Committee Minutes

PENSION AND INSURANCE COMMITTEE
Wednesday, February 22, 2006
A101

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

Committee Members Present: Mayor Brown (joined the meeting in progress),
Gerald Hamerlik, Curt Kreun, Mike Flannery, Maureen Storstad.

Hamerlik stated 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,
standing and giving their name and address for the record.

Matter of Approval of Mintues from November 21, 2005 meeting.

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

Matter of Early Retirement Proposal/Request from Master Police Officer Donald
Beck.

Hovland stated that he has reviewed the working copy of the plan document and
that there currently is not a provision that allows for early retirement prior
to age 55. He continued that Council approval would be needed to make the
change in the plan to allow it.

Schmisek stated that this item had been put on the agenda for the Committee’s
review and to see if the committee wishes research to be done to see if adding
a provision to the plan to allow for such an early retirement would be possible
and to determine any cost associated with granting the request.

Hamerlik commented that a number of years ago there was a buydown option
authorized in the plan that allowed for individuals to buy down to age 55 and
inquired whether there was any early retirement at any age based on a medical
need. Staff commented that there was not. Hovland added that Human Resources
does have some other options available to the employee through offered benefits
that would allow the employee to terminate employment prior to age 55 without
tapping into his pension and they are continuing to work on these options.

Lt. Mike Hedlund, stated that he is MPO Beck’s supervisor and that on behalf of
the administration they support the request in principle due to the medical
issues and feel that it would be in both the employee’s and the department’s
best interest for him to retire early.

Kreun inquired as to what the other options are that are being offered and
whether there is any outside documentation to support the medical basis for the
request. Hovland stated that at this time no medical verification has been
provided. Hamerlik commented that this would be something that we should ask
for prior to further consideration of the request. Kreun agreed and stated
that it is not unreasonable to ask for this information when that is the basis
for the request.

Schmisek stated that staff can research what options may be available to modify
the plan if the committee wishes and whether that modification could be limited
to items such as a medical option. Kreun stated that this individual works in
a crucial position where his medical condition would be crucial to performing
is job in the best interest of the city and public and noted that he is very
close to retirement and perhaps research should also include limits in these
areas. Hamerlik stated that he would also feel that it should also be spelled
out what levels of documentation would need to be provided in order to be able
to take the option if it were added to the plan.

Motion by Kreun, Second by Storstad to authorize staff to research with plan
consultants the possibility of adding a prior to age 55 early retirement
provision to the defined benefit plan and any possible circumstances that could
warrant the use of that provision and associated costs for the change.

Flannery stated that he would recommend that the cost figures be available at
the time that the committee discusses this next, as when past changes have been
considered and approved, such as the past buydown, it took a substantial period
of time to get the cost numbers. He continued that in this case, it seems that
the employee would be looking to move rather quickly on this matter if the
committee approves the request and having all the information at the time it
was approved would be best. The group discussed that staff should gather the
information as soon as possible and a special committee meeting should be
called at that time for discussion of this item.

Upon call for the question, Aye: All. Motion Carried.

Matter of Riversource Investments Presentation.

Kris Andersen, Riversource Investments, was present to review with the
Committee the performance of the assets that they manage on behalf of the
City. Andersen reviewed briefly the corporate structure of their company and
the objectives and guidelines that they use in working with the assets. She
commented that they have enjoyed a 13 year relationship with the City and
thanked the Committee for the opportunity.

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

Andersen stated that overall the portfolio saw a return on 5.98% for 2005, and
a since inception annualized return of 6.89%. She noted that as of the
beginning of January they were no longer managing any assets in the equity
portion, as those were transferred to Voyageur Asset Management. Schmisek
commented that due to the transfer there will be some new contract documents
coming that will restate the actual allocations that they will now work with
and that those will be reviewed by legal counsel and executed by staff.

Andersen proceeded with a review of the performance of each individual asset
class and the methodology that is used in determining the holdings in each of
the portfolios, including reviewing a list of the top 10 holdings in each
portfolio. She noted that in the Fixed Income area this year marked the third
anniversary of the change in strategy in this fund and that it continues to be
managed out of their Minneapolis headquarters. In the International asset
class she noted that these funds are managed out of the London Office.

Kreun inquired whether the returns were before or after fees. Andersen stated
that they were before fees and that she would get the net returns and provide
that to the committee.


Matter of ING Presentation.

Adrianne Potwora, ING, was present to discuss the performance of the assets
that they manage. She introduced the Committee to Doug Benedetto, Sr. Vice
President, who accompanied her to the meeting today. Potwora commented that
they have had a relationship with the City since 1985 and thanked the Committee
for the opportunity to continue the working partnership. She briefly reviewed
with the committee the corporate structure and history, as well as the process
their use to determine the holdings in the portfolio.

Potwora commented that there were three issues that they looked at in
determining the holdings. They were: 1) why oil prices were so high. They
believe that it is due to demand shock as the world’s need for oil has
increased substantially, not supply shock as many had thought. 2) why the high
oil price is not effecting the economy. They believe that this is due to the
fact that we are now using oil more efficiently and completely and have much
less waste product than we did in earlier years. Another factor that they
believe affects this is that the interest rates have continued to remain low
and many are refinancing mortgages and using the realized cash to offset the
higher prices. 3) why interest rates continue to be so low. She continued
that short term interest rates have risen some, but long term rates continue to
be low and they believe this is due to the demand for our treasuries in some
markets such as the Asian market where they are being heavily sought. Potwora
continued that they had believed that there would be some slow down in the
market and that reversal did start in the fourth quarter of 2005. They believe
that this will continue in 2006 and they are making investment moves to
compensate.

Potwora stated that for 2005 the assets performed with a 9.12% return, which is
above the benchmarks in most categories. She noted that in particular the
Growth Equity (11.00% return compared with benchmark return of 5.26%) and the
International Equity (17.79% return as compared to a benchmark return of
14.02%). Potwora stated that since inception, the asset return is 10.63%.

Benedetto commented that the good returns for the year are in particular to the
teams choice to overweight in the international and growth sectors and then the
outstanding performance of the managers in those sectors. He added that on
page 20 of the presentation book there is a year by year breakdown of the
performance of the portfolio and noted that this does not include the portion
that is held by Aetna for the payments to retirees. Benedetto stated that the
long-term performance of the plan reinforces that they have a proven process
that works in making their investment choices.

Benedetto commented that one change that they would suggest to the Committee
would be to split the SMIDcap portfolio into two distinct categories, small and
mid-cap. He stated that they anticipate the equities to continue to outperform
fixed income in the coming year and making this change would give the
investment team the most flexibility in making investment decisions for the
plan. Benedetto added that they will be sending some information to the
committee in the near future on another suggested change to the allocation,
which would be the addition of a real estate component. He stated that this
would not be REITs, but would be wholly owned properties through one of their
subsidiaries and would be a very small addition to the portfolio, probably 5%.
He stated that the team has been doing some research in this area and believes
that using the wholly owned properties will allow them to search out properties
that would become good investments for the plan.

Kreun inquired whether the returns were net of fees. Benedetto stated that
they were before fees and that the net number would be about 65-70 basis points
lower and they would get the exact numbers and forward those to the committee.

Schmisek stated that there has been a concerned citizen inquiring as to the
earnings assumption of 8.25% used in the plan and whether that is a reasonable
assumption to use and that he has heard that the economy will begin to slip
into a deeper recession than the 1930’s and wondered whether they had some
comments on that. Benedetto stated that they definitely do not see that
slippage and that they feel the couple of years of market lag that was seen
back in 2000-2002 was the worst for the plan sponsors and that is over now. He
stated that most of the plans that they see use an investment assumption
between 7.5% and 8.5% and that we are being reasonable in using the 8.25%
assumption. He noted that looking at the current long-term return on the
portfolio, we are performing well above that assumption. Andersen stated that
Riversource would also concur with the comments made by Benedetto.

Potwora commented that they will get information sent back to the committee on
the split of the SMIDcap into separate small and mid-cap portfolios. Mark
Hall, Alerus Financial, plan trustee, inquired what level of split they would
be recommending. Benedetto stated that they would recommend starting with a
50/50 split, but leaving it a little fluid so that managers could adjust within
a range based on the investment teams expertise in what will work in the given
market.

Potwora stated that they will also provide information to the Committee on the
proposed addition of real estate to the portfolio. Benedetto added that this
is a really new concept for plans such as ours, but that the investment team
believes that post-90’s real estate issues are behind the market and that it
could increase value and earnings to have as a small component in our
portfolio. He stated that they will try to provide the information on both of
these recommendations prior to the next committee meeting.

Introduction of Voyageur Asset Management.

Hall stated that Voyageur will be coming in at one of the next meetings to
introduce themselves, but that he wanted to update the committee on the
transfer of assets. He stated that the transfer was made in mid-January and
thus far has been a very smooth transfer and operation. He commented that as
of yesterday the market value of the assets that were transferred to Voyageur
was $12.6 million.

Hall also commented that at the March 20 meeting they will be coming in to give
their review of the three managers.

Adjournment.

Motion by Hamerlik, Second by Kreun, to adjourn at 2:35 p.m. Aye: All.

Respectfully submitted,



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