Committee Minutes

PENSION AND INSURANCE COMMITTEE
Tuesday, September 27, 2005
A101



The meeting was called to order at 1:05 p.m.


Committee Members Present: Mike Flannery, Gerald Hamerlik, Curt Kreun, Maureen
Storstad.
Committee Members Absent: Mayor Brown.


Hamerlik 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 June 20, 2005 meeting.

Motion by Kreun, Second by Storstad to approve the minutes as submitted. Aye:
All. Motion Carried.

Hamerlik announced that since the representatives from Alerus Financial had not
arrived at the meeting yet, we would move on to Other Business.


Other Business.

Storstad stated that she had been asked to bring back to the committee the item
dealing with increasing the contribution percentage in the Defined Contribution
Pension Plan (DC Plan). The group briefly reviewed the history on this item
and that a committee recommendation to Council had been referred back to the
committee for further study and that upon reviewed of additional information it
appeared that research indicated that the current percentage was comparable
with the Defined Benefit Plan.

Flannery inquired whether any research had ever been done on terminating the
current DC Plan and rather having those people go into the DC Plan that is
administered by NDPERS, as that plan seems to always have higher than normal
returns and gives participants some other benefits upon retirement that are
useful.

The group asked that this item be placed on the next committee agenda and have
information on history for redistribution to the committee along with any
information on proposed options.



Matter of Alerus Financial Presentation.

Mark Hall and Sunil Swami, Alerus Financial, were present at the meeting to
report on various projects that they have been working on.

A) Defined Contribution Plan Portfolio.
Hall introduced Josh Richter, who was attending the meeting via conference
call. He stated that Richter has evaluated the funds that are currently
offered in our DC Plan and had some recommendations for changes that would
improve the plan.

Richter reviewed with the committee the performance information from the
presentation booklet which was distributed today. He noted that in the Stable
Value, Money Market category we currently offer both the Federated Prime
Obligation and the Federated Capital Preservation funds. He stated that due to
restrictions in the prospectus we can not carry both of these. He continued
that he would recommend deleting the Federated Prime Obligation Fund as it has
not exhibited as high a performance as the Federated Capital Preservation
Fund.

Richter continued that he would also recommend a change in the Mid-Cap Growth
Fund category. He explained that we currently carry the Touchstone Emerging
Growth A, which used to be in the Small Cap category, but due to changes in its
structure it has been moved to the Mid-Cap Growth, which now leads to a
duplication. He continued that he would recommend eliminating that fund from
the line up as it’s performance has not been as good as the other fund in this
category, Calamos Growth A.

Richter stated that the movement of Touchstone to the Mid-Cap Growth category
has left us with no fund in the Small Cap Value category. He recommended
adding the Goldman Sachs Small Value Service Fund to fill this opening.

He stated that a similar situation exists with BlackRock Aurora A which we used
to have in our Small Cap Growth category, but due to shifts in its style it is
not in the Small Cap Blend category. He recommended eliminating the BlackRock
Aurora A from our portfolio and filling the Small Cap Growth vacancy with
Columbia Acorn Z.

Richter commented that the last change he was recommending was in the Specialty
Fund Category. He stated that we currently carry the Delaware REIT A fund, but
he would recommend replacing it with Goldman Sachs Real Estate Securities which
has shown better performance.

Richter added that additional information for all of the funds proposed to be
added to the portfolio is provided for the committees review under tab 4 of the
presentation booklet.

Schmisek inquired whether there was any change needed in the plan document to
make the fund switches. Hall stated that there was not, only administrative
approval is required. Schmisek inquired as to the process that would be used
for individuals that currently are invested in the funds proposed to be
eliminated. Hall stated that letters would be sent out to participants. He
continued that normally there is a time given when individuals can elect to go
in and manually move their investment dollars or if they do not respond then
their dollars would be automatically rolled into the new fund in the same
class. He added that historically about 40% of people choose to manually move
themselves to new allocations, while 60% allow the funds to be automatically
moved for them.

The group discussed whether there was any need to get comments from the
participants before making a decision. Hall and Richter both concurred that
normally the sponsor is informed of recommendations on fund selection and
concerns with performance and then makes a decision which is communicated to
the participants and that they have found that process to be the least
confusing for participants. Hall added that it also lets them know that
someone is watching over the fund performance and doing their best to make sure
that the best selections are available for them.

Flannery stated that in the Nationwide Deferred Comp plan which the City uses,
when a fund is closed, people currently invested are also given the opportunity
to leave their dollars in the fund and just elect to have new contributions go
into the new fund. Richter stated that could be an option for the City, except
for the Federated Prime Obligation fund which needs to be eliminated due to
restrictions beyond our control. Richter stated that he could not see why
someone would want to leave dollars in a fund that was not performing and that
it is usually reviewed as the responsibility of the plan sponsor to remove a
fund once you find fault with it.

Schmisek inquired whether there were any transfer fees associated with the
moves necessary by eliminating the funds. Hall stated that there were not, as
all the funds used in the plan are no load.

Kreun concurred with Richter’s earlier comment that most investors would not
want to continue having dollars in a losing fund and that it may be better to
eliminate them and transfer to something that will perform better for them.
Flannery agreed and stated he just brought it up since it would be a difference
between the two and questions may come up.

Hall stated that the letters that they send out will also state that the
participant can contact Alerus to discuss their individual holdings and try to
determine a new allocation that is more advantageous for them. He commented
that there is a high concentration in a couple of the funds recommended to be
eliminated probably due to the fact that many participant’s used the templates
for investment that were in the initial registration information. Hamerlik
commented that this does show that they are looking for direction in making
fund selection and that the group should rely on the advice of the plan trustee
as they are the experts in this area.

Motion by Storstad, Second by Flannery to approve the recommended fund changes
in the Defined Contribution Plan as presented by the Plan Trustee. Aye: All.
Motion Carried.

Hall stated that he would draft correspondence to the participants and then
forward to the City for review.

B) Investment Policy.

Hall distributed a draft investment policy to the Committee. He stated that
thus far the only information guiding investment managers for the Defined
Benefit Plan must be pulled from the committee and City Council minutes. He
continued that adoption of an actual investment policy document would make this
information more easily accessible for those participating in and working for
the plan. Hall added that included in the policy is a provision for an annual
review of the policy, as the existing policy has been in place since March of
1996 and has not been officially reviewed since then.

Hamerlik inquired whether the entire policy would be reviewed annually or just
the investment allocation. Hall stated that you could choose to look at
either, but probably the allocation is where the Committee would be more likely
to make changes.

Hamerlik suggested perhaps we should also give the employee reps an opportunity
to comment on this document before acting on it. Flannery inquired why the
numbers in the minimum and maximum categories do not add up to 100%. The group
discussed that they are ranges and a manager just needs to ensure that they are
within those ranges to be in compliance. Hall will tweek the chart so that it
conveys the intent of the committee.

Schmisek stated that the draft and implementation of an actual policy beyond
just the investment allocation has been long overdue and thanked Alerus for
their work in developing this document. He stated that we would also forward
copies of the document to the City Attorney and Dorsey & Whitney, who serve as
our Pension Consulting Attorney, for their review.

C) Defined Benefit Plan RFP Update.

Hall reviewed the RFP process thus far including that there were 18 respondents
to be considered as a new investment manager. Swami stated that in reviewing
the performance of PMG, the main concern was with the large cap funds and
therefore, the decision was made to look specifically for a manager to assume
the large cap management duties, while maintaining the rest of the allocation
with PMG. He continued that the focus is on finding a manager with good
performance in either a large cap core fund or a large cap with an allocation
that is 40/60 value/growth split to balance the large cap split that Aeltus
has. Hall commented, and Swami concurred, that this will also avoid any
unnecessary transfer costs in liquidating funds in areas that PMG is really
performing up to standard in.

Hall stated that in reviewing the proposals submitted it became clear that
there were some that would not be able to meet our needs or some that only are
able to offer us mutual fund offerings which will not give us the yield that we
are looking for. He continued that they are recommending that the City move
forward to the next level with five firms: Merrill Lynch, Bremer Bank, Lazard
Asset Management, Voyageur Asset Management, and Sit Investment Associates.
The group discussed options for proceeding and the process used to narrow the
field to the final selection.

Flannery inquired about the process used to narrow to the recommended five
firms. Hall informed the committee that some of the responders only had the
capability of using mutual funds and that some managers in the group that had
the ability to offer individual securities or mutual funds, but in their
response to the RFP only listed a mutual fund option. He stated that those were
eliminated, as individual securities provide a much better return for the plan.
The group discussed whether they should have been directed to bid individual
securities and whether this would have made a difference in the selection of
the finalists. Following discussion, the consensus was that each bidder had
the responsibility to propose what they felt was the best that their firm had
to offer and if they chose mutual funds they should be evaluated on that
choice. The group further discussed that the bidders also had the chance to
call and ask questions and some did avail themselves of that opportunity.
Flannery stated that he feels we may have seen some different bids if we would
have had an investment policy already in place at the time we did the RFP and
also if we would have been more specific in the RFP. Schmisek commented that
any bidder with a question could have called to clarify our expectations if
they were not certain what we were looking for. Hamerlik added that they
should all be adept at responding to these and should know what to consider in
preparing their responses. Swami commented that had he personally been bidding
on a project of this size, he would not have bid mutual funds, as individual
securities would be a much better fit for the amount of assets to be managed.

Motion by Kreun, second by Storstad, to proceed with the 5 firms recommended by
Alerus Financial for further evaluation, to be interviewed by a subcommittee
comprised of 3 members of the committee (Hamerlik, Storstad and Flannery), the
trustee, and ex-officio member (Schmisek), to bring to the whole committee a
final recommendation. Aye: All. Motion carried.

Schmisek commented that he would like to see the process move to completion in
a timeline that would allow the newly selected manager to be in place effective
January 1, 2006. Hall stated that they should have no problem with meeting a
timeline of an early November recommendation, which would coincide with their
six month trustee report. He continued that he would see maybe the
subcommittee meeting in about two weeks to review the additional information
that was being requested from the five finalists and then interviews the end of
Cotober or first part of November. Hamerlik commented that if the process
could be completed by November 10 then the matter could get on a COW and
Council agenda prior to the end of November. Schmisek added that we should
also strive to get the investment policy in place prior to the final selection
of the manager, as there were some firms that needed that in place before they
could accept a contract with us.

The group discussed a desire to have a meeting prior to October 15 to finalize
the investment policy and hear an update from the subcommittee. The agenda
will also include a discussion on the defined contribution plan contribution
rate.

Meeting adjourned by the Chair at 2:55 p.m.

Respectfully submitted,


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