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HomeMy WebLinkAbout2014-04-17 MinutesLioneld Jordan Chairman Sondra E. Smith Treasurer Eldon Roberts Secretary Retired Position I Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page l of 23 Jerry Friend Retired Position 2 John Brown Retired Position 3 Melvin Stanley Retired Position 4 Frank Johnson Retired Position 5 Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held on April 17, 2014 at 3:00 p.m. in Room 326 of the City Administration Building located at 113 West Mountain Street, Fayetteville, Arkansas. Mayor Jordan called the meeting to order. PRESENT: Frank Johnson, Eldon Roberts, Jerry Friend, John Brown, Melvin Stanley, Kit Williams, City Attorney, Sondra Smith, City Clerk, Dee McCoy, City Clerk's office, Andrea Foren, Purchasing, Paul Becker, Finance Director, Elaine Longer and Kim Cooper, Longer Investments. January 16, 2014 Meeting Minutes Sondra Smith: The minutes have not been e-mailed out. They are in your packet for your review and can be approved at the next meeting. Pension List Changes: None Approval of the Pension List: Approval of the May, June and July 2014 pension lists Sondra Smith: There is one slight change. There will be an extra benefit for Rick Hoyt due to years of service and age. The additional amount is for July and is prorated. The July pension list has Mr. Hoyt listed twice with the extra benefit listed in a separate line item. After July it will be the full extra benefit. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 2 of 23 Jerry Friend moved to approve the May, June and July 2014 pension lists. Eldon Roberts seconded the motion. The motion passed with a unanimous vote. Unfinished Business: City Attorney Memo Reeardine Parkine Fines Kit Williams: The fines that are collected by the Police Department, part of them are deposited in the police pension fund. The vast majority of our fines are not collected by the Police Department but are collected by the Parking Division. We don't use police officers to write very many parking tickets. They can, for example, if someone parked in a disabled spot illegally, write a ticket for that. State law says 10% of all fines and forfeitures collected by the Police Department of the City for violation of ordinance or state law would be added to your fund. Parking revenue, almost all of that, would not be applicable. Mayor Jordan: Frank, wasn't that the question that you asked at the last meeting? Frank Johnson: Yes, that answered it. Sondra Smith: In your packet is a copy of City Attorney Kit Williams' memo and a copy of the information from Sharon Waters, Parking & Telecommunications Manager. New Business: Revenue & Expense Report: 1st Quarter — March 31, 2014 Report Sondra Smith: 000 the end of the 3rd quarter your book value was $6,546,751.74 and your market value was $7,253,749.76. That's down slightly from the year end. Kit Williams: What you should be looking at is the market value. Book value is just what you paid for it. Market value is what it's allegedly worth March 31st. That can obviously fluctuate up and down with the market. Actuarial Valuation State Code 24-11-205 Sondra Smith: In your packet is a copy of the state code regarding your actuary report and how it's paid for. The money that comes in from the state, part of it is used to pay for the actuary reports. Jerry Friend: Do they bid those out our anything? Kit Williams: I've doubt it because Jody Carreiro has done it for as long as I can remember. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 3 of 23 Paul Becker: The actuarial study has not been bid out since I've been going down there Jerry Friend: How do we know if we are paying him too much? Paul Becker: That's in the jurisdiction of the Pension Review Board. They make that selection and renew those contracts. Whether or not it can be done cheaper by somebody else, I can't Eat ,MTA 3N Kit Williams: It's very possible that it's professional services, so they might not actually bid it out. They might have gone out for request for qualifications. When it is done that way, they look at their qualifications and not the amount of money it costs. Rick Hoyt Additional Benefit Sondra Smith: There is a copy of the state statute in your packet that explains the additional benefit, how that works and when they qualify for it. Kit Williams: How many years did he work over 25? Eldon Roberts: He actually worked a little over three, but they have to be completed. He had three completed. Richard Watson and Rick Hoyt and I are the only three that draw that. There will never be anybody else. Kit Williams: That was under the old plan? Eldon Roberts: Right. I might add too that it is a non -spousal benefit. Arkansas Local Police & Fire Retirement System (LOPFI) Consolidation with LOPFI Letter Dated January, 2014 Sondra Smith: In your packet is a letter that we received letting you know the consolidation dates if you decide to consolidate with LOPFI. The window is April 1, 2014 to October 1, 2014 for this year. If you decide to do that we would have to do an actuarial evaluation. Frank Johnson: We are interested. Eldon Roberts: We knew this letter was coming. When this first came up there was some talk amongst the board to do a special evaluation and spend $4,000 to $5,000. We had a meeting and found out the rank and file is not ready to go that route yet. "At Risk" Letter from Pension Review Board (PRB) — Action Plan Needed Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 4 of 23 Eldon Roberts: PRB is telling what their take is on it if no changes are made. I don't know where the information is coming from. Sondra Smith: PRB is wants us to respond. The letter says "Respond with a plan of action." They would really like a response by April 30di. Kit Williams: Where the letter says the assumption is that the City would be responsible for benefit payments, I think that is incorrect in most cases. There have been cities, that in order to allow their pension plans to increase benefits when they were not approved by Jody Carreiro and the state people, agreed to stand behind the plan and finance the plan. If a city council did that, that city is on the hook. They have to stand behind it. They can't back out of it once they've done something like that. Apart from that, under current state law, I do not believe the City is liable. Of course, that law can be changed by any legislature and the legislature could make the City responsible at some point in time. Eldon Roberts: Is that the law that you disagree with, that the Attorney General rendered an opinion? Kit Williams: No. There have been two laws brought forward in legislative sessions that would have in fact done that. The City opposed those laws and pointed out to the legislator that was bringing them forward the substantial effect on city finances if that law was passed. In one case, a legislator who was a local legislator withdrew it. It was something that the Pension Review Board actually sponsored. He was just carrying it for them and didn't know what the consequences would be so he withdrew it. The second time it was tried by a different person. The Arkansas Municipal League and Fayetteville opposed that law and it was not passed. The basic position that we had was that it should be a City Council decision and it shouldn't be forced upon them by the State Legislature. A decision to spend local taxpayer money should be made here not in Little Rock. Eldon Roberts: There's no for sure direction, there's no court precedent in the State of Arkansas. That's what we're waiting for and it probably will come sometime down the path. I don't think we will be involved. We'll just have to follow the precedent once it's set. Kit Williams: That's about whether or not you can reduce benefits. The Attorney General and I disagree on that. He looks at a code section and thinks it says one thing and I look at the code section and think it says something else. We just agree to disagree on that. So you're right, there's no final decision by a court on whether or not you have the power to reduce benefits at this point in time to save your plan. Eldon Roberts: That's what you and the Attorney General argue about. There's no precedent set yet whether a city is liable for our pension plan when the money is exhausted. That is what's going to come out in court one of these days. Kit Williams: It's possible it would. I see no provision in the law that would remotely make the city liable. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 5 of 23 Eldon Roberts: It's not been to court. Kit Williams: That's right. The law can be changed by the legislature. Sondra Smith: You have a huge unfunded liability that someone's going to have to pay for at some point in time, unless things drastically change in the plan. I think the unfunded liability is about $12 million. Jerry Friend: Can Jody Carreiro officially require us to send a plan of action? Kit Williams: No, I don't think he can. Sondra Smith: I don't know that Jody is requesting it, I think it's being requested by the Pension Review Board. Paul Becker: I think it's from David Clark as directed by the Pension Review Board. Jerry Friend: The Pension Review Board can officially require us to? Paul Becker: They can ask you, yes. Kit Williams: I don't think they have any power over you. You're a creature of the statute. The only power they have is the power to review increases in benefits. You're not going to be able to increase benefits anymore anyway. Eldon Roberts: I think they have the power to withhold our insurance turn back money for not reporting and filling out forms that have to be sent in every year. Paul and I see them do that. They do have the power to withhold your insurance turn back money. I don't know that they have that power or would do that for us not responding to this letter they've written. Kit Williams: You can certainly respond. I think we did that for the Fire Pension Board when they got a request like that. I think we did a short response. Sondra Smith: We did. Kit Williams: We looked at it and there doesn't appear to be a way to resolve the issue at this point in time. The Fire Pension Board isn't ready to reduce benefits and the City Council isn't ready to have the consolidation go forward. So what's your plan? There's an impasse. Jerry Friend: If they say that we can't lower benefits, how can you have a plan? Kit Williams: The only other thing would be if you could convince the voters to raise your millage. Jerry Friend: I'd even vote against that. I don't want to pay more taxes. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 6 of 23 Paul Becker: You'd have to go to the council. Sondra Smith: Kit, you said you didn't think they would lose their current millage by trying to raise the millage? Kit Williams: I don't think the current millage would go away. Sondra Smith: You'd have to word it a certain way so you wouldn't have to worry about losing your current millage. Is it in the state statute that if the benefits keep dropping and you only have a certain number of pensioners left you have to pro -rate benefits? Kit Williams: That's what would happen if you actually had nothing in your fund. You would still get the millage coming in and the turn back. You would distribute that in a prorated basis for that year and then when it's distributed that would be it for that year. Then the next year you would be able to have further payments. That is not a good plan though. Sondra Smith: We don't want you to get to that point. Jerry Friend: What concerns me is being told we can't do anything until we get to that place. Kit Williams: If the Fire Pension Board decided to lower benefits they would have to reduce benefits 22% to make their plan basically sound. There's no guarantee but the risk of ruin is very little. They chose not to do it. If they had chosen to do it then they could possibly get a test case to the courts and they would tell you one way or the other if you can reduce benefits. To do that some pensioner would have to challenge the reduction. Now, if the board was right there would be no problem and no loss. If the board was wrong, all you do is pay all the pensioners, including yourselves, the money as if you had not made the reduction. The board members don't have any liability because the pension plan is still whole. You can wait until the pension plan craters and there's no money in there, then a pensioner could sue you, for not fulfilling your fiduciary duties to preserve the plan, and if they win then you all would be individually liable because there would be no money in the plan to pay that. Doing nothing has a risk. Melvin Stanley: Even when the Attorney General says we don't have the ability to reduce benefits? Kit Williams: Right because he's an attorney like me, and he could be wrong, without a court decision, you're not absolutely protected. In defending you, I would argue what the Attorney General is saying. Eldon Roberts: You'd take his side then of course. Kit Williams: I would be defending you so I would certainly be taking that side and make every argument I could that you didn't have the right to do it. I would point out that's what the Attorney General said and that's what the Arkansas Pension Review Board says. I would do everything I could to defend you. The only difference is there's some possibility of individual liability on each one of you as board members in that case. In the other case, where you would Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 7 of 23 lower it, if I was wrong, there wouldn't be any blow back on you all because you would go back to paying what you'd been paying and you'd pay the other part back. That could all be paid out of the trust fund so you all would not be individually liable. That's why I recommended that to the Firemen's Pension Board, but they didn't want to do that. Jerry Friend: How do we need to go about drafting the letter? Sondra Smith: We need to do it here today. Kit Williams: Or instruct the secretary what to put it in and the Mayor can sign it. Jerry Friend: Just that we feel our hands are tied. Kit Williams: You can do that. You can site the Attorney General that it is his opinion we can't lower benefits. The only thing we can do is raise revenues and we don't think we can. Jerry Friend: Right. Eldon Roberts: To me, out of the options they've given us here to respond back to it is the no change option. Kit Williams: But you might want to say why because anything like this might be evidence in the future. Jerry Friend: I think we should say why. Sondra Smith: Maybe after Elaine gives the report we can draft something. I can get it typed and emailed out to everybody. Frank Johnson: I think there should be some reference to how this has been in discussion for the last year or two. Kit Williams: Oh yeah, I think that makes sense. Sondra Smith: We can put that in the letter. Frank Johnson: It's been a matter record and it's not something that we just started talking about. I think it's important for that to be in there. Kit Williams: Let's go to Elaine so she doesn't have to listen to us. Elaine Longer: It's a very important topic. Even if the performance had been above the actuary assumption it's still in a situation where the weight of the benefits is too great for the capital. So it is a real timely discussion. I'm happy to help you in any way that I can. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 8 of 23 Longer Investments: Longer Investment Advisor Agreement 2013 Longer Investments is' Quarter report March 31, 2014 Longer Investments monthly report Elaine Longer: If you look at your reports, this is through the end of the first quarter. We've taken a couple of moves to sort of position the funds with transfers. We have some things in there that may or may not be what another money manager would hold. For instance, we had gold in there, we sold the gold at a good gain. That's not something that you want to keep and maybe in two months it's back down and then someone has to sell it at a less opportune time. So we've done some tweaking like that just to position the fund to be ready to transition. If you look at your portfolio, the first page is the portfolio appraisal as of March 3lst. Equities are about 45% of total. The income yield, which is just the dividends paid on the stocks is 3.76%. That's considerably higher than the S&P 500 which is about 2.1%. So we adhere to the conservative, the blue chip stocks that pay good dividend yield and are more defensive in the market than other types of companies. Then we have the other income securities which represent about 13% of total portfolio and produce an income yield of 6%. This has been a great addition to the portfolio. We added this in in 2013 because we were concerned about the downside risk in bond prices if interest rates should rise. Last year the ten year treasury net return was about minus 8%. This other income category delivered about 15% positive return last year. The Guggenheim Multi -Asset Fund is technically a portfolio that holds high income stock and about a 10% real estate investment trust holding, so it's growth plus income. But you can see that during the time that we've held it you've had about a 12% appreciation while it's earning a 6% return on income. The next category is investment grade bond fund which is 16% of total portfolio and yields approximately 4%. We still have some of these treasuries that now you can't even come close to them, a 5 1/8 coupon which will roll off in 2016 and a 4% treasury that won't expire until 2018. The treasury component of the portfolio is about 15% and still yields about 4% on cost. What I mean about you can't see that anymore, the current five year yield is about a 1.5% and the current ten year is about 2.6%. Then the next category, we still have some of the government agency securities which carry the 6 1/8% coupon. They won't roll off until 2015. We also have a limited partnership which represents only about 1% of the portfolio, but this is a master limited partnership that holds energy investment and yields about 6.33%. The total value is about $7.2 million, and the income yield which is just dividends and interest income is close to 4% on the total. So you have a growth component that is approximately 50% but you still have a 4% yield on total portfolio compared to the current ten year yield of a 2.60. That's been our emphasis, is to really try to secure the income yield which provides the downside protection but also it's really difficult to get yield in this type of environment because the safety trade, which is treasuries, you can't get any yield over there. You have to stretch out the risk curve or out the maturity spectrum to try to Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 9 of 23 get income yield into the portfolio. That's why you see we've incorporated so many different asset classes and types of securities within those asset classes to try to secure that yield in a conservative manner but still be able to give you a good total return. I remember the good old days where we used to be able to buy 6% government agencies with a five year maturity and a two year call. We could do that all day long. Now you can't get anything close to that. What the Fed is doing with their zero interest rate policy is they are basically holding interest rates at zero. That's forcing pension funds and endowments, retired people, people who need income to go out the risk curve to get income. So where are they going? They are going into junk bonds, less than investment grade bonds, or they extend into bond funds that may have a weighted average maturity of twenty years but they don't know the price risk should interest rates rise. They think they own a Treasury bond fund, but it has significant price risk on the down side if interest rates go into a rising cycle. It's a bit of a trip right now to be able to incorporate the income side of the portfolio without extending the risk. Kit Williams: Does the low cost of the ten year treasuries indicate that the general feeling in the world is that inflation and interest rates are going to remain low? Elaine Longer: Well, it's a real high wire act right now. If you've seen any of Janet Yellen, the new Fed chair her testimonies, they are juggling a lot. The first target, when they entered into taper, and taper is just reducing the amount of purchases that the Fed is doing in the treasury market monthly, they were at $85 billion a month and they've been tapering that off. They are trying to get to a point, sometime in the 4" quarter this year, where the Fed is not buying treasuries. In terms of when they intend to increase interest rates from zero, the goal that they sat is that they would be data dependent instead of calendar dependent. They are looking for unemployment to drop below 6.5% with inflation not going above 2%. So here we are close to 6.5% and now they are starting to move the target and now we are starting to hear 6% unemployment because inflation it still not above 2%. There are a lot of moving parts and pieces and that's why you see so much volatility in the bond market because every time Janet Yellen speaks, the whole world stops to listen. I'm hopeful that we'll get back to a point where the market is not so dependent upon central bankers. Kit Williams: Once the tapering is over, won't that stop a lot of the dependency? Elaine Longer: We're hopeful, yes. Once the taper is over you're still looking at the zero interest rate policy. By holding rates at zero, when the Fed is committed to trying to secure a 2% inflation rate, tells you that their goal is a negative real rate of return on risk free asset. They can't take rates below zero, what they can do is hold them there as inflation goes up so that you end up actually earning a negative rate of return. That's what their goal is at this point. Kit Williams: Because they are against savings? Elaine Longer: They aren't against savings so much, but if you're retired and you can't take the risk of junk or the stock market, there's not a lot out there that the individual can achieve without going out the risk curve. It's kind of a balancing act where if you look at the percent of exposure that we have to each one of those assets within the other income category or the master limited partnership category, even though they are high quality assets, we know that in a 2008 type Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 10 of 23 event, they're not going to act like bonds. They're going to act like stocks. You have to be very careful and monitor them as carefully as we do stock investments. The next page shows realized gains year to date are about $78,000 and total income which is dividends and interest income is approximately the same. The next page just shows the fixed income side of the portfolio, so the weighted average yield to maturity is 4.4% and the weighted average maturity is 3.6 years. This is a very conservative maturity and that's why you haven't seen a lot of price risk with the volatility in the interest rates because we've adhered to a fairly short moderate duration or maturity structure. Yet, we still have high coupons so we have an income yield that's higher than what you would have if you were in thirty year bonds. The beauty of it is, if you face a rising interest rate environment, you have a lot of liquidity in the short term holdings to use to go out the yield curve to tap into higher interest rates. At this point, it's kind of like a waiting pattern. You don't want to sell anything that you've got because you can't replace those coupons, but it's too soon to roll into something else that has a longer maturity. The next page shows the return history inception to date and year to date in 2014, that's this final line. The first quarter of the year, the DOW was down about 1%, the S&P was up about 1%. The small cap stocks are performing worse because in the market like this people are more likely to go into a conservative stock, so as of yesterday, the small cap indices was down about 4% year to date. Fixed income is a positive 1.4% and the income other category is up 5.7% so that the total return for the first quarter of the year was 1.1%. On the far column the 5.875% is just the weighted average total of your actuary assumed return inception to date. It was 6% for quite some time then it popped up to 7% in 2008-2009. Then of course, when interest rates crashed, then the actuary assumption was returned back to 5% largely because on the fixed income side of the portfolio you can't achieve the 6% that we used to be able to achieve. The actuary assumption during the time that this portfolio has been managed is 5 7/8% and you achieved a 6.1% compounded return annually inception to date net of all expenses. That's what I mean about the weight of the benefit that it's not a return question because your actuary assumptions that lie behind the portfolio, to be able to maintain the goals of the retirement portfolio, have been that. If you look at the next page, it's the contributions and withdrawals year to date. You can see that the withdrawals year to date have been about $268,000, and the contribution was $427 for a class action law suit. It's funny, we did a study that looked at all the class action lawsuits that have been filled inception to date on this portfolio and it's just ridiculous. The paperwork that has to go into every request for information and how much is returned. I'd like to know what the attorneys make on that. Kit Williams: I'm afraid to ask, because usually they're making millions. Elaine Longer: The next page just shows your inception to date reconciliations. Beginning value in 1990 was $1.35 million. Then there were additions that came into the portfolio of $3.5 million from other money managers as it was consolidated and transferred securities in. Total distributions have been $10.5 million and that nets against total investment return which has been $8.55 million. The total portfolio is worth $7.253 million. Paul Becker: Elaine, when you go to the net income, is that strictly interest income? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page It of 23 Elaine Longer: No, this is total return. If you look at the categories right here, net income plus accrued income is about $5.15 million. That would be all dividends and interest income. Then if you look at realized and unrealized gains that total is about $3.4 million. That would be the growth or appreciation of the security. It would break down as income which includes not just bond interest income but also dividend income. Paul Becker: So a majority of the gains have come from bond interest and interest income on security? Elaine Longer: And the capital appreciate part which is just unrealized and realized gains is about the $2.4 million. The investment policy follows and there's really nothing that I would recommend at this time changing. The asset weighting gives us plenty of room to operate within. Especially with the ability to exceed the equity category by up to 10%. You've seen us exceed on both ends in the time period that we've managed the portfolio, so there's plenty of flexibility to be able to do whatever we need to do within the asset category. Kit Williams: So you would not recommend any changes in the current investment policy? Elaine Longer: No. Kit Williams: Because they are looking at other people. Elaine Longer: Yes. Another thing is, once we changed it to be able to incorporate those other income assets in the income category that opened up a lot of ability for us to be more defensive, trying to achieve income, without subjecting the portfolio to the price risk that you find in a straight bond. I would say that's still going to be important as you go forward because at this point you are still at this multi -decade low of interest rates. You look at the duration, which is the measure of price volatility on a ten year treasury at these interest rates, duration takes into account the maturity length of a bond and also the coupon. The lower the coupon rate of return, the longer the maturity structure, the more the volatility in response to a given change in interest rate. Back in the early 1980's where we had such a dramatic rise in interest rates, you might have had a ten year treasury with a 10% coupon. You still could have seen maybe a 4% decline in price or given a 1% change in interest rates, but netted against a 10% coupon you could still have a positive return. The problem now is the duration is close to 9% and you've got a coupon on 2.6%, so 1% rate of increase in the interest rates can bring about a 9% decline in price, offset by only a 2.5% or 2.6% income return. That's a thing at this point in time because of the volatility factor, the duration, and the low coupon which is unable to offset much price sensitivity, it's very dangerous to be out there in the bond market. Sondra Smith: We don't have an equity variance to approve this month? Elaine Longer: No. I wondered if you have an update on moving forward with another money management firm. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 12 of 23 Kit Williams: I think they are doing a selection today. Jerry Friend: No, we're not selecting one today. We are narrowing the field today. Eldon Roberts: We are going over our proposals. We had six and we'll go through those today I assume. It looks like you'll be on the hook until June though. Didn't you say you'd be willing to do that? I don't think we're going to quite make it, so we'll probably have to ask you to stay with us until June sometime. Elaine Longer: We have really appreciated our involvement with the City, both with Fire and the Police Pension. We're sorry to leave the stage. Kit Williams: You've done a stellar job. Mayor Jordan: Yes you have. Elaine Longer: Thank you. We'll help in any way that we can in this transition. Andrea Foren: About how long do you think the transition period will need to be? Elaine Longer: Once the succeeding firm is engaged by the City, then it's just a matter of us submitting paperwork to Northern Trust and they handle the transfer of securities to whoever the next custodian will be. The beauty of it is it could stay at Northern Trust. It depends on the next firm. Eldon Roberts: That's where I was going, what if they don't use Northern Trust? Elaine Longer: It's a very easy transfer because you don't hold anything that's illiquid or is not traded on the exchanges. Sondra Smith: Thank you, we'll keep you posted. RFO 14-06 Police Pension, Financial Advisor Trustee Services Andrea Foren email 02/27/14 Kit Williams: My only question before you start that, are you finished with the letter? If you are, I'm going to go, I need to leave. I don't know if you need me for the letter either. Do you think you're in a position to draft one up now? Sondra Smith: I'm ready to draft one up. Kit Williams: From what they've already told you? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 13 of 23 Sondra Smith: No. I don't think we had a total agreement on what we were going to use Mayor Jordan: Do you want to go ahead and do the letter now? Eldon Roberts: If Kit's got to go we might should so he can stay here and keep us on the right path. Kit Williams: I think you've already made some statements. I thought you were in agreement that you all were in a position where you felt like you could not at this point lower rates because of the Attorney General's position. That you're aware that the City Council's not ready to assume the financial responsibility to consolidate and that you've been aware of this for a number of years, and have been working on this and considering this for a number of years but there is not satisfactory plan that you can come up with at this point in time. Eldon Roberts: Sounds great. Jerry Friend: Sounds great to me. Kit Williams: Is that okay, Frank? Frank Johnson: I'm still to Jerry's point, I'm not very clear of what the intent of the letter was. It's like asking us to respond to something that they are already aware of. Is the intent of the letter about our acknowledging? Kith Williams: It really is. It's a form letter type thing. We saw the same thing with the Fire Department. Eldon Roberts: There are about seventeen funds or more that got this letter, it's not just us. Kit Williams: And it wasn't just this year. They want to make sure the funds understand there's a serious issue here and that even though it's out there a number of years, they want you all to look at it and see if there's any plan you can make at this point in time. Frank Johnson: I think what you said is fine. I would say a preface to the letter should be that we have considered the options without being coy about it long before we got your letter. It has been part of the discussion that this board has had. Eldon Roberts: And will continue to be. Melvin Stanley: Every meeting. Frank Johnson: And maybe short bullet points, some response to additional city contributions. Well, that's highly unlikely. I'd say just a response on each one of these bullet points. It shouldn't be any more than one or two paragraphs it seems like. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 14 of 23 Kit Williams: I think it's good to respond but I don't think that really that we got much of a response from them when we responded from the Fire one. Do you remember anything from them Mayor? Were any of you here when Jody Carreiro came and gave us a presentation about the Fire one and how they would have to reduce benefits? Mayor Jordan: We had a joint meeting. Eldon Roberts: I think they had one just within that period of time. I remember the one you're talking about Mayor. That's where you sat beside me and told me not to run for re-election. Mayor Jordan: I think I said you need to get out while you can. Eldon Roberts: This has been within the last year. Kit Williams: No, it's been longer than that when they had Jody do a complete analysis. We had many people there including active people on the other plans who were also not really supportive of using too much of current City funds to pay because they knew that they were going to be tapped themselves. There's only so much money to go around. Paul Becker: We actually had two meetings. They were in room 219. Both Jody Carreiro and David Clark gave a presentation talking about Fire. Then there was a meeting here in room 326 that was joint with the council members where they gave some estimate of what they felt it would cost to consolidate. That was about four years ago, if I remember correctly. Eldon Roberts: Has it been that long? Kit Williams: It's been that long. Mayor Jordan: It's been a while back. Eldon Roberts: The meeting that you and I were in Mayor was downstairs in the old courtroom. It was joint between the Fire and Police and Jody Carreiro and David Clark were here. It was about 2009 or 2010. No, I was not present for the one where Jody came up, I was going to try to attend that because I wanted to hear what he wanted to tell them. Paul Becker: Frank in answer to your question Eldon and I are down there, about three years ago they started sending these letters because there was a concern they were being ignored. At times, they talked about going to talk to people. They didn't even have the full board of trustees like yourself to talk too and that information wasn't communicated. This was a suggested solution so that they could hear back to ensure that the board had received the information. Kit Williams: And appreciated the seriousness of the situation. Jerry Friend: I think what you said will tell all of that. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 15 of 23 Sondra Smith: As a reminder, every one of those benefit increases that caused you to get to this point was approved by the PRB board and their actuary. Now you're in the shape that you're in. Melvin Stanley: And members of this board, which can't be done by police only, has to be a Mayor and a secretary. It has to be six out of seven. I wasn't even here. Sondra Smith: The thing about it is that every benefit increase that was approved was approved because we received approval from PRB and at the time you were not actuarially sound. Melvin Stanley: But still, on the spousal benefits, to give my wife full benefits if I fall dead right now, somebody should have thought and said wow could this not cause us problems? Sondra Smith: I did say wow. Kit Williams: It was obviously a very substantial increase of cost to the pension. Melvin Stanley: And now we're told that even that benefit if we pull back on it, we'll be sued. Which would make up a difference in our actuarial report. Sondra Smith: It would make a huge difference. Melvin Stanley: Somebody would sue us. Kit Williams: And it would be up to the court to decide whether or not you can reduce the benefit or not. Frank Johnson: By eliminating that benefit. Melvin Stanley: Just that one benefit. Sondra Smith: You can't totally eliminate it because of the state law. Kit Williams: But you can reduce it down to what the state law says which is 50%. Melvin Stanley: The only reason for my wife to want me around is because maybe she likes me just a little bit. Other than that she'll have all the money. Somebody should have said let's think about this. Kit Williams: I wouldn't have voted for that. Eldon Roberts: Where were you at for that meeting? Melvin Stanley: If I thought you were going to vote on that, I would have been here. I think I was in the middle of a bad divorce right then probably. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 16 of 23 Frank Johnson: It would be nice if there's some way, and I'm not sure if this'll come across as being curt, but if in closing in this letter if we can say we are very receptive to more viable options. This is almost like a due diligence thing as opposed to giving us more viable options. I can't help from thinking that if a reduction of benefits is part of the options that maybe they think we should initiate some by contacting our socializing the problem with our local legislatures. We should pursue some legislative changes to give us that right. That is so long and drawn out. Can you imagine pursuing something like that with that bunch in Little Rock? These aren't viable options. The only viable option, I think is on there, and at some point we are going to have think about what we are going to do. More than just talking about. Melvin Stanley: We've been chasing our tails for three years on this thing. Frank Johnson: I guess it's up to us. Kit Williams: Six years ago I wrote a memo to the Fire Pension board and since I hadn't been able to get their attention on earlier memos, I titled it "Train Wreck Approaching" that was when they first started being a little bit more serious about understanding. I wrote it before the market crashed. So even with a great market going up, up, up, they still were not going to make it. Sondra Smith: I can guarantee you when I was sitting on the board, if we would have known that you cannot reduce the benefits that you were increasing, some of them would have never been approved. I guarantee you. Jerry Friend: In fact, some of us said, if this doesn't work we can always go back. That was stated. Sondra Smith: I remember that conversation. We thought if things went bad in the market that those increases could be reduced back down to the 50%. Melvin Stanley: Where were you then Kit? Kit Williams: I don't remember those conversations, but I agree that they can be reduced right now. Frank Johnson: Well, maybe at another time since we have other things on the agenda. I don't like having a discussion about reducing benefits. Kit Williams: You said the rank and files aren't ready. Eldon Roberts: Not at this time. They all understand. Kit Williams: The longer you wait the more they have to be reduced. Sondra Smith: Jerry and I were on the same page on that. We thought we could go back. No one mentioned that you could never reduce those benefits once you increase them above the Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 17 of 23 50%. So we thought if the market ever got real bad, the pension fund started failing, we could change those benefits back. Frank Johnson: So a law that would allow this board to throttle up and down depending on where we're at, is that what you're saying? Sondra Smith: When those benefit increases were voted on by the board, we thought if things went sour in the market and the funds started depleting that we could reverse those benefit decisions; like changing the spousal benefit and the things that we had increased that were not part of state statute, that we could change those back or move them back down. Frank Johnson: There are some who believe that if they go back then they'll never go back up. Kit Williams: Well they wouldn't go back up because you're reducing them only so it's sustainable. Sondra Smith: At the time they probably never would've been passed if we would've known they could never have been reversed. Frank Johnson: So we're back to the discussion about the percentage to go back to stay solvent. Eldon Roberts: That's only if we decide to go there at this point in time. I'm for waiting a while, just like the rank and file members are. But it's whatever this board's pleasure is. We can do whatever we want to do against what the rank and file says. Frank Johnson: I'm not suggesting that. We got a taste of that from, who at the time I thought were more your constituents, just when we were thinking about paying for a study. That's a sure way to get people here for a meeting, the closer we get to a discussion about a reduction of benefits. But there's always letting the clock run out and then we could talk to them about this and where we're at. Kit Williams: As I've told this board repeatedly, the Fire Pension Board is going to hit the dirt long before you do. Things will happen then that will be enlightening. Melvin Stanley: The precedent will be set whether it's good or bad. Kit Williams: There very well could be litigation at that point in time that would reveal whether or not the courts feel like the boards have the inherent power as trustees to ensure that the fund does not go bad by reducing benefits in a timely manner. Eldon Roberts: It's not just Fayetteville Fire, there's seven or eight more that are on the list they call insolvent. We are on that list but there's seven or eight that are insolvent and any of those at some given time could initiate lawsuits. Jerry Friend: Remind me, where do we have to get before they take the ability to? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 18 of 23 Sondra Smith: $5 million. Jerry Friend: Are we going to hit $5 million before this stuff happens and then it'll be too late to do anything. Sondra Smith: You don't know because if the market takes a big dip tomorrow you could go down really quick. But Fire is under $5 million. Jerry Friend: But by the time they get their lawsuit or whatever, we might be under $5 million and can't do anything anyways. Kit Williams: You wouldn't be able to do the same kind of investment that you can do right now. The understanding is you can maintain and keep the investments you have, so you don't have to liquidate all the stocks or anything like that, you can still buy mutual funds, which usually follow the market. So it's like owning stock. It's not terrible handcuffs to put on. Melvin Stanley: You just can't buy any penny stocks. Kit Williams: I wouldn't do it. Mayor Jordan: So as far as the letter goes, bringing us back to that. Kit Williams: I think Sondra's got it. Sondra Smith: There was a motion and a second to approve what's been said here today. Jerry Friend moved to approve the At Risk Letter based on what was stated at the meeting. Eldon Roberts seconded the motion. The motion passed with a unanimous vote. Mayor Jordan: Okay now, Andrea, take it away. Andrea Foren: The City advertised on behalf of your board for request for qualification for a new financial advisor for your fund. We advertised March 10th and received six statements of qualification back on April 4th. If you look at this voting form that was provided in your packet, state law says that you cannot consider price when selecting a firm. You have to select them based on their qualification and then negotiate their fee after selecting a firm based on how qualified they are. Eldon Roberts: I saw that in there and I have to ask if we finally hire somebody and can't come to terms on the fees that we pay them, where are we at then? Andrea Foren: Then you go to the second ranked firm. You would have the ability to go back out for another RFQ if you desired or you could go to the second ranked firm. Mayor Jordan: Have you all had a chance to look them all over? Do you want to open it up to some discussion here? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 19 of 23 Eldon Roberts: I'd certainly like to see it stay in the state of Arkansas and keep the money in the state of Arkansas. That will narrow it down to two I believe. Garrison Financial and Regions Bank, I believe it's in Little Rock. Andrea Foren: The proximity to Fayetteville is 20% of the consideration based on the RFQ that we put out. Frank Johnson: I agree. John Brown: We're quite used to having someone come into these meetings, provide us with financial statements and explain this. Which is very helpful. If you have someone, I think, at a greater distance, would they be willing to come? Eldon Roberts: Well they're required but I think possibly we could require them to show up at our quarterly meetings and give us a report. Mayor Jordan: Absolutely. Eldon Roberts: They would have to send somebody here. Should we want to see them on the spur of the moment or in a hurriedly fashion, it would be a little tough. Jerry Friend: I agree with you, mostly. However, Tulsa is closer than Little Rock. It's just not in the state of Arkansas. There was one there I really liked, but I prefer to stay close to home, which makes Garrison on Dickson Street. Eldon Roberts: You and I have been on the other end of this thing. Jerry Friend: Which makes Dickson Street look pretty good. Eldon Roberts: You've been on the other end of that deal with me, nobody else on this board has. Big is not necessarily better. Frank Johnson: I didn't see any really significant variances in the services that any of them offer. I don't want to limit discussion but my preference would be to go with Garrison. Eldon Roberts: That's where I'm at too. John Brown: As I've read over these, this is there flowery presentation of their firms, basically that is what you're getting. I can't imagine anyone is going to say anything negative about themselves. They're very similar qualifications. Mayor Jordan: Sondra you can correct me if I'm wrong, when we did this with the firemen, I think they brought in two and interviewed them. Sondra Smith: Two or three. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 20 of 23 Mayor Jordan: They brought them in and just fired questions at them. Then they made a call from there. You can pick your top two or three and bring them in for an interview. Or if you feel comfortable with somebody today, I'm good with that. Melvin Stanley: I have not had a chance to go over a lot of this but I've leaned pretty heavily on this guy here on my right because I figure he's watching his money and is watching mine as well. He says he has checked into this Garrison firm and said that he believes that they are doing a good job with the Fire Department and I would most certainly yield to that. Frank Johnson: They were also recommended by Elaine as well, I'm not sure how that factors in. Eldon Roberts: Well I notice how much work they already do for the City and I understood both of you two gentlemen to tell us back some time ago that they had been doing some work even other than what they are doing now for the City and you were pretty comfortable with it. Paul Becker: I'm familiar with three of the firms. Bank of Oklahoma, they do trust work for us. Regions at one time did trust work. Garrison had the agreement with the City, they did the investment for the City prior to the time I got here which was 2006. They did it for eight years. They did a very good job, market conditions have changed but during those years they did a very good job. The City chose to change through a selection process. They have been doing the Fire Department and from what I can tell, I can't speak for the Fire Trustees, they seem to have been doing a good job. Sondra and the Mayor can comment on that. They've been doing the best they can for the Fire Department, which is restricted and there's only so much. I am familiar with them on an investment basis and I will say that do a good job. Mayor Jordan: They have, we've dealt with them before. Eldon Roberts: It's here for everyone to see, I'm just pointing it out, the Fire Department obviously, the Fayetteville Public Library, Fayetteville Public Education Foundation, Single Parent Scholarship of Northwest Arkansas, United Way of Northwest Arkansas, Elizabeth Richardson Center. I've talked to the Fire Department and they are as tickled with these folks as they can be. They don't feel like they've missed a step by leaving Elaine and going there. Elaine opted to let them go because of the $5 million deal. She just couldn't generate the revenue and the income with the restrictions once they fell below $5 million. But they are very comfortable with this group. Frank Johnson: Just a question for Andrea, I have a financial interest in two of the organizations they have on there, just as a matter of disclosure, is there any issues there? Andrea Foren: I don't believe so, unless you are part owner in the company or something. Frank Johnson: No. What's the next step? Mayor Jordan: If you want to make a motion and second to pick Garrison and then we just take a vote, then I'm good with that. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 2l of 23 Frank Johnson: For an interview or to hire? Eldon Roberts: Hire. Sondra Smith: Don't we need to fill out the form? Andrea Foren: Yes, I would prefer to short list and vote that way if negotiations weren't successful with Garrison, you could come back to whoever your second one is that you selected. That's something that we do with city practice, I don't know that it's required of the board or anything. Mayor Jordan: I can tell you the Firemen picked three, brought them in and interviewed them and made a call after they interviewed them that day. Jerry Friend: I would feel more comfortable interviewing two or three but if everybody's set on Garrison I would hate to bring somebody in knowing that we're not going to get them. So if everybody's for Garrison then I don't have a problem with it. Mayor Jordan: If we can't come to terms with Garrison, who do you want to fall back on? Eldon Roberts: Back to what I was saying about staying in the state, Regions. Andrea Foren: You wouldn't have to vote on a second today. If negotiations fait with Garrison, you could start over or have another meeting and select a second firm. Frank Johnson: We stilt have that timeline with Longer. We have until June. Mayor Jordan: Who would you like to be your negotiator? The Firemen had Pete Reagan negotiate with Garrison. Eldon Roberts: I think it should be this board. I wouldn't want that responsibility. Mayor Jordan: He made a report to the board. Andrea Foren: It was kind of just a primary contact person. Mayor Jordan: He wasn't the one that said this is what we're going to do. Mayor Jordan: First we need to vote for Garrison. Eldon Roberts: I'm interested in the fees obviously, and I don't want to pay any more than we've been paying and I don't want to pay as much starting out. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes April 17, 2014 Page 22 of 23 Frank Johnson moved to hire Garrison Financial to be the financial advisor for the Police Pension Board. Eldon Roberts seconded the motion. The motion passed with a 6-1 vote, Jerry Friend voting no. Sondra Smith: The only reason I voted yes is because we went through that and I've heard Garrison and all the other ones and really you don't hear any more than what you read in the packet. I asked accounting and they are very happy with Garrison. We haven't had any issues. We've used them now for two years. That's the reason that I'm comfortable with them. Jerry Friend moved to have Eldon Roberts and John Brown talk to Garrison Financial. Melvin Stanley seconded the motion. Upon roll call the motion passed with a unanimous vote. Eldon Roberts: How are we going to get this appointment set up with Garrison? Do I need to call them myself and set up an appointment with a time frame John and I can both meet? Sondra Smith: Yes. And then we will need to have a special meeting after you get the contract negotiated before June 30th. The sooner you can get that done then we can have a meeting. Maybe at that meeting they can come in and introduce themselves to the board. Andrea Foren: Typically, you can get a draft contract from them. Sondra Smith: In your packets there's a copy of the Longer Investment contract and the fees. It's called the Advisor Agreement. Eldon Roberts: Do we have elections coming up for the Pension Board? Sondra Smith: Yes. I was getting ready to mention that. We are sending those out around the first of May. Make sure that people get that turned back in. We'll probably give people until the middle of May. If we give them too long they forget to turn everything back in. Melvin Stanley: Who's up for reelection? Eldon Roberts: Jerry and Frank. Informational: 2014 Meeting schedule July 17, 2014 October 16, 2014 Mayor Jordan: So we have another meeting in June and we may not have to have one in July if we have one in June. Sondra Smith: I would advise you that we have the meeting before the end of May because your current board is through the end of May. Should someone else be appointed or elected to Policemen's Pension and Relief Fund Board of Tmstees Meeting Minutes April 17, 2014 Page 23 of 23 the board you don't want them to come to the meeting and have to select an investment advisor or hear all this for the first time. I am not saying that anyone is going to get voted off the board but I would just suggest we have a meeting sometime late in May before the actual deadline of the board terms. Eldon Roberts: I guess before we go any further, Jerry and Frank are you both willing to serve again? Jerry Friend: Yes. Frank Johnson: Yes. Meeting adjourned at 4:00 p.m.