Committee Minutes

PENSION AND INSURANCE COMMITTEE MINUTES
Wednesday. June 4, 2003
Council Chambers

The meeting was called to order at 1:00 p.m.

Committee Members Present: Richard Duquette (Mayor’s Designee), Al Grasser,
Vince Liddy.
Committee Members Absent: Eliot Glassheim, Gerald Hamerlik
Staff Members: John Schmisek

Duquette announced that if anyone wishes to speak to any issue to please do so
before the vote is taken on that item by asking to be recognized by the chair,
coming to the front podium, and giving their name and address for the record.

Duquette stated that he would like to recognize Al Grasser, long-time Pension
and Insurance Committee member for his almost ten years of service as an
employee member of the committee. Duquette introduced Maureen Storstad, newly
elected employee representative on the Committee. Grasser excused from
meeting. Storstad assumes committee position.

Matter of approval of minutes from the May 15, 2003 meeting.

Motion by Liddy, Second by Storstad to approve the minutes as distributed.
Aye: All. Motion carried.

Matter of PMG Presentation.

Schmisek stated that Kristi Anderson, Vice President, American Express
Portfolio Management Group, for their annual review of the past year’s
performance.

Anderson reviewed with the committee the organizational changes that American
Express has undergone since September 2001, including their new Chief
Investment Officer and the establishments of offices in other major cities
around the U.S. and London. Anderson also explained that over the last year
they have changed from a top down investment approach to a bottom up approach
for all but fixed income and international portions of the portfolio. The
international portion uses a combination approach and the fixed income remains
as a top down approach. The change was made after evaluation of the previous
method showed that it was no longer being effective and providing significant
value to client’s portfolios. She stated that they are following the
investment allocation as established by the City.

Schmisek stated that PMG manages 50% of the assets in the plan, but they
account for 67% of the losses in the plan. Anderson stated that this was
partly due to the high concentration that they have in equities and in the
former method they used to compile their portfolio. They have since changed
their approach to equity selection and so far this year have seen a positive
effect in the returns.

Liddy inquired how often they review the portfolios. Anderson stated that they
review each portfolio each day, and change as soon as they feel appropriate.

Matter of Aeltus Presentation.

Al Haberern of Aeltus was present to discuss the performance of Aeltus in
2002. He began with a brief review of corporate changes that have occurred
since Aeltus was acquired by ING and benefits that will result from the
transaction. He stated for the upcoming year they have a three prong approach
for growth – they expect small cap stocks to do well, they believe that fixed
income growth will slow, and large cap growth will increase. He stated that
they will be gradually increasing their holdings in technology as that market
improves while decreasing their fixed income and increasing their small cap
holdings. He reported that as of last night the assets have continued their
gradual increase as the market continues to improve.

Haberern stated that he would like recommend that the City decide to add the
CORE account to the asset allocation that they have chosen for Aeltus. He
feels that with the growth of small cap stocks, this would benefit our plan.
Schmisek inquired what percent he would recommend if the committee wanted to
include the CORE fund. Haberern replied that he would move 50% of the current
small cap value allocation into the CORE fund.

Liddy inquired about real estate. Haberern stated that at this time the market
for real estate is in a down turn. He stated that at such time as they see the
market as a good investment for the City they would then come to us with the
request to add that to the portfolio.

Matter of Actuarial Valuation Report Presentation.

Eric Rolling and Rebecca Galioto of Deloitte & Touche, LLP was present to
review with the committee the annual actuarial valuation report. Rolling
stated that this is his first year with the City as a client, and as such he
gave a brief review of his qualifications and work history. He also reviewed
with the committee the process and procedures that are followed in completing
our report. He reviewed with the committee the assumptions that are in place
for the City plan and stated that last year the City adopted a 5 year smoothing
method and this is reflected in this year’s report. He explained that the
smoothing method recognizes gains and losses over a 5year time period. This
smoothes the affect of markets on the plan assets, lessening the roller coaster
effect when there are unstable markets.

Rolling stated that for this year the plan liability increased from $43,251,000
to $46,793,000 dropping the plan from 88.7% funding to 81.2% funding. This
puts the City’s recommended contribution at $1,835,465 or 16.32% of covered
payroll. Rolling drew the committee’s attention to the graph on page 14 of his
presentation materials which shows a graphical projection of what anticipated
future contributions will be for the plan.

The Committee inquired whether they should be making any changes at this time.
He stated that the City should show fiscal concern over the current market
effects on the plan, but there is no need to panic. Schmisek stated that we
are currently using the 1983 GATT mortality table and inquired whether we
should look at making a change to a newer version. Rolling stated that the IRS
has not approved the newer versions at this point. He stated that once new
tables are approved in the next two to five years they will recommend
implementation at that time. He stated that this would bring a 2-10% increase
in plan liability.

Schmisek asked for Rolling to review the assumptions that are currently being
used in the plan and make any recommendations for changes. Rolling stated that
all assumptions we are using are valid and fitting for our municipal plan.

Grasser commented that are expenses seem to be increasing each year and are
significant cost to the plan. He suggested that the Committee may want to look
at a breakdown of expenses between managers and trustee too see if the increase
is attributed to any one area. He also suggested that the committee may want
to reevaluate the manager that has been showing larger losses over the last few
years to see if there is a different firm that could better serve the City.

Storstad inquired what mortality ages the table comes out with. Rolling stated
that most are in the mid-70’s.

Storstad made a motion, second by Liddy to receive and file. Aye:All. Motion
carried.

Schmisek inquired whether the amortization period that they are currently using
for the unfunded liability, which is 14 years, is an appropriate length of time
as compared to other municipal plans. Rolling stated that the average is to
use a 30 year amortization, but he believed that the City had taken an
aggressive approach and shorter time period in an effort to have the unfunded
fully paid prior to the last participant retiring. The committee directed
Schmisek to work with Rolling on different amortizations for the unfunded
liability and to report back to the committee at the next meeting.

Matter of Amerndment to Defined Benefit and Defined Contribution Plans.

This item was held until the next committee meeting.

Matter of Increase in Contribution Percentage for Defined Contribution Plan.

Schmisek stated that the Committee had asked that a calculation be done as to
what the cost to the City would be for each 1% of contribution increase for the
Defined Contribution Plan. RaeAnn Burger, Compensation and Benefits
Specialistm Human Resources had calculated that the salary for participants in
that plan is $199,762 each of the 26 pay periods, setting the cost of 1% at
$51,938. This is based on the 147 current employees participating in the
plan.

Shari Hensrude-Ellingson of Alerus Financial presented to the committee a
simple model that she had developed showing a comparison between the benefit
for a retiree under the Defined Benefit Plan and working backward to determine
a rough contribution limit for the Defined Contribution Plan that, if all
assumptions are met, would lead to a similar benefit. Her assumptions were an
employee with 35 years of service, who will spend 35 years in retirement,
starting salary of $35,000, expected rate of return 8%, expected inflation
rate of 2.5% would require contribution levels of 18.2165 % for an age 55
retirement, 8.7342% for age 62 retirement, and 6.2843% for age 65 retirement
for a benefit similar to what a DB Plan participant receives. These are
overall total contribution levels, with 50% by the employer and 50% by the
employee. Given these assumptions, our current 4% with 4% match seems adequate
for both ages 62 and 65 retirement, but short for age 55 retirement. She
suggested that the committee may want to work with Deloitte & Touche to develop
a more comprehensive model before proceeding on this matter.

Ed Grossbauer, Fire Department, stated that he believes that the committee
should continue to gather information on this matter, as a number of employees
do not feel that the 4% adequate to provide for their retirement, and many
employees especially in Public Safety area do retire at 55 and according to the
model presented the current percent is not adequate.

Schmisek reminded the committee that some of the unfunded liability in the DB
Plan is due to contribution rates that were set lower than needed to cover
employee’s benefit. The City is now in the process of making up for that
shortfall.

Rolling stated that the committee should also consider that in the DC Plan
participants are paying all of the plan fees, whereas in the DB Plan the
participants do not pay the fees, the burden is borne by the City.

The Committee directed Schmisek to follow-up with Deloitte & Touche on
developing a more comprehensive model for evaluation of the contribution
percentage and to place this item on the next agenda.

Motion by Liddy, Second by Storstad to adjourn.

Respectfully submitted,


John M. Schmisek, CPA
Director of Finance and Administrative Services