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HomeMy WebLinkAbout2012-01-19 MinutesLioneld Jordan Chairman Sondra E. Smith Treasurer Fave e Eldon Roberts Secretary/Retired Position 1 ARKANSAS Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 1 of 13 Jerry Friend Retired Position 2 Tim Helder Retired Position 3 Melvin Stanley Retired Position 4 Frank Johnson Retired Position 5 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held at 3:00 PM on January 19, 2012 in Room 326 of the City Administration Building Eldon Roberts called the meeting to order. PRESENT: Frank Johnson, Eldon Roberts, Melvin Stanley, Tim Helder, Jerry Friend, Mayor Jordan, Sondra Smith, City Clerk, Lisa Branson, Deputy City Clerk, Trish Leach, Accounting, Elaine Longer and Tina Lamb, Longer Investments. ABSENT: Mayor Jordan Approval of the Minutes: Approval of the October 20, 2011 meeting minutes Tim Helder moved to approve the October 20, 2011 Policemen's Pension and Relief Fund Board of Trustees meeting minutes. Melvin Stanley seconded the motion. Upon roll call the motion passed 6-0. Mayor Jordan was absent. Pension List Changes: Joe P. Black Deceased December 1, 2011. His Spouse Mildred Black will receive his pension. Eldon Roberts: Does this require a vote Sondra? Sondra Smith: No vote is required. It is an informational item only. Approval of the Pension List: Re -approval of the January 2012 Pension List Eldon Roberts: Why are we reapproving the January list? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 2 of 13 Sondra Smith: Because Mr. Black passed away after the approval of the January list. You approve the pension list three months in advance. Since he passed away we had to revise the January pension list. Approval of the February, March and April 2012 Pension Lists Eldon Roberts: Are there any changes to the February, March and April pension list? Sondra Smith: Not at this time. Jerry Friend moved to approve the revised January, 2012 and the February, March and April, 2012 Pension List. Tim Helder seconded the motion. Upon roll call the motion passed 6-0. Mayor Jordan was absent. New Business: Local Pension Fund Report to the Council Sondra Smith: This report is what the Mayor gives to the Council in open session according to state statutes. No action is needed. Frank Johnson: Do we want to have a discussion on this report. Eldon Roberts: This is basically a repeat of what gets told to the Council every year. It mentions that the Fire Pension is no longer able to invest in equities. They can only invest in fixed incomes and whatever. Other than that there is not any thing different. Frank Johnson: This is an annual report to the Council and I did not see it. This is part of his annual address right? Sondra Smith: No, this is not part of the State of the City report. Statute says at the first meeting in January a report on the pension funds is given. The State of the City report can be given at a latter date. Frank Johnson: I would be interested in having a discussion. I would like to include a follow up from him on the agenda item. Sondra, you were there it could have been that he just read it. Sondra Smith: The Mayor read exactly what is in the report. Frank Johnson: I don't know if there was any dialogue or questions. Sondra Smith: There was a little dialogue. I can get you a copy of the City Council minutes. Most of the dialogue referred to the Firemen's Pension plan. Frank Johnson: I don't want to make an issue out of this but I do remember reading one from Mayor Coody that included some language, that if someone was to reflect back on this Board's effort to do as much as we could to keep this program solvent, I would not have read it that way. It was consistent with some of the language that was used during meetings that was recorded as minutes such as raiding the pension fund and different things like that. I thought that was not a Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 3 of 13 very fair portrayal of the discussion that actually took place. Who has time to read all the minutes? My point is if we have a short discussion with the Mayor about his report as a matter of record I think it would be good for us. Sondra Smith: Do you want it on the April agenda? Eldon Roberts: The fourth paragraph of the report states: However, the City Attorney has advised the Pension Board that the City has no direct obligation to fund the pension plan; other than a .4 mill dedicated levy for each, plus state insurance turn back. That is probably a true statement. Frank Johnson: It is his opinion. Eldon Roberts: That's right, it is his opinion of how the law reads and that is basically maybe how it reads. Somewhere down the road there is going to be lawsuits filed against some City. We have discussed this before. That may all change. That is something that is coming down the pipe there is no doubt about it. Where the first lawsuit will be filed and against what city no one knows. It is happening in other states and it will happen here. Tim Helder: What did Little Rock do? Did they tie in the old pension funds along with current law enforcement and fire to pass that tax? They have a tax, that has already passed, that was going to help support the old pension funds and help them staff and do different things. It was all tied together I think. Eldon Roberts: I am not for sure about the particulars of it. I go to those pension board meetings in Little Rock and it was being talked about down there. They came up with the idea because they were really in a bad situation. We heard that the Little Rock Police Department was probably the worse funded plan out there as opposed to our local fire plan. They came up with the idea of a 1% sales tax. I do not know what all it was going to do but within that 1% sales tax a certain amount was going to be earmarked to go directly to the old Police Pension plan. Jerry Friend: Did it pass? Eldon Roberts: Yes it did. It is not enough but it is going to back them off of being the front runner now. David Clark told me that all eyes are on Fayetteville Fire at this point in time now. With this last bomb that hit them on being unable to participate in equities it is going to sink them faster obviously. We will have to take a wait and see approach. 2012 Estimated Premium Tax Allocation Eldon Roberts: We are projected to go down on the premium tax allocation. I am sure this is just a projection because I don't guess the revenues are all in. They are coming up with new formulas on how to divide this money. The one I saw they were taking some money from us and giving it to the Fire Department. I said so you are taking money form a D minus fund to give to an F fund. Basically I think they agree that was what was happening. They are estimating the Police Pension will receive $103,808. The report that Trish prepares for us in 2011 we received $205,000. That is a cut of $100,000. In 2010 we received $213,000. We are getting hit here in Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 4 of 13 a direction that is going in the wrong direction. I fail to see how a D minus plan can help an F plan but the people in Little Rock are doing this. They have been fusing and fighting over this insurance turn back money ever since it was enacted and the formula gets tweaked and changed every legislative session. I think they are trying to get more money to the plans that really need it and take it from the plans that don't really need it. We really need that money too. They are going to take it and pass it on to the Fire Department but it is not enough to save the Fire Department either. Revenue & Expense Report Eldon Roberts: This is a handy report. You can look at it and see where we are and where we were in years past in every category. Board Contact Information Sondra Smith: I need you all to look at the Board contact list and see if any changes need to be made. Eldon Roberts: Everything seems to be current that you have. Board Election: Jerry Friend and Frank Johnson Eldon Roberts: When is the election in April? Sondra Smith: The actual election is in May. We will send information out in April. Designate new authorized signors for Northern Trust Account Sondra Smith: Northern Trust handles your account with Elaine Longer. The Northern Trust account currently has authorized signors on the account that should not be on it. They have sent a form that everyone needs to sign. It has been suggested that the Mayor and myself be the authorized signors on the Northern Trust account. If you do not want the Mayor and me as signors we can change the form. We also have to authorize someone on the Board other than the authorized signors to approve the authorized signors. Eldon Roberts: I fail to see the reason why we have to vote to allow you and the Mayor to sign because you are on this Board by law like we are. We can't control anything about you and the Mayor being on this Board. I fail to see that we need to take any action about you all being on this Board. Sondra Smith: This is about whom is going to sign anything at Northern Trust. If the Mayor and I are no longer here you will need to change this if you allow the Mayor and me to be the authorized signors. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 5 of 13 Elaine Longer, Longer Investments: Northern Trust would not have let a check go out to any account that is not in the name of the account. Even though you still had names that were dated no one could have wired money to account that is not in the name of the account. Sondra Smith: Since I have been here we have not needed to sign anything, that I am aware of, except the monthly transfers. Jerry Friend: How do you remember to send the things that we have to sign to us every year? Sondra Smith: The affidavits are on my monthly to do list. Jerry Friend: Can you put this on your list to visit every year so we can talk about whose name is on the authorized signors list. Sondra Smith: I will. Tim Helder moved for the Mayor Jordan and City Clerk Sondra Smith to sign any needed documents that Northern Trust provides. Jerry Friend seconded the motion. Upon roll call the motion passed 6-0. Mayor Jordan was absent. Tim Helder moved that Eldon Roberts sign the form that approves Mayor Jordan and Sondra Smith as authorized signors. Melvin Stanley seconded the motion. Upon roll call the motion passed 6-0. Mayor Jordan was absent. Discussion Items: LOPFI Eldon Roberts: We have that on the agenda every meeting as a reminder. Nothing has changed from the City's aspect, looking at the situation or ours, so no action is taken. It may be a viable option at sometime down the road. Longer Investments Report: Elaine Longer: After the close we have Microsoft, Google, Intel and IBM earnings. The first page is the portfolio appraisal and this is as of year end. The total common stock is 46.5% but we have also used certain stock funds, utility funds, utility stocks and high income dividend stocks as other income security. When you include that in the common equity category you are still over the 50% technically speaking. We need approval to be over that 50% mark. Jerry Friend moved to approve the equity overage. Tim Helder seconded the motion. Upon roll call the motion passed 6-0. Mayor Jordan was absent. Elaine Longer: If you look at the first page the 46.5% equity exposure, your income yield, which is the dividends that are paid on the stocks, is 3.9%. So the income that we are able to get off of the stock part of the portfolio is two times the income yield on the ten year treasury right now. So we have been adhering to a strategy of investing in high dividend paying stocks and that has really out performed this year relative to the rest of the market. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 6 of 13 The other income securities you will see that the income yield on these securities, which are high dividend paying stocks, utility stocks and others is 5.13% so that is why we have incorporated these into the equity category because we can not come close to a 5% yield on bonds. The next category is mutual funds fixed and it is composed of the treasury fund and then an investment grade bond fund. The yield on those two funds is 4.23% average and this compares to the five year treasury that is now 0.8% and the ten year is about a 1.9%. You have to be really creative right now to be able to get income into a portfolio. That is why we are incorporating a number of different asset classes but then within those asset classes we are weighing them very conservatively so that there is not over exposure to any one type of asset or any one security. The preferred debt securities we have about 6% invested in that category yielding 6.34% and the AT&T preferred, which was purchased to yield 6.4% is going to be called in February. It is always distressing when you get a 6.4% coupon called in an environment where the reinvestment rate is so much lower. We will find something out there. The government bonds we have still about 14% in treasuries yielding 4.05% but as you can see these treasuries were purchased when interest rates where much lower. If you look at the book value or the cost the cost was about $1,006,000 the market value is $1.16 million. You have almost a 16% increase in the price of these bonds as interest rates have declined. That is called duration. Duration is a measure of the volatility of the price of a bond for a change in interest rates. So when interest rates are declining bond prices go up in value because your 4% bond that we paid $103 for is worth a lot more now that interest in that type of maturity is yielding about 1.25%. On the declining interest side bond prices give you total return which is capital appreciation plus income yield. When moving to 2012 we have to be aware that, if we face inflation fear or inflationary impact from the Federal Reserves monetary policy or the government's fiscal policy, what you could have is the reversal of this type of increase in price, you can have a decline in price in the event of rising interest rates. Government agencies we still have a 6 1/8 coupon that matures in 2015. That bond has increased 20% in value as interest rates have declined. We have gold equal to 3.7% of total portfolio. We do not have much cash at this point. Money market is about 0.2%. The closing value on December 31, 2011 was $8.162 million. Income is $292,000 so you have almost a 4.1% income yield on a portfolio that has 55% invested in growth. That is what we have been shooting for all year is to have the income supporting the portfolio in the midst of all the volatility that we have had. Realized gains and losses are $148,000 year to date and the net income was $199,000. That is just the dividends and income that was paid on your bonds and your stocks and then realized gain. Total return was higher because this report only includes income and realized gains. It does not include appreciation in assets. The next page breaks down the bond portfolio and it explains more of how we are looking at bond portfolios. If you look at the weighted averages at December 31, 2010 the average yield to maturity was 4.5% and in 2011 it is 4.4%. We have been able to hold the income return constant on the bond side of the portfolio even in a year where we have had dramatic declines in interest rates. In the mean time we have shortened the average maturity from 8.7 years to 5.9 years. What this does is it reduces the price risk. If you look at average duration we have reduced duration from 6.6 to 5.2. What that means is for a given change in interest rates of 1% the price Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 7 of 13 volatility on your bond portfolio has been reduced from 6.6 to 5.2. If we should see a rise in interest rates, especially in the longer end maturities we are positioned to be able to capitalize on it because we have held income constant, we have reduced maturity and we reduced volatility in the event of rising interest rates. The percentage of bond holdings that mature within three to five years is 30%. Those are as good as cash to us. We can sell those, if we see an opportunity to roll early and go into higher income yield we would have the opportunity to do that because anything that is in these short maturities is really as good as cash to us. The way that the bond portfolio is structured right now is a bit like standing on your head and patting your tummy at the same time to try to get income in this market. You don't want to stretch too hard on the yield curve and exposure the portfolio to negative price risk if interest rates increase but at the same time income return in this kind of an environment, where you have very low income on bonds and you have low equity returns, the income part of the portfolio return is a very important part of the whole equation. To get 4% on income without having to count on appreciation in stocks is a big part of total return. The next page is your investment return summary from inception to date. The strategy that we were following this year is to go with multi national corporations that paid a secure dividend and are well diversified and able to tap into growth around the world. The equity return was 5.4%. That compares to a break even return on the S&P 500. The S&P 500 including dividends returned 2.1%. The equity return was more than twice what the S&P 500 return was. The equity mutual funds, this is the international investment, we left international early in the year so it did not have much of an impact on total return on the portfolio. The American stock exchange was the best performer of the developed economies and of the emerging economies as well. It is interesting that the USA was the king of the hill this year in terms of equity returns. International was down 15% and the fixed income return was 9.4%. That is the price appreciation on your bonds in a declining interest rate environment which adds to the 4.4% income return. The total return is 9.4%. For the year the total return was 5.2% including all asset classes. If you look at total return inception to date the compound annual return net of all expenses is still the 6.2% which exceeds the actuary assumption of 6%. You have out performed the actuary assumption from the start which was 6% and that has been changed in the past year or so to a 5% actuary assumption going forward. You are still on track to be able to say that from a fiduciary standpoint you have met the actuary assumptions of return. The next page shows contributions and distributions year to date. The distributions year to date have been about $773,000. If you look at the distribution it is the weight of the distribution on the asset base that is causing the fund to still be in a situation where your unfunded liabilities are coming through as not solvent. The distributions as a percent of the beginning of the year asset value were 9%. So even though you have achieved a 5.2% return this year the distributions were 9% so the value of the account declined by 4%. The next report shows the asset reconciliation inception to date which shows in 1990 the original contribution was $1.35 million and then the total contributions from that point have been $3.5 million. The total distributions have been $8.7 million. The components of return are broken down as net income and accrued income so about $4.7 million of the total return has been income and accrued income. Realized and unrealized gains have been about $3 million. Your net investment return has been about $7.66 million over that time period. You can see matching the $7.6 million against total distributions have been $8.7 million. This is still a little bit out of Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 8 of 13 balance, not terribly so, but about $1.1 million in excess distributions up to two investment return over that period form 1990 or in 21 years. Elaine Longer: Are there any questions on those reports? Longer Investments 4th Quarter 2011 report A copy was given to the Board. Longer View A copy was given to the Board. Elaine Longer: It is always difficult to try and take what is on the screens and put it on paper especially this year where we have had so much volatility and especially so much volatility related to governmental actions or inactions not just domestically but around the world. This is basically a piece that is prepared by Strategas Research. It shows the S&P 500 moves through December 8, 2011 that were 2% or greater in either direction. When I was looking at this and reviewing the year, it is interesting when you look at August and look at minus 2.6% to minus 4.8% to minus 6.7% and then the next day up 4.7% and then the next day down 4.4% and the next day up 4.6%. This is basically the kind of year that we have had if you look at it in chart terms as opposed to numbers terms you can see that from where we started the year we have had a lot of movement but basically on a cash basis. We ended up the year unchanged. If you include dividend income we ended up the year with a 2% return but we have been every where in between. The reasons for the volatility there has been so much going on domestically with America struggling with policies out of Washington that are nonpartisan. They can't get anything passed. We have been through a couple of deadlines of debt reduction where we were supposed to have that in August, we did not make it so we lost our AAA rating and were down graded to AA. The super committee was supposed to pick up the slack in November, that failed and so we have a situation where policy in America is really pretty much frozen in place until we get through the election. There is not much that has been done on a serious level as a pretense to our deficient spending and unlikely to be done until we get into 2013. Domestically that has created some volatility throughout the year. What you see in August, a lot of this was related to America's inability to deal with debt and deficits and the loss of our AAA credit rating. But then internationally we see the same thing happening in Europe and not much has been done as far as the European situation is concerned. There have been a lot of meetings and a lot of summits and a lot of money thrown around it through the ECB and coordinated efforts with all the central banks of the world, but they are still working on what will need to happen which is a coordinated fiscal, political resolution not just a monetary resolution. We are still working through that. This year holds a lot of challenges, because what they agreed to do December 9, 2011, now the 17 members of the Euro that actually share the Euro currency have to ratify all of those agreements. It is still very much up in the air. We can see that the Greece haircut that started out as a 20% haircut on debt in the first quarter, which grew to a 50% haircut about July is now at a 68% haircut. In the future they are trading like it is going to be 75%. So Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 9 of 13 you can see it is kind of a moving target. Since the markets are very responsive to any kind of uncertainty this kind of thing creates a lot of churning and volatility. In the midst of all of that the earnings have been good. Corporate America is in great shape, the balance sheets are good and we have seen a 12.9% increase in the dividend on the S&P 500 this year. It is kind of a world where you have the good news and you have the bad news and in America the good news won out. There was enough good news that our return of plus 2% ranked relatively very strongly compared to the rest of the world. That is on the third page. We are at 2.1% and then Britain was minus 5.6%, Canadian was down 11%, Spain was down 13%, Germany was off almost 15% and France off 17%. The developing economies, India is down 25%, China down 21% and Brazil down 18%. America was the bright spot, as traumatic as it felt through the year, we were still the bright spot as far as the world economies were concerned. So we go into this year structured like we have been structured. It is a defensive position where you are really structured more on the high dividend stocks. We still have not gone back into the international arena because we feel that the value is still here in the American markets and also the stability. In a world that seems very unstable the beauty of what we have had to offer here is we have a stable currency and we have a stable Federal Reserve that can implement policy fairly easily. Our corporate America is in very good shape. We are going to stick with what gave us a good year last year and continue down that path. Eldon Roberts: We are still in the game the defensive team is on the field. Elaine Longer: In this business you do run different plays depending on if you are in a defensive posture or offensive posture. You can't leave the field. You look at the comparable return on investment of 0.8% on the five year treasury and 1.9% on the ten year so month to date through last night the S&P 500 is up over 4%. When you think about that is two and one half weeks time as giving you a return equivalent to two and one half years invested in the ten year treasury. That is why you can't leave the field. You still have to be in the game but cognizant of the macro risks that are still out there. As much as we love these multinational corporations with the good dividends diversified all over the world they denominate a lot of their contracts in euros. You can't say that they are immune if something continues to happen and if the euro should break down to 120 or even par to the dollar. There are still macro risks out there but you can't leave the game completely because the relative attractiveness of stocks versus bonds since bond returns are so low. You are still weighted towards stocks. Melvin Stanley: On page two of your report I noticed you bought some gold shares. Have we always had those or is that new? Elaine Longer: We have come in and out of gold. We have traded it more than we have held it. Last year there were several times that we were in the gold miner's index and we would make money. It is pretty volatile so if we get a 15% to 25% we take it. We have traded Agnico Eagle Gold and we have traded Gold Index. We also had Central Fund of Canadian which held 50% gold and 50% silver. We took the gains on that last year. This is similar to the gold trust, this Central Fund but this is 100% gold. It is not something that we fall asleep on. Melvin Stanley: It does not show a current yield. Elaine Longer: That is the thing about gold it does not pay income, dividends or interest income. It is something that in this world where the currencies are in such flux, gold has been pretty stable. Last year towards the fourth quarter and in December it fell pretty dramatically, Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 10 of 13 for the year it was still up. The reason is that gold is a safe harbor investment. It is a currency of last resort. The more uncertainty there is with the euro and with the relative currency trades, gold is kind of a safe harbor. When that went up to 156 after the close of the year we sold it. It is no longer in your portfolio. Eldon Roberts: Do you have any questions for Elaine? Jerry Friend: Greece is in talks now and that could go probably down. Elaine Longer: They are still in talks and you get a lot of rumors and the rumors actually move the market. The latest rumor is that they have an agreement that will amount to 68% haircut. What they started out talking about was 20%, which means that the holders of great debt would only get eighty cents on the dollar, as the situation got worse through the year, in July they started talking about a 50% haircut. Now they are talking 68% because basically they will take a haircut of 50% on the cash value of the outstanding bonds. The remaining 50% of their bond investment will be turned in for a 20 or 30 year bond with only a 4% coupon. They are still arguing and discussing about whether it would be 20 years or 30 years whether it will be a 4% coupon or a 4.5% coupon. The bottom line is you are exchanging your debt that might have been due in two years and now you are stuck with this 4% bond that might be due in 30 years. The value of that bond is not going to be anywhere close to par, which is what you thought you were going to have maturing at a 100 cents on the dollar in two years, you might be issued a bond that is only trading at 50 cents on the dollar. That is why the total haircut may only be a 50% haircut on the bonds that you actually own. The rest of it that you turn in you are going to get a piece of paper that is not worth what you are turning in. Jerry Friend: Is that banks that loan all that money. Is it our banks or somewhere else? Elaine Longer: It is banks. Our banks are not heavily exposed to Greece but the European banking system is exposed to Greece. A lot of this is in the European banking system and that is why there is such a case of the nerves about all of this. It is not so much about Greece as it is about then Portugal, then Italy, and then Spain. Greece is manageable but they are very concerned about the contagion affect. Eldon Roberts: In your opinion what if the political landscape changes in the United States in the upcoming election. Elaine Longer: It is really a philosophical election between bigger government and smaller government. Depending on how the election goes I think that is how you will see policy develop. If you end up with Republicans taking the Senate, which I have read a lot of research on the political landscape, there are 23 democratic seats up for reelection in the Senate and only 10 or 13 in the Republican side so with Nelson not seeking reelection a lot of the polls are saying that it is possible that the Republicans can pick up control of the Senate but not a filibuster proof amount. Then you still have the White House and major legislation that would be passed if you had a Republican in the White House, like potential repeal of Obama Care. These types of things won't go forward because you still have the veto power of the White House. If you end up still with divided government you could still end up in a situation where we can't resolve any of this. That is the danger. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 11 of 13 At this point in time the bond market is not really attacking America's bonds because we are like the safe harbor right now. We are the best house in a bad neighborhood. If you look at our balance sheet it is not much better than the European's that are under so much pressure. At this point in time we are not the focal point we are really sort of the safe harbor. If we get into the election outcome and there is no relief to the gridlock I think that could be problematic as far as the markets are concerned because we just this month topped 100% in terms of our total debt to our GDP. When countries get above 80% is when it really starts to affect the long term growth rate of the economy. It starts to hinder your ability to grow out of it. You start to paint yourself into policy gridlock where they better do something. You don't want the markets to force your hand like what is happening in Europe. It is better for them to come together and be able to do it in a systematic way. You don't want the markets to react and then do it in a quick response or a crisis type of situation. I don't know which way it will go I just hope that we are not looking at divided government in this partisanship that results in nothing of a serious nature being addressed. Eldon Roberts: It would take the Republican's winning the Senate and the White House because exactly what you said is right. They will be able to retain the House. They have a 60 point margin there. Should they pick up enough seats in the Senate to gain that but not the White House and the President remains the same he will veto everything that they come forward with. They can not get enough votes to override his veto. It would be business as usual for four more years. Elaine Longer: That's the danger. If you look at a pie chart of our budget and you look at social security, Medicare, defense, interest expense on the debt and you look at the discretionary part that people can actually tweak without getting into big philosophical fights it is only about 18% of the pie. You can't really address what is going on in this environment as far the deficit is concerned, the deficit that the spending as operating deficit is about 10% of GDP. Total debt now is 100% of GDP. You can't address it until you start getting to the point where you can actually sit down and talk about cutting into the bone and no one wants to touch that especially in an election year. Frank Johnson: That is the part that confuses me is the impact of retention in the international markets and how it is talked about there versus how here it is talked about differently. Overall it seems like the impact would be significant regardless of how it is described just based on what you were just saying. What drives the agenda socially and what we are going to continue to commit to a small slice or if it grows. I wonder at times if we can even have a constructive dialog to keep that spending. Kind of like what we do in Arkansas, there is a law in Arkansas where you have to balance the budget. Melvin Stanley: Where did this come from? Where did it ever come to a point where the Federal government could operate in the red? The City of Fayetteville can't do it and the State can't do it. Elaine Longer: The Federal government has had the ability to do it because what backs the treasury debt is the full faith and credit of the US government technically. Melvin Stanley: Did this happen when we went off gold standard. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 12 of 13 Elaine Longer: In 1971 when we went off the gold standard then there wasn't really an anchor of real value, hard asset behind the gold. A lot of people contribute it to the fact that in this world of fiat currencies, basically begin the euro and the dollar, and nothing is backed by gold. So they trade relative to each other but if you sink in quantitative easing the Federal Reserve was able to expand their balance sheet by over two trillion dollars basically buying debt that the US government is issuing and creating money at the key stroke of a computer. It is basically creating the ability out of thin air to purchase debt. Technically the ECB is not allowed to conduct quantitative easing by virtue of its charter but the ECB is working to allow banks to borrow at a three year rate of 1%. That is basically allowing them to liquefy what is on their books because they are allowing them to use just about anything on the books as collateral. They are sitting on these assets. The ECB is doing it too. The governments are un -tethered to a gold standard. The debt has increased all through the 1980's. It did not really get problematic. We are at this 10% of GDP. This is the highest it has been since the 1940's. It is out of line from where we have been at any point in our recent history. Jerry Friend: So even though Fayetteville and Arkansas can not borrow can they still go into debt? Elaine Longer: They can issue bonds and a lot of times it is backed by the entity that is issuing them. That is different because you actually have a revenue source that is backing it. Jerry Friend: Our pension fund is a liability to the City even though they did not borrow any money against us. I think there is more debt out there. Frank Johnson: It is no negative impact by the City's credit rating. That is what I understood. Eldon Roberts: I have heard it both ways. Elaine Longer: Around the country it is a very serious problem if you look at your actuary assumed rate of return it has always been 6%. At the time we started managing you we felt comfortable with that because you had interest rates on bonds that were 6% or 7% and you had expected returns on stocks from the low level at about 8%, 9% or 10% as far as the historical average annual return. You can easily back into an expected return of 6% on a balanced fund with a reasonable expectation of return. Even when we were talking to the Fire Department in 2002 still 6% felt like a reasonable assumption of return. But at this point in time when you have 10 year treasuries at sub 2% and you have expected returns on stocks up 7% plus or minus one then expected return on a balance portfolio comes down to around 5%. What is happening is pension funds across the country they have not reduced their expected return to be at a realistic level relative to current interest rates, current expected returns. You are at a modest expected return most of them are 8% to 8.5%. When you take a fund that has an 8% expected return and they have an unfunded liability of a certain amount and you say the expected return is only going to be 5% what happens is that unfunded liability just gets magnified. This is across the country. This is hidden in pension books that nobody really sees. In the investing that we are doing for municipal bonds I am only buying issues that I know. I would not buy a municipal bond fund in this kind of an environment because you really don't know where all this pension risk is hiding. It is much worse than anything you are talking about because your expected return is realistic. An 8% or 8.5%, which is where a lot of municipalities and state funds are is really unrealistic. Even though you don't own a ten year treasury at a 1.9% the Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes January 19, 2012 Page 13 of 13 bonds in your portfolio are still going to be benchmarked to that. For instance if the ten year treasury yield goes from 1.9% to 3.5% or 4% your 4% treasury that is due in 2018 is going to go down in price so your total return, you are still going to earn your 4% coupon, but net the price decline you may end up with a zero return or minus 2%. It is still a good bond you are still earning your 4% but the fact of the matter is even though you don't own a 1.9% ten year treasury your portfolio wilt act in response to what happens to that 1.9%. It is real important for pension funds to look at the assumptions of return. You are conservatively postured and always have been since 1990. You are the exception not the rule. Eldon Roberts: Does anyone else have any questions for Elaine? Thank you. Longer Investments monthly report A copy was given to the Board. Informational: 2012 Meeting Schedule A copy was given to the Board. Other: Eldon Roberts: The $200 death check that was to go to Adrian Cooper did they ever come forward. Sondra Smith: No. The check is still on my desk. I have done all kinds of research to try to contact his family. I called a cell number that we thought belonged to his daughter in law but have not heard back. We have not received a death certificate. We have searched newspapers and everything we can. Eldon Roberts: Should you visit with Kit and see about putting that money back in the pension fund and if any time they come forward with the death certificate reissue it. Meeting Adjourned at 4:05 PM