Committee Minutes

PENSION AND INSURANCE COMMITTEE
MINUTES
December 3, 2008 - - 3:00 p.m. - - A101

Present: Richard Duquette, Maureen Storstad, Mike Flannery.
Absent: Mike McNamara, Doug Christensen.

Duquette called the meeting to order at 3:00 p.m.

Matter of Tenth Amendment to DB Pension Plan.

John Schmisek, Director of Finance, stated that this amendment was drafted by Terry-Lynne Lastovich, Dorsey & Whitney, and will update our plan to include mandatory legislative changes and to reflect opinions issued in case law. There is no effect on benefits or cost to the plan associated with the passage of this amendment.

Motion by Storstad, Second by Flannery, to approve the tenth amendment to the DB Pension Plan. Aye: All. Motion Carried.

Matter of Eighth Amendment to the DC Pension Plan.

Schmisek stated that this amendment will modify the DC Plan to include the same legislative changes and case law opinions as discussed above. Schmisek noted that there is one correction that will be made in regards to venue, copy distributed states Minnesota and should have been North Dakota and will be corrected in final revision to plan.

Motion by Flannery, Second by Storstad, to approve the eighth amendment to the DC Pension Plan. Aye: All. Motion Carried.

Matter of Asset Investment Discussion.

Schmisek gave a brief history of the research that was done related to having the ND State Investment Board handle the management of the DB Pension Plan assets. At this time, the State would not be able to accommodate the strategy that the Committee has been considering, going with index funds. The state informed us that they use almost entirely enhanced index funds within their pool and that we would only have the ability to set our allocation and then would be invested across all funds in their pool in that asset class. We would have no ability to select only certain funds within the asset class in the pool nor could we opt out of any holdings in an asset class without eliminating that asset class altogether from our allocation. The State also informed us that the fees would still be at or just above those quoted a year ago, average 55 basis points, which was approximately $225,000 per year based on a $40.5 million dollar asset base.

Schmisek continued that Alerus Financial had also been asked to bring in a portfolio of index funds which would meet the allocation that the City had preferred based on the results of the Asset Liability Study. Mark Hall and Jeff Hoplin, Alerus Financial, were present at the meeting and Eric Roling, Deloitte & Touche, was in attendance via phone.

Flannery presented some questions to Roling related to the portfolio in Scenario 4, portfolio 3 from the study presented at the last meeting:

1) Why is there no mid-cap allocation? Roling: Any mid-cap holdings would be included within the small cap allocation.
2) Where would the S&P fit in the allocation? Roling: The S&P is the benchmark for the large cap allocation so would fit in that area.
3) Is there an equivalent benchmark for the S&P for the emerging market allocation? Roling: There is and he will provide that information to the committee.
4) Is the Plan prohibited from purchasing municipal bonds of the City of GF as part of the portfolio if the rate of return would be advantageous? Roling: Advised the committee to check with legal counsel, as for private companies there are many restrictions on holding corporate bonds of your company in the company pension plan and may or may not also be restriction on municipal govt. plans.

Mark Hall and Jeff Hoplin distributed a handout of a proposal with eight portfolios which consists of semi-passive enhanced index funds. Portfolio six would be the allocation which most closely matches allocation identified by the committee as desirable when the Asset Liability Study was reviewed at the last meeting. Alerus also provided copies of the April 2007 proposal which had been distributed to the committee related to a switch to index funds.

In regards to Portfolio 6 of the current proposal, the portfolio does include a small percentage allocation to REITS and commodities, which were not a part of Roling’s allocation, and could either remain in or be eliminated from the portfolio at the wishes of the Committee. Jeff stated that Alerus is proposing to use the semi-passive enhanced index funds rather than straight index funds, as research shows that over time performance is greater with very little added risk and would benefit the City.

Hoplin commented that right now some of the problems in the market are from hedge funds that are heavily leveraged and in need of cash, but only able to sell high quality equities in their portfolios based on market, which has led those higher quality stocks to actually be outperformed by the junk class securities, which will reverse once market cycles through. He also stated that in regards to the Pension Plan holding municipal bonds, would advise against it even if legal, as can get same and usually better rates from federal securities and with municipal bonds, lose the tax benefit when you hold them in the plan as pension payments are taxable to the retirees so just doesn’t make sense to use them in the plan.

Hall noted that as with all portfolios that Alerus manages, do monitor the performance of the funds included and if see a trend within one fund that is not acceptable will replace that fund with a better one.

Storstad stated that the City had been looking at straight index funds and inquired whether the fees would be lower if went that route rather than the enhanced funds. Hall stated that there would be little or no difference in the fees charged, as at the 30 basis points quoted are at the lowest level for the size of our portfolio. Hoplin responded that understand the City, as all customers, want the most reasonable fees while still attaining the quality returns, and can say that for all the funds proposed both the beta and alpha are positive and fees are warranted based on returns should see from the portfolio. He continued that Alerus looks at many funds and tried to pick the most solid funds that fit closest to the classes identified by the City and believe that have a very beneficial portfolio put together. Hall noted that Sunil Swami, Chief Investment Officer of Alerus Financial, is very good with evaluating funds and in particular the international class and will again have him review the portfolio and massage if needed to get even closer to the portfolio selected from the study.

Schmisek asked if Roling could provide an opinion on the portfolio proposed by Alerus. Roling stated that he would like to review a hard copy of the portfolio and if we could get that to him he would review and provide an opinion within the next week, but in general does not seem to pose any problems from what the committee had expressed a preference for, as long as the amount of management involved within the funds is not aggressive where they begin to take large risks or shifts to try and beat the market.

Flannery stated that as to the scenarios from the Study that were being considered, he prefers Scenario 4, portfolio 3 which has a little more diversity and is interested to hear Roling’s feedback on Alerus’ proposal. Storstad stated that she concurs with 60:40 allocation as shown in Scenario 4, portfolio 3.

Motion by Flannery, Second by Storstad, to recommend that Council approve a switch to an investment asset allocation of 60:40 for the assets in the Defined Benefit Pension Plan. Aye: All. Motion Carried.

Hall stated that if the Committee does decide to go to straight index funds, Alerus can provide that, but would recommend the enhanced as a better fit. He continued that another advantage to the City of consolidating the management is in being able to receive more concise and timelier reporting with easier tracking of the assets. He stated that monthly performance updates could be provided to the committee if desired. Hoplin added that there are also a number of electronic analysis that are readily available to use in evaluating fund performance, almost instantly. He added that Swami has commented that he feels the market is entering a time as we saw in the 70’s which was very choppy and if that becomes the case, the ensuing markets will provide opportunities for value to be added from at least a small level of management of the funds and would strongly encourage the committee to not make too passive a choice in investment.

The group discussed the need to move this forward to the Committee of the Whole meeting on Monday, December 8 so that it could be acted on at the December 15 meeting, allowing resolution prior to the end of the year. A staff report will be forward to the Committee of the Whole with basic information. The group agreed on a Pension Committee meeting December 10 at 5:00 p.m. in room A101, at which time Roling will have completed his review and a decision could be made on whether to proceed with semi-passive funds or index funds. A revised staff report with final fund selections will then be submitted, along with a revised investment policy to the Council for approval at the December 15 meeting.

Hall stated that logistically, will take some time to transition all the assets from the active managers to whichever funds are selected by the City. He continued that the first step after adoption that he will take is to notify all managers by letter to stop trading and to prepare for transfer of assets as of a set date. Alerus will then start selling off the assets and buying in as direction of the committee. He stated that he will also be in contact with George Blain of Aetna to work out the timing for funding that is needed to satisfy pension payments to retirees, as that has now been flowing through ING.

Meeting adjourned at 4:00 p.m.

Respectfully submitted,


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

SLL