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HomeMy WebLinkAboutMinutes_Pension Public Safety_Workshop_01/22/2010TEQUESTA PUBLIC SAFETY OFFICERS' PENSION TRUST FUND . WORKSHOP MEETING MINUTES January 22, 2010 Call To Order and Roll Cali A workshop meeting of the Tequesta Public Safety Officers' Pension Trust Fund Board of Trustees was held in the Manager's conference room at the Tequesta viiiage t~iaii; 345 i equesta urive, i equesta, t=iorida, on January 22, ~u~u. i ne meeting was. called to order at 9:00 a.m. A roll call was taken by Recording Secretary Betty Laur. In attendance at the meeting were: Chair Ed Sabin, Secretary Frank D'Ambra, Board Member Ray Giblin, and Board Member Robert Young. Board Member David Cooper was absent from the meeting. Also in attendance were Mayor Pat Watkins, Vice Mayor Tam Paterno, Council Member Calvin Turnquest, Council Member Vince Arena, Village Manager Michael R. Couzzo, Jr., Attorney Bonni Jensen, Pension Coordinator Lori McWilliams, and Recording Secretary Betty Laur. Duane Howison of Gabriel Roeder and Smith Company was present via telephone. Fire Chief James Weinand joined the meeting at y:v4 a.m.; rinance virector .ioHnn i=orsytne arrived at 9:ua a.m. Human Resources Direc#or Medene Reid arrived later in the meeting. Review and Discussion of Public Safety Pension Actuarial Valuation Report dated 10/1 /09 Mr. Howison provided an overview of the actuarial valuation report dated 10/1 /09, which determined the funding requirements for fiscal years beginning 10/1/09 and 10/1/10. The schedule of funding requirements showed a net funding requirement for the fiscal year ending 9/30/09 of $196,642. The total had jumped 16.93% of payroll since the last valuation #wo years ago. The estimated required contribution for fiscal year ending 9/30/11 was $102,950 for police and $2$5,745 for fire fighters, and the total required ViAage contribu#ion was $388,695. Mr. Howison explained the fire fighters' contribution rate had been decreased from b 1°h, to 5"/0, and me actuary nad issued an actuana~ impact statement on August 1, 2008 which showed #hat the effect of this amendment was cost neutral to the plan because State funds were used to pay for it. The following changes had been made in actuartiai assumptions and methods: i j assumed mortality rates had been changed from the 1983 Group Annuity Mortality Table to the RP-2000 Generational Mortality Table. The RP-2000 table assumed that mortality would improve in the future. Mr. Howison re#erred to page 22 0# the report which contained a table of fife expectancy and probability of dying in the next year far dipFerent age groups. i fie Kr-2uuu table was more refrecwe oT what was expected in the future. Because this plan had a small number of participants, only one or two outliers could cause deviations from the assumptions, no matter which table was used. The mortality change had increased the funding requirement by approximately 2-1/2% of payroll. Workshop Meeting Minutes Board of Trustees of Public Safety Officers' Pension Trust Fund January 22, 2010 2 2) 5-year asset smoothing had been adopted to determine the actuarial value of assets. In the past, market value had been used to determine funding requirements. The smoothing method was designed no# to overstate or understate the asset value, but rather to smooth out volatility. Last year, the expected return on asse#s had not been met, so it was being smoothed out and they were not recognizing all of that loss this year. Secretary D'Ambra expressed concern that if the methodology were changed to smoothing during a downturn and then the markets rebounded, that was de#erring putting money into the plan at a time when it would have been advantageous to do so from an investment perspective, and the cost of plan funding was increased over a period of time; therefore, from an accounting standpoint it might look a little better, but the impact was it would increase the cost to the plan because of losing out on the investment opportunities that would have been available if that money had gone in sooner. Mr. Howison acknowledged it was atrade-off between the asset performance issue and better visibili#y for funding requirements so that you were not faced with as steep an increase. The Board had fel# it was more advantageous to have a smoother funding rise, and you were not prevented from putting in more than required in a down market. Mr. Howison agreed i# was a matter of paying sooner or later. Chair Sabin commented when the decision was made #o go to the smoothing method, the Board had been advised that most plans followed the smoothing method. Discussion ensued. Secretary D'Ambra commented he did not disagree with using the smoothing me#hod, but if it were possible #o contribute at a higher level to take advantage of marke# opportunity, he believed it would be in everybody's best long-term interest #o do so. Chair Sabin advised the Board could consider recommending to the Village Council that the Village consider go higher than the minimum contribution, and the investment manager could provide advice on that based on the markets. Secretary D'Ambra did not agree with going with smoothing just because other plans did it. Vice Mayor Paterno asked if smoothing would mask investment returns in bad times, making it hard to evaluate the investment manger's performance. Chair Sabin responded that the investment monitor measured the plan against peer groups. Attorney Jensen advised there was a report that gave that analysis. Vice Mayor Paterno commented the ViNage Council did not always realize the concerns, they just saw the amount of cash they needed to put in. Attorney Jensen suggested sending the Council the executive summary page, and Chair Sabin advised the Board was happy to work with Pension Coordinator McWilliams to give the Council that snapshot of investment performance as well as contributions. Council Member Arena noted the losses were not earth-shattering figures, and mus# be weighed against taking it easy on your budget and going over five years-which one really helped the Village more. Attorney Jensen noted the actuary had calculated the contribution that would have been needed if smoothing no# been used, 21.14%, Workshop Meeting Minutes Board of Trustees of Public Safety Officers' Pension Trust Fund January 22, 2010 3 and it was possible to convert that to a dollar figure. Vice Mayor Patemo commented by changing the methodology during a down time it made a big difference because under the old method it would have been 80% funded and under the new method it was 97% funded. Discussion ensued regarding the Council meeting when this was decided, whe#her advice had been to hold back. Secretary D'Ambra commented the plan was now underfunded by a million dollars, which was masked by the smoothing. Chair Sabin expressed his opinion that the million dollar shortfall could not be contributed solely to the smoothing, but primarily to the decline in market values. Discussion ensued. Chair Sabin requested clarification from Mr. Howison, who referred to the bottom of page 2 of the actuarial valuation report which discussed the difference in the funding using the old and new methods. Chair Sabin clarified that there was no question that smoo#hing had an impact, bu# it should be made clear there were different methods tha# could be used to determine funding position, and if you changed your method of calculation to a market value of assets calculation you were 80% funded, but if you used the various rules promulga#ed by government accounting, and financial accounting boards relative to actuarial valuation, which could be argued were not as meaningful, that was where one got to the 97%. Mr. Howison agreed that to jump to the conclusion that the plan was 80% funded because of a change in me#hodology for the assumptions was not accura#e; the funding requirement would have been a little over 4% of payroll higher, or approximately $100,000, if marke# value were still being used. Secretary D'Ambra questioned the length of amortization of the investment loss; Mr. Howison responded it was now 20 years. 3) The funding method had been changed from the Aggregate Funding Method to the Entry Age Normal Funding method. Mr. Howison explained the entry age normal method was more commonly used by municipal plans. The net effect of this change brought the funding requirement down a little. If two plans were identical from their inception, with one using the aggregate funding me#hod and the other using entry age normal funding method, there would not be much difference in the #unding patterns between the two methods. Under the aggregate method losses would be amortized over a shorter period; most plans under entry age normal funding amortized over 30 years and paid it off like a mortgage. In this plan the unfunded amount amortization was as a level dollar amount over 20 years, so the payment would be level in the future, but as payroll went up this would go down. Discussion of lRS amortization times ensued. Mr. Howison explained there was no# much difference for this plan between the two methods. Attorney Jensen explained State law provisions would apply to the pension fund. Secretary D'Ambra asked if the Soard should move in the direction of the IRS amortization period of 7 years. Attorney Jensen explained she did not know if that would be bes# practice since this had been developed for private plans~he Village was always meeting its #unding requirements as required under Florida law, which was different for many private plans. Chair Workshop Meeting Minutes Board of Trustees of Public Safety Officers' Pension Trust Fund January 22, 2010 4 Sabin confirmed with Mr. Howison the Village's investment gains and losses were amortized over 20 years at a level dollar amount. Chair Sabin expressed his understanding the effect of investment gains or losses in any one year was spread over a 10-year period, and now that smoothing had been introduced, in the first year 20% went in, in the second year 40%, etc., so in effect it took a little longer #han 10 years to get the full effect in the calculation. Mr. Howison responded that was mixing two components-one was the investmen# loss, and that was recognized over 5 years, but the other piece was the smoothing method which extended 20 years. Chair Sabin called attention to prior minutes with an example presented by Mr. Palmquist of an $80,000 loss before smoothing and then with the smoothing me#hod. Since Mr. Palmquist had used the terminology "future working lifetime", Mr. Howison advised that referred to the aggregate funding method. Secretary D'Ambra asked the contribution range-Mr. Howison advised there was no maximum, bu# there were different ways to increase the funding requirement, such as shortening the amortization period; however, since the debt payment was only about $33,000, it would not make a huge difference. Attorney Jensen advised private sector plans had a range, in governmental plans the loss could be fully funded. Village Manager Couzzo and Council Member Arena discussed what had happened at the Council meeting when there had been an opportunity to roves#, but #hat opportunity had not lasted. Chair Sabin noted no one had a crystal ball, and when the Board had made these decisions, they were trying to adjust to more up-to-date assump#ions. Mr. Palmquist had advised at the time that in good times was when the assumptions should be dealt with, and the Board would continue to evaluate these items going forward. Mr. Howison talked about the investment return assumption-it was now 8% and the actuary would like it to go down to 7-1/2°10. They had done a study last spring and recommended lowering the rate #0 7-1/2% or 7%. Chair Sabin advised that would be taken up with the investment manager. Mr. Howison advised a reduction of '/% would result in approximately 4% percent of payroll increase in funding requirement. Discussion ensued. Village Manager Couzzo indicated all of the assump#ions decreased the expectation and increased the contribution, and reduced the risk because the assumptions were not as great. Mr. Howison confirmed the investment return was a net percentage. Expenses were running 1-1/2%. Mr. Howison cautioned to keep in mind the plan was young, so a 20-year amortization made sense, since those people should still be in the plan receiving benefits for several years. Workshop Meeting Minutes Board of Trustees of Public Safety Officers' Pension Trust Fund January 22, 2010 5 Mr. Howison reviewed the chapter revenue chart on page 3 of the actuarial valuation, which was actuarial confirmation of the use of State Chapter money. Secretary D'Ambra asked if as salaries went up, the base amount changed. Mr. Howison advised that amount was static unless some type of plan improvement was implemented. Secretary D'Ambra commented Florida League of Cities was trying to get the State to make a change so that if the plan met State requirements these dollars migh# be released #or funding purposes. Attomey Jensen advised it could be proposed for this legislative session but she had not seen anything yet. Council Member Arena asked if the firefighters' contribution had been reduced from 6.1 % to 5% because State funds were being received on fire insurance, if it went down why would the Village have to suffer? Would the fire contribution then go back to 6.1 %? Attorney Jensen advised the State had taken the position that in order to increase employee contributions there had to be some corresponding benefit it did not have to equal the cost of the increase in the contribution. There was no clear definition of a benefit-it would have to be something better #han they had. This was only for 175 and 185 money. Mr. Howison confirmed when retums did not meet the assumption the Village was responsible to make up the difference. Vice Mayor Patemo asked if going forward retums were not mee#ing the assumption, could the additional State funds be used to pay that, to which the response was no. It was confirmed that the employee contribution could be raised by negotiation. Further discussion ensued regarding the 6.1 % contribution versus 5%. Mr. Howison advised that comparable plans around the state were paying much higher contributions, such as 30% of payroll, and this plan had been well-funded in the past, which helped with the present contribution rate. The FRS rate was currently 20.92%. Mr. Howison left the meeting at this point. Discussion of Alternative Investment Strates~ies and Investment Manager Performance Secretary D'Ambra expressed his concerns. He s#ated he had asked Dan Johnson of Bogdahn if he could succinctly describe the investment process utilized by Rockwood, and did not get an answer he was comfortable with-he talked about being opportunistic, abou# black box quantita#ive methodology, and if the manager could not explain to him how they made money, he had a concern. He recognized that was not the manager, it was the moni#or, but the monitor made a recommendation, and the response did not make him comfortable. As a consequence of tha#, he did no# have a clear expectation of how they should be performing in relation to the market cycle. He would like to see that addressed. Chair Sabin responded that twice a year, the investment Workshop Meeting Minutes Board of Trustees of Public Safety (N#icers' Pension Trust Fund January 22, 2010 6 manager met with the Board and there was a lengthy discussion, and the investment manager would be able #o answer his questions specifically. Attomey Jensen expressed her opinion the investmen# manager should be notified the Board wanted that information so they could bring their materials, and when they were hired they had pretty substantial discussion about their me#hodology. Secretary D'Ambra commented before they were hired the investment manager's performance had been good, and after they were hired i# had not been nearly as strong. He had real concerns about their performance over the past three years. Also, when you looked at managers in the top quartile and how they performed over five years, the success rate of them repeating that performance was only about 18%-19% on average, so what comfort did he have in the methodology of manager selection that they would perform a# a high teve! going forward. Another concern was there was only one manager with one style managing both frxed income and equities. He understood that to diversify would mean using some bonds or other vehicles, but he thought that should be discussed with the manager as a possibility. On the fixed side, he was concerned with duration being so much shorter than the government corporate bond index. Secretary D'Ambra wanted these concerns discussed at the next meeting, Chair Sabin responded these were similar issues to what was discussed at each semiannual meeting with the investment manager, which was usually an hour to an hour and a half discussion. Vice Mayor Paterno indicated he was curious whether Bogdahn was more concerned with this pension or how it did in the universe. Attorney Jensen advised there was an attribution report the Board did not receive. Secretary D'Ambra asked that Mr. Johnson be reminded he had asked that the attribution report be provided. Secretary D'Ambra also wanted to know i# they were compliant. Vice Mayor Paterno commented he had the Finance Director caN Bogdahn last week to ask how they came up with their returns, internal rate of return, and weighted return. Attorney Jensen responded, clearly Mr. Johnson should be asked, but it was her understanding Bogdahn took the fund's custodian's reports and input each and every item and replicated each to come up with their reports. Vice Mayor Paterno responded i# was his understanding they took into consideration ail the costs and contributions included in their rate of re#um. Attorney Jensen explained they did a financial reconciliation and netted out contributions; they showed the capi#ai appreciation and income. it was her understanding it was an exact replication of what had happened, and contributions did no# count in the rate of return. Finance Director Forsythe advised she had spoken with #hem regarding internal ra#e of return which took in#o accoun# everything and weighted return which did not; she would have thought the weighted return would have been lower, but in fact, it was not. Vice Mayor Patemo indicated his question was exactly what rate of return they were Workshop Meeting Minutes Board of Trustees of Public Safety Officers' Pension Trust Fund January 22, 2010 7 showing. Secretary D'Ambra commented they should be compliant with approved method of computation of return and if the manager was not compliant that was a reason for concern. Chair Sabin responded not to jump #o that conclusion; Secretary D'Ambra responded at the last meeting he asked for some changes in the report for clarification, which he hoped Bogdahn had done. Packets for the next meeting were distributed so that the members could look at the current monitor's and manager's reports. Attorney Jensen advised she did not look so much to the manager's quarterly returns because they were marketing for themselves-not that they would misstate their returns, but if there were a doubt they would go in their own direction. Her judgment of the manager's returns was really on the monitor's report, because they mimicked the portfolio and were able #o report from an independent standpoint, they had a fiduciary relationship to the Board and a responsibility to report to the Board in the plan's best interes#s. The moni#or's report was a clearer picture of the returns. The manager brought their market outlook and #heir fu#ure determination of what the funds should be invested in, the particular market environment, and what should be done going forward. Vice Mayor Patemo commented at one time the manager was using a different cutoff than Bogdahn; Attorney Jensen responded they might have used a different start date~he da#e that Rockwood actually started investing as opposed to Bogdahn, who probably used an official cutoff such as the beginning of a quarter. Secretary D'Ambra wanted to see a full year calendar summary; Chair Sabin pointed out that information. Other Matters Vice Mayor Paterno asked that the proposed ordinance be addressed. Attorney Jensen went through the proposed amendments to the plan document and explained each one, whether it was voluntary or mandated, and where the wording had come from. The amendments were the HEART provision, in which the death benefit was mandatory, and the disability portion was not; the definition of firefighter which had been omitted bu# should have been included because the plan covered the firefighters; definition of salary to include differential wages; change in designs#ed beneficiary up to twice; increasing Board terms from 2 to 4 years which was voluntary and recommended by the attorney; fund management authorizing someone who had fiduciary responsibility to make payments, and if internal control procedures could be met a signs#ure stamp could be used; foreign investments were proposed to be raised to 25% from 10% which was recommended by the monitor; divestiture from scrutinized companies. There was discussion regarding how one would go about reverting back to a 6.1 firefighter contribution should 175 money ever become insufficient to make up the 1.1 % difference; Attorney Jensen commented the question at that point would be whether the State would require some sort of a benefit. Another proposed amendmen# was to clear up language regarding payment of disability benefits #hat conflicted with the mandated HEART provision. There was Workshop Meeting Minutes Board of Trustees of Public Safety Officers' Pension Trust Fund January 22, 2010 8 discussion regarding the DROP program. The next proposed update was addition of termination of the plan in accordance with the situation that took place in the Town of Lake Park so that if the plan terminated everyone would be entitled to their payout. Another amendment was to allow the Village to pay health insurance premiums for police and firefighter retirees to third party providers because they could get up to $3,000 in income tax deductions if the premiums were paid by the Village; although not mandatory this was recommended by the attorney. The final proposed amendment was the new exclusion of forfeiture that was added to the State statutes. The IRS determination letter was discussed. Attorney Jensen advised when it was received, further changes might need to be made. Vice Mayor Paterno thanked the Board members for their service. ADJOURNMENT There being no further business, the meeting was adjourned at 11:25 a.m. Respectfully submitted, Betty Laur Recording Secretary