Owosso Employee's Retirement System Minutes
June 17, 2004 - 8:00am
PRESENT:
CHAIRMAN PAUL K. HOOD, TRUSTEES JOHN C.M. DAVIS, WILLIAM HORTON,
STANLEY P. JELINEK AND JAMES R. TREADWAY.
ABSENT:
TRUSTEES
WILLIAM G. BLANCHETT AND LINDA L. ROBERTSON.
CALL
MEETING TO ORDER
Chairman Hood
called meeting to order at 8:07 a.m.
APPROVE MINUTES OF MARCH 18, 2004 REGULAR MEETING
Motion by Trustee
Jelinek to approve the minutes of the March 18, 2004 Employees
Retirement System Board meeting.
Motion supported
by Trustee Horton and concurred in by unanimous vote.
APPROVE PENSION CHECK REPORTS
·
March,
2004 $85,006.22
·
April,
2004 $85,412.13
·
May,
2004 $84,780.50
Motion supported by
Trustee Jelinek and concurred in by unanimous vote.
APPROVE STATEMENTS
Motion by Trustee
Horton to approve the following statements:
·
Chemical Bank and Trust
Company
March-May, 2004
·
Fifth Third Bank
February-May, 2004
·
Tom Johnson Investment
Management, Inc.
Period ending 03/31/04
Motion supported
by Trustee Treadway and concurred in by unanimous vote.
PAYMENT AUTHORIZATIONS
Motion by Trustee
Treadway to approve the following payments:
·
Tom Johnson Investment
Management, Inc.
Management Fee
For Period 01/01/04 through
03/31/04 $9,115.07
·
Chemical Bank and Trust
Company
Management Fee
For Period
03/01/04 through
05/31/2004 $7,877.91
·
Gabriel, Roeder, Smith
& Company
Actuarial Services for Fiscal Year
2003-2004 $9,200.00
·
City of Owosso
Reimbursement for Audit
Expenses $4,200.00
COMMUNICATIONS
The following
communications were received for file:
·
Ronald J. Tobey, City
Treasurer – Report of Checks Written
·
Gail L. Schultz, City
Clerk – General City Representatives (2) Election Results
·
William C. Brown, City
Attorney – copy of communication to Kristi Tice, Fifth Third Bank
regarding trading fees
·
2004 MAPERS Membership
Directory
The following publications and conference announcements are on file with
the City Clerk – if you would like to read them, please contact her:
·
Gabriel, Roeder, Smith &
Company – April News Scan
·
Tom Johnson Investment
Management, Inc. 1st Quarter 2004 Insight
·
Lerach, Couglin, Stoia &
Robbins, LLP – Corporate Governance Bulletin
·
Government Finance
Officers Association – A Primer on Early Retirement Incentives
·
Rodwan Consulting Company
– Service brochure
·
Miscellaneous Conference
Announcements
Trustee Jelinek commented on the new
trustees and felt that they would both do a good job on the Board.
Chairman Hood commended Trustees Horton and Jelinek for their service to
the Board.
City Attorney Brown commented regarding
his letter to Kristi Tice, Fifth Third Bank, regarding outside trading
fees. Chairman Hood questioned if all managers were treated equally and
had been notified by letter regarding the $25 done away fee. There was
confusion with how the trade done away was done through Merrill Lynch
and the money managers. Ms. Vanerian commented regarding the done away
fees and SEC requirements.
Trustee Jelinek
commented regarding Ms. Vanerian’s previous statements regarding
problems with communications with Fifth Third Bank and their not being
aware of the situation and a problem with getting the information from
Fifth Third Bank.
Fifth
Third Bank – Discussion related to Transaction Costs associated with
Trading
Kristi Tice,
representative from Fifth Third Bank, commented regarding actions taken
after December meeting. She commented that they would need to code
their system if they were to trade with Merrill Lynch and requested a
letter of direction. She commented regarding Merrill Lynch charging 10
cents per share commission versus trading with Lehman at 5 cents per
share commission. She stated that they were not aware of a $25.00 done
away fee that was going to be charged for trades not done through
Merrill-Lynch. She stated that she feels that Merrill Lynch should
waive the $25 done away fee until Fifth Third Bank is notified by letter
of direction. There was further discussion regarding the $25 done away
fee.
City Attorney Brown
asked Ms. Vanerian to explain the difference between execution and
commission. Marie Vanerian, representative from Merrill-Lynch,
explained the difference between commission and execution. She stated
that execution and commission are two separate things. Trades executed
at the close of the market are all at the same rate.
There was general
Board discussion regarding obtaining the cheapest way to get the
transactions done; best execution price you can get the trade for (the
price of the security); commission fee negotiations; lack of
communication between the Board, Merrill Lynch and Fifth Third Bank; the
goal is to be working in the best interest of plan participants; Board
should be negotiating commission rates; Merrill-Lynch advising us; prior
negotiations between the Board and Old Kent Bank. Ms. Vanerian
suggested that if the there is going to be more trading than what we
have seen in the past, renegotiation of the transaction costs is in
order.
Trustee Jelinek
questioned who is responsible for communicating the information to the
money managers. Chairman Hood commented that he doesn’t recall having
negotiated the 10 cents fee. He commented that we are looking for the
best for the system at the lowest price available.
Trustee Davis
commented that we always want to trade at best price. Chairman Hood
questioned if all managers should contact Merrill Lynch prior to making
trades to see what Merrill Lynch could do to make it the best trade.
Ms. Vanerian commented regarding resolving the confusion. She stated
that it would “behoove us, all of us, to go to where best execution
is”. She also recommended revisiting commission rates charged.
Ms. Kukulis asked
if the Board and the money managers have copies of the agreements that
cover the fees charged.
Ms. Tice stated
that they have a number of traders and requested a letter of direction
so that accounts can be coded for trades above or below $500. Ms.
Vanerian again suggested that where execution is equal or better that it
needs to be done at Merrill-Lynch. She also recommended discussing or
renegotiating the commission rates that are being charged.
There was further discussion regarding
custody fees and the transaction charges of $25 waived when Fifth Third
Bank had custody. There was discussion regarding the Board negotiating
commission rates and all managers should trade at 5 cents a share.
Ms. Vanerian asked
that if the execution was equal or better at Merrill and the commission
rates were equal across the board, would the Board be satisfied to say
that the trades should be done at Merrill. The Board felt that was what
they had been saying before.
There was
discussion regarding negotiating commission rates.
Ms. Vanerian
commented that because of Fifth Third Bank’s unawareness of the issue
that Merrill Lynch will waive the trade done away fees for those
transactions previously done and that they will waive the fees going
forward as these fees should be minor. City Attorney Brown asked if
Merrill Lynch would waive the fees going forward. Ms. Vanerian said
yes.
Board members
indicated that the trades should be done at the best advantage to the
plan. They said that the trades should be done with Merrill Lynch when
they can be done at the same or better commission rate. Ms. Vanerian
recommended renegotiating the commission fees.
Motion by Trustee
Jelinek to approve the following payment:
·
Fifth Third Bank
Administrative Fees
For Period ending
03/31/04 $6,572.22
Motion supported
by Trustee Davis and concurred in by unanimous vote.
Brian Lee commented
that they have already told their traders that if you can match, we
already told our trader, when you can match commissions with somebody
else, match, not necessarily beat, but match, do it with Merrill Lynch.
City Attorney Brown
requested that the following be included in the minutes: “that Merrill
Lynch would waive the trade done away fees already submitted and going
forward”. Ms. Vanerian agreed to this. Brian Lee commented that “if
Merrill is 5, if we get 5, then we will trade with Merrill, exclusively
at 5”.
Motion by Trustee Horton to rescind
prior action taken at the March 18, 2004 Board Meeting related to the
deduction of the Fifth Third Bank fees in the amount of $4,325.00.
Motion supported by
Trustee Treadway and concurred in by unanimous vote.
NEW
BUSINESS
Adopt
2004-2005 Budget - $8,300.00
Motion by Trustee
Jelinek to adopt the 2004-2005 budget of $8,300.00 for the Employees
Retirement System.
Motion supported by
Trustee Horton and concurred in by unanimous vote.
Consideration of Interest Rate (5%) on Employee Contributions
Motion by Trustee
Jelinek to authorize the interest rate of 5% on employee contributions.
Motion supported
by Trustee Treadway and concurred in by unanimous vote.
Request for
Transfer of Funds to MERS – Jon D. Cecil
Motion by Trustee
Horton to approve the transfer of fund to MERS for Jon D. Cecil
effective May 21, 2004 in the amount of $95,745.00.
Motion supported
by Trustee Jelinek and concurred in by unanimous vote.
Application for
Retirement: John L. Kenney (effective 05-23-2004)
Motion by Trustee
Jelinek to approve the 2003 Summary Annual Report and List of Expenses
Paid by Soft Dollars Report as follows:
CITY OF OWOSSO EMPLOYEES RETIREMENT SYSTEM
2003 Summary Annual
Report and List
of Expenses Paid by
Soft Dollars
The Public Employees
Retirement System Investment Act requires the City of Owosso Employees
Retirement System to prepare and issue a summary annual report and to publish
and make available annually a list of all expenses paid by soft
dollars. The following information is provided for the year 2003.
The name of the
retirement system is the City of
Owosso Employees Retirement System.
The Retirement System’s investment fiduciaries are:
BOARD
OF TRUSTEES:
Paul K. Hood
William Blanchett
John C.M. Davis
William Horton
Stanley Jelinek
Linda Robertson
James Treadway
INVESTMENT
MANAGERS:
Fifth Third Bank
Chemical Bank and Trust
Tom Johnson Investment Mgt. Inc.
As reported in the
actuarial valuation for the annual period ending December 31, 2003, the
Retirement System’s valuation assets were $32,112,528 and its actuarial
accrued liabilities were $25,761,222, which produced a funded ratio of
124.7.
For the annual
period ending December 31, 2003, the Retirement System’s investment
performance on a mark to market basis (net of manager fees and
transaction costs) was 17.5%. On December 31, 2003, the market value of
the assets was $29,272,720.
For the annual
period ending December 31, 2003, the Retirement System’s non-soft dollar
expenses were $104,475 and benefit payments and member refunds were
$1,106,880. Expenses paid by soft dollars totaled $14,497. Employer
contributions required for the year covered by the report are $2,671,
expected to be received by the June 30, 2004 City fiscal year end.
Motion supported by Trustee Horton and
concurred in by unanimous vote.
Gabriel, Roeder, Smith & Company – Presentation of 2003 Annual Report
W. James Koss,
representative from Gabriel, Roeder, Smith & Company, presented the
December 31, 2003 actuarial report. He discussed employee contribution
versus city contribution. He reported that the trust fund has been
doing very well in past years. He also reported that we are over
funded. The City is going to have to contribute in 0.06% in the upcoming
year, approximately $2,671.00.
There was general discussion regarding
which employees are in each division; dipping into the over funding
reduces the amount available for reducing the city’s share; the Actuary
provides recommendation for use of over funding as it relates to City’s
contribution; no benefit increases in Fire Department; increase in the
multiplier for the Police Department; money set aside for current
retirees is greater than the liabilities associated with that current
retiree group; and book transfers.
Chairman Hood
expressed concern with lack of conclusion related to status of system by
Gabriel, Roeder, Smith & Company. Mr. Koss reported that the company is
moving away from giving a blanket evaluation of the system.
Following is the “Comments,
Recommendations and Conclusions”
as presented in the Report:
Funding: Accrued assets exceeded
actuarial accrued liabilities by $6,351,306. This amount was amortized
as a level percent of payroll over 10 years and applied as a credit to
the computed normal cost contribution. It is important to note that as
the accumulated credit (the difference between assets and accrued
liabilities) is gradually recognized, the computed rate will return to
the level of the normal cost of benefits.
Actuarial Experience: Overall experience
of the Retirement System during the year ended December 31, 2003 was
less favorable than assumed, generating a net experience loss of
$432,617. This loss was primarily attributable to a lower return on
investment than was assumed.
Looking Ahead: Due to market value
investment returns over the past four years, the funding value of assets
exceeds the market value by $2,646,997. This $2,646,997 figure
represents adverse investment experience over the past four years that
has not been fully reflected in the valuation. If we were to base the
valuation on market value, the funded status would decrease from 124.7 %
to 114.4% and the contribution for the fiscal year beginning July 1,
2004 would have been 3.3% of payroll or $138,619. The investment return
assumption is assumed to be on the funding value of assets, not the
market value of assets. The rate of investment return assumption of
7.00% may be an assumption that is difficult to achieve over the next
few years. To achieve the 7.00% return on funding value over the next
four years, the market must achieve the 7.00% return plus returns to
eliminate the current $2,646,997 in unrecognized losses that have not
yet been reflected in the valuation.
Plan Provisions: Effective for this
valuation, the pension multiplier for active Police members increased
from 2.5% of Final Average Compensation for all years of service to a
maximum of 80% FAC to 2.8% of FAC for the first 25 years of service plus
1.0% of FAC for years of service in excess of 25 years to a maximum of
80% FAC. This change increased plan liabilities by $61,925.
All other provisions remain unchanged
from the prior valuation.
Plan Assumptions and Methods: For the
December 31, 2003 development of valuation assets, the difference
between the expected funding value and market was re-amortized in four
equal installments to provide for a smoother contribution pattern. All
other plan assumptions and methods remain unchanged from the
December 31, 2002 valuation.
We recommend an experience review of the
assumptions and methods employed in the valuation. The Board should set
a date for a review in the near future plus a timetable for future
experience reviews after that. Generally accepted practice recommends a
review of assumptions and methods every five to ten years.
Public Act 728: On December 30, 2002
Michigan Public Act 728 became effective. This act sets new standards
for all Michigan State and Local government retirement systems. In
particular, the Act requires that supplemental actuarial analysis be
performed by the System’s actuary (including an analysis of the long
term costs associated with any proposed pension benefit change) and
provided to the Retirement Board and the decision making body that will
approve the proposed pension benefit change. This analysis is required
at least 7 days before a proposed pension benefit change is adopted.
There are additional requirements related to the confirmation of receipt
by the System of the required employer contributions.
Conclusion: There are many
considerations when evaluating the actuarial condition of a retirement
system. As a result, a single word is incapable of describing all facets
of the actuarial condition of a retirement system. As a firm we have
been moving away from blanket evaluations of the overall actuarial
condition of the retirement system such as excellent or fair. This
conclusion section will not appear in future valuation reports. The
readers of this report are encouraged to draw their own conclusions on
the actuarial condition of the Retirement System.
Certification: We certify that the valuation is complete and accurate
and was made in accordance with generally recognized actuarial methods.
The actuarial assumptions summarized in Section C are in the aggregate a
reasonable representation of the past and anticipated future experience
of the System.
Mr. Koss
recommended the Board have an experience study of assumptions and
methods employed in the valuation done.
Motion by Trustee
Horton to have Gabriel, Roeder, Smith & Company provide a quote to do an
experience study for the Retirement System.
The Board did not
feel that it was necessary to have a motion to provide a quote to do
this study. There was Board consensus to have Gabriel, Roeder, Smith &
Company provide a quote to do the experience study.
INVESTMENT MANAGERS REPORT
Fifth Third Bank –
Management Review Report
Brian T. Lee,
Managing Director-Portfolio Management for Fifth Third Bank, addressed
the Board with the Investment Management Review.
Mr. Lee commented
regarding expected Federal Reserve increase of interest rates; bond fund
duration; amount of cash fund; and International Equity Fund.
The following is
the “Summary” as provided in the printed Investment Management Review:
- Equity
overweight/fixed income underweight will continue until interest
rate levels stabilize
- We would
recommend that the small company equity position be reallocated to
include small company value sticks
- Fifth
Third Small Company Value Fund
- 50/50
allocation
- Further
define guidelines for International Equity allocation. We
recommend:
- 5% at
cost
-
Rebalance:
- < 365
days, or
Motion by Trustee
Treadway to allow up to 6% with goal to stay at 5% with rebalance in a
reasonable amount of time for the International Equity allocation.
Motion supported
by Trustee Horton and concurred in by unanimous vote.
Ms. Vanerian will
draft a letter to be included with the Policy Statement. She will
present the letter to the Board prior to submitting it to the money
managers for signature.
There was further
discussion regarding the amount of transactions and the reasoning behind
that strategy. Mr. Lee commented the transactions were made when
combining Old Kent Bank with Fifth Third Bank. He said that they had,
in a reasonable time frame, moved the strategies that they had for Old
Kent Bank to Fifth Third Bank. Mr. Lee also commented that more
recently they had made a final move of the large cap core fund to Fifth
Third Asset Management and one of the resulting issues of that move was
to make the trades necessary to bring that all in line with what they
are doing with the large cap core fund. He reported that this is a
one-time event and that you are not going to typically see a lot of
turnover in this fund. He noted that typical turnover of this fund is
about 13%.
Ms. Tice will
provide bios on the Asset Managers at Fifth Third Bank.
Merrill-Lynch: First Quarter 2004 Executive Summary Report
Marie Vanerian,
representative from Merrill-Lynch, addressed the Board regarding the
first quarter summary. She reported that we had record-breaking
earnings. She recommended that we diversify our assets as best we can,
stay on track, and keep high quality and diversified investments.
Total Portfolio
Performance Summary for Period Ending 03/31/2004
|
|
SOURCES OF FUNDS
THOUSANDS OF DOLLARS |
|
QUARTER |
|
CUMULATIVE
12/91-3/04 |
|
BEGINNING MARKET VALUE
NET CONTRIBUTIONS
INVESTMENT EARNINGS
ENDING MARKET VALUE |
29,399
-214
549
29,734 |
|
16,702
-7,246
20,277
29,734 |
Ms. Vanerian again
reported that she will draft a letter regarding the investment policy
change; present the draft information to the Board and the City
Attorney; and notify other money managers of the change.
SET NEXT BOARD
MEETING
ADJOURNMENT
Motion by Trustee Horton to adjourn the
meeting at 10:44 a.m. Motion supported by Trustee Treadway and
concurred in by unanimous vote.
__________________________________________________
Gail L. Schultz,
Owosso City Clerk
