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PENSION AND INSURANCE COMMITTEE
Monday, June 20, 2005
Council Chambers


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

Committee Members Present: Mayor Brown (joined meeting in progress), Mike
Flannery, Gerald Hamerlik, Curt Kreun, Maureen Storstad.
Committee Members Absent: None

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.

(Mayor Brown joined meeting.)

Matter of Approval of Minutes from April 13, 2005 meeting.

Motion to approve the minutes by Flannery, second by Storstad. Aye: All.
Motion carried.

Matter of Presentation by Alerus Financial, plan trustee.

Mark Hall, Alerus Financial stated that in the inside pocket of the
presentation folder there is a consolidated report showing comparative returns
for all the plan managers. Hall stated that they are providing this to make it
easier for the committee to review the performance than to try and compare the
reports from each of the managers, as they all present in a different manner.
The committee discussed whether each committee member wanted to continue
receiving monthly reports from each manager or whether receiving this
consolidated report would suffice. Hamerlik commented that perhaps if Hall and
committee staff each received a copy that would be enough and then they could
bring any notable information forward to the committee.

Motion by Flannery, Second by Kreun, for the trustee to explore with plan
managers whether decreasing the number of provided reports would equate to a
cost saving for the City. Aye: All. Motion Carried.

Hamerlik inquired whether it would be good information to share these
consolidated reports with all other council and employee reps. Schmisek
commented that the problem is they may not be familiar with how to interpret
them and the effect they have on the benefit without having been present at the
meetings where the information is discussed. He added that these reports are
always available in the Finance Department and can be viewed by anyone wishing
to.

Hall noted that while contributions to the plan are equally split between the
two managers, PMG ends up managing a larger share of assets. He continued that
this occurs because distributions to retirees come from the Aetna portion which
comes from the share deposited with Aeltus. He added that the committee may
want to consider a method for rebalancing the assets on a periodic basis, or
the PMG portion is going to continue growing. He commented that this is a
concern particularly since Aeltus has actually been performing better, but
those higher returns do not impact the plan as much since their proportion of
the plan is less.

Hall continued that during the RFP response period he heard from several
vendors that had questions on our official investment policy. He continued
that the policy the City currently has is very general and Alerus’s
recommendation would be to expand the policy to include more specific
information. Hamerlik inquired how often a policy should be reviewed, as the
current allocations were set several years ago. Hall stated that usually they
are reviewed on an as needed basis and our policy allocations seem to be
alright, their main recommendation would be to add more information to the
policy so that it was not so heavily dependent on searching the minutes to find
information on the aspects of the policy.

Hall stated that in reviewing the current holdings of the two managers, they
are in compliance with the investment allocation set by the City. Hall
introduced Sunil Swami, Chief Investment Strategist and Product Manager of
Asset Management for Alerus Financial, who would be presenting the remainder of
the evaluation of the managers.

Swami stated that Tab 2 of the presentation booklet addressed PMG and their
performance over the last year. He e commented that PMG continues to
underperform their benchmark, which is a concern since 38% of our portfolio has
the worst performance. He commented that competitors were hitting 52 week
highs during this same time. He continued that PMG has shown a consistent
pattern of underperformance and diverging underperformance, as illustrated in
the graph on page 16, where the risk/reward scatter shows them in the worst
ranked quadrant. At this time, PMG is performing in the bottom decile as
compared to their peers. In reviewing their portfolio, Swami noted that they
are heavily overweighted in consumer cyclicals and tech stocks, neither of
which has been performing well for the last several years.

Swami stated that in the fixed income and small cap areas PMG appears to
perform better, with performance that is nearer that of their peers.

Swami stated that in reviewing the equity fund PMG has had good performance in
the past, but in the short term their performance has begun to lag and he
stated that it should be monitored closely over this year. He added that he
would recommend the same for their international portfolio which has improved
but is still slightly underperforming.

Flannery inquired whether there are any penalties to the City if we decide to
make a change from PMG to another manager. Hall stated that there should not
be, but he will review their contract to ensure that in the event we move to a
new manager any costs will be kept to a minimum.

Swami commented that his greatest concern is with the equity portfolio, as even
though the international may be underperforming, it is such a small portion of
the portfolio that it does not have as big an impact as the equity portfolio
does.


Matter of Update on DB Plan Investment Manager RFP.

Mark Hall stated that the RFP responses were received and he has begun working
on evaluating them. He continued that initially 2 responses had been rejected,
as they were not received properly labeled and by the bid opening date and time
stated in the RFP. Hall suggested that a potential timeline would be to meet
with the subcommittee in about two weeks for a brief overview of the remaining
respondents and then bring a recommendation of the top 3-5 respondents to the
full committee in the end of July. He continued that at that point dates for
interviews could be set and Hamerlik inquired is the timline could be shortened
further, with two weeks to the subcommittee seeming reasonable, but perhaps
another two to the full committee could possibly work.

Hall stated that if the concern is trying to alleviate future losses in the
large cap area, the committee could consider pulling the funds in that
allocation from PMG at this point and could advise Alerus on where they would
like to invest the funds until the new manager is selected, however, there
would be some administrative items to look at in making this type of temporary
move. Hamerlik responded that he would rather see the RFP be resolved as
quickly as possible so that a permanent decision was made instead of a lot of
interim shifting.

Flannery requested a complete list of the respondents. Hall stated that he
would forward that to all committee members.

Flannery inquired whether the Library had made the remainder of their
contribution due for 2004. Schmisek responded that to his knowledge it had
not. He added that Dorsey & Whitney and Deloitte & Touche have both concurred
that should the library elect to not make that payment, overall liability for
the contribution falls to the City. He continued that should this persist one
option that the City has is to spin off the Library from our plan, much like we
did with the Airport several years ago. Hall pointed out that the actuarial
report does note the lack of a contribution and they will continue to note and
track it. Storstad stated that they had made a budget amendment for the amount
necessary to cover the payment that should have been made in 2004, but that
payment had not been made at this point. She added that for the 2006 budget
the library also increased their pension line item to attempt to cover the
anticipated payment in that year.

Kreun commented that the committee should also start looking at what goals we
want to set for the new manager in the area of performance so that we can
improve the funding position of the plan to a point where we are again
comfortable with it and the annual contribution is not quite so large. Hall
concurred that since there are a number of individuals at or near the
retirement point, the plan could become taxed if they all retire at the age
elected.

Schmisek stated that Eric Roling at Deloitte & Touche is in the process of
completing some studies that address the issue of our actual history of
employees retiring at the elected age to see if we should be making an
adjustment as part of the annual report to account for that.

Schmisek commented that he believes that the idea of annually reviewing the
investment policy and allocation is something that we should implement. He
stated that we need to make sure in drafting the policy that we leave enough
leeway for the managers to have the flexibility they need to work.

Adjournment.

Motion to Adjourn by Hamerlik, Second by Storstad. Aye: All. Motion carried.

Respectfully submitted,


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

SLL