it was last year. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 4 of 10 Sondra Smith: I have the spreadsheet that Trish did. I will put it in the next packet so you can see the distribution over the past few years. Eldon Roberts: What was the total this time? Paul Becker: $213,357 Eldon Roberts: That's just the police? Paul Becker: That is just the police portion. Eldon Roberts: LOPFI and old. Paul Becker: No, that's the police for the old pension plan. Sondra Smith: The future supplement was $26,061.50 and the regular supplement was $28,200. One you get in a lump sum check and the other you get in monthly benefit on your check. Paul Becker: The lump sum was distributed, was it not Trish? Sondra Smith: Yes, it was sent out with the July check. Eldon Roberts: That's close to what I remember it being last year. Sondra Smith: Last year the big distribution was $214,429.30 this year it was $213,357.83. Last year the future supplement was $38,350 this year it was $26,061.50. Last year the regular police supplement was $30,000 this year it was $28,200. They paid us on both the future supplement and the police supplement for Anna Mary Dennis and Mr. Lawson. Trish Leach: We get to keep that, when it is paid not by an error, but because someone deceases they tell us to keep it. Discussion Items: LOPFI Sondra Smith: I have been asked to keep that on the agenda. Jerry Friend: I don't think much has changed so we can't discuss it. Weren't we waiting on some studies? Eldon Roberts: I think we opted to not do anything. Kit Williams: You all are not nearly in the shape that the Fire Pension is. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 5 of 10 Longer Investments Elaine Longer: The last time I was here was the end of April and I remember saying I wouldn't be surprised if we hadn't seen the highs of the year. With that on April 26th the market started back down and has been through a correction that at the low point was about 15% or 16% off that high. We've had about a 7% or 8% bounce off that low so we are kind of defining a trading range that I think will take us into the end of the year. The high end being about 11,300 the low end being about 9,650 we will trade around in that area until some of the outlook gets a little bit clearer. We have a lot of legislation coming out of Washington still today. They passed the financial regulator bill. There are a lot of questions about what's in it and I read a lot about this. I have a lot of research sources that come into the office. Even among the professionals there is a lot of confusion about what is in that bill and what it is actually going to mean in terms of consumer finance, investment banking, and your community banks will be affected by this. The two things that seem to come out in all the reading I've done is that it is going raise the cost of doing business. Whether you are a consumer and you have a debit card or if you are Bank of America they may end up letting go their lowest profit margin accounts or make them convert to web based banking. If you are corporation trying to do business there are going to be higher hurtles to get through the pre lending requirements and documentations. There is a lot in this bill that can raise the cost of doing business but also my concern is that it can also reduce the velocity of money. We touched on this in our newsletter. The Fed President from the Dallas Fed, Richard Fisher gave an interview last week and he touched on this also that there is only so much the Fed can do. The Fed has put a lot of liquidity into the system so now until you get lending going or loan demand you can't really circulate that money through the system. That's how money circulates. Even though the Fed has been pushing the reserves into the system and we've got 0% interest rates at 3% to 3.5% prime lending rate. The velocity has been falling because commercial and industrial loan demand and over all loan demand has been falling. We still haven't recovered to the point where people want to go out there and take on more debt. Corporations are building cash on the balance sheet, households are paying down debt, the mood in the economy is not to go out there and take on more debt at this point in time. What happens then is when you've got this decrease in loan demand, even while the Fed is putting reserves into the system, it doesn't circulate, so the velocity and the money supply go down. That seems perverse when you hear the Fed is putting so much money into the system, why would the money supply be going down it's because it is just not circulating. The whole reason this is important is because economic growth is a very strong way contingent upon this circulation of money, the velocity of money and having those supplies of liquidity flowing. As we go into this second half what we are looking at is the potential for a slow down. The first quarter GDP was revised, the final revision was down to 2.7% from 5.6% in the fourth quarter. We have already seen a slowing in the first quarter. Now you're looking at the second quarter and third quarter could be lower than what street estimates had been. The question is whether or not we will go into a double dip. A double dip means will we go into a negative GDP growth, another recession. We are still vulnerable to that and that's what causes me concern about the legislation and the extent of how big these legislative bills are because it's not a step wise progression. The thing is we are vulnerable Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 6 of 10 because we are limping along at 2.7% growth rate and we don't really know what the hits wilt be to that 2.7% but we know one thing we don't have a lot of policy responses like we did in 2008 to offset the weakness. That's why you see the markets so jittery and all the volatility that you are seeing in the market because there really is a lot of uncertainty about whether or not we will have a second dip in the recession. Like I said in the newsletter we are not in that camp at this point in time but even if you go to a 1.5% to 2% growth rate it will feel like a recession. You have to have growth of about 3% to 3.5% to have improvement in unemployment. If you are a 1.5% to 2% you're barely growing jobs at a rate that assimilates new entrance into the work force into jobs. You have to have about 125,000 jobs per month created just to hold the unemployment rate where it is right now. It takes consistent 250,000 and higher on a monthly rate to begin to reduce the employment rate. If you are at 1.5% to 2% technically you are not in a recession but it will feel like it because the unemployment rate will stay high and deficits will not go down. States and municipalities will continue to have problems with their financing. It will feel like it but it may not actually be a technical recession. When I write the newsletter what I'm trying to do is to communicate what I see out there because it does impact how we structure the portfolios. You look at where the 10 year treasury yield is, I think the last time I was here it was about a 3.7%, now we are sub 3% on the 10 year. Today the two year treasury went to an all time low of .58%. The good news from the stock market stand point is that there aren't very many attractive alternatives to stocks. Longer Investments monthly report. Page one shows the stock component is about 43% and you have a 3.2% dividend yield on the stock part of the portfolio. That includes a lot of growth stocks like Cisco and others that pay no dividend but you still have a very high component of very strong dividend pairs. This is, in our opinion, the safest way to be able to stay in the equity gain but be in there with a little bit of a more defensive posture than just being strictly out there for growth. You have higher than 10 year treasury yield on the stock part of the portfolio. Page two international stocks are at 5% of total portfolio. Today we don't have to have that authorization to be over 50% because your total equities are below that amount. The investment grade bond fund yields 5.3%, the preferred debts that you own yield 6.4%, you have a couple cooperates in there. This treasury that's a 4% due 2018, we have been purchasing that to hold reserves and every time it got close to a 3.9% or 3.8% we would add to it. That part of your portfolio is actually 16.5% of total portfolio but it was the best way that we could access the treasury market and really keep the maturity moderate but also to offset the reinvestment risk. A lot of portfolios right now are experiencing reinvestment risks where they have a 5% coupon rolling off and their reinvestment is 2%. This has been a real good addition to the bond portfolio because it's a high coupon treasury but it's been easy to monitor also and a fairly moderate maturity, not quit 10 years. This bond today is trading at over 110. While you have made 4% income on the bond we've also made 7% on price appreciation. That's wonderful and we love it when that happens but this is something, this is something that we have discussed at meetings in the past, that can turn around to be the price risk on bonds should interest rates go higher. Bonds have the ability to fluctuate in the market for a given change in interest rates. Right now we are experiencing the good side of that in that the bonds you own have gone up in price while interest Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 7 of 10 rates have gone down. That is one of the reasons we adhere to a fairly moderate maturity structure because when that turns you will have income less the price change with rising interest rates. When you are at a 7% expected return and now you have a 10 year treasury yield that is sub 3% and 50% of your portfolio in a balanced portfolio account is invested in bonds. Even though your bonds yield about 4.8% the fact of the matter is as far as what your portfolio value is you're priced at 2.7% or whatever the current rates are. The price appreciation that we have experienced on those bonds is embedded in performance at this point. Even though we're not out there buying the 10 year for you at 2.9% your bonds are priced as if we are because market value is already reflected into performance. Going forward when you look at 50% of the portfolio able to earn 3% in treasury equivalents then that gives you an even higher hurdle that you have to be able to achieve on the equity side. To get to 7% it requires that you get a consistent average annual return of 12% or so on the equity side of the portfolio. I don't know anyone that is using those assumptions, we aren't. We are running retirement accounts and projections at 7% to 9%. It gets back to that assumption again and where did the 7% jump come from, because it was 6%. We still haven't amended the policy because we don't have an answer for that. I can't sign on to that because I can't realistically with the market the way it is and with interest rates where they are, you can't run those numbers. A lot of it is because of where the fixed income market is, not necessarily the stock market. Even if you don't hold a 10 year treasury anything that you have that's investment grade that is in the fixed income market trades on a spread relative to the 10 year. You've a got an investment grade bond fund that yields 5.3% if the 10 year goes to 5% that bond fund is not going to be yielding 5.3% it's probably going to yielding 6.5%. In fixed income the 10 year is the bench mark. We just have to be aware of that as we look at the portfolio and look at the projections and everything going forward that this is a historically low yield on the 10 year and on the two year. Page four we have updated it for July 13th. Equities are about 42%. We have been using some hedges in the equity part of the portfolio so that we have been able to minimize some of the volatility on the equity side but still be able to continue to get the dividend yield on the stocks. Page six the overall portfolio value the most recent is the 7.8 million, overall income is $257,000 and that equates to 3.5% on total portfolio. The income yield on your total account is higher than a 10 year even though you have approximately a 50% growth component. That is because we have tried to keep the income high off of the stock part of the portfolio. Page seven realized gains year to date are $194,000. Net income is what you received in dividends and interest, $95,000. Page eight the fixed income part of the portfolio is broken down in terms of weighted average yield to maturity which is 4.7% and you weighted average maturity in years is 6.8 years. Your income is much higher than a comparable maturity treasury would give you. The current five year yield is 1.7%. You are a little bit longer in terms of maturity but instead of the 1.7% you are Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 8 of 10 at 4.7%. You don't have many bonds maturing in the next year or so just 6.8% so you don't have a lot of reinvestment risk. Page nine shows the contributions and distributions year to date and there have been a few litigation recovers and $540,000 in terms of distribution. Page 10 shows performance through June 301h the stock part of the portfolio was down 6.4%, comparable S&P was down between 7.6% on the cash index and 6.7% on the index with compounded dividends. The international holdings are down 11.8%. As bad as the US market was during the first half of the year the international was worse. China is down about 25% and the EAFE index which includes Europe and Asia is down 14.7%. You have out performed on the international holdings and a lot of that had to do with being under weight Europe. Europe was hit pretty hard. Then the fixed income the bond part is up 6.3% and that's the price appreciation plus the income that you received so that the bonds have offset the weakness in the stock side of the portfolio. It's practically unchanged for the first half of the year. We have a lot coming up in the second half of the year and all eyes are on Washington. We have a lot in terms of the election results. I think it will be a fairly high charged election season. I expect there will be continued volatility as we get into the second half and the fourth quarter. A discussion followed on how the election might affect the stock market. Paul Becker: The discount rate was discussed during the first quarter at the Pension Review Board meeting in Little Rock. Eldon can attest to the fact that I was very direct about what my personal opinion was. They were instructed to look at a five year average. That discount should be reduced. At least we will get a better picture of where we are at. Eldon Roberts: It took forever to get to that point. We've asked how did you arrive at this number and we could never get any answers. Paul brought it to their attention at the meeting and I think some more people felt the same way. There was enough pressure that they are going to try to look at that again and maybe give you some numbers that you can live with or at least understand. They couldn't tell us how they come up with that number. There is beginning to be a lot of pressure put on the people that are the big players about this insurance tumback money and how it is being distributed because there has not been any rhyme or reason as to how that's being passed out equitably and people are on their case. The formulas are so cloudy and are designed to be that way. They can't answer why it went from 6% to 7%. There is enough light being put on them now that they are going back to the drawing board and try to figure out something that everyone can understand and began to see is it really fair or is it not fair. I don't know if that will be good for us or bad. I think it might be better for us but I'm not sure of that. Elaine Longer: I think that's a good thing. This is going on not just in Arkansas or Fayetteville but there has been a lot written about the unfunded pension liabilities nationally and a lot of them are at 8% assumptions. The frightening thing about that is if they go to a realistic assumption of return it really increases what those unfunded liabilities are which are already at a very high level. The states and municipalities I think are facing this all across the country. Longer Investments 2nd Quarter 2010 report: A copy was given to the Board. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 9 of 10 Longer Investments Privacy Notice: A copy was given to the Board. The Longer View: A copy was given to the Board. Informational 2010 Meeting Schedule: A copy was given to the Board. Other Business Frank Johnson: The policy that requires us to give our investment objectives or strategies is that biannually or how often is that? My question had to do with when was the last time we actually did it. Kit Williams: February of 2009 was the last time the policy was officially accepted and approved. Eldon Roberts: That is when we all signed it. Frank Johnson: Semi-annually, ok. So we are within our policy. Eldon Roberts: Elaine has been very good about bringing it to our attention when we need to tweak this. Sondra Smith: It also changes if the board members change. Kit Williams: But it's the same policy. You all can change your investment philosophy or policy at any meeting. Frank Johnson: To be inline with our own policies I have been looking at the investment objectives and any challenges that we have as we move forward especially in the second half of the year to meet these objectives. I'm not suggesting a change at all especially if we have consultation to tell us other wise. I thought it would be beneficial for us to have some discussion about it for the record. Paul Becker: What you have done with the investment policy is you have set the broad spectrum up to 50% equities. If she gets to the point that she goes over that she brings it to your attention. Unless you have a major investment strategy decision or change for her, I would think you would want to keep the same policy. If you want to get more conservative and give that direction to her certainly that is within your prevue but that is more or less the frame work of it. Eldon Roberts: When is the next meeting? Sondra Smith: It's October 21st Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 15, 2010 Page 10 of 10 Meeting Adjourned at 3:30 PM