Committee Minutes

PENSION AND INSURANCE COMMITTEE
Monday, October 4, 2004
Council Chambers


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

Committee Members Present: Mayor Brown, Gerald Hamerlik, Curt Kreun, Maureen
Storstad.
Committee Members Absent: Vince Liddy.
Staff Present: John Schmisek, Dawn Wilkie, Sherie Lundmark

Mayor Brown 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. He also thanked the committee members for the time and effort that
they put into serving on this committee.

Matter of Approval of Minutes from June 30, 2004 Meeting.

Motion by Kreun, second by Storstad to approve the minutes as previously
distributed. Aye : All. Motion Carried.

Matter of Alerus Presentation.

Mark Hall, Alerus Financial, stated that he was here with Jeff Bauman and Sunil
Swami to present an evaluation of the performance of the Defined Benefit
Managers, Aeltus and PMG. He proceeded with a brief overview of historical
information on the plan including the current investment allocation and
balances of the funds that the managers control.

Hall introduced Sunil Swami, who has recently been hired as the Chief
Investment Strategist and Product Manager of Asset Management for Alerus
Financial, and briefly highlighted Swami’s professional experience. Hall also
introduced Jeff Bauman, Investment Analyst for Alerus Financial. He stated
that Bauman is responsible for working with many of the analysis that are
provided to the committee. Swami stated that he was glad to meet the committee
and looked forward to working with the City Pension Plan.

Swami directed the committee to Tab II, which shows the analysis of PMG’s
performance versus the benchmark. He stated that the comparison shows that PMG
is currently, and has since inception performed below the benchmark in all
categories except the small cap. He stated that the overall opinion of the
performance of this manager is that they are not performing at an acceptable
level. He directed the committee to section ii, which showed a breakdown of
the equity performance. The exhibits in Tab II, section ii, graphically show
the slip in performance and the widening gap between the performance of the PMG
funds and its benchmark, particularly in the last two years. He stated that in
the foreign and fixed income market there is underperformance, but it is much
closer to the benchmark, and those allocations are a much smaller portion of
the investments, thereby lessening the material affect on the plan assets,
whereas the equity portion makes up the majority of the investment portfolio.
He stated this is of particular concern, as PMG currently manages a larger
portion of the plan assets. Hall reminded the committee that while assets are
split on a 50/50 basis between PMG and Aeltus, all payments to retirees are
made by Aetna, which is a part of the Aeltus group, and thus their actively
managed portion of the funds is less than PMG’s.

Schmisek pointed out to the committee that concern has been expressed by the
committee over the last few years in regard to the decreasing performance. The
committee had decided to allow PMG to continue its management role at that time
based on information provided by PMG on their corporate restructuring, which
they believed would improve their performance.

Swami drew the committee’s attention to the overall rankings of the manager,
which were in the top first or second deciles in comparison to their peers, and
now are ranking near the bottom in the ninth or tenth decile consistently. He
reiterated his concern that the bulk of their portfolio is severely
underperforming and that this is a large portion of our plan assets. He noted
that the manager is not appearing to take much risk in the investment
selections that are being made, but appear to be selecting investments that are
not producing returns either. Swami stated that given the results of the
analysis, it is his opinion that this manager has not made improvement and is
continuing to perform at an unacceptable level.

Swami directed the committee to Tab III, which details the performance of
Aeltus. Overall, Swami stated that this manager is performing at an acceptable
level. In all areas, they are performing at or above the benchmark, and this
has been a consistent pattern of performance from them since inception. As
with PMG, the international and fixed income segments are small allocations of
the total portfolio, and any recent underperformance in that area is not of a
material amount to the plan. The sector managers in the equity area appear to
be making very good choices and their performance is reinforced in the
graphical analysis conducted by Alerus. They are performing exactly where we
would want them.

He stated that his only area of note for this manager is the SMID cap fund that
they have added to our portfolio in the last year. He stated that there are
not very many other companies which use this classification, and his only
concern maybe that depending on the particular holdings in that fund, there is
a chance of overlap and not being able to clearly see that they are adhering to
the investment allocation as set out by the City. Schmisek stated that the
committee had approved adding this SMID cap, but if the trustee feels a need to
review this addition in more detail we can provide information to them.

Swami summarized his analysis for the committee by stating that he sees two
areas for review, the performance of PMG in particular in their large cap
portfolio and reviewing whether the city should include the SMID cap in its
allocation for the Aeltus funds.

Schmisek stated that as a result of the continuing decline in the performance
of PMG the committee had requested that Alerus put together some potential
avenues that the City could pursue if they decided to solicit RFP’s to replace
that manager. Schmisek reminded the committee that at one time the manager
and trustee had been the same and the committee had decided to move to a
separation of duties in those areas.

Hall distributed to the committee a list of potential options for
consideration. Hall stated that in brief the options he sees are as follows:
1) the committee could take on the entire project of selecting a new manager;
2) Committee request Alerus Financial to secure RFP’s from regional/national
investment managers; 3) Committee requests Alerus Financial to secure RFP’s
from regional/national investment managers, assess RFP’s, interview prospects,
and make recommendations; and 4) Committee requests Alerus Financial to expand
services to include investment manager. He added that the Committee may also
want to consider whether they wish to continue with one manager or with several
managers, each specializing in one designated asset class. Hall reminded the
committee that the actuary had also concurred that the time may be right for a
change in investment manager due to the continuing decline in performance for
PMG.

Hall continued that he would recommend that option 4 be eliminated, as he sees
Alerus having a much greater benefit to the City in the advisory capacity as
trustee as they have been serving. Hamerlik concurred with eliminating option
4, as he was in favor of continuing to have Alerus as an advisor. Hamerlik
inquired as to the fee schedule for Alerus performing services in the RFP
process, in particular for option 3. Hall stated that they had discussed this
and an estimated fee, based on 20-30 firms responding would be $10,000-15,000.
This would include Alerus designing the RFP, reviewing and interviewing the
responses, and making a recommendation to the committee.

Hamerlik stated that he would be in favor of Option 3 with a slight adjustment
to include a subcommittee of the Pension Committee to be involved in the
process, particularly the evaluation, interview and recommendation portions.
He was in favor of perhaps the subcommittee consisting of one committee member
and one staff member.

Motion by Hamerlik, second by Kreun to ask Alerus to secure RFP’s and work with
a subcommittee appointed by the Chair to make a recommendation to this
committee as to a replacement manager for the Defined Benefit Plan. Swami
stated that he would recommend that the prior to Alerus creating an RFP the
City should give consideration to whether they wanted to continue with one
manager or switch to several, one in each of the designated asset classes.
Hamerlik stated that his vision was to continue with one manager unless Alerus
would advise otherwise. Wilkie suggested that maybe the subcommittee could
work with Alerus on these technical details. Kreun stated that he would like
to know Alerus’s recommendation in this area. Schmisek added that he had a
concern with administration if a switch to multiple managers, both for
submitting contributions and for evaluations. Wilkie suggested she also would
agree with staying with the current format of one comprehensive manager for
these funds. Swami stated that if the committee wishes to stay with one
manager then the key will be to look for a manager with good overall
performance capability, but in particular one that has a good record in the
asset class where our largest allocation of funds is and that should not be
difficult to find.

The committee discussed potential makeup of the subcommittee. Consensus was to
include Hamerlik as the Council representative on the subcommittee. Agreement
to modify the motion to include one employee representative of the committee in
place of one staff member. Storstad was appointed to serve as the employee
representative, with Schmisek serving as staff for the subcommittee. Upon
call for the question, Aye: All. Motion carried.

Hamerlik inquired whether it would be professional to send a letter to PMG
prior to the RFP process being started so that they had notice. Schmisek
stated that a letter would be sent to PMG and that they would also make Aeltus
aware of the plans so they know our intent.

Other Business.

Wilkie stated that she appreciated the thoroughness of the presentation and the
time that Alerus put into the presentation to help the committee review the
situation.

Motion to adjourn by Hamerlik, second by Storstad.

Respectfully submitted,


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