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HomeMy WebLinkAbout2011-04-28 MinutesBoard Members Mayor Jordan Chairman Sondra E. Smith Secretary Marion Doss Position 1/Retired Pete Reagan Position 2/Retired Gene Warford Position 3/Retired Ronnie Wood Position 4/Retired Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page l of 15 A meeting of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees was held at 3:00 PM on April 28, 2011 in Room 326 of the City Administration Building. Mayor Jordan called the meeting to order. Present: Gene Warford, Marion Doss, Ronnie Wood, Sondra Smith, Mayor Jordan, Paul Becker, Kit Williams, and Elaine Longer, Longer Investments. Pete Reagan was absent. Approval of the Minutes: October 18, 2010 Special Meeting Minutes, January 27, 2011 Meeting Minutes and the February 14, 2011 Special Meeting Minutes. Marion Doss: Did we already approve those other two previously? Sondra Smith: No, we are meeting quarterly. In January we didn't approve the October 18th because I didn't know if you needed to approve them or the Council since it was a joint meeting. We decided to have both you and the Council approve them. The Council has approved them. Ronnie Wood moved to approve the October 18, 2010 Special Meeting Minutes, January 27, 2011 Meeting Minutes and the February 14, 2011 Special Meeting Minutes Firemen's Pension and Relief Fund Board of Trustees meeting minutes. Marion Doss seconded the motion. Upon roll call the motion passed 5-0. Pete Reagan was absent. Pension List Changes: None Approval of the Pension List May, June and July 2011 Pension List 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 2 of 15 Ronnie Wood: There are no changes? Sondra Smith: No changes. Marion Doss moved to approve the May, June and July 2011 Pension Lists. Gene Warford seconded the motion. Upon roll call the motion passed 5-0. Pete Reagan was absent. Old Business: Letter to PRB reeardin2 the projected insolvency status of the fund A copy of the letter was given to the Board Sondra Smith: That is a copy of the letter that the Board asked us to draft and send to PRB. We never did get a reply. I called and talked to David Clark and he said they had not sent a reply. Kit Williams: They haven't done anything at the legislature. Sondra Smith: He didn't feel like there was a reply needed. We did get a reply back to the Policemen's Pension. They also sent a letter asking for help with the state law to be able to reduce the benefits and they said no, they choose not to do that, if you all want to pursue talking to state legislatures, you are more than welcome to do that. David Clark said that would probably be best thing for us to do. Kit Williams: That would be two years from now. Sondra Smith: Yes, before it could be done. He said it was so late in the game by the time we sent the letter down. They told the Police Pension they were not interested in doing that. Paul Becker: There were some other changes in the legislation that addressed the Guarantee Fund. The Guarantee Fund will essentially go away. A newly created fund will be available for some additional help. If you remember right now with the Guarantee Fund Fayetteville can't access it because you have to have a one mill levy in place and you could not have a pension benefit increase. That will change over time and make another fund available to help out. However, again I would say the size of that fund is not going to be enough to handle all the problems in the system. Kit Williams: I would question about whether we are going to be able to qualify for that. It's not quiet as draconian as saying you have to be at the 50% level and you have to have a full mill enacted. I wonder if we are even going to be able to qualify for the newer more relaxed standards. Marion Doss: When could we get a copy for you to read and explain to us? 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 3 of 15 Kit Williams: We are going to the Municipal League summer convention and they always talk about all the new laws. After the convention probably at our next meeting we can talk about that. Sondra Smith: I went to a meeting yesterday in Little Rock and Jody Carreiro happened to be there. I told him we had requested PRB to pursue changing state statutes and he mentioned maybe there was some people that he could talk to and see if we couldn't move that along a little bit. Gene Warford: Sounded real promising but don't hold your breath. Marion Doss: I'm curious about that. You always have a little bit of hope. New business: Revenue Expense Report for March 31, 2011 Sondra Smith: That is the report that Trish in Accounting prepares for us. It shows your book value as of March 31, 2011 and your market value at that point in time and it gives a comparison. Paul Becker: The most important thing that it shows is you have a $172,000 loss in the first quarter prior to any mark to market or adjustment for the value of assets. Sondra Smith: If you look at your losses from 2004 all the way across each year you have a loss. Kit Williams: Even though there were a number of years when the stock market was going up. Sondra Smith: Yes, you still have loss in your plan. Parking tokens are available for the Board to use when attending meetings. Please 20 by the Parking office to get Vour tokens. Sondra Smith: Parking management will not be giving hang tags anymore. They will give you tokens to use. I'm not sure where they are going to allow you to park just check with them. You can take a copy of the letter if you want to so they will know that you are on the Board and you're allowed to park. Marion Doss: I was wondering today if we were going to get new hang tags. 2011 Elections: Gene Warford and Ronnie Wood are up for election. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 4 of 15 Do we send ballots reeardless of the number of nominations? Do we need to call a Special Meetine to open the ballots and count the votes? Sondra Smith: Gene Warford and Ronnie Wood are up for election. We received three nominations back. We called all three people and Gene is not willing to serve another term. I asked Kit what we do when we only have two nominations. We only had fourteen people return their nomination forms. The way I'm reading the state statutes you have to do a ballot election in May. Kit Williams: It says "retired members shall elect the retired member or members by secret ballot in May of each year. " You confirmed to me you don't want to run. Gene Warford: I'm not running. Kit Williams: We only have two people for two positions but I think we still have to have a secret ballot because that is what state statute says. Sondra Smith: At one point in time Kit said because we don't have everyone return the nomination forms we need to have a place where people can write in a name on the ballot. They can vote for someone other than who was nominated. The nomination process is not part of state statue. It is this Board's decision to do that. The ballot process is state statue. Ronnie Wood: We have two nominations? Sondra Smith: We had three nominations. The other question I have about the process is we had the same people nominated for both positions. When we put positions on there they are confused about that. You might have one person nominate someone for position 3 and one person nominate the same person for position 4. On the ballot I don't know if you want me to put both names for both positions? Marion Doss: My suggestion would be we do away with nominating for positions. We send a letter and Ronnie Wood and Gene Warford terms are up and we need nominations. We don't nominate for position 3, position 4, position 2, or position 1 we just have the nominations. Kit Williams: In that case if you had three the top two vote getters that would be elected. Marion Doss: I don't see any use in that and it is confusing. We had talked about that the last time because I think someone had done the same thing. Sondra Smith: That is the way the Police Pension does it. They don't want the position numbers. I think you are pretty adamant about having positions numbers. Kit Williams: You would have to have a formal motion. You all can change your procedure as you please. You are empowered by the statute to set up the procedure except for the fact that it has to be a secret written ballot. Apart from that you handle the procedure on how it should be done. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 5 of 15 Marion Doss: I'm all for a secret ballot. I think all your voting should be secret ballot but I would make a motion that we don't nominate for positions we just nominate. Kit Williams: The two that receive the most votes are the ones that would be elected. Sondra Smith: Do not put position numbers on the nomination or the ballot letters, correct? Marion Doss: I would think. Mayor Jordan: The two top vote getters win. Marion Doss: They win the nomination. Kit Williams: The ones that win the election. Right now we are doing the election. The nominations have already been done. Sondra Smith: You don't have to do the nomination process. That's up to you all. The nomination process is something this Board adopted and it is not in the state statutes. The Police Pension does not do the nomination process. They send out a ballot and say these are the people that are eligible. We send out a list of everyone that is eligible and then they pick from the list. That is strictly up to you all. Marion Doss: I was mainly thinking on the nominations we don't say positions that would end that confusion. Kit Williams: Anyone that gets a nomination would then be nominated normally. Even if a person gets a single nomination they would be on the ballot as a nominated person. It's a step the Police don't do. They list everybody that would be eligible. How do they handle it if someone doesn't want to serve? Ronnie Wood: That was my question? We only got three nominations. Marion Doss: I was thinking about the nomination process at least when we get those three names back, Sondra can call. We vote on those two I guess. Ronnie Wood: Process of elimination would be a lot easier if we had nominations. Sondra Smith: It doesn't matter to me. When we get the ballots back if there are five people on the ballot you're going to have them rated first, second, third, fourth, and fifth. We call number one, if he wants to serve good. Number two, if he wants to serve good. If number three doesn't want to serve we go to number four. Kit Williams: You're saying that would work. That is the way they do it. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 6 of 15 Sondra Smith: Yes, it's same thing with nominations. If we send the nominations out we only get two people nominated and one of those people doesn't want to serve. That could have happened this time. We had three nominations, what if two people didn't want to serve? You would have gone through the process again. Marion Doss: The bad news is you get to continue to serve until your replacement is duly elected. Ronnie Wood: My thought was if you have a pretty long list of names. Sondra Smith: It doesn't matter to me. If you all want to continue the nomination process and just leave the positions number off we can do that. Then we will have to leave the position numbers off the ballots too because they are not nominated for positions. Marion Doss: That would be pretty simple. Kit Williams: We don't have to decide the nomination this time because it has already happened. We do need to talk about what to do for the actual election, whether you want them to run for positions. Marion Doss: I don't think so. We should just send a ballot out and put the two names. I do think in the future, if we continue nominations, we should do the same thing and leave the position off completely. I thought we had to have the election no matter what. Kit Williams: We have to have the election. Sondra Smith: We have to send the ballots no matter what. Some people are really confused when they bring the nomination forms in because they think that is their vote. Then, when they get the ballot they think they have already voted. Marion Doss: That would bean argument for just sending out the ballot. Sondra Smith: That is something you can think about. You have a year to think about it before we have to do it again. We will send the ballots out and we will not put position numbers on them if this is passed. Marion Doss made a motion to do away with position numbers on the election ballot. Ronnie Wood seconded the motion. Upon roll call the motion passed 5-0. Pete Reagan was absent. Sondra Smith: I guess we will have to call a special meeting in June to count the ballots because the election has to take place in May. Since we adopted the new election process you've changed from monthly meetings to quarterly meetings and you don't meet again until the end of July. Since the ballots have to now be opened at a meeting then we need to know what date in May we can have a special meeting to open the ballots. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 7 of 15 Kit Williams: The election has to be by secret ballot in May of each year. It says that is how you elect the members. You probably don't have to actually open them up but you would have to hold them in your office until the next meeting. Gene would still be on the Board up until his replacement is elected. We would have a full Board up until the election occurred where the votes were actually counted. If you had a special meeting in the interim either you would be serving or else you could count the ballots at that meeting. I know Sondra doesn't probably want to hold the ballots all that length of time. Sondra Smith: I would prefer not since we had the issue with the ballots last time. Kit Williams: It might be nice if you all would schedule a special meeting just to count the ballots. Mayor Jordan: In May? Kit Williams: Yes. Mayor Jordan: We need to have a special meeting in May to count the ballots. Kit Williams: That would certainly be better for Sondra and it would better for Gene too. A discussion followed on a date to meet in June. Marion Doss: It would be nice if whoever gets elected they have some time to prepare. It's really just a formality to do that. I guess we have voted in the past that the Pension Board has to. Mayor Jordan: We will have a special meeting on May 19th Sondra Smith: I will confirm that with everyone and make sure. I don't know if Pete can be here. Kit Williams: We just have to have a quorum. Longer Investments: Ouarterly Report —1st Ouarter 2011 A cony was given to the Board. Elaine Longer: It has been a wild start to the year. The markets are higher. We've had a lot going on this week because we had the Fed meeting and for the first time ever the Fed Chairman did a press conference following the Fed meeting. It's interesting because the Fed meeting always took place and then it would be a couple weeks before you would get the minutes to the meeting. Basically they said they are going to quit the quantitative easing that they are currently doing in June as they proposed at the start but they will not restrict the repurchasing of security. In other words the balance sheet of the Fed which has swollen because they have been buying the debt of 600 billion since quantitative easing number two started. They are going to continue 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 8 of 15 to hold that level of the debt. The big question was will they be selling off some of that debt and reducing the Feds balance sheet or will they continue to reinvest the proceeds and any maturing securities back into the treasury market? Yesterday the new news was that yes they are going to continue to do that. Even though quantitative easing number two is not going to go forward they are not going to shrink the Feds balance sheet. The first step towards tightening policy will be when they start to shrink the Feds balance sheet and get rid of some of the debt. That's why stocks, gold and silver went up because it still indicates that the Fed is willing to err on the side of loose policy at this point in the economic cycle as opposed to err on a side of moving to a restrictive stance a little bit too soon. Today we got news that the unemployment claims for the most recent weeks recording period jumped back up to 425,000. We had touched a low of about 388,000 so the 425,000 starts to show a little bit of weakness. The first quarter GDP number was reported at 1.8% so we have a sub 2% GDP growth rate for the first quarter. That's just the first number it will be subject to revisions but a lot of the economists were calling for it to be that weak. The important thing is to get any real improvement on unemployment you have to have above a 3% GDP growth rate otherwise you are only growing at the rate that you need to grow at to assimilate the new entrants into the work force and you're not making any headway on reducing the 9% unemployment rate. There is a lot going on in Washington about the big show, which will be, do they raise the debt limit? Kit Williams: Don't they have to raise the debt level? Elaine Longer: They have to but there's going to be some horse trading. We saw a lot of drama recently about the budget for 2011 and what ended up happening is they did approve cuts of what they said were $34 billion. The Republicans were going for $61 billion inline with their commitment to voters in the November election of doing $100 billion, so with the remainder of the year that would prorate it at $61 billion and they settled for $34 billion. The real number was more like $14 billion when you delete the programs that have been funded on paper but the money hadn't been spent so they just crossed that off and the one time only expenditures that make no difference in the continuing spending of the government. When you take out the accounting gimmicks it was really a cut of $14 billion which was nothing. We are generating $4 billion a day in debt so it's less than one half of 1% of spending. As we approach the debt limit argument this becomes a bigger battle because the markets will be on edge about whether or not there is going to be any gains in the shift that might cause a problem with funding our debt. The Republicans have come under a lot of criticism especially the freshman class that ran on this cutting government spending, so they are going to adhere to a more ridged line going into this debt ceiling debate. We are still not out of the woods and it is important to realize that the economy, even though it's improving, is still not out of the woods because when a government is funding at a $1.6 trillion deficit rate that is 10% of GDP. Ten percent of GDP is deficit spending. Then you still have the Federal Reserve coming out, they're not actually going to be buying the debt and putting that $600 billion into market like they have been but they are not going to shrink the size of their balance sheet. You still have a lot of life support systems hooked up to this economy. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 9 of 15 Basically that all means we are still favoring equities over bonds. With the market up 15% last year earnings were up more than the price of stocks went up. As we came into this year even though we came off a strong year the valuation of the market is still relatively cheap by historical measures especially in comparison to what you can get in a 10 year treasury. That's why you see stocks are still going up and they are still responding positively to the earnings we are getting out in the past couple weeks. The risk that we see and the change that we have made that is pretty significant is in the bond market. We have shortened maturities on our bonds. The reason we do that is because we are anticipating that we could have a rising interest rate environment. The importance of that is that bond prices fluctuate for a given change in interest rates. If interest rates go higher the price of ten year bonds drops. The longer the bond in maturity the more volatility there is. In a ten-year treasury, the current ten year that pays only 3.3%, if that interest rate were to go up to 4.3% the price of that bond declines by 8.2%. There is an inverse relationship with bond prices and interest rates. We have moved to a more conservative stance because of our concern about the inflationary impact of Fed policy but also as the economy gains traction, will interest rates increase? As the Fed exits the market of buying treasuries, that are newly issued, will interest rates have to go higher in order to attract other buyers? This is the main reason we have made a significant change by reducing the maturity of your bonds by an average of three years on the total portfolio to get to a more defensive posture. The outlook is still kind of cloudy. Earnings are coming through good especially in the companies where they are multi national and US companies that are positioned in a growth area. The other growth areas in the world the emerging markets, China and India so we are seeing positive earnings growth. The major US Corporations are well positioned to tap into the international growth even though US growth remains sluggish. Page one of the report shows the portfolio appraisal as of March 31'd Page four has an update as of April 27t1. Equities are 48% of total portfolio. The dividend yield on the stocks is 3.2%. This compares to 3.3% on a ten year treasury. What we have done on the stock portfolio since we have come out of this crisis in 2008 is we want to have growth in the portfolio. We think stocks are more attractive relative to bonds but we are still conservatively postured going for income plus growth by using the high dividends stocks for the most part to fill out the equity side of the portfolio. On page five international makes up 5.2% of total portfolio so your total is over 50%. You are 52.5% of total portfolio. We need a vote to approve being over 50%. Equity Overage Gene Warford moved to approve the equity overage. Ronnie Wood seconded the motion. Upon roll call the motion passed 5-0. Pete Reagan was absent. Elaine Longer: The next section of the portfolio you will see we have other income securities. We have incorporated some other income producing securities to give us a higher yield than what we can get in the bond market but they won't have the price sensitivity to inflation that a fixed income or bond security has. We are using this multi asset income fund which is high 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 10 of 15 dividend paying stocks, it has some bonds in it, it has 8% real estate investment trusts and it yields 4.7%. We can't get that in a bond. We also use a utility fund that incorporates a lot of electric and gas utilities that yields 4.1%. That part of the portfolio which represents 5.6% of total it's really funds that holds stocks but it yields 4.5%. We have the investment grade bond fund that we use which is approximately a 5% yield. We still have the preferred debt securities again we have to diversify because these are tied to underlying positions in corporations. It is a debt security but we always make sure that we don't have over 3 to 3.5% exposure to any one issuing entity even though it's AT&T and GE, we are still very cautious on that. That yields 6.3% and then you still have some corporate bonds that yield 7.1%. We have a remaining US Treasury that is a 4% due in 2018 so it is only a seven year maturity. We paid 102 for it and it's currently trading around 108 because now that particular security is selling at about a 2.5% yield to maturity. That yields 4% on our cost. We still have a 6% federal home loan bond that is not callable until 2012 that yields 6%. The final category is the alternative investments and you can see we have about 3.5% of the portfolio in the Central Fund of Canada and that is a fund that holds gold and silver. We have fluctuated between holding 2% and 5% of portfolio in that fund. At this time we are about 3.5%. We have taken some profits on it but it's up 21 % year to date so it's been a nice addition to the portfolio. In terms of cash and cash equivalent your cash is about 5.2% so we have purchasing power in the portfolio and you will see restricted cash of $108,000. It is cash that will go out to the City on May 5th. The total portfolio value is about $5.359 million and the income yield on the total portfolio is 3.5%. Even though you have stocks plus alternatives (gold and silver), plus international stocks and including the other income which is high dividend paying stock funds, your total income plus growth part of your portfolio is approximately 62%. Your real income paying bonds are only about 40% but you still have an income yield on the total portfolio that would exceed if you had all of your investments in a 10 year treasury. That's what we are trying to do is to maintain income returns, liquidity, and still have the growth component. The next page realized gains year to date are $360,000. That is gains we have taken on stock or bond positions that we have sold. The net income is dividend and interest income of about $169,000 year to date. Paul Becker: Elaine, on the year to date we just went over, is that correct? It says 9-1-2010 through 3-31-2011. Elaine Longer: I'm sorry that is a typo. Paul Becker: That's first quarter right. It should be 1-1-2011. Elaine Longer: We will send out a revised copy of that. Page eight is a summary of the bond portfolio. The average yield to maturity on your bonds is about 4.7% compared to at the end of the year 4.8%. The average maturity has declined by almost three years to 7 years from an almost ten year average maturity at year end. We don't have as much price volatility in the portfolio but we have been able to retain the same income yield. To give you a comparison you have 4.7% yield in a seven year maturity. The ten year is a 3.3% in a ten year maturity. You have a high income locked in a conservative posture. 5.9% of total bonds mature within three years. In our opinion that's as good as cash because we can convert anything that is a short 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 11 of 15 maturity bond to cash and next day settlement. If interest rates increase we have the liquidity in the portfolio to be able to tap into that and buy bonds at a higher yield. I feel real good about where we stand as far as the fixed income is concerned. Last year we achieved above average rates on fixed income because it was a declining interest rate environment. If you go to the next page and look at the returns for 2010 you will see that equities were up 12.5%. International stocks were up 9.4% and the fixed income part of the portfolio was up 8%. On the other report the income part of that return was 4.8% but the total return was 8% because we have price appreciation with declining interest rates. We've harvested those gains, we sold the longer bonds that we had that gave us outsized return, so now we have battened down the hatches and are more conservative. Last year total return was 11.5%. If you look at the returns this year through 4-27-11 stocks were up 6.4% and International is 2.1%. International was hit when Japan was hit because Japan makes up 22% of the international index. Japan went down about 20% in a very brief time frame because of the earth quake and the tsunami. Fixed income is up 1% year to date so total return is 4.5%. If you look you have fully recovered from the disaster that took place in 2008. You recovered around June or so of last year. Now we are back to getting into the compounding returns the 6% that is the actuary assumption. The index returns year to date is listed below. S&P is up about 7.7%. In a market like this where it is strong and a lot of money is going into materials, the durable goods, and some of those that pay a high dividend will lag a little bit. If the market pulls back we will be out performing because when you are in the high dividend stocks that are more conservative they don't have as much volatility. Page 10 shows from inception to date the distributions and contributions that have taken place in the fund. The total contributions have been $1.1 million and the total distributions have been $9.1 million. The net distributions have been approximately $8 million since 2002. The next page is the asset reconciliation where we take those numbers and basically put them in a column so that you can see beginning value, additions to the plan, distributions of $9.1 million, net income, realized and unrealized gains. Of your total return, about $1.72 million has come from the fixed income side from income. Where as about $1.7 million has also come from the growth side of the portfolio. Your total investment return has been $3.4 million. We have been working on revising the investment policy. We are revising all of our policies. It's something that needs to be done because SEC Rules and Regulations have changed a lot in the past couple of years. For the Police and Fire Fund we consulted with a private law firm to make sure that what is in your policy also adheres to the laws that we need to be aware of in terms of public money. This is your amended or updated policy. You can keep it and take a look at it and have time to review it. Nothing changes in terms of your asset allocation except we include the plus or minus 10% on the ranges above and below the range so that if we are in the middle of a quarter and we are out of the range we are still in line with your policy. What we have always asked for approval has been put into the policy. Since we are registered with the SEC when they come in to audit you they show up at the door and everything is available to them. They will go straight to the policy and look at the portfolios to make sure you are in compliance with the policy. This takes what we do at each meeting and puts it into the investment policy. There is nothing that changes in terms of that. It does still include options for hedging purposes. The only thing it restricts is not doing naked options which we never do that. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 12 of 15 If we are using options we are using them to hedge an underlying position. No leveraging without prior approval and your securities are not lent out without your approval. That doesn't happen because you're held in a custody trust account. If you were held in a brokerage account and it was a margin account or had margin capabilities they would be able to loan out securities without your prior approval. With your custody arrangement at Northern Trust that doesn't happen. As far as the things that would be restricted you are in compliance with all the facts. The other thing that has been in the news and I include this for you because I think it's really fascinating. The Standard and Poor's rating agency has put America's debt on credit watch negative. That means we have not lost our Triple A Credit raring but they have reviewed our financial situation and as far as they are concerned the outlook has switched to negative. That typically means when they put a creditor or an issuing entity, whether it's a corporation, municipal, or a sovereign debt on credit watch negative typically 33% get down graded. This is a fascinating article because it profiles their concerns. What I found so interesting about this is they are laying out the importance of the debt being dealt with by 2013, then over laying the political and possibility of that taking place. They give a lot of very interesting data, economic projections and basically saying that even under their most optimistic scenario they don't see our debt as a percent of GDP going down from 10% below 8%, which is still very high by historical standards. It's an article to read. I read this stuff all the time but this was a very good piece the way it was put together. I think anyone who is vested with fiduciary responsibility over a fund it is important to be aware of that. We won't know for awhile if it means that we will be down graded but it was something that is really historical to even be considered to be down graded. We talk about the price earnings multiple or valuation of the market relative to historical averages and you can see the S&P 500 at the current price is about 13.5 time earnings. We have written in our prior new letters that compares to about 15 times earnings historically. This chart over lays inflations so when you have had an inflation between 1% and 3% which is where we are now according to the CPI, the average earnings multiple has been 17 3/4. Even if you go higher and say what if inflation pops up to 3 to 5%, the stock market is still under valued relative to the average price earnings multiple in that type of inflationary environment. This is why we try to incorporate the growth a little bit over the 50%. I can go through a list of blue chip stocks that pay higher than 10 year treasury yield. In fact this week we have had dividend increases from Proctor and Gamble, Johnson and Johnson, IBM, Chevron, Exxon and Mobile. There's so much more value, I feel so much better shopping over there than the fixed income market today. The next report shows the federal surplus and deficit as a percent of GDP. You can see a picture paints a thousand words. You can see when they're talking about how alarming 10% of GDP for a debt level is. This chart goes back to 1947. You can see that this is clearly out of line with historical averages. The last report is something that concerns economists and it's not just the unemployment number that is so high right now. The duration of unemployment is very important because in today's world skills change very quickly, the work force and technology changes. The technology is changing so rapidly that as people stay out of the workforce for extended periods of time they become less employable. This is an important chart because when you see additional applications for unemployment being 425,000 we still haven't gotten to the point where we can start chiseling away at this entrenched unemployment that we are dealing with. That's why you are seeing the Federal Reserve err on the side of caution. They would much rather stay easy too long than to become tight too soon. They have a dual mandate, they 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 13 of 15 have inflation but they also have job growth. They are trying to juggle the two and it's an interesting dance to watch but I'm a little bit concerned that the inflation side is going to be playing second fiddle to the job growth side, especially as we move into 2012. We have become more cautious about our outlook on interest rates thinking that there is risk and that we could see rising rates. Are there any questions? Paul Becker: According to this chart the average duration of an individual on unemployment is about 37 '/z weeks right now? Elaine Longer: Yes. Paul Becker: Before this latest crash, the highest one was about 21. Elaine Longer: Yes, it's almost double what you can see were prior peaks during economic weakness. Kit Williams: What risk do you think we have going into stagnation like what we had in the seventies or eighties? Elaine Longer: There is always that risk because you look at how much stimulus is in the economy from the government between the Federal Reserve policy of quantitative easing but also running a deficit of 10% of GDP which is highly simulative. Neither one of those are sustainable. I would much rather see a first quarter GDP number of 4% thinking that some of these props are going to have to go by the way side than to see a GDP number of 1.8 knowing that some of the juice is going to have to be taken out of system. There is always that risk and I think we are still at risk but there could be a double dip. I think that's why the Federal Reserve is going to err on the side of caution because they would hate to start into a timing mode and then be blamed for some kind of a negative GDP number out there in the fourth quarter. Everybody is still cautious about whether or not this is really a self sustaining economic recovery at this point. The economy is still hooked up to the life support system and the Fed took a baby step to say we are not going to be buying new securities but we are not going to shrink the balance sheet. The next step will be when the Fed feels confident enough to shrink the balance sheet. We are not there. They actually said in their statement that interest rates will stay low for an extended period of time. Now everyone has taken off any kind of a rate increase for 2011. That moves out to 2012. We are still not out of the woods and subject to say an energy spike or that type of thing that could come out of left field. Still the economy and the consumer is not really up and running on their own. Our stance is we are balanced across all kinds of asset classes, treasuries, agencies, corporate debt, high income securities, preferred debt, gold and silver, stocks, international and the theme across all of those assets is quality, quality, quality. We have to participate, you can't meet your funding requirements sitting in cash. There is no such thing as a risk free asset out there. Bonds are not risk free. Bonds have a lot of price risk when you are starting at 3.3% interest rate on the 10 year. All you can do is be diversified and really emphasis quality. That is what the portfolio structure is structured to achieve. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 14 of 15 Marion Doss: Elaine, I think you are doing a real good job. Do you still issue the warning that this pension fund can't sustain itself? Elaine Longer: I looked back to 2002 and looked at the notes for that meeting where we weren't hired yet as the portfolio manager but we had done a review of the investments and at that point the fund was 40% unfunded. I made the comment that you can't get there from here on investment return because you would have had to have a 40% return on investment to get to the point where you are clicking along at 6% to maintain funding. You just can't get there. At that time I think there were funds that were expected to come in from an insurance tumback. At that time I said "it takes some sort of contribution to capital or relief of the demands on that capital which is the distribution rate." You can't get there on investment return because investment return is calculated by looking at the average annual rate of return on stocks and the average annual rate of return on the benchmark 10 year yield. Then you weight that 50/50 and that gives you the expected return over a long term time period. The way expected return is calculated is on historical returns that have a pretty good longevity as far as being able to be achieved. To think that a fund like this could get a 40% pop and then continue to go 6%, it just won't happen. It's a function of the contributions that are coming in and the distributions that are going out. Marion Doss: I thought so, thank you. Mayor Jordan: What got you in this spot won't get you where you need to be. Elaine Longer: I get the DVD's from the city so we can see the parts of the meetings that we don't participate in and I know there is a real struggle going on. I also know that there is a problem with even looking at reducing benefits as far as the Attorney General opinion. I think back to 2002 and I don't go back as far with the Fire Pension as I do with the Police, that goes back to 1989. I don't know where it all was when we came in but even at that point there was quite an unfunded liability. I think the benefit increases came in 1999 and then you hit a three year bear market. It was the worst consecutive bear market since 1938 to 1942. When you are looking at compound annual 6% a year as your benchmark, for instance the market was down 40% during that three year period on the S&P 500, the NASDAQ was down about 80%. The Policemen were down total negative decline was 5% but still it took us a while to get back because even though they declined by 5% the three years they were suppose to make 18%, six percent a year for three years. It was a real victory they were only down by 5% but you still have a 23% gap between what the actuary rate of return should have been during that time period and what they actually experienced. Then it takes time to recover that gap. Over a long course of time they are 6.3% compound annual verses a 6% actuary but I don't know what your long term history is because we only go back to 2002. When you are looking at pension funds that have fiduciary responsibilities such as this you can't go much out of line with S&P type stocks, treasury and investment grade bonds, so you are limited in terms of your asset classes. You can't hope to get a 40% pop. What I would have to do to even get that would be to risk a 40% decline. That's the thing from an investment stand point, it can't close the gap. Marion Doss: I think we are all risk adverse. That's how I am on the pension fund. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 28, 2011 Page 15 of 15 Elaine Longer: You have to be because you are held by the prudent expert rule when you are a fiduciary of a public pension fund like this. It's an even higher level of responsibility than a prudent rule. Yes, you must always overlay the security as well as the fact that you have to achieve growth and income. Paul Becker: A summary of your remarks is earnings are not going to solve this problem. Elaine Longer: No, I said it 2002 and I still say it is a function of the contributions coming into the fund and the distributions going out. In 2002 there was the expectation that there would be more capital coming into the fund. I'm not a parry to that discussion so I don't know what happened there but I do remember that was in the discussion at that time. Kit Williams: It was not enough to really make that big of a difference. Marion Doss: I think we got additional money for two years, wasn't it Kit? Kit Williams: Something like that and it really wasn't enough to turn it around. Marion Doss: You may have to repeat that, we will probably have a new member on the Pension Board at the next meeting. Elaine Longer: Okay. Marion Doss: Thank you very much. 2011 Meefine Schedule A copy was given to the Board. Meeting adjourned at 4:15 p.m. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316