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HomeMy WebLinkAbout2011-07-28 MinutesBoard Members Mayor Jordan Chairman Sondra E. Smith Secretary Marion Doss Position 1/Retired Pete Reagan Position 2/Retired Dennis Mullen Position 3/Retired Ronnie Wood Position 4/Retired Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 28, 2011 Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes July 28, 2011 Page l of 23 A meeting of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees was held at 3:00 PM on July 28, 2011 in Room 326 of the City Administration Building. Mayor Jordan called the meeting to order. Present: Gene Warford, Marion Doss, Pete Reagan, Sondra Smith, Mayor Jordan, Paul Becker, Kit Williams, Elaine Longer and Kim Cooper, Longer Investments. Ronnie Wood was absent. Sondra Smith: Mayor, you might want to recognize Dennis Mullens this is his first meeting as a new Board member. Mayor Jordan: It's wonderful to have you here. Sondra Smith: Welcome to the Board. Approval of the Minutes: April 28, 2011 meeting minutes and the May 19, 2011 special meeting minutes Marion Doss moved to approve the April 28, 2011 meeting minutes and the May 19, 2011 special meeting minutes. Peter Reagan seconded the motion. Upon roll call the motion passed 5-0. Ronnie Wood was absent. Pension List Changes: None Approval of the Pension List August, September, and October 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 July 28, 2011 Page 2 of 23 Sondra Smith: At this time there are no changes to the pension lists. If something happens between now and then we will bring them back for re -approval. Dennis Mullens moved to approve the August, September, and October 2011 Pension Lists. Peter Reagan seconded the motion. Upon roll call the motion passed 5-0. Ronnie Wood was absent. Old Business: None New Business: Revenue & Expense Report Sondra Smith: That's the report that Trish gives us. No approval is needed. The report shows that on 06/30/11 your book value was $4,807,736.88 and your market value was $5,135,575.37. Actuarial Valuation Sondra Smith: This is a report from Jody Carreiro that has your fund predictions. Currently you are 29% funded and you have $14.5 million unfunded liabilities. PRB letter regarding Evaluating Investments dated June 7, 2011 Mayor Jordan: This is something I thought would be of interest. I hope you all received a copy of this letter from PRB, regarding valuating investments dated June 7, 2011. You wanted to know the position of David Clark with PRB if the fund drops below $5,000,000. I assumed you all would ask me to get a letter for you at this meeting. Peter Reagan: I asked you that in the meeting. Mayor Jordan: This is the letter we received back from them. Sondra Smith: The July 81h letter is the letter Paul Becker received back from PRB. Mayor Jordan: I asked Paul to look into that. Paul called David Clark and David sent a letter back. This is the letter we got back explaining the $5,000,000 situation. Sondra Smith: Elaine Longer's letter is in the agenda also. She states that if the fund goes below $5,000,000 and we have to change our investments, she doesn't feel like she can manage our account any longer. 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 July 28, 2011 Page 3 of 23 Mayor Jordan: You can ask her questions when she is here later. I wanted to get you a letter from PRB and see what comments you had. Peter Reagan referred to sections of the letter dated July 8f' from David Clark to Paul Becker. "The PRB is not directing the pension fund to sell such asset. The type of decision is soley with the pension fund Board of Trustees and its advisors." Mayor Jordan: That's true. Sondra Smith: But it also says, "however the pension fund should not enter into new holdings that are outside those listed as acceptable for a sum less than $5, 000, 000. " Mayor Jordan: I think PRB is basically saying they are not going to make you make that decision. Peter Regan: There was one firm in this state, one group of investors that worked for a certain firm that was selling annuities and loaded mutual funds and when you try to get out those early it really cost you. They have called that firm and that individual to task. This is to all the pension funds in Arkansas saying you don't have to get out of it right now, but you should at your earliest chance where you won't lose a lot of money. Marion Doss: It looks to me like PRB is not going to give any advice. They are kind of keeping themselves in the clear, protecting themselves. Peter Reagan: It doesn't make a whole lot of sense, even if you go below $5,000,000, to move your funds out of the stock market and into I% CD's. Marion Doss: That's true unless the law says you have to. Mayor Jordan: I think that's something Elaine will address. A lot of these questions can be asked when Elaine Longer gets here. I don't know the law. Paul brought this to our attention and he was concerned. The City Attorney sent out a memo and you all wanted a letter from the PRB, so as the Chairman as of this group I got a letter from the PRB which is what I felt I would be instructed to do. Peter Reagan: I appreciate that and I personally called the Chairman of the PRB. Mayor Jordan: The decision will be left up to this Board to decide what we are going to do or not going to do. I personally thought, when I read the letter, that PRB agreed that was the law but they were not going to force this Board to make that decision. That would be up to us to make that call. Peter Reagan: Yes. Mayor Jordan: Is that a fair assessment? 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 July 28, 2011 Page 4 of 23 Sondra Smith: It's up to us to abide by the law or not. Mayor Jordan: Any other discussion on this? Peter Reagan: I'm not in favor of making any changes. Sondra Smith: I'm in favor of abiding by the law. Mayor Jordan: This is where we need the City Attorney to ask him some questions on this if it's a legal matter. If we become fiduciary responsible and we don't we can be in some trouble, if we're not then we're not. Let's move on from this because Kit should be in here to answer some of the questions. We can come back to this when Elaine is in here and we can ask her some questions. We are going to need some direction because if the market value is at $5.1 and your book value is at $4.8 we are getting in that range. Peter Reagan: Again we are treading new waters. Mayor Jordan: That's true and we have never been here before. I'm sure the City Attorney can advice us on that. City Attorney letter referencing PRB letter dated June 7, 2011 Kit Williams: My memo was related to the letter we received that indicated to me, that it was PRB's conclusion, that once we went below $5,000,000 in total assets in the fund, we would lose the right to hire Elaine Longer to invest the money in a much broader range, which she has done very successfully for you all. It would then mean that you all would be limited to investing in certain CD type investments and no load mutual funds but nothing else. You could not own individual stocks or anything like that. I read the statute that they talked about and I put in my memo "Anything in this section to the contrary notwithstanding, until the assets of the system amount to at least five million dollars ($5,000,000.00), the funds of the system, not in the checking account, may be invested in shares of no-load mutual funds" Basically that's it except for buying CD's and other things like that which are even more conservative and initially how you had to invest until you got up to a higher level. I think I agree with PRB that is in fact what the situation is and that is the safest interpretation of that particular section. At the Mayors request Paul contacted PRB to clarify if that was really what they meant and the letter came back on July 8th. That letter is in your packet and that is their interpretation. They said if you own annuities or something like that you would take a substantial loss in selling you could wait until the annuity had paid off and they were not ordering us to sell. However, we need to follow the law. What is the valuation of the fund? Not what we paid, what it's actually worth. That market value is what counts at this point in time. Sondra Smith: We are $135,000 above $5 million. 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 July 28, 2011 Page 5 of 23 Kit Williams: When was that updated? Sondra Smith: June 30th Kit Williams: As you're aware we are almost a full month more and recently with all the strife in DC, about whether or not they are going to extend the federal government debt limit, the market has been going down. We could very well be at or below $5,000,000 right now. If you are then I think the problem will be that you will have to follow the law and that point you would have to ask Elaine to liquidate any of the assets that are capable of being liquidation without a substantial loss. That would be a lot of them, there might to some long term bonds that she would say she could not get rid of without a significant loss. The stocks and things like that I think you have to sell them and transfer those funds into no load mutual funds to meet the statute. If you do not then you're potentially violating the law and there are bad ramifications for that. If you did not do that and there was further substantial declines in the stock market with stocks that you own, a beneficiary could claim that you have violated your fiduciary duty to them to follow the law and that you could be personally liable for the losses. With the fund at $5,000,000 that could be a big hit maybe more than what anybody on the Board could withstand. I think the safe route is to follow this statute and what PRB has said. Even if you are not below $5,000,000 now, you would need to have a motion at this point in time to say if in fact when that occurs, and we know that is going to occur because the fund has been going down, to instruct your financial advisor to then follow this particular statute at that point in time. I know there is some reluctance to do that and I can understand. I think Elaine is going to do better then these no load mutual funds. I think she has a better track record and has done a very excellent service for you all. I didn't pass the statute, you didn't, the legislature did and it's our duty not to question whether of not that statute makes sense, but we still have to follow it. Peter Reagan: What is the statute number when it goes below $5,000,000? Kit Williams: ACA 24-11-805 Investments and Securities Subsection G. Subsection G does not specifically say when it goes back below $5,000,000. It says when you obtain $5,000,000 or more then you can do these other investments instead of just the no load funds. The PRB interprets that to mean that you can only do that as long as you are above $5,000,000 and when you drop back below $5,000,000 you can't take advantage of Subsection G anymore to have the additional options. I think that is by far the safest interpretation, especially with their letters to the affect, my advice is that you follow what they have told you to do and do it. If you don't you could make an argument and say this doesn't say that if it ever goes below you can't do that anymore. I think that's a fair interpretation of the intent of that statute that only funds that have more money, $5,000,000 or more, are allowed these other sources of investments and when the fund doesn't have $5,000,000 they can't do it. Peter Reagan: I have a problem and you weren't here when I referenced the second to last sentence in the first paragraph of the July 8th letter from David Clark to Paul Becker: "The PRB 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 July 28, 2011 Page 6 of 23 is not directing the pension fund to sell such asset. This type of decision rests solely with the pension fund Board of Trustees and its advisors." I was under the assumption that once you obtained the $5,000,000 goal that there was no looking back. I set on this Board when we obtained the $5,000,000 goal and we were able to invest in other investments other than CD's and treasury bills. I'm not ready to make any changes to our current investment policy at this meeting. I think we need to do some more research on it. Whether it is through the Attorney General's office or however we proceed to do it. I think there needs to be some other legal remedy but we need to do some more study on this. Kit Williams: It says in the second paragraph of this letter "The same position is maintained in terms ofpension funds with assets that were greater than $5,000,000, but have since decreased below that threshold. Asset classes currently in the portfolio that do not meet those described in the memo may need to be held until the fund can exit in a prudent manner. However, the pension fund should not enter into new holdings that are outside those listed as acceptable for a fund less than $5, 000, 000. " He did say if you hold annuities or things like this that you can not exit in a prudent manner that you wouldn't necessarily have to sell those. The PRB even though they might not be directing you to do anything has advised you that their interpretation of the statute is that you might not hold those assets. You may not buy anymore assets, which would mean that our investment advisor would not be allowed to buy anymore stocks, or anything that would be beyond those statutory requirements even if you were holding some. My concern is that if you delay and do nothing and your fund is below $5,000,000 then you all might be later held to have made the wrong decision and violated your fiduciary duty to the other pensioners, to a tune of hundreds of thousands dollars of losses, that you all as trustees and who would support that position, could be personally liable. If you on the other hand follow the basic reasoning of this letter and take the more prudent and conservative point you would not face any potential liability at all, you would be following what the PRB has suggested, what the statute seems to imply, although it does not say it specifically. It does not say decrease in the statute but what it seems to imply and what the reasonable intent would be, at that point it would mean that you would not be able to take full advantage of your financial advisors advice in being able to buy and sell stocks for you, and to basically do the excellent job that she has done through the years. You would be taking a great risk if you do not do that, if you delay and do not follow what seems to me to be pretty clear instructions or advice from the PRB on what your rights are if you go below $5,000,000. Longer Investment letter referencing PRB letter dated June 7, 2011 Elaine Longer: We sent a letter to the Pension Board here and our stand is if you have to go into a prescribed investment style of passive index funds, treasuries, agencies, we can no longer 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 July 28, 2011 Page 7 of 23 manage the fund. The reason is because we lose the ability to do for you what we believe is really important, especially at this point in the market. As I review your portfolio you will see my concerns about holding a ten year treasury which is what you would be forced into. That is the reason that we said if this does come about we will have to leave. I don't mind having responsibility as long as I have control over what I do but I can't have responsibility and no control over what I do. You don't need to have a money manager overlaying a fee if you have to be in an index fund and I can't do for you what I've done on the fixed income side if they are prescribing a certain fixed income fix. It would go contrary to where we have clients right now. We would not be able to do anything for you and it would be a fiduciary responsibility even though we don't have any control over what is being done. That is why we sent the letter to you that if this does come down under $5,000,000 we will be happy to help you transition but we would no longer be the money manager. PRB Letter regarding Evaluating Investments dated July 8, 2011 responding to Paul Becker telephone conversation 2011 Turnback Funds Sondra Smith: They have already received those funds on their checks. That's additional money we get ever year. I have a spreadsheet included in the packet that shows what we received this year and it goes all the way back to 2002 and what we have received each year. We disburse those funds according to what the State tells. That has all been taken care of. Marion Doss: The turnback fund is $131,000 plus and the fire future supplements is $29,618? Sondra Smith: The future supplement is what you get on your checks. It was dispersed at $590 for the retirees and spouses of retirees and $118 for the volunteers. Peter Reagan: There is a formula they are required to go by. Sondra Smith: Trish and I both calculate it to make sure we match. The $139, 000 goes back into your fund. Peter Reagan: The future supplement is the monies that are left over in the fund from cities that do not pick up their checks, funds that do not qualify, or funds that have not done proper reporting. Rather than that money going back to the general fund the money is kept in a pot and distributed to all firefighters in the State of Arkansas on the old fire plan. Marion Doss: The $131,000 is that the only time we get turn back? Is that the only check we will get in 2011? Sondra Smith: Yes, and you only get it once a year. It usually comes in July or August. 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 July 28, 2011 Page 8 of 23 Marion Doss: That diminishes each year. Sondra Smith: Last year you received $122,000. This year you received $131,000 so it went up a little bit. It varies, you never know how much you are going to get. Peter Reagan: It all depends on what the legislature does. Sondra Smith: Right, I know on Police and I'm not sure on Fire that it is based on insurance premiums. Peter Reagan: Yes, and legislature toys with the formula every year. My understanding is the new one is a five year spreadsheet that will increase to the top twenty departments in the state. Fayetteville is one of them so our shares will increase. Sondra Smith: When you pay your insurance a portion goes down to fund then back to the pension plans. Peter Reagan: State Police also gets a cut out of that. What's left the Governor gets. LOPFI Consolidation of Local Pension Fund Sondra Smith: That's a copy of a letter that Trish received. Sometimes we talk about consolidation and there is only a certain time during the year that you can consolidate. If you want to do that, now is the time to start the process. Marion Doss: How long do we have to do that? Sondra Smith: Not very long I don't think. Peter Reagan: An actuary has to be performed, you have to send a check for $600 to Gabriel, Roeder, Smith and they have to do an evaluation to compute the unfunded liabilities. Marion Doss: Looks to me like it might be the time to request a consolidation. I would like to hear Elaine's report first and see what she says with the investment policy. Mayor Jordan: It will take awhile. That's why I wanted to get as much of this other stuff done as I could because it's a pretty lengthy explanation. Alliant — Liability Insurance program Sondra Smith: That is a letter we received regarding fiduciary responsibility and liability insurance. It's an informational item only. 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 July 28, 2011 Page 9 of 23 Marion Doss: Are they trying to sell us something? Sondra Smith: Yes, insurance. Longer Investments: Investment Policy Review A copy was given to the Board Correction to the 1st Ouarter Report A copy was given to the Board Longer memo and information regarding SEC adopted amendments to Part 2 of Form ADV. A copy was given to the Board Elaine Longer and Associates information A copy was given to the Board The Longer View A copy was given to the Board Longer Investments Privacv Notice A copy was given to the Board Ouarterly Report — 2nd Ouarter 2011 Elaine Longer: Page one shows the June 30th portfolio appraisal. We have gone to a more conservative stance, as of June 30th we were at 46% stocks and International was trimmed down to 0.8% of portfolio. There are numerous reasons for this but you see in the news all the things that are coming out as far as this prolonged financial crisis. What is going on in Europe with the Greece situation, Italy, and Ireland, but also what we are facing in the US as we got through this great debt unwind that has been a result of the 2008 financial crisis. We are dealing with it domestically just like the Europeans have to deal with Greece and Italy and some of the peripheral members of the EU. We are in more of a defensive posture. If you look at the dividend yield, at that time we were at 3.44%, which is the income yield on your stocks and compared to the ten year treasury the ten year treasury yields less than 3%. We have maintained a stock portfolio that has an income yield higher than the ten year treasury to be able to remain with a growth profile in a more defensive way. 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 July 28, 2011 Page 10 of 23 The next asset class is called other income securities and we have 4% of portfolio in this Guggenheim Multi -Asset income fund which is a mutual fund of high income stocks, utility stocks and also in that fund we have 8% in real estate investment trusts. The largest position in that fund is about 1.5% of total fund. This is a way for us to be able to put money to work to earn a 4.8% which is much higher than we can get on a fixed income but in a broadly diversified and high quality portfolio of income assets. You have the utility fund which yields 4.14% it's only weighted at 2.3% of portfolio but we can't anything close to a 4.5% income return unless we were to go to a 30 year treasury and I would not take anybody to a 30 year treasury at today's interest rates. On June 30th we had a fund that was invested in treasuries that yield 4.28% but we have since left it at our cost because of the concern about what will happen if we don't end up with a creditable method of addressing this debt limit. I believe that both sides have incentive enough that they are not going to lead us over a cliff into default. The problem is unless we have a creditable plan to address the deficit the rating agencies will down grade our debt and we haven't been there before. Since 1941 we've been a Triple A credit so no one really knows how to judge what that will cause in the markets in terms of volatility because there are some institutions that hold treasuries that hold them because they have to hold Triple A credit. Moody's and Standard & Poor's have said if they downgrade the treasury debt then they are also going to have to downgrade the agencies. They may downgrade as many as 7,000 state and municipality bonds. When you say the Triple A will be the new Double A in some regards that's probably true in a long term but in a short term it can cause a lot of volatility so we have exited anything that's on the long term of the treasury curve until we get through this crisis and see what they come up with. We still have the corporate bond fund which is all investment grade corporate bond fund and we have preferred debt that yields 6.3%. This again is only 6% of portfolio but you can see in this environment, where you have a five year treasury that's only 1.5% and a ten year treasury that's 2.95% you have to stretch and incorporate other asset classes in a prudent manner to be able to get the income into the portfolio. That's what I was talking about in terms of if you go to this five million limit and you have to subscribe to that defined rules of investing and including what they want to do on the fixed income side all of this would have to be sold. We aren't putting anyone in a ten year treasury at this point in time because there is price volatility in the longer dated bonds given a change in interest rates. This was in the news letter that we just finished for the second quarter. If interest rates go up by one percentage point the price of the ten treasury will drop by 8 3/4%. That term is called duration, it's a measure of the price volatility of a bond given the change in interest rate, the longer the maturity the more volatility there is. Even in the ten treasuries you have 8 3/4% price decline if that ten year just goes to 4%. Given what is going on out there in the world I can't rule that out, especially since I started managing money in the early eighties where interest rates on the ten year were about 15%. You can't rule it out and if you go through that kind of a price decline you eat up almost three years worth of income return, and the price decline on the bond from a one percentage point increase in rates. That's the reason we are being so careful about the exposure to the maturity length in the bond side of the portfolio because you have price risk. 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 July 28, 2011 Page 11 of 23 On the other side if you look at the treasury you own, this 4% that is due in 2018, we purchased it to yield 3.9%, and that was bought in the first quarter of 2010. Since then interest rates in the longer maturities have declined so that now the seven year that came at auction today was priced to yield about 2.28%. The price of that treasury has gone from what we paid for it 102 up to 110 at this point, today it's closer to 114, that has been a beneficiary of that volatility factor, as interest rates decline you have price appreciation plus income. It can turn and go the other way. We are still holding onto these treasuries that we bought at a higher yield but we are not entering into new positions at this point in time except a fund like the Treasury Bond Fund where we can control the down side where to close stock. We still have the federal home loan bonds. The income yield on the total portfolio even with nearly 50% invested in growth it's a still a 3.93% which is higher than what you would get if you were just sitting in a 100% bond fund. The reason is because we have bonds moved to where the stock part of the portfolio also contributes to the income of the account. It's a more defensive posture than what we did maybe in the eighties or nineties but at this point and time it feels like a reasonable place to be. Page three is an update as of July 26th. Again about 46% is in domestic stocks and about 1.7% in International. You have not seen us for quite some time not have to ask for a vote to approve being over 50%. We are under 50% so we do not need to vote today. The market value is $5,068,000 and the total income yield is 3.81 %. Kit Williams: That's as of today? Elaine Longer: The 26th, yes? Mayor Jordan: There is a possibility within a month it could drop below $5,000,000. Elaine Longer: In a day, when you really look at it you are 1.5% away. Yesterday the market was down almost 200, today we were up as much as 82 points and closed down 65. These are very volatile times. I would just urge you that if there is a question about what you can and cannot do, should it dip under $5,000,000, you need an answer. Re -pricing today it maybe under $5,000,000, I don't know. That is only a 1% waver and if you look at it yesterday the stock market was down almost 2%. We weren't down as much as the market because we have a more defensive structure but then today it's down another one half percent. So if you are at 2.5% and you are at 50% equities that would be 1 3/4% on the total portfolio if you drop as much as the market. I don't know what your value is today but you're close to the $5,000,000. Dennis Mullens: Hypothetically it could go up in a second. Elaine Longer: It could. Dennis Mullens: I can't see them not doing something about that. Elaine Longer: You're close enough you need to have a definitive plan. 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 July 28, 2011 Page 12 of 23 Page five shows the realized gains and losses year to date which are about $154,000 that's mostly because we've taken gains on some of the stocks that we've lightened up on. Page six shows the weighted average yield to maturity on your fixed income securities. What's important is, because of that risk for price fluctuation, we've reduced the average maturity on bonds from 9.9 to 7.0 years but the fact of the matter is this is as of June 30th and you're much lower than that in terms of average maturity because of the fact that we have actually sold that long term bond fund. We have not given up any of the income yield and that's because we incorporate a lot of other activity into the portfolio to get your fixed income at 4.8%. To give you an idea the thirty year bond is at 4.2% and has a lot of price risk. You're at 4.8% yield but your weighted average maturity is only 7 years. Below that in terms of the maturity distribution one to three years 6% of the bonds that you hold mature within three years. Basically that means that's as good as cash to us because we don't have to hold a bond we can execute in the market and basically execute at the price on the screen. So 6.2% of the bonds can actually be rolled to longer maturities if we have an opportunity where that makes sense. At this point in time we are more defensively structured, as far as the maturities go, because if we end up in some kind of chaos relative to either congress doesn't see eye to eye or we pass the August 2nd deadline or we face a debt down grade, we've got plenty flexibility in the portfolio to then extend maturities and tap into higher yields, if they become available but at this point in time it's anyone's guess what is going to happen. Page seven shows the performance year to date. Stocks are about 2.5%, International is down 6% but that's mostly the Japan exposure and that was only .8% of portfolio so it doesn't really affect performance. Fixed income is up 1.8%, so 2.2% is the total return. The report shows the annualized index returns inception to June 30th. S&P is up 4%, your cumulative annualized return has been 4.8%, and the bond fund return has been 4.2% and your cumulative annualized has been 4.6%. A 50150 weighting of the S&P and the Lehman Bond Index is 4.4% and your compound annual rate has been 4.9%. We don't have as long of a history with you as we do the Police but at least when we hit that minus 20% in 2008, we have since fully recovered and back to a compound annual of almost 5% getting back to the 6% that was in force when we started. That's been changed in the past year to a 5% compound annual is what they are using in their calculations, we've changed the policy and we mention that in the new policy but up until that point in time it was 6% compound annual. Page eight shows the contributions inception to date going back to August of 2002. The contributions to the fund have been $1.121 million and the distributions from the fund have been $9.3 million. That's what you are dealing with in terms of the unfunded liability is the weight of the distributions on the principal. Page nine shows the beginning value of the fund at $9.9 million back in 2002, the contributions have been $1.1 million and the distributions $9.3. The components of return have been net income of $1.74 million. That comes in a form of dividends on stocks and interest income on bonds. Realized and unrealized gains would be about $1.7 million and that comes in a form of growth. It is interesting that you've has a 50150 allocation between bonds and stocks and even though we've been through such a historic year as 2008 where stocks got hit so hard still the 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 July 28, 2011 Page 13 of 23 growth side of the portfolio has delivered about 50% of the returns of the total return which has been $3.4 million. We've revised the investment policy. When we where here the last time there was a clause that needed to be updated for the Police Pension and we went ahead and put that into the Fire policy as well. We went to the Friday Law Firm because we are dealing with a lot of changes in our business. We are in the process of updating all of the investment policies for everyone that is a client of Longer Investments and bringing everybody up to current rules and regulations. Their recommendation was to change to this investment policy which basically doesn't change anything as far as the definition of your asset allocation with the exception, that it gives us the authority within a policy to lay outside of the equity range by what we have already been authorized, but it puts it in a policy and says that we will notify you any time we are outside those ranges at the next meeting. That protects us in the interim that we can be out of line with your policy by plus or minus 10% and then we will notify you at the next meeting. It includes the new actuarial return assumption which is 5% instead of the 6% that was in the prior policy. Nothing else changes in terms of your fee structure, your administrative set up, asset allocation, it just brings everything up to date. If you want to have more time to look at that we can do that and asked that it be signed before the next meeting, or whatever works for you. I think it is good to update that and make sure that everything is current. Peter Reagan made a motion to approve the proposed changes in the investment policy. Dennis Mullins seconded the motion. Sondra Smith: I would rather wait and let Paul Becker review it, because it is different then the one that we reviewed, and give us time to look it over. Not that I don't trust Elaine, I just think it's good for us all to be on the same page. Marion Doss: Kit, have you reviewed this? Mayor Jordan: Paul will be back Monday. Kit Williams: I have not however, my advice to you all is that you are not going to be able to legally continue with Longer Investments very much longer. I'm sure this policy is fine. I wouldn't think I would need to review it. I'm afraid that the way PRB has interrupted the statute and the danger to you all individually if you do not follow their advice. Even though I don't think it's the best thing financially for the fund, I think Longer Investments would do a better job than if you were forced into no load mutual funds and CD's. I don't think the statute allows you that option. If you want to approve this now I certainly don't have a problem with that. Marion Doss: Elaine, if you can't use you anymore, what kind of process would that be? Elaine Longer: As soon as we receive notification we would have to liquidate the portfolio, except for your treasuries the things that actually fall under the coverage of the new policies. 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 July 28, 2011 Page 14 of 23 would be your entire stock portfolio, International, everything that is in the fixed income side except the treasuries. I don't know if they allow you to keep the agencies. Kit Williams: Then no load funds would have to be purchased and I don't know if you would be able assist them in doing that. Elaine Longer: We wouldn't be able to do that because our relationship would end as soon as we can not invest along the lines of what we are doing for other clients. We would be able to help with the liquidation and transfer the assets. I don't know if Paul would be doing it or who would but past the point that we can't actually purchase what we would be purchasing for other clients, we can't do that for the Fire Pension. I have problems with you moving in that direction myself so I would not want to be part of that step. I will be happy to do anything I can do if that becomes the way it has to go to transition you smoothly but I wouldn't want to be the one putting you into assets that I would otherwise not be buying. Marion Doss: If you get rid of this in a hurry, since the market value does fluctuate, there are times to sell things, if it is a certain date you might have potential for big losses. If you say you have to do all this for a certain time. That's the reason it has to be in an orderly manner which I think you're saying it would be when you talk about transition. Elaine Longer: The best way I think that it could probably transition is that Paul would have to set up an account that funds would be transferred to because again, you don't need to be held at a custodian like Northern Trust and be paying custodian fees when you are not really holding anything but index funds and treasury. It's possible that it can be coordinated in such way that when we liquidate, on settlement date, the wire goes out to settle what he is buying on the other side. It can be coordinated that the account that will be receiving the funds can be set up so there is very little time lag between having to liquidate and what he will be buying on the purchase side. Kit Williams: As their financial advisor if they had to do the liquidation of these separate sorts of funds that you have now, stocks and things like that, would you advise them to maintain the same sort of mix between fixed asset and the no load funds? The stocks that we have now in place, that money in the no load fund, or do you have any advice for the Board of what the mix would be that you would recommend? Even though I know you can't buy any no-load funds. Elaine Longer: This is why I don't understand how you're going to do this. I'm telling you this because I feel very sympathetic to our public servants who really depend on this. Right now you are dealing with a 5% return objective. When you take half the portfolio and you index it to treasuries they are not going to want to index you into a ten year maturity at this point in time. But say that you did go there you are talking about a 2.9% return. It would not be wise to take you to a ten year weighted average maturity so you say a five year weighted average maturity you are at 1.5%. Half the portfolio at 1.5% gives you 0.75. That means on the rest of it to even make the 5% you have to have 8.5% on the stock side to even hit the 5% bogie which is not going to get you to a funded position. 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 July 28, 2011 Page 15 of 23 When you talk about what your plan is dealing with, which is risk of ruin, that is what the term is when you look at your unfunded liability, what you are really talking about is what is the risk of ruin. This would further that inability to come out of this in a good way. As far as your asset allocation you've seen it fluctuate anywhere from a low end of 35% or 40% equities up to where I'm asking for allowance to be at 60% instead of 50% and everywhere in between, I can't tell you where I will be thirty days from now. To tell you 50% and lock it in, I can't do that because it's a judgment call everyday. It's like you can stay with your same investment policy but then it begs the question about who makes that on going asset allocation decision between equities and fixed income which is a moving target. This is a very fluid environment. So, in answer to your question you can stay with your same investment policy which is 25% to 50% equities. I think that's a wide enough range to give you the flexibility you need to have but that's the question who is going to make that call? My concerns about where you're going are both on the fixed income side and the equity side. Peter Reagan: I understand, Mr. Chairman I have a motion on the floor. Mayor Jordan: I have some reservation about supporting this until we decide exactly what we are going to do. I personally think we need to have a special meeting of the Board as a whole. If we go two or three months and this thing has dropped below $5,000,000, according to my City Attorney who is my legal advisory, I can be held personally responsible for this fund. That is something we really need to consider here. Honestly, I'm not part of this pension. It's your pension fund. I have done what you wanted me to do, but when we get into a situation where a court of law can hold me legally responsible, then it gets into another matter, particularly when my City Attorney has advised me that if it drops below $5,000,000, then we can be held personally responsible. Elaine I think you do a great job but we are getting into a situation where we can be going to court and I have to look at that very seriously. Elaine Longer: In the policy we are still operating in compliance. Mayor Jordan: I see that we are still above $5,000,000. Like you say it can change tomorrow. Elaine Longer: But you're too close for comfort. Mayor Jordan: We are going to have to come up with a plan and we are going to have to make some sort of action. Sondra Smith: I agree with the Mayor. Elaine Longer has done an excellent job but it looks like our hands are tied and it doesn't sound like its going to be good for the plan to have to do this step but that's the state statute. I don't know how on one instance you don't want to follow the law and in another instance you want to follow the law. Mayor Jordan: What are your thoughts? Marion Doss: I know Pete has a motion on the floor. I would like to see exact differences and I would like for Kit to research this. Kit said he thought it would be okay to sign this change right now. Elaine in light of all these changes do you think it might be the time to seriously ask for 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 July 28, 2011 Page 16 of 23 consolidation with the State fund. It looks like right now that is the best hope. They can invest their money in different ways and earn more. Elaine Longer: The City would have to pay to move it to LOPFI. Upon roll call the motion passed 4-1. Sondra Smith voting no. Ronnie Wood was absent. Elaine Longer: To answer your question and I haven't been a party to the meetings about moving into LOPFI except I do read the minutes to the meeting. It seems like the problem with that is the City has to buy the unfunded liability to move into LOPFI, it that true? Kit Williams: It's a multi million dollar liability. When we had meetings that the Aldermen have attended they indicated they were not in a position to support that because of the cost. That's why we got into the situation whether or not the Board could reduce benefits and the Attorney General indicated he did not think they could reduce benefits. My research was they could reduce benefits but they have not been reduced. The longer we go on without reducing benefits the more expensive it will be to ever consolidate with LOPFI. Elaine Longer: Sounds like you are between a rock and a hard place. I've been saying LOPFI is a great idea but it sounds like you have to get funded, reduce benefits, or the city has to pick up the unfunded liability to move you into LOPFI. In lieu of going into this prescribed program definitely, either staying with a real investment portfolio like what we run or go to LOPFI either one, would be preferable than to go into index funds, treasuries or CD's. Peter Reagan: Thank you, Elaine. Marion Doss: Thank you, Elaine. You have done areal good job. Elaine Longer: Thank you. We have really enjoyed being apart of the Firemen's Pension so I really appreciate that. Peter Reagan: You have done an excellent job and I will do everything I can to keep you on Board. Elaine Longer: Thank you. Dennis Mullens: You think we should have another meeting before October? Mayor Jordan: I think we need some resolution. I'm concerned about it and we need a plan. Elaine Longer: Kim mentioned to me when a distribution goes out it could drop. How much is a distribution a month. Kim Cooper: Usually they are over $100,000. Marion Doss: $119,000. 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 July 28, 2011 Page 17 of 23 Elaine Longer: Besides the market activity you're close enough that a distribution could put you under $5,000,000. It would be good to know what you do or do not have to do. Marion Doss: I'm open to anytime you have any ideas on calling a special meeting. Mayor Jordan: I thinking we give it a few weeks and next month we call another meeting. I would like all of the Board here before we do anything where everybody can weigh in. Peter Reagan: There is no state statute that says when we fall below $5,000,000 that we have to liquidate our assets. Is that correct? Kit Williams: Yes, there is a statute state that talks about the $5,000,000 level and the way it's interpreted. Peter Reagan: No, it doesn't talk about going below the $5,000,000. It talks about achieving the $5,000,000. Kit Williams: The likely interpretation by the courts of that statute is if you go below $5,000,000 you have to liquidate. Peter Reagan: But there is no state statute that says that we have to liquidate our assets when we fall below $5,000,000. Kit Williams: There is no state statute that says that precisely. Peter Reagan: Thank you. Kit Williams: Often that is true in many cases but that does not mean that the courts will not say that is what that statute says. Peter Reagan: PRB has made that interpretation but PRB is not a legislative body. Kit Williams: I can say if you all don't do that and you get sued I will be trying to make that argument for you and say there is no state statute that says that but that's not necessarily the winning argument. Peter Reagan: I understand that and again that's the reason we have courts because attorneys can't agree and every day citizens can't agree. I'm saying we do not have a state statute that says that we have to liquidate assets when we fall below the $5,000,000 threshold. It's not real clear in the Pension Review Board letter because they are not directing us to sell such assets. So I'm not real concerned about it but what I am concerned about is that we have someone to determine for us what happens when we fall below $5,000,000. Is that something we ask the Attorney General? How do we go about doing that? I'm not going to act on something that says because PRB says we should and there is nothing in state statute that says we have to. I would rather take the chance on being sued by one of my pensioners that I serve on this Board representing. If we 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 July 28, 2011 Page 18 of 23 have to liquidate our assets, our investment advisor already told us that our income is going down the tubes and I think there will be a lot more chance for a lawsuit personally against everyone on this Board by doing that than by staying with the investment folks. Mayor Jordan: I need a little direction from this Board on what you want me to do as the chair of this Board. Sondra Smith: What happens if we stay with the investment advisor, which we all agree we love, the market goes south again and we have another 20% decrease in our funds, what are we going to do then? Marion Doss: We could ask the Attorney General for an opinion. If that means when it goes beyond $5,000,000 we have to change. Although, everyone says if the Attorney General's opinion agrees with what they want they are all for it. If it disagrees with what they want to say, they say well that's just an opinion. Kit Williams: It is just an opinion just like mine is just an opinion so is the PRB because this hasn't been taken into court. The big danger is, if you ignore the PRB who has been running these programs and giving you advice through the years, and if you ignore my advice, I think it's more likely than not going to mean what the PRB says that's where the biggest danger is to you all as a Board personally. I think there would be very little risk if you take the PRB's advice and you follow what this statute implies if it doesn't say directly. This is something for you all to decide and as your attorney in this particular case representing you all I'm trying to look after your personal interest also. That's why I felt like I needed to make sure that you knew that you could be taking a large personal risk if you do not follow through with what PRB has said. Marion Doss: What do you think about requesting an Attorney General's opinion? Kit Williams: That could certainly be done but again that's not a court of law. No matter what the Attorney General says we really won't know. I don't oppose you asking the Attorney General. Mayor Jordan: Why don't we do that? Kit Williams: That will take a period of time before the Attorney General responds and you might be in big problems before that. Peter Reagan made a motion to ask for an Attorney General Opinion: Under A.C.A. 24- 11-805 if our fund falls below the $5,000,000 mark are we forced to liquidate assets and go into no load mutual, treasury bills, and CD's. Dennis Mullens seconded the motion. Mayor Jordan: So we might have big problems before that. Kit Williams: Yes because it takes a long time for the Attorney General to get a response and who knows what will happen in the mean time. I am very concerned about the market myself. 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 July 28, 2011 Page 19 of 23 Dennis Mullens: You think it applies to what the PRB Board says? Does it really mean that does apply? Kit Williams: PRB and I can both be wrong. We can both think that this said only when it goes up and therefore even if you only have $10.00 in your fund you can still have a financial advisor and do all this other kind of investment. I don't think that's a reasonable interpretation. I think PRB is correct. Mayor Jordan: This Board is making a suggestion that I get an Attorney General's opinion, is that correct? Sondra Smith: It concerns me to wait. Kit Williams: Regardless of whether or not you wait you can ask the Attorney General. Marion Doss: Sometimes those opinions come back real quick and sometimes it takes a long time. Mayor Jordan: We keep up with the way this is going every month or so. Elaine, can we get monthly reports on how this fund is doing? Elaine Longer: You get monthly reports from Northern Trust. Mayor Jordan: If this drags out three or four months waiting on an Attorney General's opinion and this drops way down I don't want to be in that kind of position. Marion Doss: I think we need to meet a little more often. Peter Reagan: No, don't do that. Sondra Smith: I don't want to wait another quarter, I'm sorry. Kit Williams: You can ask for an Attorney General's opinion, that's the motion on the floor. Mayor Jordan: We can, I'll go along with that. Upon roll call the motion passed 5-0. Ronnie Wood was absent. Mayor Jordan: That's settled, I will get an Attorney General's opinion. I will get something on that tomorrow. I also want you all to understand if we get a report and this starts going south in a hurry I want to call a special meeting. Marion Doss: Sounds good. Mayor Jordan: As I have said before this is your pension but also I have to protect myself and I want you to understand 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 July 28, 2011 Page 20 of 23 Marion Doss: I would like to make a motion that we request the City to consolidate with LOPFI and express a realization that we may have to negotiate a temporary benefit decrease to make it work. The main thing is consolidation with LOPFI. Sondra Smith: With a benefit decrease? Marion Doss: Possible temporary. Kit Williams: Temporary benefit decrease. Marion Doss: I'm looking at something negotiable. When the City Council was here before one of them expressed that if we wouldn't bend they wouldn't bend. I realize we may have to. It looks like the way it is going we are not going to have anything in a few in years so I would rather have less of something than nothing. Kit Williams: What I was questioning was when you said a temporary benefit decrease because they would not be able to do an actuarial study that is required to get into LOPFI. It would not be a temporary and they would have to know how much the benefit decrease was to be able to run the study. Marion Doss: The reason I don't put a number there is that would be something we can negotiate. The reason I said temporary is that leaves it down the road ten years from now or if things turned around there might be a possibility. That would be up to LOPFI we wouldn't have any control over it anymore if it went to LOPFL It looks to me like the only answer is consolidation. The fund is going down hill and there is not going to be anything left before long. Sondra Smith: Elaine has said all along we can't cam ourselves out of this predicament. Kit Williams: This is the way it has been for a few years, you are right. Marion Doss: Elaine told us that when she first took over that it had to have more income or less out go. Elaine Longer: At the time we started it was 40% under funded. You have to get 40% before you start trying to get 6% and investment returns just can't do that. Unless you bet the ranch and you can't do that in a fiduciary account. It's always been the weight of the distributions on the asset size. In 2002 I remember that there was some turn back or something that was anticipated to kick in more principle to the fund. Marion Doss: There was something where additional money came in but it only came in for two years. Mayor Jordan: What is your motion? Marion Doss: To request consolidation with LOPFI. 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 July 28, 2011 Page 21 of 23 Sondra Smith: Does that include a benefit decrease or not? Marion Doss: A realization that we may have to negotiate a benefit decrease. The reason I'm saying that is because every time it comes up, when it says what it will cost the City every year that is the thing that kicks it out. Kit Williams: It's just too high a cost. Mayor Jordan: What does possible decrease mean? Marion Doss: Sondra made a motion a while back about a benefit decrease. Two motions were made to that affect. Then when we met with the City Council and talked about consolidation one of the Councilmen said I will work with them if they will bend a little bit but if they won't bend I won't bend. That's a realization and we may have to do that. I realize we may have to do that but I don't have a number yet. That is something we will have to discuss. Mayor Jordan: Any thoughts on this? Elaine Longer: Mayor, I would have that question answered as soon as you can because I don't know when the last discussion took place where you were considering LOPFI but it wasn't soon after the 2008 decline. Since then in 2009 the total return was 16.3% and then last year 11.5%. That's 27% to 28% on the fund where the actuary assumption at that point in time was 6% so I would say just from a guess the outlook would be better than the last study you had done when you were seriously considering going into LOPFI. It probably would go off year end which your fiscal year end is June 30"'. Even though year to date the markets are pretty flat the last year end fiscal through June 30th will look good. I think that's worth looking at because it could be it's a different picture in terms of what percentage of decrease you would have to take to be able to fold into LOPFI. Mayor Jordan: As the Chair I need to ask the question so we are talking about consolidation with LOPFI, what are the steps we need to take, we need to look at possible decrease, what steps do you want me to take? Sondra Smith: It would be consolidation with LOPFI but there would probably have to be a benefit decrease for the City to be able to afford it. Before I would second it, it would have to be with a benefit decrease in order for the City to afford that. Marion Doss: That's the reason I said that in the motion. I just think that is going to have to happen because the last time I forgot what it was going to cost. Kit Williams: It was about a 22% decrease. Sondra Smith: Between 22 and 23%. Kit Williams: To get to a fairly phenomenal cost to the City. 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 July 28, 2011 Page 22 of 23 Marion Doss: I'm hoping maybe we can work something in between that. Mayor Jordan: So what you are saying is start looking into this. Marion Doss: Yes, and we have to do it now because we don't have too much longer to get it done or it will be like last time and they will say its too late in the year, you will have to wait another year. Elaine Longer: I don't know who did that study for you, do you know Kit? Kit Williams: Yes, Jody does it and we have to pay him do that. Marion Doss: Under consolidation doesn't PRB use a different actuary? Sondra Smith: Yes. Marion Doss: I don't think it costs as much. Peter Reagan: LOPFI is Gabriel, Roeder, Smith. Elaine Longer: I think as of June 30t1i this year that's going to look a lot better than the last time that you had it done. Marion Doss: Thank you, I didn't realize that but I hope you are right. Mayor Jordan: We will need some funding to do that too won't we? Marion Doss made a motion to do a possible benefit decrease and consolidation with LOPFI. Sondra Smith seconded the motion. Upon roll call the motion passed 3-2. Ronnie Wood was absent. Sondra Smith made a motion in light of PRB's report that we consider going ahead and doing whatever we have to do to abide by the PRB letter and the requirements on the $5,000,000. Mayor Jordan seconded the motion. Mayor Jordan: I don't think they are in favor of that but okay. Marion Doss: We agreed we are going to get an Attorney General's opinion. Kit Williams: You can get an Attorney General's opinion either way it doesn't make any difference. Peter Reagan: It does too, it's whether you can keep regular assets or not. 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 July 28, 2011 Page 23 of 23 Kit Williams: No, but you can get the Attorney General's opinion which ever way you decide to go. Sondra Smith: That doesn't mean we are going to liquidate tomorrow. It just means we are going to look into starting the process. Mayor Jordan: I have a little bit of difficulty with that until we have a full Board here. I know there are representations from all quadrants of this. We have a motion and a second but I probably won't support this until we have a full Board here. If we get the Attorney General's opinion we can look at that and closely monitor this. I will call a special meeting if this starts heading south. Upon roll call the motion failed 1-4. Sondra Smith voting yes. Ronnie Wood was absent. Mayor Jordan: You want me to get an Attorney General Opinion. Peter Reagan: If you don't mind I would like to look at the wording before it is sent down. Mayor Jordan: Sure, I won't send anything down that you all don't look at. Peter Reagan: Thank you. Kit Williams: Didn't you give him the wording? It seemed pretty straight forward. Peter Reagan: As the maker of the motion I would like to look at it. Mayor Jordan: That will be fine. We will draft up something and we will let you all look at it. Peter Reagan: Thank you Mayor. 2011 MeetinE Schedule A copy was given to the Board. Meeting adjourned at 4:30 p.m. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316