Committee Minutes

PENSION AND INSURANCE COMMITTEE
Wednesday, March 2, 2005
Council Chambers


The meeting was called to order at 1:30 p.m. by Richard Duquette.

Committee Members Present: Richard Duquette (Mayor’s Designee), Mayor Brown
(joined meeting in progress), Mike Flannery, Gerald Hamerlik, Curt Kreun,
Maureen Storstad.
Committee Members Absent: None
Staff Present: John Schmisek, RaeAnn Burger, Sherie Lundmark

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.

Matter of Approval of Minutes from October 4, 2004 meeting.

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

Matter of PMG Presentation. (Kris Andersen)

Kris Andersen, Vice President, American Express Asset Management Group,
appeared before the committee to review 2004 performance and an outlook for
2005 for the assets in the Defined Benefit Plan which they manage. She
informed the committee that in the third quarter American Express will be
spinning off the entities that used to be known as IDS prior to their
acquisition by American Express, the investment and insurance divisions. She
continued that all of the investment management area will remain intact within
the new entity, so there will be no effect on the way that our portfolio is
managed. She added that the new entity will be a Fortune 300 company with over
$400 billion in assets and will continue to maintain their headquarters in
Minneapolis, with branch locations as they are now located. Andersen reviewed
with the group the current structure of the company and the management
professionals that work with our portfolio. She highlighted their firm’s
economic outlook for 2005 which included an anticipation that interest rates
will continue a slow increase, as will inflation. They also expect corporate
profits to increase a more modest amount than seen in 2004.

Andersen informed the committee that the 2004 total account return was 7.35%
and a since inception return of 6.97%. She continued with a review of the
performance for each sector highlighting investment professionals and top
holdings in each sector portfolio.

(Mayor Brown joined the meeting and took over chair from Duquette.)

Andersen concluded her presentation with brief comments on the basic guidelines
that they use in managing our plan and an explanation of the process that their
investment professionals use in selecting the holdings in our portfolios.

Matter of Aeltus Presentation. (Adrianne Potwora and Al Haberern)

Al Haberern and Adrianne Potwora, both Vice President, Institutional Sales and
Relationship Management with Aeltus, appeared before the committee to present
the 2004 performance overview. Haberern gave a brief overview of the 2004
economy and their expectation for 2005 market conditions. He stated that for
2004 the City of Grand Forks holdings had a return of 10.37%, and a since
inception return of 10.70%. Haberern added that they are proud to provide this
information to the committee, as it is above the actuarial assumption of 8%
that we use in our plan. Haberern concluded the presentation by thanking the
committee for the successful relationship that they have had since 1981. He
stressed the continued commitment that their firm has to provide value to the
City of Grand Forks plan by continually monitoring the performance of all their
investment professionals as well as market conditions.

Schmisek stated that at a future meeting the committee will receive a report
from the trustee giving them feedback on the performance of both of these
managers. Mark Hall, plan trustee with Alerus Financial, stated that he would
anticipate a report will be presented to the committee in mid-April. He
continued to inform the group in regards to the RFP for investment management
services. He stated that the subcommittee has met and that the draft will be
to John Schmisek by the end of the week and upon his approval, it will then be
distributed to the compiled list of investment professionals that they have put
together.

Hall continued that he would also like to bring to the committee’s attention
that as part of their presentation, they will likely be recommending that the
cash in the Aetna contract over and above what is needed to cover annuity
payments should be transferred to the Aeltus account. He stated that the
committee has authorized this transfer in the past and the reason for the
transfer would be to save in management fees, as Aetna charges substantially
more to manage these assets than Aeltus does.

Matter of Request from 10 Employees to Rollover 457 dollars to purchase past
years of service.

Schmisek stated that attached to the agenda is a copy of information pertaining
to this item. He stated that most of the attached information had been
distributed to the committee previously, however that was about a year ago, so
new material was being provided for easier reference. Schmisek continued that
this item had been considered and a motion passed to be forwarded to the
Council at the March 16, 2004 meeting and he continued to read the previous
motion from the staff report, exhibit 9 of the handout materials. He stated
that the item was then pulled from the Council agenda and has been inactive
until February when a request on behalf of the group of affected employees was
made to explore whether our plan would allow the transfer in of money from the
individuals deferred compensation accounts to cover part of the cost of these
buy backs. He continued that this option is now allowed by the IRS and was
pointed out to them by their deferred comp representative. Schmisek stated
that exhibit 10 is the request that was made and exhibit 11 is a response from
Dorsey & Whitney, our pension attorney as to their opinion on this request. In
summary, he stated that the IRS does allow this type of trustee to trustee
transfer and that our plan, and possibly our 457 plan, would need to be amended
to allow this type of transfer. He continued that Dorsey & Whitney also
provided some concerns in regards to approval of this item and that they stress
that should the committee and ultimately council approve this request, that the
individuals should be strongly urged to contact a financial planner for
guidance on whether the transfer of these liquid retirement assets to the much
more restrictive defined benefit plan was in their best interest.

Hamerlik inquired why this item was pulled from the Council agenda after the
committee had taken action on it a year ago. Duquette stated that the item was
pulled at his request with input from the employees, as they wanted more time
to review the numbers further, as the amounts were $60-70,000 for some of the
affected individuals and they wanted to explore possible means of paying for
this buy back. Schmisek added that the current request was not to change any
of the terms that had previously been approved, but only to consider adding an
amendment to the plan which would give the affected employees that option of
adding a 457 rollover as an additional means to cover the cost of the buy
back.

Schmisek stated that the group was being provided this information today so
they could read through it and prepare for discussion at the next meeting. He
stated that at the next meeting at the end of this month the actuary will be
here to present the annual report and that as a part of that he will be
bringing information on a change in the salary increase assumption and
information on whether or not a change from the current 5% assumption to a 3%
assumption is more appropriate, given our actual history of increases. He
stated that at that time the actuary could also provide revised numbers for
these individuals, including information as to whether this change in
assumption would affect the buy back numbers.

Hamerlik stated that there may always be new changes that develop that could
affect the amount of this buy back, but his feeling is that this item needs to
go forward and be resolved at the Council level so that the affected
individuals could move forward with their financial planning.

Duquette stated that the assumption change is for the plan as a whole and not
specifically due to the request by the 10 individuals. He concurred with the
feeling that this item needs to be resolved and stated that he brought forward
the request for the rollover option as a potential way to help make the buy
back an affordable possibility for those involved.

Other.

Flannery stated that he had an item that he would like to have the committee
consider. He stated that the city currently offers an optional deferred
compensation plan from Nationwide Retirement Solutions to the employees and
that he has become aware of a similar plan through ICMA which he would propose
that the City also offer as an additional option for employees. He continued
that while many of the funds offered are similar, the way the fees are assessed
to the plan are different and as such could provide participants with a better
return on their accounts. Flannery distributed a handout to the committee
detailing the difference in returns between the two plans. He explained that
in the Nationwide Plan the fees are included as a reduction in the rate of
return that the fund has, whereas the ICMA plan charges participants a flat $18
per year for having an account. He continued that for participants with small
balances there is little difference, but for participants with a larger
balance, the returns can be significantly higher by just paying the flat fee.
Flannery stated that he is requesting that the committee consider passing a
recommendation that would allow the City to offer both the ICMA and the
Nationwide 457 plans as alternatives for employees to use for investments. He
stated that there would be no cost to the City for the addition of the ICMA
plan, and added that we already have contracted employees that participate in
it rather than the traditional pension plan. He stated that the only City
related item would be a small amount of administrative work needed from RaeAnn
to process the addition of this for participating employees.

Hamerlik inquired as to whom was requesting this item to come forward, if it
was an individual request or a group of employees. Flannery replied that he
had done the research following information that came to light during the
researching of the retirement savings plans that had been put in place
recently. He stated that he has presented this information to the employee
reps group and they are in favor of having this as another option for
employees.

Kreun inquired whether there were potentially other carriers in the market that
may also offer a similar program and why we should just look at these two.
Duquette stated that there are potentially a number of other vendors, but he
added that these two entities do specialize in governmental entity benefit
plans. Kreun added that the City may need to look at setting a limit as to the
number of providers that we authorize for benefit programs so as to keep down
the administrative time that is required and any unforeseen costs to a
minimum.

Storstad inquired whether there was any potential to negotiate the $18 fee and
also if there is a possibility that it could increase for participants in the
future. Flannery stated that the fee is stated is their basic fee for that
plan and he did not know the potential for change in it.

Burger gave a brief overview of the history of the deferred comp offerings for
the committee. She stated that there are some questions and information that
would need to be verified with both Nationwide and ICMA before the City makes a
final decision on this item. She added that one item that she would need to
track closely would be the amount that individuals are contributing to each
plan to make sure that, should someone elect to participate in both plans, they
do not go over the IRS limit for investments in one year.

Hall commented that he would also encourage the City to check on whether the
City is considered a plan sponsor and if they are what any potential
sponsorship fees may be.

The committee requested that staff research the potential of adding the ICMA as
an additional 457 provider and report back to the committee at a future
meeting.

Motion to adjourn by Kreun, second by Storstad. Aye: All. Motion Carried.

Respectfully submitted,

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

SL