HomeMy WebLinkAbout2009-05-14 - Agendas - Final Fayetteville Fireman's Pension and Relief Fund
Meeting Date
Adjourn Time
Attendees:
Subject: 1,v Subject: •d U D
Motion To: Motion To:
Motion By: Motion By: j
Seconded: Seconded: k &P.
Mayor Jordan Mayor Jordan
Marion Doss Marion Doss
Pete Reagan Pete Reagan
Gene Warford Gene Warford
i
Ronnie Wood Ronnie Wood
Sondra Smith Sondra Smith
Subject: OaCAr,. t%. Subject: Ai
Motion To: R Motion To: �
Motion By: d Motion By:
Seconded: wott en Seconded: Q`7)
Mayor Jordan �,/ Mayor Jordan ✓
Marion Doss Marion Doss ✓
Pete Reagan Pete Reagan v�
Gene Warford r/ Gene Warford
Ronnie Wood Ronnie Wood
Sondra Smith Sondra Smith
Fayetteville Fireman's Pension and Relief Fund
Meeting Date
Adjourn Time 16116�p PA--
Attendees:
A- -Attendees:
Subject: O` « Subject:
Motion To: a Motion To:
Motion By: Motion By:
Seconded: Seconded:
Mayor Jordan �,/ Mayor Jordan
Marion Doss ✓ Marion Doss
Pete Reagan ✓ Pete Reagan
Gene Warford ✓ Gene Warford
Ronnie Wood ✓ Ronnie Wood
Sondra Smith Sondra Smith
r
Subject: Subject:
c
Motion To: Motion To:
Motion By: Motion By:
Seconded: Seconded:
Mayor Jordan Mayor Jordan
Marion Doss / Marion Doss
Pete Reagan ✓ Pete Reagan
Gene Warford ✓ Gene Warford
Ronnie Wood Ronnie Wood
Sondra Smith Sondra Smith
Lioneld Jordan Chairman Pete Reagan Position 2/Retired
Sondra E.Smith Secretary Gene Warford Position 3/Retired
Marion Doss Position 1/Retired Ta e e0i Ron Wood Position 4/Retired
ARKANSAS
Firemen's Pension and Relief Fund
Meeting Agenda
May 14, 2009
A meeting of the Fayetteville Firemen's Pension and Relief Fund will be held at
10:00 AM on May 14, 2009 in Room 326 of the City Administration Building.
Approval of the Minutes:
• February 11, 2009 Special Firemen's Pension meeting minutes
• February 11, 2009 Special Firemen's Pension and Policemen's Pension Joint
meeting minutes
Approval of the Pension List:
• April, 2009 Revised Pension List (Donald Watts and Randall Wright deceased
in March their widows are now drawing
• May, June, and July, 2009 Pension List
New Business:
• Donald Watts Deceased
• Randall Wright Deceased
• City Attorney memo — March 5, 2009 FOIA applicability to Police and Fire
Pension Board meetings
• City Attorney memo — March 12, 2009 May the Pension Board of Trustees
reduce current benefits
Old Business:
• 2009 Board Member Elections — Election Ballot Deadline is May 15, 2009
• Attorney General's Opinion — Have not received
• Actuarial Study Letter
Longer Investments:
• Longer Investments — February 20, 2009 market update letter
• Longer Investments — March 4, 2009 letter regarding Northern Trust
• Longer Investment — Investment Report
Firemen's Pension and Relief Fund
Board Members Board of Trustees Meeting Minutes
11,2009
Mayor Jordan Chairman - FebruPage I of 8
Sondra E.Smith Secretary
Marion Doss Position I/Retired
Pete Reagan Position 2/Retired
7aye
Gene Warford Position 3/Retired ARKANSAS
Ron Wood Position 4/Retired
Firemen's Pension and Relief Fund
Meeting Minutes
February 11, 2009
A meeting of the Fayetteville Firemen's Pension and Relief Fund was held at 1:00 PM on
February 11, 2009 in Room 219 of the City Administration Building.
Mayor Jordan called the meeting to order.
Present: Mayor Jordan, Ronnie Wood, Marion Doss, Pete Reagan, Gene Warford, Sondra
Smith, Trish Leach, Accounting, Assistant City Attorney David Whitaker, Paul Beck,
Finance and Internal Services Director, Elaine Longer and Kim Cooper, Longer
Investments, Jody Carrerio, Osborn, Carrerio & Associates, Inc., Actuary, and David
Clark,Arkansas Fire & Police Pension Review Board Executive Director.
Approval of the Minutes:
Approval of the September 30, 2008 Meetine Minutes
Pete Reagan moved to approve the September 30, 2008 Meeting Minutes. Ronnie Wood
seconded the motion. Upon roll call the motion passed 6-0.
Approval of the Pension Lists:
Approval of the February,March and April 2009 Pension Lists
Sondra Smith: Currently there are no changes to the pension lists.
Pete Reagan moved to approve the February, March and April 2009 pension lists. Gene
Warford seconded the motion. Upon roll call the motion passed 6-0.
New Business:
2008 Pension Report to the City Council
Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 2 of 8
Sondra Smith: Mayor that is a copy of the report for the Board that you gave to the City
Council in January. That's the required report that you have to give according to state law. I
wanted the board to have a copy.
Pete Reagan: That's just informational.
Sondra Smith: Yes.
Signature authorization for transfers
Sondra Smith: Because we have a new Mayor we had to change the signature authorization to
give Mayor Jordan permission to sign your pension transfers. I wanted to make you aware of
that. I think you have already authorized the Mayor, City Clerk, and Deputy City Clerk to sign
those transfers.
2009 Board Member Elections
Sondra Smith: We elect board members in May. I wanted to put that on the agenda so that if
you have any changes to the election process we can go ahead and discuss those changes.
Pete Reagan: Did we have any problems that you know of last year in the election process? I
think it went rather smooth. I'm not sure who's up for election. Do you know?
Sondra Smith: We did not have any problems with the last election. It went pretty smooth.
Gene Warford and Ronnie Wood are up for election. That will be Position 3 and Position 4.
Pete Reagan: The announcement of election will take place at our next meeting?
Sondra Smith: We will probably send out asking for nominations in April. When we get the
nominations then we send out who was nominated.
Pete Reagan: The same time frame will be used as in the last election? I think we gave them
two weeks to send in nominations.
Sondra Smith: We will do it exactly like we have done in the past if that worked well for
everyone.
Pete Reagan: I think it went very smooth thanks to your help.
2009 NCPERS Conference—Approximate cost$3,000
Pete Reagan: Mayor this is an association that the Pension Board is a member of. It is the
National Conference of Public Employees Retirement Systems. They have an office in
Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 3 of 8
Washington D.C. and stay apprized of the changes and problems that we have with the defined
benefit plans. I know the Arkansas Pension Review Board is also a member of it. Because of
the cost this year I don't think we can really afford to spend the money to send someone to that
conference this year. It's really an expensive conference but I would like to stay members of that
association.
Sondra Smith: We have paid the membership dues. It is about $150.00 a year. The board
voted at the last meeting to go ahead and pay the membership dues.
2009 Parking Permits
Sondra Smith: There's no action required on that. I think Lisa has already handed them out to
everyone.
Longer Investments:
Elaine Longer: This report is as of the end of the year 2008. The first report is your portfolio
appraisal that gives your investment positions. One thing to note is that the stock positions in the
portfolio are weighted at 39%, the foreign equity is 7.2%. Your total stock portfolio positions
are approximately 46%, within policy guidelines of 25%to 50%.
On the fixed income side we hold investment grade corporate bonds, preferred debts,
government agencies, treasury securities, and a CD. The over all income yield on the total
portfolio including the 46% you have invested in stocks is 3.4%. To give you some comparison
the current income yield on the ten year treasury is 2.8% so you have an income yield on the
total portfolio that's in excess of the ten year treasury. This is the first time in fifty five years
that you have had the dividend income on stocks exceed the ten year treasury yield. The income
on the portfolio has remained strong even in the declining interest rate environment.
Page four is my concerns going forward. On your bond portfolio your weighted average yield to
maturity is 4.8% and that's within a maturity structure of 4.� years. Your average maturity is 4.3
years and you have a 4.9% income locked in on mostly investment grade and government bonds.
The problem is that the current five year treasury which would be your comparable maturity is
yielding 1.74%. As these bonds roll off without going outside investment grade corporate's or
government agencies, like what we have used in the past, your reinvestment rate in a comparable
maturity will drop to 1.74%.
We haven't faced a big decline in the income on the portfolio. It has held pretty constant at 5%
or so since 2002, because as bonds mature we were reinvesting out the yield curve but now the
ten year treasury is at a 2.8%. Even that is not going work as we come up with reinvestments on
the fixed income side.
Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 4 of 8
Page five is contributions and distributions from inception to date which is August 2002 where
we started managing the account. The total contributions have been $901,000, distributions have
been$6,933,000.
Page six is the summary of returns through December 31, 2008, which we summarized and
annualized because that coincides with the actuary report that we are discussing today, you can
see that the equity side has returned 10.4% average annual return, bonds are about 4.1% with the
total coming in at 7.1% as opposed to the assumptions of return of 6%. For 2008 the equity
returns are minus 40%, the foreign funds are minus 38%, fixed income was 5.3%, so the total
account was down approximately 20%. The indices are listed for comparison below. The S & P
is down about 38.5%,the DOW was off about 34%,NASDAQ off 40%, MSCI which is an index
of foreign funds was off 45%.
As bad as the US was last year it was one of the bright spots in the world performance of
markets. Lower part of page six shows the beginning value of the portfolio, the deposits and
distributions that have taken place and then the components of return which are net income,
accrued income, and realized and unrealized gains from the stock part of the portfolio so that the
total investment return inclusive of 2008 has been$1,900,000. That's against distributions net of
deposits of roughly$6,000,000.
The investment policy follows and basically it is a policy that allows for 25%to 50% exposure in
the equity market. The rest is in investment grade bonds with an expected return of 6%. Are
there any questions about the reports or about the outlook?
Pete Reagan: I would like to once again thank you Elaine and your staff for the diligent work
that you have preformed for us over the last seven years. I think you have done an excellent job
and however this turns out we hope to be with you through the easy times and the hard times.
Elaine Longer: I appreciate that. We don't go back as far with the Fireman as we do with the
Policemen. Some of the pensions that we have managed for twenty years, what we are doing is
we are looking back on the best years and the worst years and this was just a horrible grizzly
year but it's not unrecoverable once we get room to run again. In the past twenty years we have
had three years that top that on the plus side even in a balanced fund portfolio. I like to leave on
good note that as bad as it seems out there, we have been through bear markets before, not with
you, but there is light at the end of the tunnel. I will leave you with that thought. Thank you.
Longer Investments November 3, 2008 letter regarding the market
A copy was given to the board.
Longer Investments December 18,2008 letter regarding the market
A copy was given to the board.
Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 5 of 8
Longer Investments letter regarding the Bernard Madoff scandal
A copy was given to the board.
Longer Investments 2008 3`d Quarter Report
A copy of the Longer Investments quarterly report was given to the board.
Longer Investments 2008 4th Ouarter Report
A copy of the Longer Investments quarterly report was given to the board.
Other Business:
Pete Reagan: We have both Jody Carreiro and David Clark here in the audience with us. We
had the meeting this morning and I know that they are the bearer of bad news, nothing that we
didn't know, but we didn't know it was that bad. I would like to publicly thank them for putting
that together and delivering that to Fayetteville for us to hear. I appreciate you taking a day out
of your time and coming up here. I would also like to say that while we have the bad news I
think there are several articles that we need to look at and think about and discuss and that being
where do we go from here and the different options that we have here. I would like to first ask
David or Jody either one, what does it cost for an evaluation if we were to choose that route?
David Clark: For the consolidation valuation it's $600 for the base fee, that's for up to twenty
participants in fund, participants being retirees as well as beneficiaries, then you add $20 for
each additional person over that twenty. You have about 62, so somewhere in the neighborhood
of$1,400.
Pete Reagan: How many questions can we ask in that evaluation?
David Clark: The evaluation that I just sited would actually provide a fee showing the benefit
structure currently as it is right now today and then a fee or employer contribution with a 3%
compounded COLA built into the plan structure. If you want to run various scenarios I would
need to check with our actuaries to find out what the additional cost would be on that. I would
need to know the number of scenarios and what you are looking at.
Pete Reagan: I would say no more than three others besides those.
David Clark: I would have to get that number and then get back with you. I can send an email
while we are still in the meeting and hopefully get a response for you.
Pete Reagan: Okay, that would be fine. Thank you, David. I think we need to look at the
different avenues of which we have to travel with this information and it's going to take some
time doing it. Jody referred to some legal questions that we have and I know Mr. Becker, Ms.
Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 6 of 8
Longer, and the Mayor have some concerns. I would think that we would take that approach
and see what we can come up with and reevaluate it.
Sondra Smith: What scenarios do we want to propose because we will have to put that in the
letter?
Pete Reagan: I would like to see what the cost is. I have no idea. I just think that a starting
point has been made here today. I would think that would be up to the board for discussion on
what questions they would want asked in the evaluations.
Mayor Jordan: I don't have any problem with that but I would agree that we kind of need to
know where we are going with all of that. Who pays for the cost and how does all that work?
Sondra Smith: The cost comes out of the pension fund, Mayor but in the letter that I have to
send down to the Pension Board to request the study, I have to let them know what scenarios that
we would like for them to base the study on. I don't know if we want to get a cost on three or
four different studies and then make a motion to do the studies or if we want to go ahead and
make a motion to do the studies depending upon the cost.
Gene Warford: Didn't you say three different scenarios and he is working on that right now.
Pete Reagan: Yes, but then we have the legal question. David did you come up with anything
on the numbers it would take to do that and the legal ramifications of that?
David Whitaker: Primarily, and that is all I can give you at this point because I had a total of
56 minutes to do the research since the questions were asked. I'm not ready to except a laymen's
conclusion that silence equals a prohibition on adjustments to your rate, as far as reductions. I
think there are strong arguments that your fiduciary duty as trustees could allow you to make
adjustments in the express interest of preservation of the fund for the evidential long term benefit
of the members and beneficiaries. I don't want to site chapter and verse on that right now
because of the limited amount of time I have had to look at it. If you were to choose to go the
route of seeking prudent reductions in current benefits, since the code itself is silent on
reductions, our recommendations in order to show diligence on your part would be that you
would adhere to the requirements set fourth in the code for an increase that is the three fourths
margin. The reasoning is that if the general assembly felt that it was important that upward
benefit adjustments need to be passed by three fourths, it seems by extension to be also prudent
that any reducing or other downward adjustment of benefits should also be accomplished by a
simple majority. We will get you more information when Mr. Williams returns to town and as
we get a little deeper into our research.
Pete Reagan: Thank you I appreciate your research over the lunch hour.
Mayor Jordan: The board is not necessarily opposed to a reduction if they have to, but you
want to look at the information and what is brought back? Is that what you are saying? I just
want to get this clear in my head?
Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 7 of 8
Pete Reagan: Personally Mayor I am not in favor of a reduction of our benefits but I understand
that we are going to have to do something. Before I commit to doing anything I need to visit
with the folks that I represent. There are 58 retired firefighters and widows that we represent.
Mayor Jordan: Okay, I understand that. Pete what would be the time line on that? Would you
wait for them to get back to you or is it at the next meeting? What are we looking at here?
Pete Reagan: I would say anytime between now and the next meeting.
Mayor Jordan: When is the next meeting?
Pete Reagan: April.
Marion Doss: Due to the current situation, we were meeting last year once a month, and then
we changed to quarterly meetings, maybe be need to meet a little more often.
Mayor Jordan: We can do that.
Marion Doss: That's up to the board that is just my suggestion until we work this out.
Pete Reagan: We can always call a special meeting. It's tough getting everybody in the same
place but I think if it's necessary we can sure do it. I think we should have time to meet with our
constituents and get their feelings on it.
David Whitaker: Mr. Mayor and to the other members of the board, I think due to the gravity
of the situation, I think the prudent course would be to have more information rather than less
before you make any decisions that you and the beneficiaries are going to deal with for a very
long time. Also from what I have learned about the situation I don't expect that while the gravity
of it is immense, I don't see anything that we have been presented as an imminent collapse of the
fund in the next six months. I think if you can do the homework and get all the options from the
folks down state. I think that is well advised.
Mayor Jordan: What we are saying is we don't need to get into a panic.
Pete Reagan: I for sure don't want to get into a panic mode about anything.
David Clark: The evaluation fee for the three additional scenarios would be $2,200.
Pete Reagan: On top of the $1,400?
David Clark: No,that is total. We would need a letter clearly stating what your three scenarios
would be, the payment for the fee, and the annual financial report for December 31, 2008 to be
filed with the PRB first.
Mayor Jordan: Do we need some sort of motion and second to do that business?
Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 8 of 8
Pete Reagan: I don't think so. I think it is just recorded in the minutes.
Mayor Jordan: Unless there is some legal requirement that we have to do that.
Marion Doss: I guess we need to come up with our scenarios first and then state those and then
see. $1,800 and$2,200 for additional scenarios seems like a bargain really.
Sondra Smith: Are we not going to decide on the scenarios today?
Pete Reagan: I would like to personally meet with our folks that we represent to find out what
their thoughts are. A lot of them were present for the morning presentation. I think before I can
represent their thoughts I need to hear from them.
Ron Wood: I would like to give every pensioner out there the opportunity to have a say in what
we do.
Mayor Jordan: Okay, I guess you will get with the pensioners and get back to us?
Pete Reagan: If the need arises that we need a special meeting we can do that.
Sondra Smith: Will we have something by the April meeting?
Pete Reagan: I would sure hope so.
Mayor Jordan: Keep us posted when you do get something. I don't know what the time frame
is on all of this.
Pete Reagan: I have a question for Mr. Becker, do you know when the 2008 financial report
will be filed with PRB?
Paul Becker: We will send it down,in a couple of months. How long does that take to
complete?
David Clark: March 31St
Pete Reagan: That has to be done before we can do anything. That is part of the process.
Sondra Smith: I have new investment policies that need to be signed by the Board that was
given to me today by the investment advisor. The change in the policy is changing the name of
Mayor.
Meeting Adjourned at 1:35 PM
Board Members Special Firemen's ..
&Policemen's Pension and Relief Fund
Mayor Jordan Chairman Board of Trustees Meeting Minutes
Sondra E.Smith Secretary/Treasurer February 11,2009
Marion Doss Position 1/Retired Page 1 of 24
Pete Reagan Position 2/Retired
Gene Warford Position 3/Refired
Ron Wood Position 4/Retired V 1
Eldon Roberts Retired Position
Position 1 a e eVl e
Jerry Friend Retired Position 2
Tim Helder Retired Position 3 A R K A N S A S
Melvin Stanley Retired Position 4
Frank Johnson Retired Position 5
Special Firemen's & Policemen's Pension and Relief Fund
Meeting Minutes
February 11,2009
A meeting of the Fayetteville Firemen's & Policemen's Pension and Relief Fund was held at
10:00 AM on February 11, 2009 in Room 219 of the City Administration Building.
Mayor Jordan called the meeting to order.
Present: Mayor Jordan, Ronnie Wood, Marion Doss, Pete Reagan, Gene Warford, Frank
Johnson, Melvin Stanley, Eldon Roberts, Tim Helder, Jerry Friend, Sondra Smith, Trish
Leach, Accounting, Assistant City Attorney David Whitaker, Paul Becker, Finance and
Internal Services Director, Elaine Longer and Kim Cooper, Longer Investments, Jody
Carreiro, Osborn, Carreiro & Associates, Inc., Actuary, and David Clark,Arkansas Fire &
Police Pension Review Board Executive Director.
Paul Becker: Mayor and members of the board I will introduce the individuals who are going to
give us presentations, Jody Carreiro of Osborn, Carreiro & Associates, Inc. who is the actuary,
he works on these plans in Little Rock and David Clark, Executive Director of LOPFI. What
they are going to do is give us a run down of the conditions of both pension plans as they
currently exist.
Jody Carreiro: Let me outline what we want to try to accomplish this morning and make sure
that we are all heading in the same direction. Then I will let David talk for just a minute and
then we will get into the body of what we've got.
As Paul mentioned I am Jody Carreiro, I'm the actuary for the old plans and we have been doing
that for twenty years. We are the ones that do the every other year actuarial valuations and the
benefit increase valuations when those come up and those type of things. What I have to share
today is some additional information that kind of expands on what's in the valuations and I will
explain what that is in just a minute. That's my role today is to try to break down all the
technical things and translate those to English as best as possible give you that information and
be able to answer your questions. Then I will ask you some of your thoughts and the things you
want to hear before 1 start getting into the meat of it.
Special Firemen's
&Policemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 2 of 24
David Clark: I'm the Director of LOPFI. Basely my role today is to be able to provide answers
to questions about consolidation of either one or both of the pension funds with LOPFL That's a
more common event as the years have rolled by. Right now LOPFI administers 103 local Fire
and Police Pension Funds and there are still 176 local Fire and Police Funds in the state,
obliviously Fayetteville has two of those funds. Last year we had 32 plans turn their
administration over to LOPFI so as I mentioned it's becoming more and more common for plans
to make that type of decision. I can certainly fill in any other type of details later on in the Q&A
potion.
Jody Carreiro: I know that we have a lot of folks that have interest in this. I know the things
that I want to cover but I want to ask the boards and the folks here what items in general that you
hope that I cover. What are some of your expectations? What are some of the things you hope
that we are going to cover in the next few minutes? What are some of the big things that you
hope that we accomplish in the next few minutes board members? I know Pete has a list.
Pete Reagan, Fire Pension: Jody if you would for our members sake and I'm sure for the Police
Pension members sake if you could give us a readers digest version of the actuary that was done
for 2007. 1 think we all have copies. Give us a basic overview of it and we will go from there
because we are using that as our guide.
Jody Carreiro: That was the first thing I was going to do so that's good. What other concerns
that you want to make sure that I address today?
Eldon Roberts, Police Pension: When and if a benefit cut is necessary and that's something we.
want to hear from you because we pretty much take our lead from you. I think that's the
question that's in everybody's mind that we would like to hear addressed.
Jody Carreiro: I understand and we are headed there. We've got to lay some ground work so
that I can do a good job of explaining that but that's clearly the big question that we want to
answer. Any other things that you want to mention that you want to make sure that I'm going to
do in the next few minutes.
Tim Helder: I'm interested to see if LOPFI is something you all are going to recommend or you
think that would be the future of our plans. Maybe discuss that a little bit.
Jody Carreiro: Okay and we will.
Paul Becker: Jody I think we would like to see is with the economic conditions that the country
is facing now, what is the general effect of the stock market and the losses that we have taken
and how does that affect the 2007 actuarial study? More or less give us an update on what it
looks like today.
Jody Carreiro: Elaine has provided me with some more up to date numbers from December 31,
2008. As we get into this I'm going to share with you some of those numbers and how that has
affected the projections going forward. This is your meeting too. This is different then a regular
Special Firemen's
&Policemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 3 of 24
board meeting. Anyone else have something that you want to make sure that I hit as I'm going
through?
Kathleen Doss: I want to know what it will take for the old pension fund to go with LOPFI.
What exactly has to occur?
Jody Carreiro: I'm going to let David cover those steps in a few minutes. I think those are all
things that are on my list. I glad to hear that the questions I came ready to answer are the
questions that you want to know the answers to.
Every two years we do an actuarial valuation of the plan and those valuations that are required
by law are intended to do a couple of things. One they are intended to show kind of where the
plan is. What the current financial condition is or the terminology that's been developed over the
years is the plan actuarially sound and what does that mean. That's one of the things that that
does. The other thing that the valuations does is they calculate how much money the city would
have to put in to get the plan fully funded over a period of time. Since they're closed to new
folks that period of time that's calculated is pretty short, it's five years. The reason why is
because everybody is retired and we should be closing in on full funding if everything was a
perfect world. That's what the Pension Review Board does for the whole state. Now the
valuation is kind of a snapshot view. It's what the value of the Plan is today. What is the present
value of all those liabilities? We have benefit commitments to pay these liabilities over a
number of years, what's the value today of that and compare that to my assets? Snapshots are
real good but they don't show everything. I'm going to share some details about what we call a
cash flow projection which shows the ebb and flow of the fund over a period of time as opposed
to saying on this date where we are. First let me talk about each of the valuations since that was
one of the questions that was produced and sent to the city last year.
On page five of the Police Pension report is a summary of what are the liabilities of the Plan.
Those are not liabilities like we think about at our households that that's a payable that we have
to pay today but it's a long term liability. It's more like a mortgage its how big is our mortgage,
what is it that we have to pay off in the next several years? On the Police Plan you will notice
the total liabilities or the total present value of all those future benefits that we have to pay out is
$19.2 million compared to assets at that point and time of $10.2 million, so there was a $9.1
million unfunded liability. You have probably talked about that in your previous meetings.
On the Fire Pension report there is $18.5 million in total liabilities and $8.7 million in assets at
that point in time so $9.8 million is the unfunded liability. To help me understand it and I think
it helps other folks understand it too, that's kind of our mortgage. An unfunded liability is not a
bad thing per say because it's not a bad thing to have a mortgage. In fact most of us wouldn't
have a house if we didn't have a mortgage right? What we have to be very concerned about is if
we don't have money to pay our mortgage payment. If we are not making the payment we need
to make to pay it off in that reasonable amount of time. That's kind'of the analogy that I think
helps us to understand that a little bit better. Those numbers turn into a funded percentage and
those are reported in the valuation report and you've probably heard them talked about already.
They are on page 10 of the valuation reports. If you look at the Police Pension Fund the funded
Special Firemen's
&Policemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
February 11,2009
Page 4 of 24
percent was 53% and the Fire Pension Fund was 47%. That means that using our analogy from a
minute ago we have about 50% equity in our pension houses. Our mortgage is about half of that
total value of our pension house so to speak. That's not necessarily bad unless we have trouble
making our house payments. Those are the funded percentages and those are talked about. The
thing that's concerning about a funded percent that's in the 50% range is this, as we have already
discussed these are closed plans, there's not new members, there is new money that comes in but
it's now only the millage and premium tax mostly. When we're retired we want a much smaller
mortgage sticking with our house analogy. So by the time we retire we would like to have our
house paid for or almost paid for and we still have a good sized mortgage in both plans. That's
an area of concern that we need to think about as we address this. That's just a real quick over
view of what these valuations say. They are snapshots, they give us a good idea of where we are
in the scheme of things, but they don't tell us everything that we want to know. They don't
answer all the questions that we have and so there are other things that we want to look.
Let me mention one other thing about the valuation reports. The numbers reported that Mr.
Becker reported to you was based on a different report that I did which is public information and
David has handed out. We presented this to the Pension Review Board and this is a report of all
the old pension funds in the state. It has a lot of different information in it. One thing that we
have done for the State Board, over the last several years, is we do a very quick and dirty
projection of if the plans continue to earn this rate of interest, if the funding sources are about the
same, if the benefits stay about the same, how long can these funds last? They are not a plan by
plan cash flow study, which I will explain what that means in just a minute. They are kind of a
quick cash flow study and that report is where some of the numbers have came from that said the
two funds were within ten to fifteen years to prorate. If you look at that full report it explains
what we did and we have just grouped it in categories. It is not meant to be a predictor to say
that this plan runs out of money here but it is for the State Board to kind of categorize,how many
plans are in real good shape, how many are okay shape, and how many need to be a little bit
concerned. Those are good numbers but again it doesn't answer all the questions that we have as
you have already eluted to. That's why we have done a cash flow study. This is stuff that I mess
with everyday and I will confuse myself sometimes so I'm kind of building up to it so we don't
get there to quickly. I do want to talk about what the cash flow study is before we actually look
at the results.
I mentioned that the valuation reports are snapshots. They are a picture of at a point in time.
What we do with a cash flow study it really a projection. We look at and talk to the City and
look at their historically information to say here is what millage is doing. You got what ever
millage that you get that's dedicated to the two funds that's grown a certain percent per year.
We can reasonably expect that to grow over a period of time. We know what premium tax does.
We do all the calculation for the premium tax. It's a real convoluted complicated formula that
we don't want to talk about right now but we have a pretty good idea of where that's going based
on the current rules for premium tax and we project that forward. It's calculated on a percent of
the calculated contribution. We can project the premium tax into the future. We can also look at
the benefits and the Police Fund has got 51-52 folks that are drawing a benefit. The Fire Pension
Fund has got 61, but that has a dozen volunteers from days gone by that are still drawing
benefits. The two plans have several people that are drawing benefits and we know who they are
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and we know the ages. It's a big enough group that we can statically project and say we expect
these folks to remain alive and here's what the benefits are, not person by person but in a general
statically method to say we are paying out, for example from the Police Fund this last year
almost a $1.6 million in benefits. We can project out what that $1.6 is going be in a year, two
years, and three years; on down the line based on the mortality that we have studied that is a
pretty good match for what these funds experience. Then we put all that together with an
assumed investment result. We can then project and say the assets of the plan were at this point
here and next year we expect them to be here etc. and get a good idea as to will the plan ran out
of money, when will it run out of money if that does happen, what are the bumps in the road as
we go along. Now that I have said all of that I have introduced what I've got that is a hand out
to you.
This is a series of graphs and charts of numbers. I looked at these projections two different
ways. We projected it based on all the information that went with the valuation of January 1,
2008. As we all know the world is not the same as it was January 1, 2008, especially the
financial world. I've got some information for December 31, 2008 that shows what jarring we
took on that and kind of melted that into this projection.
To explain what I've got lets just look.at page one of the first Police projection and tell you what
that is and then we can look at the difference and then we will look at Fire. On this Police
projection there's a green line on the graph that's the best estimate line and that is the line of the
projected assets. After we do all the things that I mentioned a minute ago we come up with a
projected asset level every year and you see that at the 7% assumed rate if that stays level every
year you see what happens. There's a little bit of a dip but the assets never get very low and
there's more than enough there to pay the benefits all the way through. Now what we have done
over the years and some people joke about my hurricane cones because I use that analogy. In the
late summer and fall when we see the hurricanes coming we always look and we don't look at
where the line is if we have any family anywhere within that cone we are a little bit concerned.
That is kind of what these yellow lines around that is. That's kind of a range of reasonable
results and the reason it's become called the hurricane is because we don't want to know that just
the basic straight projection stays above zero. We want to know within a reasonable range
bouncing around that that we stay above zero. We don't want the hurricane cone to hit the coast
line we want it to stay off shore away from zero. If you look at this first projection here you see
that the bottom of the range of reasonable results is a lot lower than the main projection but it
stays above zero in all years. As of January 1, 2008 were not too concerned about the Police
plan in the long run it would be fine, but as we said we are not January 1, 2008.
Let me point out just a couple of things on page two before we look at the graph on page three.
This is kind of the numbers that are the basis of what you have of the graph that we just looked at
to disclose all these numbers to you. The two things I want to point out about these numbers are
this. Number one if you look at the employer contribution column and compare that to the
benefit payment column you will notice that the current contributions to the plan are just under
half of the benefit payments. That's not necessarily bad but what that means is that we are at a
point in time in the life of these plans that we are dependent on investment income. It's not all
contributions coming in from the City that is making our benefit payments anymore. We have to
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have the contributions that are coming in and investment income to do that. The point that
brings up that's worth discussing for just a moment is why what's happened in the financial
markets is so difficult on your plans as opposed to say the big LOPFI system, APERS, or
Teachers. Their concerned about the financial markets, everyone is, but it doesn't cause them
great concern. One reason is that they have other income, because they have active members and
people contributing and cities contributing, they have income that pays most of the benefits so
while the assets are down in this down market they do not have to sell those depreciated assets to
make benefit payments. We are not that lucky with either of these plans. We're in a situation
where we've got to make $1.6 million on the Police side of benefits payments this year. We've
got $700.000 of income the other $900,000 has got to come from somewhere. Where that's
going to come from is that we are going to have to sell depreciated assets. For a closed plan it
makes the financial crisis doubly sever. That's why this is so difficult to deal with and why it's
so important to take a deep breath and kind of go through this because it does make it harder
because we have to sell assets while they are down. We can't wait for the market to pop back up
or come back up. We can't wait for that we have to pay our benefits now. The other thing I think
that is important on this page to point out if you look at the benefit payment column you will
notice on the Police Plan that we are looking at the benefit payments are almost $1.6 million for
2008. Look at thirty years from now, it's over $800,000. Sometimes we tend to think that it's a
closed plan we have all retirees all these guys are going to die off we are not going to have to pay
benefits for very long. Thirty years from now benefits under the current benefit structure are still
half of what you are paying out now in the Police Plan and they are similar in the Fire Plan.
Thirty years because of the good spousal benefits that these plans have, because of the improved
mortality over the years, for those reasons in thirty years we still expect to be paying out over
half of the benefits. I think that's an important point. As an actuary I'm concerned about those
people in thirty years are still getting their benefits and doing well. I think that is an important
point to make off of this.
Pete Reagan: On page two on the employer contribution can you tell us what that is because the
Police Plan is closed and the Fire Plan is officially closed too now.
Jody Carreiro: That is about$400,000 from millage.
Paul Becker: It's Millage and premium tax. In the case of the Police Pension Fund it's forfeits
that are directed there. That's what they are called employer supplement.
Jody Carreiro: Right, those three pieces, about $400,000 millage, $180,000 premium tax, and
about$120,000 on the Police side that's fine and fees etc.
Page three is the same graph we looked at a moment ago with one big addition. I put in the
December 31, 2008 real market losses that happened. I don't know if Elaine has had a chance to
give you a full December 31 report yet. I guess you will have that later today to get all the
details. You all know about what happened to the assets in the Plan during the last year.
Everybody took sufficient losses and you see where the losses for December 31, 2008 ended up.
That changes the complexion of things because if you take this one time big drop and still earn
7% every year, if you look at the police graph they still remain above zero but the range of
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reasonable results, one side of the hurricane cone hits the shore line. That's not good that's bad.
We know that 7% every year it is not that smooth, it's going to be bouncing up and down, it's
going to be bouncing somewhere in that zone we hope. The event that happened this last year
was certainly not in the zone. It was a hopefully once in a lifetime event that we are going to
have to deal with. We see how this changed what happened and that gives us fewer assets to
earn on. We are going to have to sell some of those assets to make benefit payments the next
couple of years while the markets recover and that's why it makes things take such a dramatic
dip going forward.
On the Police side of things if the market recovers fairly well in the next few years and things
kind of stabilize and we get back some of the losses of 2008 and get on a little more steady track,
the Police Plan looking at the numbers should survive but it's going to be a very difficult for the
next several years. The next several years is going to be very important to that.
The news isn't as good on the Fire Pension side and I know that you guys have peeked ahead so
let me go ahead and get there. Page five has got the basic chart based on January 1, 2008 for the
Fire Pension Plan. Please don't take any remarks that I make as being a commentary on
investments and investment strategies. That's not my job I am an actuary I'm not an investment
advisory. You guys work that stuff out with Ms. Longer. Any remarks that I make about
allocation and all of that is in a general stand point as far as what I see with other pension plans
that helps me predict going forward. That's kind of the frame work of anything that I say about
investments and how you invested. Now that I have said that both pension funds looking back
historically, from my view point, have worked to be a little bit more conservative. Everybody
has retired in both funds,it's just like an individual, an individual's portfolio typically when they
retire is more conservative than the guy that's still working. As a plan we've kind of retired now
so we want our portfolio to recognize that. Your portfolio does recognize that. What that means
is it appears to me, from my point of view, that in the last few years when the market did well
you guys didn't participate in all of the doing well as much as some plans that were more
aggressive. That was okay if we hadn't taking such a bath in 2008. That was what you wanted
to do and evidently that's what you all had talked about and came to that conclusion. That
wasn't a bad conclusion but the results have not been good either. I'm not commenting on the
choices that you made I'm just saying because of them and what happened this year it makes it
difficult. Elaine may what to add to that later. I'm not faulting the choices that have been made
just to make that perfectly clear. You needed to be more conservative. We have some pension
funds in these old plans that are way too aggressive to be at this point in their life. I don't like it
and their investment managers don't like it but the boards push it to be more aggressive. The
things that you have done are very logical and make very good sense but because of what has
happened in the market it has been a hurt.
Since the benefit increase about ten years ago if you look back at the valuation you will see that
the funding percentage went down some at that time, which you would expect, because it was a
significant benefit increase. Instead of building back up, due to a combination of being pretty
conservative with your investments, and the fact that the city made what it had to make but
nothing more into the plan the funded percentages have continued to slip. Then 2008 happened
and when your funded percentage wasn't that good to began with and you get with a big market
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crunch like this it becomes a bad deal. You can see from the projection that right now the
projection is. The more detailed projection shows that the Fire Pension Plan unless we find
something else to do based on the current portfolio and all of those things has got about fifteen
years left. With the 2008 assets that reduces that fifteen years down to ten years, and we have
issues that you have to deal with. The question I ask myself when I had all my projections pulled
up is can we earn our way out of these problems? Can the fund maybe be a little more
aggressive? Can the fund find a way to earn its way out of the current issues? The Police side
the issues are bad but they are probably sustainable, so you probably can earn your way out, a
portfolio that earns 7% or shooting for 7.5% can probably earn its way out of problems.
The trouble on the Fire Pension side is now because of what has happened this last year you're
behind the eight ball even more and to earn your way out of it you would have to earn 15% to
16% a year over the next ten years, that's a problem. You can't just earn your way out of it. We
can't just hide and say the market is going to come back we know that we will earn our way of it.
It is a more difficult problem than that. The Police Plan probably can earn its way out of that and
proceed along. The Fire Pension Plan you may want to think about more difficult choices. I
don't know what all they are we will talk about some of those in the next few minutes.
Melvin Stanley: Just a little bit of clarification on your analogy about our house mortgage and
our pension mortgage. Your house mortgage you intend when your mortgage is paid that your
house is worth a considerable amount of money and if I understand the pension right we want
our pension to be worth very little when the last pensioner draws his check.
Jody Carreiro: You're right. Our mortgages that we are paying off would be a house with a
declining value instead of an increasing value. I think one of those columns is the accrued
liability. If we wanted to say our house analogy the value of our house right now is $18.9
million but it's going down every year because everybody's already retired we've already
commented all the benefits we are going to comment. Now it's a matter of mortality taking over.
Your right the house is not a perfect analogy but we do want to get close to a fully funded but the
fully funded we are shooting for is kind of a declining balance.
Melvin Stanley: We want a reverse mortgage.
Jody Carreiro: Almost. A fully funded plan would be a reverse mortgage. You are right it is a
declining balance. Like any analogy it's not perfect it does a pretty good job but it's not perfect.
Jerry Friend: You said if we can get 7% growth that we might scrap by. Is that considering the
same amount of liability as we have now?
Jody Carreiro: Everything I have done is a current benefit structure. Yes sir.
Gene Warford: On the Fire Pension,just from looking at the graph, which it doesn't look good,
I don't think Elaine can bring in 15% or 17%. With a projected 7% if we took a 10% reduction
in benefits would that be about the same as an investment type deal?
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Jody Carreiro: I haven't plugged in to figure out what reduction in benefits that a 7% long term
projection would kind of balance it out. I looked at a couple of examples, because we don't have
a proposal on the table right now. I looked at a 20% decrease in benefits and at a 20% decrease
in benefits and 7% to 7.5% will maintain the fund going forward. I was trying think to think of
something to suggest that if you did have to look at a benefit decrease something that would
work in the long term. I'm not sure I know what that is. You have to come to an agreement
that's what you want to look at before I jump off any cliffs. There are a lot of issues. We have
to talk those issues don't we.
I'm not a lawyer but the law says the 50% of pay, the minimum benefits, is what's set in the law.
David and I have had several long discussions about this and neither us have a final brilliant
conclusion. Once a benefit increase has been given, we've always assumed that it's permanent.
There's nothing in the law that says that it is or it isn't. From what little research we've done so
far I think that legally you could probably look at that. I think you would want to do that very
carefully and work with your City Attorney and the contact in the Attorney Generals office that
David's board works with and have them work together to come up with a legal solution. I think
there's legal hurtles that will have to be hurtled that are important. I don't think that they are
hurtles that are too high to get over but again I am not a lawyer. I think they will have to be very
carefully dealt with. The B part of that is that you would have to have something that the
membership can swallow. I understand that I don't want anybody's benefit to be cut but if that's
what you have to do to pay that benefit in thirty years and pay everybody I know that you are
willing to look at that. I would think that a solution that kind of dings everybody a little bit that
might be worth looking at, the best thing right now might be a reduction of some amount that
would be coupled with the City agreeing to consolidate with LOPFI with a COLA. That way
when you try to sell a benefit reduction to the membership at the same time you can say you are
going to come back to that in a few years depending on the size of the reduction. The issue with
that, just kind of briefly looking at that, because when there is a consolidation the City has to
sign on the dotted line that they are going to pay the required contribution. In the old plan law
we do valuations and we calculate a contribution that should be done to get the Plan where it
needs to be but that's not what the City is required to pay. The City is required to pay those
dedicated things that are set out in the law which for Police and Fire Plans is millage, premium
tax, and employee and employer match but that's gone away now. For the Police Pension its
fines and fees so the City only puts in what it has to put in. They were doing exactly what they
where suppose to do. I'm not getting on to them I'm just saying that's what is outlined in the
law that they have to do. If they sign on the dotted line with LOPFI, under whatever scenario,
they would have to sign on the dotted line that they are going to pay the calculated contribution.
That calculated contributed even if we did some combination like I just mentioned would
increase therefore they would have to have more money from the City to go into LOPFI.
If everybody says we don't like this but we are going to have to look at it then we will look more
at the numbers and come back with a detail for you as to how much that will be depending on
how much of a cut, COLA and all of those pieces. We can find out those answers, but at this
point we are still just talking, so I don't have an exact answer. To me the only way that you get
something that is sellable to the membership that would some how jump the legal hurtles and at
the same time get everybody whole in the long run is going to be some kind of combination of
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those things. I don't know if that is the right combination but that's the best thought that I have
at this point in time. That's not a recommendation as of yet but that's kind of a talking
discussion point right now. Did I finally answer your question?
Let me take a break for a second while you are thinking of some more questions and let David
talk about what the process is to consolidate with LOPFI and how that works and what all that
entails.
David Clark: The process for consolidation is LOPFI will perform a separate valuation from the
one that Jody has talked about this morning. It will determine the cost for the City's portion of
the contribution to fund the promised benefits for the remainder of the lifetime of the pension
fund itself. It will be a combination of the pension fund liabilities and the on going LOPFI
liabilities because obliviously LOPFI has members coming in and leaving the fund all the time
because it is an active open fund. To do the valuation the pension fund Board of Trustees would
need to tell us that it is ok to go ahead with the valuation and provide the payment for the
valuation fee. We would then calculate what that contribution cost would be based on the
current plan provisions and also what the current position of LOPFI is. We have to close out the
LOPFI valuation cycle first before we can do a consolidation valuation. We are on the calendar
year just like you guys are so we have to close out 2008 first before we can do a consolidation
valuation which means we are going to be around April 1"before we can even proceed with that
type of valuation for you all. When we get the valuation results back obliviously forward those
on to the board of trustees along with the additional documents that in the event that you want to
proceed with a consolidation then you have those documents before you make that discussion to
do so. The valuation does not obligate you to proceed it just simply communicates what the cost
would be to be able to proceed with the consolidation. If the Board and the City ultimately says
yes we want to do this then the City does have to sign off on an agreement with the LOPE Board
of Trustees saying that they will in fact make the monthly contributions that are required to help
again fund all those promised benefits.
The way that we do consolidations now is that the whole pension fund costs are amortized over a
closed fifteen year period. What that does is stretches out the payment period which under a
stand alone or old plan is five years. All of the valuations that Jody produces uses an assumption
that the PRB has built in that's a five year cycle. LOPFI has allowed it to be stretched out to
fifteen years but a closed period. The idea behind that is that it actually gives a little bit of relief
to the city officials but it makes a little bit of an enticement for a more of an attractive option for
the cities and the pension funds if they want to consolidate. It kind of ease's those monthly
contributions. Also you get to the fifteen year cycle that at the end of that cycle and all the cost
or the unfunded liabilities are now satisfied for the pension fund and that leaves the City with
just the on going LOPFI contribution cost so in other words there is an end point. It makes sure
there are enough assets available for the remainder of the pension member's life times to pay
those benefits. That is just a really quick fly over about how consolidation works.
Pete Reagan: How many of these plans do you now manage in the State of Arkansas?
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David Clark: We have 103 plans that we currently administer the benefits for and there's 176
plans remaining that are stand alone plans like the Fayetteville Plans.
Pate Reagan: So 103 cities in the State of Arkansas have taken on that liability.
David Clark: That's correct they have already entered in that type of agreement and turned the
administration over to LOPFI.
Eldon Roberts: David what was the underlying reason that most of the cities decided to merge
with LOPFI?
David Clark: There's a mandatory provision if the number of pension fund members drops
below five the city has to consolidate, but actually this last year the majority of the plans that
come into LOPFI's Administration were the product of the boards and the city officials seeing
what the market conditions are and what was going on in 2008 and what probably is going to
happen over the next couple of years in the market. They have decided to go ahead and turn the
administration over to LOPFI. We had 17 of the 32 plans that made a voluntary decision to do
so. Years ago it was also, for the most part, a voluntary decision as well for the plans to go
ahead and consolidate with LOPFI.
Eldon Roberts: Most of the reason being kind of like what we are facing here with the old Fire
and Police Plans.
David Clark: That's exactly right, because there is a significant unfunded liability and they
wanted to make sure that the ability to pay the benefits remains. There's a discussion about one
could walk into the moral obligation that City's have for the people that have rendered service all
these years. Many of the City's have recognized that and decided to go ahead and step up and do
quite frankly what we feel to believe be the correct thing to do and that is to make sure that the
benefits are available for all the retirees. We have one large location that meet with me a couple
weeks ago and they are going to proceed with the valuation after April 1. They are actually
looking at it for both of their plans, Fire and Police. The Mayor made the same statement that he
felt that it was like a duty for them to go ahead and step up and see what the costs are and make
sure that they can absorb that with their on going budgets.
Eldon Roberts: What is the current percentage rate that a LOPFI member today in the Police or
Fire, after they serve the timeframe they have to serve to retire, what is the percentage of salary
that they would retire at?
David Clark: Well there's a benefit cap of 85% of final average pay. Depending on Police or
Fire and the number of years that a person has and if they are benefit program one or benefit
program two, that number of years is going to vary. The main thing is that a person could
actually accrue up to 85% of their salary for a benefit.
Eldon Roberts: Okay, their not that far from what we are drawing. We are drawing 90% of
salary. LOPFI has a built in guaranteed 3% cost of living every year?
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David Clark: It is a 3% compound COLA,that's correct.
Eldon Roberts: So in four or five years they are going to be at roughly 100% of salary and
going to go right on.
David Clark: That's right. The premium tax that's currently allocated separately to the old
pension funds that still go to the City but they just use that on their monthly bases to make their
contributions or help defray part of that contribution cost.
Dennis Ledbetter: The benefits that we have say now will it change, if they come back with a
proposal and they say for us to do this these are the rules we are going to go by now.
David Clark: When we do the valuation hopefully we're going to do it as the benefit structure
is currently for both plans. That's going to be a directive that you guys are going to have to tell
us. If there happens to be a roll back of benefits quite frankly we are going to have our legal
council to get involved to find out if that's something that we need our Board of Trustees to sign
off on. One thing that Jody and I visited about is if that happens to be the directive that you guys
issue that you probably should consider having each one of the pension fund or the benefit
recipients sign off on their approval before you go too far down that path, if you have to have
that discussion, and again that's a decision for you guys to make not for Jody or me. The point
being is that if there is an agreement and if the benefits are changed from something from what
they are right now then when the agreement is signed by the City and LOPFI Board of Trustees
that's the benefit structure that will be in place and remain unless it's amended to something
higher, it won't go lower but it could be something higher. By way of example say that there is a
roll back of benefits and the City and the Board of Trustees decides that this isn't the best time to
go ahead and implement a cost of living adjustment at this point but they may review it at some
point in the future two, three or four years down the road. At that point then a COLA could be
implemented so that would actually be considered a benefit increase so there would be an up tick
in the benefits but the benefits would not be reduced.
Dennis Ledbetter: The same we have for the widows and stuff they would remain the same?
David Clark: That's exactly right. The reason why the survivor benefits remain the same is
that's a product of the section of code that the pension fund members are under. It's actually
Arkansas law. The benefit structure for survivors does not move to what the survivor benefits
are for the LOPFI members because while you are administered by LOPFI you are still a pension
fund member.
Rick Holt: What is the unfunded liabilities percentage on the LOPFI over all? Do you do a
valuation of the state wide plan?
David Clark: We do and that is on an annual basis and we have to go back to 2007. We are
looking over all, just for the LOPFI only plan, the plan was actually funded itself, just LOPFI
only not looking at any of the old plan liabilities was at 91% funded. If you have to factor in and
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we have to factor in what.the liabilities are for the old pension funds that dropped that down to
78%.
Rick Hoyt: Mr. Becker this might not be fair because you might not be familiar with this but
your predecessor was Steve Davis,right?
Paul Becker: That's correct.
Rick Hoyt: I'm a member of the Police Pension Fund. I retired after 28 r/z years with the City.
I've always been a proponent behind the scenes of wanting our plan to go to LOPFI just because
of it's such a bigger plan and because it's got a COLA and its kind of a sure thing to me. Now I
can't speak for the other members on the Police Plan but that has just been my personal feeling
over the years. I will tell you that in discussions several years ago with your predecessor I kind
of made that know and Mr. Davis had actually kind of discouraged us from going right now,
back then. He said you know there's a lot of money coming in from the insurance turn back and
right now you need to gather all the money you can to put in that plan because it's going to get
healthier and then at some point in the future you may want to go to LOPFI because it will be a .
more attractive package because the assets will be at a greater level and the City won't have to
pay as much. I remember Mr. Davis talking about this several times, he said it was very
attractive from the City's stand point to have the Plan go to LOPFI because of some of the
liabilities that are on the books of the City. He said that having those liabilities off the books of
the City made the ability of the City to sell bonds and do other financial instruments more
attractive for the City's financial picture. Are you aware of that, do you agree with that, do you
have any view on that? If this went to LOPE it would be better for the City in the long run for
other reasons.
Paul Becker: I can't speak for Steve Davis. I understand that at one time he discussed that with
people about sending it to LOPFI and my option no, it would not be financially in the City's best
interest to set it from a liability stand point or anything like that. These pensions are trusts they
are not a liability of the City so it does not have a benefit to the City as far as issuing bonds or
anything of that nature.
Rick Hoyt: That's what I was getting at because he eluded to the fact that issuance of bonds and
so forth could be negatively affected by carrying this pension system on their local books.
Paul Becker: That wouldn't be my option.
Rick Hoyt: Thank you.
Marion Doss: David from what was said here I guess all these 103 plans that LOPFI now
administer they all have maintained there current benefits.
David Clark: That's correct several of them have put a COLA in on the way in as well.
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Eldon Roberts: I heard you mention something about mandatory reasons that City's merge with
LOPFI. I'm not familiar if there is anything mandatory.
David Clark: The mandatory provision for consolidation comes into play when the number of
pension fund participants falls below five.
Eldon Roberts: Not just active people the beneficiaries.
David Clark: No not beneficiaries, participants only include the actual members of the pension
fund themselves, which doesn't have to be an active member it could be a retired member, that
when that number drops below five then the fund has to consolidate with LOPFI.
Eldon Roberts: You mentioned if we merged with LOPFI that the COLA might be a possibility
and look at it two or three years down the road. Who makes the final decision on whether that
occurs or not.
David Clark: The City makes that decision because at that point it's now a relationship between
the LOPFI Board and the City.
Eldon Roberts: Thank you.
Pete Reagan: David do you know of any current legislation in the pipe line that we might could
get$15 to $20 million out of for our fund?
David Clark: I'm not aware of anything that has any real possibility of passing out of the
legislature this session. The reason I say that is earlier last year we had a meeting with the
Governor and the only way the money could be attracted would be to pull it out of the general
revenue portion. The Governor made it very clear to us that anything that would adversely affect
general revenue he wouldn't be able to support. While there are a couple proposals that would
touch the general revenue it would have to be in a very minor sense,the $15 to $20 million range
quite frankly that would be something that we would probably have a lot of resistance against.
The first thing is we have to get it out of Joint Retirement Committee and then both houses
before it ever gets to the Governor's desk. At this point there are a lot of bills out there that are
still waiting to have some type of action but I haven't seen anything that specifically addresses
that topic.
Pete Reagan: Thank you.
Jimmy Vineyard: Of those 103 City's that have been brought in is their monthly bill during
that fifteen year time frame computed against current payroll?
David Clark: That's exactly how we have to do that because we have to use the total payroll
dollars to be able to charge the monthly contributions against.
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Jimmy Vineyard: In that 103 what is the percentage against payroll that you are seeing in some
of the hard case situations?
David Clark: What are the variations of the quarter rates? It goes all over the map I've seen I
think 47%. We have to do individual valuations. We have 454 separate groups so that's why
I've drawn a little blank here but we do have some in the 40%range for employer contributions.
Jimmy Vineyard: Thank you.
Paul Becker: I asked Jody if he would have any ball park of what the cost to the City would be
if consolidation was considered.
Jody Carreiro: We talked very generally about consolidation and I had set my spreadsheet up
to do a quick calculation. The Fire Plan has about $550,000 on the Fire Pension side of things
and the $550,000 is millage and premium tax. The City already has those dedicated sources that
could still be used to pay a LOPFI bill if it consolidated. With the current assets and the current
benefit structure, and again this is very rough, but the cost to the City would be about $1 million
without a COLA which means when you take the $550,000 out the City would have an
additional obligation of $450,000. If the current benefit structure was consolidated the City
would have an additional benefit amount of close to $1 million. If you looked at a 10%
reduction and no COLA it would be $850,000 minus the $550,000 so it would be $300,000
additional from the City to make the LOPFI payment it appears. If you did a 10% reduction with
the COLA so folks would get back to the same level in just a few years there would be an
additional about$800,000 from the City. .
Paul Becker: So everyone understands that is per year and that is just for Fire Pension, right?
Jody Carreiro: That's just for Fire Pension and that is per year numbers yes sir.
Mayor Jordan: You are telling me that it would cost us a $1 million a year. Give me a real
good straight answer here.
Jody Carreiro: Yes sir, I can do that. The current benefit structure would cost the City an
additional million dollars per year with a COLA.
Eldon Roberts: You're talking about Fire Pension only.
Jody Carreiro: That's Fire Pension.
Sondra Smith: Under contributions it has members for 2008 12, 2009 10 etc. Some people
may question what that means.
Jody Carreiro: As of January 1, 2008 there were two members that were on DROP. That were
still active and on DROP and that's an estimate of their member contribution.
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Sondra Smith: We now have zero.
Jody Carreiro: Okay, you can just scratch that out then.
Pete Reagan: What are you currently using as a mortality rate for both the active member and
the widow for the both Fire and Police?
Jody Carreiro: We changed just this last year to "The 1983 Group Annuity Mortality Table".
It was based on a study that started in 1983. Last year we looked at mortality over five or six
years previous to this last valuation and what had happened in all the plans as a whole. We
matched that up to several pension mortality tables to find the one that was the closest match to
what was really happening, the rate that folks were passing away and that was the table that was
the closest. It's not the newest mortality table but it was the one that was the closest to real
experience.
Pete Reagan: Do you know right off the top of your head what the average age is?
Jody Carreiro: No 1 don't. I don't know your average age. In the valuation report on page 14
shows all of the members and their benefits broken down in quinquenal slots, five year age slots.
There are five members that are over 85 and seven members that are over 80 and five more
members that are over 75 so in the Fire Pension Plan you've got 17 of your 61 members that are
over 75.
Pete Reagan: I believe it was in September or October of last year you gave a presentation in
Little Rock on the history of the old fund and how it was funded both by the employer and
employee. Could you give us a readers digest version of how that funding took place?
Jody Carreiro: Are you talking about the premium tax?
Pete Reagan: No, the actually percentage of payroll that the employee and employer
contributed.
Jody Carreiro: For several years there was not an employee or employer contribution rate. In
the late seventies maybe early eighties it went to 3% and then stair stepped up to 6% employee
and 6% employer matching that was required of everyone. The premium tax was added for Fire
Pension Plans in the twenties and the Police Plans didn't start getting a piece of premium tax
until much later. I think right at the advent of LOPFI which was 1982. The millage was put in
somewhere in between that the millage was allowed and a lot of cities had a full dedicated mill
and then the millage roll back in the late eighties where everything rolled back to .4 and some
cities went back to their folks and got it back up to a full mill and some folks stayed at the .4
millage when that happened. Those have always been the sources. There have been some minor
tweaks but in general those have been the sources of funding over the years. One of big things
why the LOPE system was brought into existence in 1982 was that there never was in the old
plans a requirement for the cities to pay the cost of the benefits as in the actuarial calculated
contribution. What the cities were required to pay by law was always less than that. That goes
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back to what I said earlier that not that the cities did wrong but the cities did what they were
suppose to but it was less than the actuarial calculated contribution. Even if you earned exactly
6% or 7% every year you still were falling behind because the contribution was less than the
actuarial calculated contribution. If all other assumptions meet you still weren't making the
contribution and fell behind because of that.
Pete Reagan: I think it was 1987 that the Arkansas Legislature saw fit to allow us to invest in
the stock market. Before that we were limited to only savings and loan.
Jody Carreiro: And government bonds.
Pete Reagan: That as you know was part of the demise of this.
Jody Carreiro: Yes, the funds were very limited and the smallest funds are still very limited.
That limit is still there for them. I think it was 1987 or 1989 before that was opened up. At first
it was only opened up for the largest funds but now it goes down to over a million that they can
invest in the broader markets. You are right they were limited on their choices of assets for
many years.
Pete Reagan: Thank you.
Jerry Friend: Back in the late seventies and eighties do you know what the employer
contribution to social security was?
Jody Carreiro: For Firemen and Policemen in Arkansas it was for the most part zero as it still
is.
Jerry Friend: I thought they pay it now.
Jody Carreiro: No. I think your Fire Pension and Police Pension here are not covered by social
security.
David Clark: That is correct.
Jody Carreiro: The Firemen and Policemen even the current ones are not covered by social
security.
Jerry Friend: I wondered if the employee contribution matched what they would have paid in
social security.
Jody Carreiro: Since the 1982 amendments to Social Security Act the rates have been 7.65%
which is 6.2% into social security proper a little bit into the disability and 1.45% is Medicare.
Everybody pays the Medicaid part so it's 6.2%to 6.5% is what is going in for an employer that's
paying into social security.
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Paul Becker: Mayor, can we recognize Elaine Longer who does the investments for funds? One
of the things that we need to consider when we are looking at the graphs that is predicated on 7%
annual smoothing of the stock market increases and I think Elaine should address how realistic
we think that is.
Elaine Longer, Longer Investments: Longer Investments is the money manger for both the
Firemen and Policemen's pension. Our tenure with the Policemen's Pension goes back to 1990
but we've only been involved with the Firemen's Pension since 2002. I will separate the two if I
can and just talk first about the Policemen's Pension. If you look at the past year this has been a
disaster in the markets and there's not a pension plan in America that has been unscathed by
what is happening in the credit markets. Last year every asset class whether you were in foreign
stock, domestic stocks, real estate, or high yield bonds, whatever you had out side of treasuries
went down. It was one of those perfect storms and so what I would like to do is look at the
period that goes up to December 31, 2007 which corresponds with the actuary report that we are
discussing and then we can talk about 2008.
If you look at the actuary report for December 31, 2007 that shows the unfunded liability where
they are, the Policemen's Pension fund has delivered a 7.1% compound annual return from 1990
through 2007. That compares to the actuary rate of return of 6%. I wanted to make it real clear
that from an investment stand point the fund has out performed by 1.1% on a long term basis
what the actuary's assumed the performance would have to be to keep the funds whole. On the
performance side when you hear so much bad news about investment performance I think it is
real important for the public to know and for the people in this room to know that the investment
performance has been more than what they actuaries wanted us to produce. Last year the funds
were down about 19% and that's pretty much in line with what the market was down about 40%
and you're in a 50% balanced fund. So being down about 19% is about what most funds
experienced. How does that compare to the past? Well prior to last year the worst year that we
experienced in the Policemen's Pension Fund was minus 5.7% in 1993. However there have
been three years during that time period that the return has been over 19% a year and that was
28% in 1991, 19.6% in 1995, and 19.2% in 1997. I think as we have discussed what has
happened this year it is important for people to realize that this is the worst year on the down
side. I don't believe that it is not recoverable, it make take time, but the history has shown that
when the market does bounce back you can have an upside year correspondingly as big as what
this down side year has been. I think that's something that as I go into meetings this year that I
am trying to reinforce to people. As bad as this feels, it feels so bad because we haven't been
here before, but we have been here before on the upside. So that's important.
From the stand point of the Fire Pension we have been involved with the Firemen's Pension
since 2002 and at the time that we started managing we thought that the expected return of 6%
was a realistic expectation of return because at that point in time the fixed income market was
delivering a 6% return. We thought with the expectations of equity returns of 8% to 10% that a
6% actuary rate of return was achievable. In fact we've been able to deliver 7.1% compound
annual through December 31, 2007. Now similar to the Policemen's Pension Fund in this year
they are down about 19% and we don't have the long term history with the Firemen to know how
that equates to their long term performance. Just looking at what we have been able to achieve
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from where the fund came in through the cut off date of the actuary report that we are discussing
that's been compound annual 7.1% as well. I think when we talk about risk adjusts to return
what people need to realize is that we operate as a fiduciary. We are held by rules with the SEC
and with the States Security Commissioner. We're bound by the prudent expert rule when
handling pension funds which is even a higher level fiduciary responsibility than the prudent
investor rule. From our stand point what we have done is to treat these funds as a fiduciary and
we invest only in investment grade bonds, government securities, and government agency
securities. The highest quality of credit is in these funds and so these fands have escaped
everything that has happened in high yield and real estate investment trust this year. The fixed
income side of the portfolio which has really stabilized the down side remains intact without risk.
On the equity side the returns have out performed our bench marks and have really delivered
what you would consider to be the historical expected return in equity markets. Going forward
the returns through December 31, 2007 in the actuary report assumed a 6% expected return. We
were comfortable with that and as a fiduciary we have to sign off on those expected returns
because it becomes part of the investment policy that governs the investment of the accounts. To
jump it up to 7% when fixed income returns have dropped to 2.8% from 6% a few years ago we
are down to 2.8% on government bonds. We still have 5%returns locked in on the fixed income
side of the portfolios but as those roll off we will be looking at a lower reinvestment rate. The
question that I have for the actuaries that are here today and it's so wonderful to have all of us in
the same room and be able to answer each others questions. Looking forward when we do
investment plans we actually lowering expected returns going forward because of the fact that
the fixed income side of the portfolio is going to be generating lower expected returns than the
past five years. My question would be how did the 7% bump up in expected returns take place
this year giving that fact that 50% of the portfolios are really tied to fixed income returns which
have dropped. What it does is it puts the burden even higher on the stock side of the portfolio by
my calculations up to 12% annual return to be able to achieve the 7% which is now the new
benchmark. I express this concern because I think it's important for all of the pensioners
because it changes the unfunded liability but it also changes the contribution from the City. That
would be my question going forward where did the 7% expected return come from and whether
or not that is really a realistic assumed rate of return given what is happening in the fixed income
market, the fact that you can't go far away from the 2.5% or 3% return in the fixed income
market without subjecting the portfolio either to credit risk or maturity risk. That would be my
main concern to bring to the meeting while we have the actuary's here. I am open for any
questions that anyone has.
Pete Reagan: Elaine I hope that we have not put you in the hot seat here. I want to say to the
general public that you have done us an excellent job and I don't feel like any of this is any down
fall you or your firm. I think you all have done an excellent job and we appreciate everything
you have done for us.
Elaine Longer: Thank you we appreciate that.
Eldon Roberts: I will echo that from the Police Department's side from my stand point of view
I can't speak for the rest of the board members. I feel very comfortable and very confident in
your ability in what you have done for us. Because we were up in the up years so high is the