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HomeMy WebLinkAbout2010-10-21 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 October 21, 2010 Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page l of 12 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held at 3:00 PM on October 21, 2010 in Room 326 of the City Administration Building Mayor Jordan called the meeting to order. Present: Jerry Friend, Tim Helder, Melvin Stanley, Eldon Roberts, Mayor Jordan, Kit Williams, City Attorney, Sondra Smith, City Clerk, Paul Becker, Finance and Internal Services Director, and Kim Cooper, Longer Investments. Frank Johnson was absent Approval of the Minutes: Approval of the July 15, 2010 meeting minutes Eldon Roberts moved to approve the July 15, 2010 Policemen's Pension and Relief Fund Board of Trustees meeting minutes. Melvin Stanley seconded the motion. Upon roll call the motion passed 6-0. Frank Johnson was absent. Pension List Changes: Glen Riggins deceased in August — Surviving spouse — Bonnie Riggins Sondra Smith: Mr. Riggins deceased in August. We have a revised list for September and October removing him and adding his spouse. Approval of the Pension List: Re -approval of the September and October, 2010 pension list. Glen Riggins deceased. Approval of the November and December, 2010 Pension List Approval of the January, 2011 Pension List Eldon Roberts moved to approve the Pension Lists. Tim Helder seconded the motion. Upon roll call the motion passed 6-0. Frank Johnson was absent. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 2 of 12 New Business: Bonnie Riggins affidavit was received Sondra Smith: We received Ms. Riggins affidavit stating she is eligible to draw the pension. Sent funeral expense check to Glen Riggins estate Sondra Smith: There is a benefit amount that goes to the pensioner's estate for $200. The check was sent to Mr. Riggins estate. Revenue Expense Report for August 31 and September 30 Sondra Smith: Trish Leach does this report for the board. August 2010 shows a market value of $8,074,655.67. The market value for September 30'h is $8,275.970.61. Your market value went up a little bit. Your book value stayed about the same. 2010 Turnback Distribution Sondra Smith: I completed a spreadsheet for the board to show you the distribution amount for 2010. We went back to 2002 so you can see the difference in the distribution amount over the years. There were two people that deceased, Anna Mary Dennis and Forrest Lawson. Their turnback goes into your fund. December 31, 2009 Actuarial Valuation A copy was emailed to the board. Sondra Smith: That is the very latest actuarial report where they changed the assumption numbers from 7% to 5%, which caused the unfunded liability to increase. Page 11 is the short test. Page 10 shows the unfunded actuarial liability is now $13,561,667. It was $9,637,071 in 2008. Paul Becker: The reason for the big jump in those unfunded liabilities is because of the discount rate going from 7% to 5% but that is much more realistic to where you are. Sondra Smith: It shows that you are only 39.7% funded because of that change. Kit Williams: That's obviously an assumption. I will say the historic record of getting 6%, if Elaine can continue to do that, it would be a better number than what the actuary is giving you. Sondra Smith: The report is normally only done every two years. There was a special report done in 2008. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 3 of 12 Paul Becker: This is an extra one. This is the second one in a row they did because of the very bad investment returns from the previous year. I don't know if they plan to do that in the future or not. Sondra Smith: They should go back to every other year unless they decide to do it yearly. Discussion Items: LOPFI Sondra Smith: I was asked to keep the LOPFI discussion on the agenda. We can take it off anytime you choose. Kit Williams: The good news is they didn't come to tell you that you are a distressed bankrupt fund like they did with the Fire. Mayor Jordan: I don't want this pension system to get into what I'm seeing with the Fire. Eldon you are right in thinking we are going to get 6% and we are going to come out of this thing. There are no guarantees in that so you may need to take a small reduction in benefits to keep this solid. I can't do too much about what's happened with the Fire Pension but we can do something here. I'm not saying you need to do that. Tim Helder: It always needs to be on the table. It's my understanding through all the discussions that there is really no precedence set that we can reduce benefits. What we are going to have to do at some point is make a determination if we are going to move in that direction. Then I guess the courts are going to decide this matter. Kit Williams: Then one of the beneficiaries would need to say "that's wrong I'm entitled to my full benefit, you can't reduce it even 5% or 10%." Then we would have a case where the judge could tell us. Until that happens I don't know how we get to court for the judge to tell us. Jerry Friend: What if we did it and no one sued? Kit Williams: We wouldn't get an answer. Jerry Friend: In twenty years someone could still sue. Kit Williams: I think they can go back three years. They can't go back all the way. In fact if a decision was made they might be cut off if they wait too long on the initial decision. I would rather have it done immediately. Jerry Friend: I would too. Kit Williams: So that we could get a quick decision. It would have to go to the Supreme Court to get a final decision on how that should be interpreted. Then it won't necessarily be a final decision because legislature can always change the statute. I could be arguing before the Supreme Court and it would be mute. There is no simple answer here. Fortunately you all are in Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 4 of 12 significantly better shape than the Fire. Page eight shows the ending market and in 2005 you were at almost $11 million, then you went down to $10.5 million, you didn't get below $10 million until 2008 where you went to $8 million. Now you are back up a little bit. The last couple years you have scrambled back up while still paying benefits and you are at $8.3 million. You're not bleeding like the Fire Pension is bleeding. No matter what the market does there's virtually no way that it can pull them out. You all certainly have more time. Mayor Jordan: Absolutely. Eldon Roberts: That's what I relish is the fact that we have more time. Melvin Stanley: When the time comes that we have to cross that bridge and there has been no precedence set, what will our guidelines be for reduction of benefits? Can we write up a contract between all of us that we reduce benefits for twelve months? Eldon Roberts: We will have to look at it. Kit Williams: You would certainly be able to go back in and increase them in the future if your fund could pass a cash flow method again. Tim Helder: You wouldn't be able to do the reverse like we did on the COLA, where we set a five year limit and at that time it came back and we would have to vote on it again. In your thinking would be able to do the same thing with the reduction and put a time frame on it to revisit? Kit Williams: We are just shooting in the dark here. There is no procedure set forth in the ordinance. It just says if it is going to go bankrupt then you can prorate it. It doesn't say you can prorate for a certain period of time or not. First you would want to choose an amount that wouldn't be anymore than you would absolutely need. In your case you are probably talking around 10% and not 20% or 22% like the Fire. If you under shot it and the fund starts growing and you are not paying out that much and you are getting more in then you would certainly be able to go back to the board and use the standard method that you've used in the past to have a COLA or increase benefits. Eldon Roberts: If we, as the local pension board, decide to reduce benefits since there is no law telling us we can do that, why can't we do it for a two year period and not have to jump through all the hoops of a cash flow study? Who's to say we are going to get that passed. Kit Williams: That would be possible. The only real limitation you have on doing that is that the part of the over all statute, the section that I think gives you the most power to do this, talks about prorating the benefits. You would have to do it as a percentage rather than a certain amount. You could just say everybody is going to lose this amount. You would have to do a proration but it is possible you could do it just like you did with a COLA especially if you could get an agreement from the other members. Even though this is governed by the statute if everyone agrees then no one would be there to challenge it. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 5 of 12 Melvin Stanley: That would be the fear of other pensioners and me is that if we did reduce benefits even if the fund came back to $20,000,000 we might never be able to return to those benefits because we couldn't get a vote to okay it. Kit Williams: That's possible too. I think you would get a vote but to ensure that it would not be a problem I think we might go the other way. Tim Helder: We are setting a precedence either way. Kit Williams: Part of it is because I think you have the inherent power as a board to try to keep your trust fund from going broke. If you have that inherent power that's more than just the statutory part therefore you have more options. Tim Helder: In your opinion if we did word it like we did the COLA, beginning January 2011 a reduction of benefits of 5% or 10% for a certain amount of time and at such time it reverts back to what it was before we had a reduction. Then we could visit it again and if we are still in need of having a reduction we could vote it back in. Paul Becker: Legally you don't know where you are. Tim Helder: If we do any kind of reduction the odds are we are going to get sued by somebody. Mayor Jordan: If you let the thing go in the ground you are probably going to get sued anyway. Tim Helder: I'm not afraid of being sued. I'm just trying to figure out what's the best way to react as a board to be responsible to the other pensioners. Kit Williams: That would also possibly restrict the amount of any attorney's fees that would be allowed to the other side because it would be a more limited reduction. The reduction would not only be a fairly small percentage but a limited amount of time. Jerry Friend: He could say I saved you for forty years. Now he can only say I saved you for three years. Kit Williams: You might want it to be a three year term instead of five and then see where you are at. Jerry Friend: I like that idea. Paul Becker: Let's not forget that the PRB is actually the overseer of all these pension plans. If in fact you lowered benefits and they took exception to it you might automatically end up in court. What you would have to do if you did it, is send it down to them and tell them what you are doing. They have one big hold on us. They can withhold premium tax and they have the ability to do that. Jerry Friend: Why would they not want us to lower? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 6 of 12 Paul Becker: I'm speculating I have no idea. Kit Williams: What right do they have to withhold premium tax? Eldon Roberts: Anytime we are out of compliance with their rules and regulations that is the big stick they hold over you. Paul Becker: Anytime we are out of compliance under their recommendation they have the ability to withhold. Kit Williams: Then we would have to sue them. Eldon Roberts: Just like if we were granted benefit increases without their blessing they can withhold it. Paul Becker: All I'm saying is by lowering the benefits you might automatically have a controversy. Kit Williams: If they didn't pay us what they should be paying us that would surely be a controversy. Eldon Roberts: We are not there yet. Mayor Jordan: We are just opening it up for discussion. Kit Williams: That is something to think about. I think the short term thing makes a lot of sense. Melvin Stanley: What Sondra said about the LOPFI discussion is probably wasted ink. I was at the meeting Monday. Kit Williams: It's more expensive to go to LOPFI than to pay the amount they were short. Isn't that what it looked like Paul? When he did his figures and said this is how much it costs to go to LOPFL If they just lost money and ran the bank down and then the City paid, it looked like the City paying cash into the fund was less than if we sent it to LOPFI. Paul Becker: It was a graduated 15 year schedule if they sent it to LOPFI. It started at $163,000 and graduated to almost $600,000. If you looked at the bottom line of both numbers they were pretty close. Melvin Stanley: Then it was $250,000 for 30 years. Paul Becker: I think it was $325,000 or $350,000 over a 15 year period or if it was send to LOPFI it was a graduated schedule. If you looked at the bottom line of the numbers actually they were not that far apart over time. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 7 of 12 Kit Williams: They made the costs to go into LOPFI much more because they have reduced that to 5% so they are going to assume it is only going to grow at 5% and that means our cost going into LOPFI just zoomed up. Now they are predicting a much bigger deficient. Melvin Stanley: I wouldn't assume that the board's attitude toward us if we got in this position would be much different than it would be towards the fire department. There was not a whole lot of sympathy that I saw in the room the other day. I think we are pretty much on our own. Paul Becker: That's probably true but the numbers for you would be a lot lower. You wouldn't have to make as deep a cut if you did something. Eldon Roberts: When Carreiro came up here a year and a half ago and we had a joint meeting with Fire and Police it came out in the newspaper that for $150,000 a year the police pension could be moved to LOPFI with no benefit reductions and no COLA but our benefits would be etched in stone. Kit Williams: But we would be on the hook for it. Eldon Roberts: No, I understand that but $150,000 would move us to LOPFI, no benefit decreases to our beneficiaries, no COLA from now on, and we would be good to go from now on. We wouldn't have all these discussions about going broke. I didn't think that sounded too bad. Since that time we have got a lot more financially sound. Kit Williams: It made it look worse even though it wasn't worse. Sondra Smith: The feeling I got from the Council members, that were at the meeting Monday night, was if the Fire Pension reduces benefits, then they can come and talk to them but until they reduce benefits they are not really interested. Paul Becker: He said $150,000 and that was off the top of his head under pressure. They are going around to six funds that they feel are in jeopardy of going defunct over the next ten to fifteen years so they did specialized studies. They did two hundred simulations in their sensitivity analysis so they have a 90% confidence level. They put a lot of time and effort into that calculation. To do the same for you would be very costly and they did that because they were instructed to by the board. To come up with a definitive number like you are talking about would probably be pretty expensive. Sondra Smith: That $150,000 isn't a guaranteed number for the City. Eldon Roberts: That's right I understand that too. Paul Becker: They really have to do a calculation. Kit Williams: That was under the 7% instead of 5%. That number would go up since they are assuming less growth now. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 8 of 12 Jerry Friend: Kit you said a few meetings ago, since we are not in dire straights right now it would be better to let some other entity sue or lower their benefits and make sure it is going to work. Kit Williams: It's much more incumbent upon the Fire Pension to do that because theirs is in very serious shape. Other cities could do it too. Eldon Roberts: Maybe other cities will do it ahead of ours. Jerry Friend: I know Little Rock is in bad shape. Eldon Roberts: Little Rock PD is supposedly in worse shape than Fayetteville Fire. Jerry Friend: I don't want us to freeze and say we are not going to do it. Sondra Smith: I serve on the Arkansas Municipal League Public Safety Commission and we took a vote to look at the premium tax and see if that distribution needs to be changed. They have put that forward. Kit Williams: That's not going to be enough to save the pensions. Sondra Smith: That is not going to be enough but may help a little bit. It may help some cities and it will hurt some cities so they may not want to do it at all. Kit Williams: You are at $8.3 million now so you are not in desperate straights where you have to make a quick decision. Eldon Roberts: If we could get something done on the insurance turnback and we were to get a larger amount that's certainly helping tip the scales in our favor. It would take a combination of things to pull us out of this. Longer Investments: Longer Investments monthly report. Kim Cooper: Page one shows the September 30th portfolio appraisal. Your domestic equities are 51.4%. Your International equities are 4%. Your total equities as of the end of September were 55.4%. Tim Helder made a motion to approve the equity overage. Melvin Stanley seconded the motion. Upon roll call the motion passed 5-0. Frank Johnson was absent. Sondra Smith was absent during the vote. Eldon Roberts: What is our limit, 50%? Kim Cooper: Fifty is your limit but we have a 10% variance with a motion. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 9 of 12 Kit Williams: That's because you think the market is going up so you want to stay invested. Kim Cooper: Continuing on page one the dividend yield on your stocks is 3.35%. That yield exceeds what we could get on a ten year treasury by 90 basis points. What we have been doing this year is emphasizing dividend income on the stocks that we have bought to be more defensive, to get more total return, and to boost your over all portfolio return. The dividend yield at 3.35% is higher than we can get in goverment bonds right now or investment grade bonds. Page two you will see the mutual funds fixed. We own an investment grade corporate bond that is yielding 5.08%. We purchased it at 105.77 and it has appreciated up to 113.09. The preferred debt which is AA Plus and A Rated Corporate that is yielding 6.4% and your government bonds are yielding 4.4%. You've got no reinvestment risk in the government bonds they mature in 2016 and 2018. Also in the government bonds we've achieved over 10% in capital appreciation so far this year from the date that we purchased them. Your government agencies are yielding 5.83%. Page three the Central Fund on Canada is a gold and silver fund. It's weighted at 3% of your total portfolio and it also has had a run up of 10% this year as we've had a run up in pricing gold and silver. We have included a portfolio appraisal for October 20th through yesterdays close to show you what the portfolio has done since the end of the quarter. Your stocks since the end of the quarter are up an additional 3% and your total portfolio year to date is now up 8.9%. Page seven is your realized gains and losses. So far this year you've had realized gains of $240,000 and your net income, which is the income from your stock dividends and your bond interest, is $157,000. Mayor Jordan: How would you compare this retirement against what we are seeing with the Fire. Kim Cooper: The investment policies are basically managed the same way. Mayor Jordan: This one is doing relatively better. Kit Williams: This one started at a lower level. Kim Cooper: We've managed this account much longer than we've managed the Fire Pension. Mayor Jordan: Does this one in your estimation look in fairly good shape? Kim Cooper: I can't really comment on the performance that the Fire Pension had prior to the time we started managing it but I can talk about what this fund has done and how its compares to actuarial returns. Mayor Jordan: I'm just trying to compare one to the other. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 10 of 12 Paul Becker: The basic issue is that the Fire Pension has less assets and the Police Pension fund has more assets. Kit Williams: Compared to their liabilities the Police Fund is in better shape. Sondra Smith: Longer Investment has been managing the Police Pension fund a lot longer than the Fire Pension Fund. The Police Pension did not do a DROP but the Fire Pension did a DROP. Eldon Roberts: We don't have one. Paul Becker: As far as your investment philosophy and the investment performance for the Fire and Police Pension. Kim Cooper: The policies are very similar and managed similar. Page eight is a report that shows your fixed income distribution. The current yield to maturity is 4.6%. Your average maturity is 6.2 years. That hasn't changed much since December 2009 even though the rates on the 10 year treasury have dropped about 150 basis points since the end of the year. That has stayed fairly constant. The maturity distribution on the lower page shows that 15% of your bonds mature within the next three years. These are all government and investment grade corporate bonds and we have been very opportunistic during the year by extending maturities and locking in yields as close to 4% as we could. So you have a stable income stream locked in with minimal reinvestment risk. Kit Williams: Compared to what the treasury bills pay over 10 years which is less than 2.5%, they have been getting a lot better returns for you than if you were buying just treasury bills. Kim Cooper: With that 15% that is maturing within the next three years we have full liquidity to tap into higher yields should they appear. In this environment it's all about having a strong balance between securing the income that you have, offsetting the reinvestment risk, and retaining flexibility to address inflation risk. We are postured that way going forward. Page nine is contributions and distributions year to date. So far the contributions have been $245,000. $244,000 was a contribution and the rest of it was securities, litigation, and claims. Your distributions year to date have been $795,000. Kit Williams: So about $500,000 out. Kim Cooper: Right, through September 30tH Paul Becker: That's between contributions and withdraws. That's not accounting for investment earnings. Kim Cooper: Exactly. Kit Williams: This is money realized and money paid. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 11 of 12 Paul Becker: This is just the total dollars contributed which is basically coming from your premium tax, and or your .4 mill and the withdraws from there to pay your expenses. This does not factor in any returns from your actual investments. Kim Cooper: Page 10 is the performance summary. Through September 30th your stocks have achieved about in line with the S&P 500. Your foreign performance is well ahead of what the EAFE or MSCI Europe Australasia Fast East Index, that's the benchmark for foreign performance and it has exceeded that. Bond performance is 11.3% and that compares to the index return year to date at 4.7%. The reason we have that good performance in bonds along with the coupon rates, we also had the capital appreciation in some of the trades that we were able to do on treasuries for you. This brings your year to date total through September 30th to 6.9%. Your annualized return from the inception of your account has been 6.1%. As the discussion about unfunded liabilities proceeds Elaine said it is important to note that this performance at 6.1% has satisfied the actuarial assumption that they had in place when we started managing the account that they said was necessary to meet the goals to fund the retirement for the police officers. The number was set at 6% and the fund has achieved 6.1 % net of all expenses even though you have come through the most traumatic economic and financial market crisis since the 1930's. It's important for the discussion that will follow regarding the unfunded liabilities to see that it's not investment performance related but rather a function of the weight of the distributions or the benefits on the capital base. Without securing additional sources of funding to shore up the pension fund it's not reasonable to assume that investment performance will rite the ship. The performance has achieved the actuarial assumptions since we started managing it back in 1990. Mayor Jordan: Thank you, that explains a lot for me. Eldon Roberts: That 6% that they are talking that we need to obtain, I remember when that came about it's been several years ago. I don't think that took into consideration the benefit increases that we have received. This was talking about at whatever percent it was, it might have been 50% that everybody retired at years ago, before all the benefit increases came about. I think any of us can sit here and see that 6.1 % from here on out is not going to carry us over. I've brought that up before. Had all the benefits remained at 50% or maybe 55%, we had three or four jumps before we got to where we are now. The 6% is talking about what we needed to maintain with those benefit levels. Obviously they have increased significantly. We are not going to be able to invest ourselves out of this financial hole we are in. Kim Cooper: I think they have been using that 6% discount rate for all of your actuarial reports since we have been managing it until last year when they went to 7% and this year when they reduced it to 5%. Paul Becker: This year it has gone to 5%, right. Kit Williams: I think they were using that even when they were looking at raising the benefits. What they didn't possibly factor in there is there was going to be increased raises that you would base your benefits on. I'm impressed that you have been able to get 6%. Eldon Roberts: I am too. That's not where I was going. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 21, 2010 Page 12 of 12 Kit Williams: I know you weren't criticizing. If you all hadn't gotten raises on top of the increased percent I'm sure everything would have been okay but I think the one factor they didn't include is the fact that there were raises given therefore your benefits were increased. Eldon Roberts: Plus the benefit increases that we have received over the years and what they have brought us up to. I was not criticizing. I think that is great that you have earned that for us but that is not going to get us out of the financial hole we are in. Kim Cooper: The bottom of the page shows a reconciliation from the beginning of your account. Your beginning balance, deposits, transfers, withdraws and the income on the account. The total investment return since 1990 has been $6.4 million. There was some discussion in the last minutes about the investment policy. We always include a copy of your investment policy in your packages if there is ever a question about how we are managing the account or if you want to review the policy during the meeting. Eldon Roberts: We leave that up to you all to bring it to our attention if there is something we might need to change that will help you all. Longer Investments 3rd Ouarter 2010 report. A copy of the report was given to the Board Informational: 2011 Meeting Schedule A copy was given to the Board Meeting Adjourned at 3:50 PM