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HomeMy WebLinkAbout2014-10-16 MinutesLioneld Jordan Chairman Sondra E. Smith Treasurer Eldon Roberts Secretary Retired Position I Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 1 of 17 Ruston Cole 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 October 16, 2014 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held on October 16, 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: Mayor Jordan, Frank Johnson, Ruston Cole, John Brown, Melvin Stanley, Sondra Smith, City Clerk, Dee McCoy, City Clerk office, Kit Williams, City Attorney, Trish Leach, Accounting, Kerry Bradley, James Bell, and Glenn Atkins, Garrison Financial ABSENT: Eldon Roberts Sondra Smith: Mayor, we have a new board member, Ruston Cole. This is his first meeting to attend. Kit Williams: Welcome aboard. Ruston Cole: Thank you. Mayor Jordan: Welcome. Approval of the Minutes: Approval of the April 17, 2014 meeting minutes Approval of the May 29, 2014 special meeting minutes Mayor Jordan: Has everyone had a chance to look those over? Do you want to do them one at a time or both at once? Sondra Smith: You can do them both at once if you'd like. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 2 of 17 Frank Johnson: I strongly encourage everyone to read April 17th, it was very interesting dialogue. John Brown moved to approve the April 17, 2014 and May 29, 2014 meeting minutes. Frank Johnson seconded the motion. The motion passed with a 6-0 vote. Eldon Roberts was absent. Pension List ChanEes: None Approval of the Pension List: Approval of the November and December 2014 pension lists Approval of the January 2015 pension list Sondra Smith: There are no changes to the pension list. If something changes we will bring them back for re -approval. Frank Johnson moved to approve the November and December 2014, and January 2015 pension lists. Melvin Stanley seconded the motion. The motion passed with a 6-0 vote. Eldon Roberts was absent. Unfinished Business: None New Business: Revenue & Expense Report: 3rd Quarter — September 30, 2014 report Sondra Smith: That is the report accounting does for us. It is a history of the revenue and expenses over the past few months. There's no approval needed. Frank Johnson: It's interesting if you put it in a graph. I would appreciate a digital copy of it so I can play with it. I will share with you guys. The graphic illustrations are sombering but it's a better perspective of where our balances are. 2013 Actuarial Valuation Sondra Smith: The actuarial report is through the end of 2013. One thing that you may want to take note in is your unfunded liability on page ten which currently is $13,381,097. You are only 34% funded. One good about that, is it has only dropped .1% since last year. It's still a large unfunded liability. Trish sends the information down to the actuaries then they do the report. Frank Johnson: Is this report shared with the Council? Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 3 of 17 Mayor Jordan: I don't have an answer for that. I don't believe it is. Kit Williams: They pull numbers out of this report and provide it to the Mayor for the annual report to the City Council but this whole report does not go to them. Frank Johnson: So the only insight they have about this comes during your annual report? Sondra Smith: Yes, in January. Kit Williams: Of course we did have that joint meeting at one point with the City Council and the Firefighters and the Fire Pension when Jody Carreiro came here. Sondra Smith: We can send it to them if you so choose. Kit Williams: It's too long to be effective. It would be better to have the Mayor's report which is shorter but has the most important stuff in it. Trish Leach: There is also a summary of some of this information in the Comprehensive Annual Financial Report for the City. Kit Williams: When the Mayor actually gives them a report during a regular City Council meeting, that's when they understand. For years they've understood that your actuarial report says that you're not financially sound at this point in time. Mayor Jordan: They are familiar with that. Frank Johnson: I was just asking as a matter of their awareness. Kit Williams: I don't know how much they are aware. I think that the Mayor gives how much the unfunded liability is. Mayor Jordan: I can tell you in my report in January I told them how serious the situation was. It was not exactly what you would call a stimulating report. Sondra Smith: We always put a copy of that report in the packet. At the January meeting there should be a copy of the report. Mayor Jordan: Is everybody good? If you want to look it over and talk some more about it, I'm fine with that. Frank Johnson: I think it's a matter of due diligence, for the record, that we should have discussion about it. I would say, just looking at the cover letter, that we are all familiar with our response is no on whether or not we meet the necessary reporter contribution. Is the funded percentage at least 97%? I'm not sure what kind of discussion we can have other than just acknowledging the condition. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 4 of 17 Kit Williams: I'll say it's been a number of years that it has been no under all those questions. It was a long time ago when it was yes. Sondra Smith: You can see on the unfunded liability page that back in 1997 you were 102.9% funded. Where there's a little asterisk beside the year that means a benefit increase or something happened to you plan. Most of the time the asterisk means it was a benefit increase. Every time a benefit increase was done the plan continued to drop. You can look at 1997, you are 102.9% funded and then you go to 68%, 71%, 59% and then you just continue to deteriorate. Frank Johnson: I certainly understand that relative to the changes in the benefits and the number of beneficiaries and the addition to the spouse and the survivor's benefits. It was 2008 when we took the big hit in the market. Kit Williams: We've come back from that, the market has any way. Frank Johnson: With that being said, with the exception of Melvin, you're looking at some of the youngest survivors on that plan. As far as I'm concerned if there's just a dollar left in it when whoever takes the last breath that is fine with me. Then there's the matter of just keeping it solvent. I don't know that there's any other discussion. What was the percentage increase in 1997? Kit Williams: I think that might have been the cost of living one that you all did where it was 3% for five years. If I'm not mistaken you did a cost of living increase. Melvin Stanley: That didn't start until 2003. Kit Williams: 2003? I don't know what you did in 2007 then. Kit Williams: That might have been one of the assumption changes. They changed the amount of money you were supposed to make on your funds up and then they adjusted it back down. Right before the market failed they said you're going to make a lot more money. Sondra Smith: In 1997 it didn't go into effect until early 1998, your percentage went up. It says "request to increase the benefit amount of present and future retirees to the highest of either 60% of salary or 55% of salary for 20 years of service." That was done, it looks like, in 1998. Before that, you were probably at 50%. That might have been the first benefit increase. In 1999, you requested for current and future retirees to go to 100% of salary but did not want to include the spouses. That was approved but they said you couldn't go to 100% I think PRB approved 90%. Then there was a resolution to merge with LOPFI in 2003, but that never went to the Council. There was another resolution to add the COLA, in 2003. We did the five year, temporary, 3% COLA it looks like. In 2005, you wanted to make that COLA permanent but we couldn't. So, that did not get approved. Then we wanted to go to 95% of base, but that didn't get approved then. In 2006, the survivors' benefits came forward again and that was approved to go from 50% to 90% for survivors. Melvin Stanley: That was when? Sondra Smith: In 2006 according to my spreadsheet if I've got it all tracked properly. . Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 5 of 17 Frank Johnson: Help me understand what the marked decrease in the 5% is contributed too from 1999 when it was at a high and then almost the following year. There's just something in there that I'm not really sure about. From 1999 to 2001, that marked decrease in the funded percent. Sondra Smith: Because that's when you did that benefit increase. Frank Johnson: To 90%? Sondra Smith: Effective date was August 1, 1999 request increase current and future retirees the base amount to 100%, but it didn't pass. PRB approved, it looks like, 90%. Frank Johnson: Previous to that it was what? Melvin Stanley: 65%. Sondra Smith: Previous to that it looks like it was maybe 60%. It says PRB approved 55% or 60%. In 1998 I wasn't here and I could not find a resolution the board passed on which percentage they went with. I'm assuming they went with 60%. Amount. That was in 1998 from what I found. In 1999 it looks like there may have been another benefit increase requested. You all wanted 100% but it looks like PRB approved 90%. I'll have to research that some more. The last big increase was in 1999 and that's where you see your plan drop drastically. Frank Johnson: I was just curious about that with the number of beneficiaries and a 25% increase, something just doesn't reconcile there. Trish Leach: You have to remember the way they base this off of this report we do for them every year. Even though people weren't drawing at the time, they would've been listed on the report as potential retirees. To me, that sort of makes sense if you think about it that even though the increase went into effect in August, at the end of the year looking forward they would take everything into consideration that was coming and say everyone is going to be drawing 90%, but not the surviving spouses. Sondra Smith: It looks like the next increase was in 2003 and that was the COLA. Kit Williams: If I remember, that's the last increase that was allowed. Sondra Smith: No, the survivors was the last increase. Kit Williams: That was after the COLA? Sondra Smith: Yes, it was in 2006 from what I've got. Kit Williams: That was a pretty substantial increase too. Frank Johnson: This is an actuarial report, this is not like the finance report that's all the cash flow basis. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 6 of 17 Sondra Smith: And that's the other thing, at the time that you did some of those benefit increases you would not have qualified for the increases on the actuarial soundness basis. The only way you qualified is because you requested the increase on a cash flow basis. That was my understanding, some of it was done when I wasn't clerk. I have been going back through records and trying to recreate what I found. I can get with Trish and make sure that the dates are pretty much the same. I know those dates are approximate, but they're real close. Frank Johnson: On page four, that contribution from employer, is that all from the millage? Trish Leach: And everything else that you collect, everything is reported. The report we send them beaks everything down into all the categories very similar to what we do on the full summary we put together. PRB has their way that we report to them and then they accumulate this. Kit Williams: The millage prior was the vast majority of this almost $800,000. Trish Leach: Yes. Frank Johnson: The necessary employer contributions, what does that number represent? Trish Leach: That's what the actuary calculated that needed to be put in the fund. Kit Williams: It says enough to pay off the unfunded actuarial liability over a five year period. Sondra Smith: So if the City were responsible, they would have to put in $3 million a year for the next five years to get you funded again. Frank Johnson: So when they calculate the unfunded liability, what was it again? Sondra Smith: That was on page ten. At the end of 2013 it was $13,381,097. You are only 34% funded, according to this report. 2014 turn back Sondra Smith: Trish is very good about doing an excel spreadsheet to show you over the past few years what that turn back money has been and what it is at this time. If you'll notice in 2014 for the plan itself we got $152,519 and the future benefit was $44,280 and the police supplement was $24,600. PRB tell us how we have to disperse that. The letter said that we have to give $1,080 per pensioner and that comes to the $44,280. The people drawing with a qualified domestic relation orders do not get that. Then you get that extra $50 a month for the police supplement, too. Currently they do a first round of money which was $120,410. Because of some funds being really low on their funded liability, they go ahead and do a second round. On the second round we received an additional $32,109. The two of those are added together to come up with your $152,519. They just started that second round about three or four years ago. We qualified for it every year since they started it. There's a copy of the checks and the letter and how we have to disperse that attached to the agenda. Instead of doing separate checks, accounting is adding that to the one monthly check now so that we can get it out quicker. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 7 of 17 Frank Johnson: So this money never really makes it into our investment portfolio. Sondra Smith: What goes into your investment portfolio, and Trish can correct me if I'm incorrect, is the $152,000. That goes back into your plan. The $44,000 is what went out at $1,080 per pensioner. The other goes out at $50 a month. Mayor Jordan: So that $152,000 goes toward $3 million? Sondra Smith: Back in the plan. And that's the reason if we get that in July Trish doesn't have to ask for a draw in August because she has that money to go ahead and pay the pension fund. Mayor Jordan: That's split off into monthly checks for everybody? Pension Review Board (PRB) "Evaluating Investments" memo Sondra Smith: That is a letter that we receive every year and they want you to look at your investments to make sure that you are investing properly. I can give Kerry and them a copy of the packet and they can look at that, but usually we are investing according to how PRB thinks we should be investing. There's really no action that we have to do on that except for look at it and make sure you're reading where it says how much liquid, performance, index. Frank Johnson: Kit what is this? Is this a due diligence thing they are doing? Kit Williams: Are you talking about this PRB thing? Frank Johnson: Yes. We are aware of what the statutory restrictions are. Kit Williams: We disagree on that. But yes, they are trying to cover themselves and make sure that every plan that has got some financial problems is aware of it. They figure, by sending this they'll certainly alert them if they aren't alerted by the fact the actuarial report says they are in trouble. Frank Johnson: Is there an expectation for a response, Sondra? Sondra Smith: No. It says "This memo is neither a complete checklist nor a legal opinion. It should be used as a guide to assist local boards with regular review of the investment program." Kit Williams: The fire plan is in such bad shape that they've actually sent a letter that wants a reply. So we have replied a couple of years to them for the fire pension plan. Sondra Smith: We had to send a letter early this year because we were an at -risk plan. They will probably send us another letter in January wanting a response. Kit Williams: The fire pension is at -risk. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 8 of 17 Sondra Smith: They sent one to the police too. Fire is insolvent, we are just at risk. So they will probably send us another letter in January like we had to answer the last time. I'll bring that before the board and this time we will write the letter at the board meeting to make sure we get it correct. Frank Johnson: Feel free to just copy and paste unless Garrison does something in the next three months that's miraculous. Sondra Smith: We'll just pull up the one we sent before and then just go through it and make any changes that y'all want to make to it. Frank Johnson: Sounds good to me. Sondra Smith: That will probably be January or April. Discuss rescheduling the January 15, 2015 Policemen's Pension meeting Sondra Smith: The meeting in January is scheduled for January the 15th that is the week of Arkansas Municipal League. I was wondering if we could go ahead and reschedule that meeting. You may not have a quorum. A discussion followed on rescheduling the January, 2015 meeting. Frank Johnson: There may be some outcomes from the Municipal League that would be related to our business. Mayor Jordan: There probably will be, Frank. Sondra Smith: They'll go over law updates, or all of the proposed things that are going to the legislators. Frank Johnson: It would be good if we could include whatever outcomes of that meeting. Sondra Smith: I'll go ahead and book this room for January 22nd at 3:00. Garrison Financial: Kerry Watkins email regarding transfer complete Kerry Watkins "Cost Basis" letter 4t" Quarter reports Kerry Bradley: Thanks for letting us help you with the investments. We are excited to work with you. We brought the whole gang today. In future meetings you might see us interchangeable but we wanted to make sure you could put a face with all of our names. James Bell, Glenn Atkins, and my name is Kerry Bradley. This is the investment team down at Garrison, so you're looking at it. Again, in future meetings we may rotate a little. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 9 of 17 Sondra include some of the information about when we were transferring it from Northern Trust to Schwab since that's where we custody most of our assets. That went very smoothly. I think it actually hit our system June 30. We got a quarter under our belt and we were able to send you a quarterly report a couple of weeks ago. I read through the minutes of the May meeting the other day and I just wanted to point out that there were some questions about policy statement and fees. I just wanted to clarify that for you guys. We did execute a new policy statement on the account. We didn't really have a problem with Elaine's. I don't know if you guys recall, we spoke about, she had a maximum and a minimum range for equity. The way we typically do it, we'll have a stated goal for our equity exposure and then a range around that. For instance, we have a 60% equity policy with a 10% variance around that. Elaine's, for instance, was 50% to 35%. We did execute a new policy statement, it's very similar. Elaine had a category entitled other, which we typically don't do. I think most of her other category was equity but it was kind of income producing equity, utilities and such. We kind of lump all that into equity exposure on our side. Again, it's very similar, it's just worded a little differently. So we did execute that, I think the Mayor signed that. There was a question about the fees, I will say our fee is a 50 basis points across the board. Elaine Longer had a tiered fee structure. For instance, if you'll see in our quarterly report the fee for the quarter was $8,961. That compares to $15,058 for the second quarter. We were able to shave a good bit off of that management fee for you guys. You guys were paying a Northern Trust fee of about $300 a month, that's gone away. That's one of the reasons we use Schwab, it doesn't cost our clients anything. They don't charge you anything to custody the assets there like Northern Trust does. The quarterly report is in your packet there. Again, we started and hit the gate running July 1s1 We have done some restricting of the portfolio. We are very close to target. Our reports are a little different then what Elaine would typically send. If you want to see something else that we're not including or that you're used to seeing from Longer, we're happy to produce that for you. Just let us know. Our policy is 60% equity, 40% fixed income. We are right at the 59.6% target at the end of September. It was a little overweight equity when we got it so we reduced some exposure there. We are setting out a little cash. Most of that will go back into fixed income, unless the markets continue to sell off like their doing then we'll probably put a little bit back into the equity market. I did give you an updated portfolio as of the 15`h. I don't know how closely you guys watch the market but it's been quite volatile the last three weeks. We've had some pretty interesting days. The portfolio is down just a little since quarter end, but it's nothing that we're massively concerned about. The letter that we send with the quarterly that is kind of a stock letter that we send to all clients. It doesn't necessarily completely apply to your portfolio since we haven't quite got it all restructured from the way Longer had it invested. I will say, just in the market in general, we had gone three years without a 10% correction in the equity market. We got that intraday yesterday. I think we hit that mark and recovered a little bit. For right now I think this is a healthy correction in the equity market. The U.S. is still growing, albeit slowly, and I think we'll see that for several more years. The equity market got spooked because of some concerns in Europe and growth over there slowing. Unless that slows markedly, I'm not of the mind that it's going to suck us into recession in the next few quarters. We are right on target. We still have some restructuring to do in the portfolio out of some funds that Longer had you in into some Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 10 of 17 individual securities. We are getting close to some of those opportunities with some of those stocks we like with the sell-off that's happened. Performance in the portfolio, unfortunately, was actually down for the quarter. We had about 86 basis points. That was from the stock side. Longer had you quite heavy in energy stocks and that's really what took a bearing this quarter. We lightened up a little bit back in July, didn't lighten up quite enough, so that's really what's dragging this portfolio down right now. It's nothing long term I'm too concerned about. There were a few drillers, deep sea drillers, in your portfolio. Those have gotten decimated the last few weeks with the price of oil dropping so rapidly. We've had a little bounce back in those today. We'll probably be pairing some of that back if we can get a little correction. It's starting to stabilize the last few days, the oil sector. I think we'll get an opportunity to rotate out of those. Hopefully we'll get a little bounce. We still have a lot of work to do on the portfolio. We'll do that over the next three or four months. I expect this to look much more like our typical portfolio towards the end of the year versus right now. Glenn is our fixed income manager so he can speak to the fixed income in your portfolio. And then y' all ask us any questions that you have. Glenn Atkins: Thank you, Kerry. I would just like to echo what Kerry said, thank you for trusting us with your business. We take it very seriously. We're grateful for your trust and confidence and we're happy to be here. We have begun to restructure the fixed income side of the portfolio as well. Basically what that means is selling some of the mutual funds and unit trust and reinvesting the proceeds into individual securities. We sold about half of the position of the iBoxx Corporate Bond Fund that's called the liquid, the LQD. We invested a portion of that in some investment grade fixed income bonds. There are two truths in the bond market. The first one is, as interest rates rise the prices of bonds fall. The second truth is that the longer your bond maturity, the faster the price falls when rates rise. The average maturity on that iBoxx liquid corporate fund is about 7.8 years. Our expectation of rising interest rates over the next 18-36 months, that's too long. That is too long of a maturity to be in, in our opinion. The index that we measure ourselves against on a fixed income side is the Barclays Intermediate Government Credit. The average maturity on that index is about three years. Your portfolio overall right now has an average maturity of 4.25 years. We're a couple, three, six months longer than the index, which I think is very well positioned. We've got some short term treasuries, some intermediate corporate bonds that we like. We've still got half of the position in the iBoxx Corporate Grade Fund. Eventually we will come out of that fund because of the long maturity and invest it in investment grade corporates that more closely match the maturity of the index. We have begun that process and you will see more of that over time. Not only does it get the portfolio structured like it needs to be, it takes a level of fees out as well because there is a fee charged on the unit trust. What I would like to do now is walk you guys through a scenario in your portfolio that we are likely to do. On the surface of it, it doesn't make any sense. I want to make sure that we talk about it, have a discussion and kind of understand it. What I would like to do is point you to the very first Treasury note that is held in your portfolio and quarterly report. That particular Treasury note is $150,000.00 in par amount, it has a coupon of 5 1/8%, which sounds really good on the surface. It matures May 15, 2016, so roughly eighteen months from now. The 5 1/8% coupon sounds really good but if you look to the far right hand side of that page under the column labeled yield, that bond is only actually yielding .4%. What's going to happen between Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 11 of 17 now and maturity, the market value on that bond at the end of September was $161,384. In the next eighteen months when that matures you're going to lose $11,384 because you're only going to get back $150,000. Even though the coupon is very high, the actual yield or the actual return that you're earning on that investment is only .4%. If you just look at the coupon, it looks really great. But if you look at the underlying yield, it's not so great of an investment. What you're likely to see us do is to sell those types of investments and reinvest them into this corporate bond sector where you look down there and the yields are anywhere from 1.5 to 2.5 depending on the maturity. That is very confusing, so I just want to pause and let's talk about this and take some questions, comments or thoughts. On the surface of it, it doesn't look like it makes any sense to sell an investment with a 5% coupon, but in fact you're only actually earning less than .5% on that because you're going to lose the difference between $161,384 and $150,000 when the bond matures. Would you rather have a bond that paid 10% interest or 5% interest? You'd rather have the 10%. If you look at alternatives in the market, you have to pay more in dollars to get that 10% bond. That's what's going on here. And because you paid more, your yield is actually considerably less than the 5 1/8%. Kerry Watkins: You didn't really pay more but the market has moved and your market value has increased. We get this questions a lot, why would you sell this at 5% coupon and buy me something at a 2% coupon? We don't necessarily focus on the coupon, we focus on the yield that we're going to get when we buy back. John Brown: It's the end result that you're looking at. Kerry Bradley: Right. Glenn Atkins: If we were to buy a current market rate bond just like this, the coupon on it would be .4%. The buyer of the bond has to be indifferent to buying the 10% at a high price, or the 5% at a low price. At the end of the day, like you said, John, it's the yield that matters. It's what you actually get. The bond market prices bonds with different coupons to where the buyer is indifferent. So if this bond were to be issued today, the coupon on it would be .4% instead of 5 1/8% and it would trade at 100% instead of 107.5%. Does that make sense? Frank Johnson: It makes sense. The return investment on these bonds are dictated by the interest rates? Glenn Atkins: Yes. Frank Johnson: I guess I'm thinking about the initial investment versus where we're at right now. Kerry Bradley: A lot of people think well your yield on cost is the 5.125% but it's worth $161,000 now if we sell it. If we hold it until maturity, we're only going to get $150,000. The extra income you're going to get from that 5%, a lot of it's going to be wiped out from the $11,000 you're going to lose on the principle. Its yield to maturity. End of the day, how much is in your pocket. Frank Johnson: Nothing is going to change in the next few months, you think? Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 12 of 17 Kerry Bradley: I think we're going to have low interest rates for an extended period. Bullard came out today, and that's kind of why the market rallied. They've tapered their bond purchases and they were supposed to end at the end of this month. He said if weakness persist in Germany and things are getting worse, we're going to keep up those purchases. He was still indicating a move first quarter. The market and all the future information you look at, people are kind of expecting a move from the Fed in September. I'm not real sure if it'll happen then. Frank Johnson: I understand. Glenn Atkins: It's a very delicate balancing act between investing in longer maturities to get more yield but not so long that you really get price declines if rates were to spike. With your portfolio right now having an average maturity, we call it a duration, of about 4.25 years. I think it's positioned very well no matter what happens to rates. What we're going to do over time is reduce that exposure to unit trust because the maturity on that thing is almost eight years, and reinvest it in things that look more like the corporate bond section that are in the 4 to 5 year maturity range to get that 2 or 2.5% yield. Either after or in conjunction with that we will begin to sell these low yielding, high coupon things that we've been talking about and reinvesting them at higher yield to maturities, or end of the day kinds of returns. On the surface of it, if you just look at that, it doesn't make any sense at all. That's why we want to talk about it and walk you through it. Melvin Stanley: The same scenario would fit for the farm credit? Glenn Atkins: Yes sir. The coupon is not what we focus on and what you all should focus on. What we should focus on as a team, you and us, is the yield to maturity, the quality of the portfolio and the average maturity of the portfolio. The average maturity of the portfolio right now is positioned as well as it can be. The changes that you're going to see coming forward is selling out of the long unit trust and investing in more intermediate term securities. That way, if we get an interest rate rise in 18 to 36 months we will suffer some price declines but it won't be that bad and we'll be able to reinvest the cash flows and the bonds as they mature at higher rates. On average, we're ideally positioned but you're going to see some shifting of the underlying deck chairs, if you will, to come out of the longer mutual fund, more intermediate, high quality corporate bonds. Kerry Bradley: To speak to the solvency of it a little bit, the actuarial assumption is 5% return. Certainly interest rates are historical lows, the Equity market with the government debt and all kind of things we have going on economically. Over the next 5 to 10 years, if we can eke out 7% in equities, which historically they've given us 10% on the bonds, they've historically given you 5% but we're in the 2%. I think a 5% rate is fine and acceptable and I think in a balanced account you can expect that over the long term, even where you are now. Those actuarial assumptions can move so much based on that return assumption. It's very interesting to see when those move just a little bit. Through June, $537,000 had been withdrawn from the portfolio. With your e-mail to me the other day for the November withdrawals, $200,000 that we have taken from July until November. I'm not sure what December will look like. Trish Leach: We'll get more property tax, so we'll just have to see. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 13 of 17 Kerry Bradley: If you didn't pull anything else out, you're looking at about $700,000 on a $7 million portfolio. That's a 10% withdrawal rate. When we're doing this for retired folks we like to not invade principal. Obviously this one is designed invade principal at some point. It's hard to time that last dollar you're going to need. Glenn Atkins: That's all we've got formally prepared to talk about. We would love to hear feedback or ideas or suggestions or criticisms or concerns, anything. We like this to be a dialogue. Frank Johnson: So, we're becoming more aggressive now in this? Kerry Bradley: I wouldn't consider it more aggressive. What Longer had on your policy statement was equity. It was maybe just a little more income producing equity. We will keep some of that in the portfolio. There is a lot of utility exposure. That's worked out pretty well this year because rates have dropped. Utility stocks act like bonds most of the time. In the 2008-2009 debacle, they acted just like an equity. They were decimated as well. We peeled off a little of that utility exposure because this time last year I wouldn't have thought the ten year would be at 2.20 but it is. Eventually rates will rise and they will normalize. We may have a couple more years of incredibly low but I wouldn't consider it more aggressive. Glenn Atkins: Certainly coming out of that long bond fund and shortening up that is a less aggressive move. Kerry Bradley: As far as total equity exposure you're going to be about the same. Our style is such that we have a good mix. We like dividends. We think that's a good check on management. We know cash flow is coming through. We like dividend paying stocks and you'll see a number of those in there. We keep a good mix of small, mid, large cap dividend producers and some that don't pay dividend. So, I would not consider it more aggressive. Frank Johnson: I don't have any more questions about the report. Kerry Bradley: As far as the letter goes that you're talking about, we fall within all of these perimeters. Our fee is very clear cut. You can see that on the back page. We will give you performance against some benchmarks that I think the board would feel completely appropriate. Liquidity for the firemen, we usually keep 3-4 months of liquidity in it. You've got a little extra liquidity just because we're restructuring now. We like to keep at least a couple months' worth of cash needs in cash for you guys. Kit Williams: Can I ask you about these graphs you brought? Glenn Atkins: I was just going to show you some pictures. The first one is what the ten year treasury yield has done since the beginning of the year. It's gone down slightly, but very volatile. The second picture is what the yield on the ten year treasury has done for the 3`d quarter. Essentially flat through quarter end, but it's down considerably since then. The takeaway from this is there's a lot of volatility in the bond market right now and we have to be very careful when we put assets to work. The last page is what rates have done since the end of the quarter. They've gone down from 247 to a 217. That is a huge upward move in prices in the bond market. It dovetails tells exactly what is happening in the stock market. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 14 of 17 Kit Williams: People transferring from stocks to bonds, that's basically what's happening here? Glenn Atkins: They call it flight to quality. I would agree with Kerry, I did not expect the ten year treasury to be as low as it is now. I do think that the consensus is for the Fed to move in September of next year. I think we are positioned as well as we can be for that now and we will continue to keep that position but we'll just rearrange the internals of it and how it looks and try to get some more yield on that shorter stuff that is really not yielding 5%. Frank Johnson: It doesn't sound like you're going to be going back to treasury hunt with this volatility and the Feds able to throttle back and forth like they're doing. Glenn Atkins: The volatility is not just in the treasury. It's in all of the bond market. We like corporates for two reasons. We are research nerds. That's what I've been doing for 27 years, researching corporate bonds. It fits very nicely with our management style. The second reason we like corporate bonds is in almost every market scenario they will outperform the other sectors in the fixed income market. Kerry Bradley: Except perhaps in a 2008-2009 event, when it hits the fan everybody wants a U.S. Treasury. Even though we've heard about the demise of the country and the dollar for years now, when the world gets scared it plugs into U.S. Treasuries. Frank Johnson: Well it's nice that you are willing to share your expertise and your background. I remember hearing you say that before, I don't remember where. Glenn Atkins: It was at a big insurance company. I learned how to do corporate bond research on junk bonds which are not investment grade. These are good, high quality companies. That's where our strength is in almost every market scenario corporates will outperform other sectors of the market. That liquid unit trust, that's a corporate bond unit trust. The problem with that is it has a fee and it's almost eight years in average maturity, which we think is too long especially if rates are going to rise. Sondra Smith: We've the Longer Investment ending reports in the packet. Frank Johnson: I have something I wanted to talk to you guys about. I'm going to assume that the beneficiaries voted us into these positions and there's an expectation with that, that we make thoughtful decisions about everything. I still feel like there's a gap in what we communicate. They're not going to want anything this dense. I just talked to a couple of people and they say we are going a good job. I guess if I have a particular question it should be should we at least have an invitation for a quarterly meeting or anything like that? Do we need to talk to them anymore, do you think? Melvin Stanley: Every pensioner knows that they are welcome in our meetings. Frank Johnson: It seems like the only time they pop in is when there's a discussion about choosing benefits. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 15 of 17 John Brown: If I could say this, Frank, I do make phone calls after these meetings and talk with some of these people. Mainly it's the spouses more than anyone that I touch base with. I'm not certain they follow any of this without someone calling them. I've even suggested a time or two to copy them on an e-mail and they say no we trust what you're doing and appreciate it. I would like to see something. Obviously they're not going to want all the information we acquire here at these meetings, but some sort of brief synopsis about what was discussed in some sort of newsletter or e-mail or something. Most of them might open their mail but I don't know that they have e-mail accounts or anything like that. If we could get some sort of information to them, I think that we owe it to them in some way to at least let them know that we do have their best interest in mind. I've heard so many times what you're doing affects your money as well. I agree, I think it's nice to communicate some of these things with them. Just to hear that information that Garrison is putting out, you would think that would be helpful to them. Ruston Cole: It would reassure them at the very least. Certainly they know or will find out that we switched our investors. I know some of them have e-mail addresses. If there was just a summary just in plain English. I think we would all need to review it. Nobody should go off on a tangent and say this is what we did today. It shouldn't take that long. I meant like today, we could put out that this is what was discussed in the meeting. Frank Johnson: How about we maybe consider this starting the next fiscal year. Between now and the next meeting, if you guys are okay with it, we can communicate back and forth on what a draft would look like. Or I'll do a draft and a mockup of what it would look like, both in a hard copy and something we can post on the City. Ruston Cole: The minutes are posted, right? Sondra Smith: The minutes are not because the board chose at one point in time not to post them. We can post them at any point in time. The video is posted. All they have to do is go online and watch the whole meeting. Ruston Cole: If they had the minutes, I think I would be more inclined to read the minutes than to watch me on television to see what was going on. . John Brown: That's basically what the minutes are. Sondra Smith: We pretty much do real close to verbatim minutes. Not total verbatim Ruston Cole: If they have access to the minutes. Sondra Smith: They don't right now because the board chose not to put that out on the website. Mayor Jordan: If somebody FOI the minutes from this meeting, a citizen, we would have to turn them over because it's public. It's that open. Frank Johnson: I like Russ' idea. I know how well you write and if the board is okay with it, you and I can work together on what that executive level type summary would be for the beneficiaries to read from our meeting. It could mirror what the agenda is and this is the outcome Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 16 of 17 and give them a link to the City's website. Or make those minutes available to them when they need them. If you guys are alright with that. John Brown: I'm fine. Sondra Smith: The City is devising a new website. It should be up and running sometime early next year. I think it will be a lot more user friendly and may give us a little bit more opportunity to post things than what we can now. Any time the board wants the minutes posted, we can do that. We just have to have authorization because they were pretty adamant that they did not want them posted on the website. I think it's a good idea. It's open and transparent. We would not post them until after they are approved because we don't want to put minutes out there that haven't been approved. Ruston Cole: What were the objections to it being posted? Sondra Smith: I don't remember, it's been so long ago. At one point in time they didn't even want the meetings filmed. Finally we decided we were going to go ahead and film the meetings because your plan was in bad shape that we felt like it was beneficial for the people that are drawing on the plan to have that information available to them. John Brown: What we do affects them. They should have a clear understanding of what's going on. Mayor Jordan: Everything I have I just turn over. If they FOI my stuff, I say there you go. Sondra Smith: If anybody ever asks for it, they get it. All they have to do is ask us for it and they get it. Mayor Jordan: Anything we got they can have. Sondra Smith: Whatever y'all want to do on a summary, if you'll get it to us once you get it ready, we can post it on the website or whatever you want us to do. We are going to go through a transition period at the first of the year sometime to where we may be slow getting things posted until we get our training done and get the website up and running again. Frank Johnson: That will give us plenty of time to work up something. I'm sure it will have to be a collaborative effort. Sondra Smith: If that's something you want to put on the next agenda we can. You can't meet without it being a public meeting. You can't just get together and start meeting. Ruston Cole: So, what would we need to do? Sondra Smith: If you want to schedule a meeting to work on that we could schedule a special meeting. Frank Johnson: Just so there's notification. Policemen's Pension & Relief Fund Board of Trustees Meeting Minutes October 16, 2014 Page 17 of 17 Sondra Smith: So there's notification. That's the only thing and it probably needs to be done in one of our meeting rooms in City Hall just because of the freedom of information act. Ruston Cole: If Frank and I are doing this would we need a shepherd in the room? Sondra Smith: No, just as long as we announce that you will be meeting. Ruston Cole: Just so it would be open. Frank Johnson: Does there have to be an agenda posted? Sondra Smith: Not necessarily. Just that you're having a meeting. Melvin Stanley: Like Eldon and I had to do when we met with Garrison. Frank Johnson: Let's talk about some dates we can do this. Sondra Smith: Get us some dates and we'll find you a meeting room. If it's just going to be two or three people we have several small meeting rooms that we can put you in. The meeting may not be filmed but as long as it's on the calendar as an open meeting, then you've met the burden of the law. Adjournment: 4:15 p.m.