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HomeMy WebLinkAbout02-01-2012 Minutes Minutes of the Regular Meeting of the CITY OF OCOEE GENERAL EMPLOYEES' RETIREMENT TRUST FUND BOARD OF TRUSTEES (GERB) Held on February 1, 2012 At 150 N. Lakeshore Drive Ocoee, FL 34761 CALL TO ORDER — Chairman Wagner Chairman Russ Wagner called the meeting to order at 10:07 a.m. in the Commission Chambers at City Hall. Roll Call Chairman Wagner called the roll. Present were Chairman Russ Wagner, Trustees Jean Grafton, David Wheeler, and Pat Gleason. Trustee Wendy West was absent excused. The recording clerk declared that a quorum was present. Also present were GERB Attorney Lee Dehner, Mr. Tim Nash of Bogdahn Consulting, LLC, Mr. Doug Lozen of Foster & Foster, the board's actuary, Human Resources Director Gene Williford, Pension Technician Junelli Maher and GERB Recording Clerk Stella McLeod. Approval of Minutes Chairman Wagner directed the board's attention to the minutes for the November 2, 2011 meeting (Exhibit #1). A motion having been made by Trustee Grafton and seconded by Trustee Wheeler, and that motion having carried unanimously, the board RESOLVED to approve the November 2011 minutes. Consent Agenda Chairman Wagner notified the board that, working with the pension technician, routine items will be placed on the consent agenda. He added that any trustee could have an item removed from the consent agenda in order to discuss it. Chairman Wagner solicited the board for a motion regarding the consent agenda. A motion having been made by Trustee Wheeler and seconded by Trustee Grafton, and that motion having carried unanimously, the board General Employees Retirement Board February 1, 2012 Page 2 of 10 RESOLVED to approve the consent agenda. Trustee Wheeler asked if the board could get the agenda packets more than 48 hours prior to the board meeting. Pension Technician Maher agreed. NEW BUSINESS A. Foster & Foster - Actuarial Report a) Mr. Doug Lozen, Foster & Foster, presented the Actuarial Valuation Report to the board (Exhibit #2). Mr. Lozen passed out iPads for the board members to use during the presentation. He noted that using the devices from now on will be cost effective since copying costs would go down. He also provided hard copies of the report. Page 5 With respect to the current funding year, Mr. Lozen noted that the total required percentage of payroll should be 24.87 %. This was approved by the board last year. He explained that the actuary cannot lock in a dollar amount in the report since the State requires that the plan's funding amount be a percentage of payroll. As the City's payroll increases, so will the percentage. Mr. Lozen said the City's requirement for the current year is at 17.51%. The members are contributing 7.36 %. This is the case because the commissioners and mayor do not contribute to the plan. Chairman Wagner added that the City picks up the difference since the commissioners and mayor do not contribute. Mr. Lozen confirmed that this was so. Beginning October 1, 2012, Mr. Lozen continued, the actuary recommends that the City contribute 22.91% of payroll to fund the plan. The reason that the percentage increased is because payroll decreased; there are fewer active members in the plan. The number of members dropped from 183 active members last year to 178 active members this year. The payroll decrease happened because members terminated or retired, hence the decrease from $8.1M to $8M. Part of the plan is funded from the unfunded liability and past actuarial losses. If payroll goes down, then payment of the unfunded liability goes up as a percentage. Additionally, the payroll growth assumption, which is used to amortize the unfunded liability, shrunk last year. There were also net actuarial losses. On page 11 is the four -year smooth average which was assumed for this last year. There were also net actuarial losses. The four -year smooth average which is assumed to be 8% was actually -.2 %. The fund was in the doldrums with respect to the General Employees Retirement Board February 1, 2012 Page 3 of 10 smoothed average. When this is calculated with the 4 -year average, there is a negative average of -.2 %. On page 18, the four years of return show that for 2011 the return was -1% although the assumption was 8 %. Next year the last year of the smoothing drops off. Mr. Lozen said he expects the funded ratio should stabilize after this year as all of those negative smoothed years drop off and assuming that there are no more investment losses. The Ocoee fund should stay there for about ten years. Gains and losses are paid off over a ten -year period. Page 8 & 9, With respect to the plan's funded ratios, one of the funded ratios is about average and the other is much better than average. On page 8, under `market value of assets', Mr. Lozen pointed out item B. This year it is $18.9 million. He noted how well that number compares to the value of benefits promised to date. On page 9, item D, total present value of accrued benefits amounted to $20,591,000. Comparing the two numbers will yield a funded ratio of 92 %. Mr. Lozen stated that the $20M figure is what would needed to be invested today at the assumed 8% rate to pay off all benefits promised to date. Comparing that to the market value of assets ($18.9M), it is clear that it is almost to the $20M. This is an above average result. Last year it was 96 %. Most plans have experienced a decrease in the funded ratio. On page 31 He drew the boards attention to the other funded ratio at the end of the report. There was a new reporting requirement. The State wants to see what is necessary to invest at 7.75% [as opposed to Ocoee's fund assumption of 8 %]. At that rate, the City would need to invest $21M which would still put the plan at 90 %. On page 29 Mr. Lozen began to discuss the GASB 25, the other funded ratio. It is at 70.33% as of 2011. Mr. Lozenn said that the best way to explain it is by making comparisons. Most plans are in the 70% range. Some plans are in the 50's. Very few plans are above 80 %. Chairman Wagner asked why people focus on it. Mr. Lozen said it does give some indication as to whether assets are keeping up with benefits since assets are what pay for benefits. He continued saying that most actuaries will say that they are most concerned about whether the sponsors can pay the recommended contribution to the plan. As long as the City continues making the recommended contribution, the funded ratio will go up over time, between 2 and 3% each year. At another city Mr. Lozen works for, the plan had a funded ratio in the 60's. Over ten years it is projected that the ratio will be between 85% to 90 %. With no gains or losses, the funded ratio should go up 2 to 3 percentage points each year. General Employees Retirement Board February 1, 2012 Page 4 of 10 With respect to why there is a difference between the two ratios, Mr. Lozen said that this rate has to do with projected pay. It is also compares the smooth value of assets to market value. Mr. Lozen's main point was that in the next ten to fifteen years, the funded ratio will be in the 90's. Board Attorney Lee Dehner asked Mr. Lozen if the GASB 25 was the one to be used in the State's new requirement. Mr. Lozen replied that it is the 92% rate that he previously quoted to the board, which is well above the State's requirements for the funded ratio. He ended the report and solicited the board for questions. Chairman Wagner asked Mr. Lozen if he had a hard dollar amount for the board with respect to the required City contributions. Mr. Lozen answered that for the current year, the contribution for the current year is $1.4M needed from the City. For 2013, the board could be looking at $1.8M. In 2011, it was $1.4M. Chairman Wagner said that was a pretty healthy number. Mr. Lozen responded by pointing out that the City's required contribution has been pretty stable over the last few years. Referring to page 29, he noted that the 2010 requirement was $1.3M, in 2011 it was $1.4M and this year it is $1.4M. One of the reasons it has been so stable is because of low pay increases. The chairman asked Mr. Lozen to discuss the increase as he discusses possible changes that need to be made. Chairman Wagner said that the City is worried about increases that will affect the City's budget, and so the City will be interested to see if some of the proposed changes can offset some of the increases. Trustee Gleason asked if there was anything the board could do now to offset the increase. Chairman Wagner answered that this was all past information. It is one year in arrears. He continued that what really impacted the data, was having to use the snap -shot date which was probably the lowest the market was for all of 2011. Had they been able to use the month later, the chairman continued, it would have been better. Mr. Nash said that it is amazing to see the endpoint sensitivity (i.e., how one bad period can affect the overall view of the plan). Chairman Wagner asked if Mr. Lozen brought with him the employee statements. Mr. Lozen said that he has the statements with him. Chairman Wagner said that every two years the board must send out a Summary Plan Description to the participating employees. Board Attorney Dehner reminded the chairman that the report would need to be acted upon by the board in terms of its approval. A motion having been made by Trustee Grafton, seconded by Trustee Gleason, to approve the report, and that motion having carried unanimously, the board General Employees Retirement Board February 1, 2012 Page 5of10 RESOLVED to approve the Actuarial Valuation Report for the plan. The board attorney reminded the chairman that based upon this approval, the board is required to determine by motion the total expected annual rate of return for the fund for three time periods: the current year, the next several years, and the years thereafter based on Mr. Nash's recommendation. Mr. Nash recommended an 8% rate of return. Chairman Wagner asked if this is consistent with what is recommended to other cities. Mr. Nash answered affirmatively. He continued that it is based upon a historical market return patterns that goes back to 1926, and that it is consistent with what they recommend to other clients. A motion having been made by Trustee Wheeler, seconded by Trustee Gleason, that the board determine the expected rate of return to be 8% based upon the recommendation of Bogdahn, the City's money manager, and the board having unanimously approved that rate, the board RESOLVED to accept the rate of return for the plan as 8 %. b) Changes to the Ordinance Chairman Wagner reminded the board about possible changes to the ordinance due to State requirements (computing personal time and overtime) and changes to the City's internal policies. Those changes will need to be reflected in the ordinance. Attorney Dehner added that the changes up to the current date are in a draft if the ordinance. Chairman Wagner said that only the commission has the authority to adopt the ordinance. Afterwards, the board administers the adopted ordinance. There is a big movement afoot for the City to modify some of the requirements and assist in paying for changes. Most of the changes will affect the new employees. The first six items (Exhibit #3) are recommended changes for new employees. Option to use quarterly investment return for the purposes of DROP will move to a fixed rate, and the rate will change from 6.5% to 3 %. Also, as of October 1, the contribution rate will go from 7.4 to 7.8. This has the biggest impact on the issue of the City's affordability. New employees will have to have a minimum of 15 years of service before they can participate in DROP. Other proposed changes include vesting going from five years to seven years, normal retirement age going from 60 to 62, and seven years of service being required in order for an age - eligible employee to retire. Mr. Lozen spoke about the effect on the pension plan. He said that it will take a while for savings to flow into the plan; however, every time someone is hired, they are less expensive than a current employee, which is a savings to the plan. He said each of the proposed changes is not very large but adding them all together could yield significant savings. Deferring retirement is a savings to the plan. Deferring retirement with the age of 62 and a 7- year vesting requirement could be a significant General Employees Retirement Board February 1, 2012 Page 6 of 10 reduction. It could save three to five % of payroll once all of the old members are no longer active employees. The change in the years of service for DROP is going to be difficult to quantify. Any of the DROP changes are likely to have a very small impact on funding. All of the changes combined could yield around 4 to 6% of savings to payroll over the long term. The change in the employee's contribution to 7.8% from 7.4% will yield an immediate savings to the City's contribution amount. It will decrease by 1.5 %. Chairman Wagner asked if there were any questions. Trustee Grafton asked when was the last time there had been a change in the employee contribution. Trustee Wheeler replied that the last change was about to eight to ten years ago. Trustee Grafton sought confirmation that the City will just make the change if they accept the recommendation, without employee input. Chairman Wagner confirmed that this is most likely true. He continued that if employees ask why, it can be said truthfully that if the defined benefit pension is to be preserved, this is what is necessary. Trustee Wheeler asked if it was being proposed to change current employee's retirement age. Chairman Wagner replied that actuarially it did not affect the plan. Trustee Wheeler also spoke about the change to years needed for retirement. Chairman Wagner responded that the normal retirement would require an employee to be fully vested regardless of age. Trustee Wheeler also pointed out that in the chairman's memo, it was stated that the chairman had discussions with the board. Trustee Wheeler noted that he himself had not had any discussions with the chairman outside of a regular meeting and that the memo should not suggest that he did. Chairman Wagner said it appeared as though the next step is to direct Mr. Lozen to do a preliminary impact statement. Attorney Dehner said that he would need to get an impact statement in the format required by the State with a copy of the proposed ordinance attached. This would then be mailed to the retirement division prior to the second reading of the ordinance. Chairman Wagner asked Mr. Lozen if he could do the impact statement now or if he would need the approved ordinance first. Mr. Lozen said that he could go ahead and create the study now. Attorney Dehner said that the sequence of steps to approval are: the board authorizes the cost study for which the board will review; with board agreement, the board then directs its attorney to draft the ordinance. After the review of the ordinance and the board's satisfaction with it, the board will recommend that the ordinance be forwarded to commission. Then the ordinance goes to the actuary for a formal impact statement which once finished, will then need to be mailed along with the draft ordinance to the State's retirement division. Trustee Grafton, seconded by Trustee Wheeler, made a motion for Mr. Lozen to prepare a preliminary impact statement as presented in the GERB General Employees Retirement Board February 1, 2012 Page 7 of 10 Chairman Wagner 's memorandum dated January 13, 2012, and that motion having passed unanimously, the board RESOLVED to authorize Mr. Lozen, Foster & Foster, to prepare the preliminary impact statement. Mr. Lozen recommended an experience study for the plan. It would look at all of the assumptions used in the plan to determine funding and examine what has happened with the plan based on each of the assumptions historically. The report would determine if any changes need to be made to the assumptions. Mr. Lozen said that now would be a good time to do the report given the changes being proposed to the plan. Trustee Wheeler asked about the cost. Mr. Lozen answered that it would cost about $7,500. He said that he would ask that a special meeting be set aside to discuss the results of the report. Chairman Wagner asked if the report results would be binding on the board. Mr. Lozen answered that assumptions do not have to be changed in every case. Chairman Wagner asked if the board could wait until after the ordinance is done. Mr. Lozen said that the board could authorize him to do the study while the other process is going on. Trustee Wheeler asked if it would have been a good idea to receive a written proposal prior today. Mr. Lozen said that the board did not need to make a decision today. Chairman Wagner said that he could add the item to the next meeting's agenda and he asked Mr. Lozen for a sample experience study. Trustee Gleason said a special meeting could be called to review the sample study. B. Investment Consultant Report — Mr. Tim Nash of Bogdahn Consulting, LLC Mr. Nash said he had good news this quarter relative to last quarter, but he expressed disdain at the volatility still plaguing the market. This is the third year whereby the snapshot in time the results are much better than the results ending 9/30/11. Calendar year results have been much better than fiscal year results. On page 3, there was a nice rebound in the market for the quarter, Mr. Nash said. The EAFE index (representing developed markets) was up 3.4% for the quarter, emerging markets were up 4,5, and the S &P 500 was up 11.8% for the quarter. Even bonds were up by 1,1 %. On page 4, value stocks did better than growth stock for the quarter. For the full year, large cap growth stocks were positive for the year (up 2.2 %) whereas mid and small cap value stocks were among the worst performers for the year, General Employees Retirement Board February 1, 2012 Page 8 of 10 On page 5, large cap stocks and Russell 1000 index showed everything was positive. Financials (about 14% of the index) were up 11% for the quarter but down 15% for the year. Financial holdings in portfolio (ICC) made it really difficult to meet benchmarks. Chairman Wagner pointed out to Mr. Nash that one of the stocks in ICC lost $400,000. The chairman wanted to know how it was that ICC did not see this coming given that two companies were going bankrupt. He asked Mr. Nash why ICC is taking retirement money and making those sorts of bets. That one loss, the chairman continued, has taken the fund toward a dramatic downturn. Chairman Wagner asked Mr. Nash what monitoring needs to happen to avoid such a thing happening again. The chairman surmised that perhaps the general employees' fund is in the wrong investment. Mr. Nash agreed that it is frustrating, but he said that Bogdahn has examined the investment strategy of ICC and is still comfortable with the firm despite the highs and lows. ICC's strategy is a more volatile strategy. He added that it is not such a matter that the firm owned a security that went bankrupt since that can happen in a variety of different investor portfolios. The question is, Mr. Nash said, were they taking on too much risk. Bogdahn examined the methodology that ICC uses to put stocks into their portfolio. Mr. Nash said that ICC is a quantitative manager meaning that they look at financial metrics of a company, examining them on a daily basis. Assuming financial metrics are strong and meet ICC's requirements for investments, the stocks end up in ICC's portfolio. It is a very disciplined, regimented process. The next question is did they own too much of it. They owned 5 %. This falls within the board's fund investment policy guidelines. The other important note is that ICC has owned American Airlines [AMR] securities off and on for the last ten years (AMR went bankrupt recently). ICC owned Ford securities when it was in trouble. Ford, however, rebounded. Mr. Nash ended by saying that Bogdahn thinks ICC's investment process is sound. Chairman Wagner asked if it is possible for the fund to recover its investment. Mr. Nash answered that the recommendation for ICC is to hold the securities. The $411,000 investment is now worth $25,620 which is not good news to the board Mr. Nash said. ICC, as the money manager having the fiduciary responsibility, wants to continue to hold the securities because they believe more can come back, but the fund will not get the full amount back. ICC has that discretion. Other than the last three quarters, ICC has performed strongly for the fund. In 2010 ICC was in the top third; in 2009 ICC was among the top four. Chairman Wagner asked Mr. Nash if the board could get something that explains what ICC expects to happen with AMR from here. Mr. Nash said that he would provide the board an internal research summary on ICC. General Employees Retirement Board February 1, 2012 Page 9 of 10 Chairman Wagner asked when the board would see the real estate security show up. Mr. Nash answered that the next time the contracts are there. There are not any buildings to buy this quarter. The next time they might potentially call the funds' capital will be April 1 Mr. Nash spoke with Mr. Jay Butterfield at American, and he doesn't know if they'll be calling for capital on April 1 but it will happen on July 1 Mr. Nash said that AMR didn't go bankrupt because of a lack of cash. It was because of union contract that are excessively exorbitant beyond other airlines; hence, they used bankruptcy strategically to reduce those costs. AMR has plenty of operating cash. He directed the board's attention to page 17 of the report. Despite ICC's performance, the total return of the fund was 5.25 %. This puts the fund in the 89 percentile. The fund did not reach the benchmark because of ICC's underperformance. With respect to endpoint sensitivity, Mr. Nash said that even with ICC's performance, for the last three years the plan has had an 11.29% rate of return which exceeds the benchmark. Trustee Gleason asked if ICC should not have seen the downturn coming. Mr. Nash said that ICC is one of the top holders of AMR. In that same quarter they announced one of the largest orders of airplanes ever from Boeing which was a sign that the company was doing well. C. Census Form Chairman Wagner asked the board attorney who would complete the form. Attorney Dehner answered that the survey is voluntary, and that most boards do not respond. It was concluded that the board will ignore the survey for now. OTHER BUSINESS A. Summary Plan Description At the last meeting, the board attorney had given the board an updated version of the plan description. The board had held off on finalizing it because of possible changes. Now that the employee statements are in hand the chairman is presuming that they can go ahead and issue the description as it is. B. FPPTA The chairman notified the board that he may not make the trip because his mother has been hospitalized. If she continues to make progress in her recovery, he will see everybody at the meeting. General Employees Retirement Board February 1, 2012 Page 10 of 10 ATTORNEY COMMENTS Board Attorney Dehner gave the board a legislative update. He said that it is not anticipated that any pension legislation will be passed since the legislature is preoccupied with redistricting. The attorney continued by saying that the proposed legislation is not a pension - friendly plan. Attorney Dehner reminded board members to file financial disclosures. COMMENTS FROM TRUSTEES / CITY LIAISON None. AGENDA FOR NEXT MEETING Actuarial Experience Study COMMENTS FROM PUBLIC Mr. Chuck Wetherly, Public Works, said that there seems to be a disincentive to elect to participate with DROP now [given the board's proposed changes]. Chairman Wagner answered that the board opted to eliminate the variable rate as a choice and only offer the fixed rate. The board agreed to reduce the interest rate to 3 %. The State's rate of return is 1 %. The main savings mechanism for DROP remains in place. ADJOURNMENT There being no other business, the meeting was adjourned at 12:04 p.m. ' e . ectfully submitted b • A.,. r , ved by: Stella McLeod, Muni' a = . Coordinator Russell B. Wagner, G RB Chairman GERB Recording Clerk