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HomeMy WebLinkAbout09-17-2019 MinutesCITY OF SEBASTIAN POLICE PENSION BOARD MINUTES OF REGULAR QUARTERLY MEETING SEPTEMBER 17, 2019 I. Call to Order -- Acting Chairperson Christine Vicars called the meeting to order at 10:18 a.m. II. Roll Call Present Board Members: Christine Vicars Randy Moyer Paul Williamson Tim Wood Absent Jason Gillette — Excused Also Present Bonni Jensen, Klausner, Kaufman, Jensen & Levinson, Attorney for the Board of Trustees Ken Killgore, Plan Administrator Cynthia Watson, Human Resources Manager Doug Lozen, Foster & Foster Scott Owens, Morgan Stanley Grant McMurray, Highland Capital Todd Wishnia, Highland Capital Janet Graham, Technical Writer Vote to Excuse Absent Board Member Motion to excuse absentee was made by Mr. Wood and seconded by Mr. Moyer. Motion carried unanimously by voice vote. IV. ADDroval of Minutes — Regular Meeting of March 12, 2019 Acting Chairperson Vicars asked if there were any changes or corrections to the Minutes of May 29, 2019. Hearing none, Ms. Vicars called for a Motion to accept the Minutes as written. Motion to accept the Minutes as presented was made by Mr. Williamson, seconded by Mr. Moyer, and approved unanimously by voice vote. V. Old Business POLICE PENSION BOARD PAGE 2 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 A. Approval of Payments 1. Salem Trust — ApriVJune $ 5,145.00 2. Highland Capital -- April/June Fixed Income 2,862.71 3. Highland Capital — April/June Equities 9.300.68 4. Boston Partners -- April/June 1,717.07 5. Fiera Capital — December 1,270.83 6. Fiera Capital — January/March 1.512.33 7. Fiera Capital — April/June 1,588.48 8. Renaissance — April/June 1,740.59 9. Brookfield Public Securities Group — ApriVJune 808.24 10. Graystone Consulting — April/June 3,375.00 11. Klausner, Kaufman, Jensen & Levinson — November 467.50 12. Klausner, Kaufman, Jensen & Levinson — May 3,692.50 13. Klausner, Kaufman, Jensen & Levinson -- June/Parker 1,360.00 14. Klausner, Kaufman, Jensen & Levinson — August 127.50 15. Foster & Foster — Preparation of State Annual Report 3,000.00 16. Foster & Foster — Work on State Disclosures/Parker 3,700.00 17. City of Sebastian -- Minutes Preparation for May 198.00 18. City of Sebastian -- July/September 6,000.00 Motion to approve the payments as listed above was made by Mr. Williamson, seconded by Mr. Wood, and approved unanimously by voice vote. B. Review of Expense Analysis Received from Salem Trust Mr. Killgore reviewed that at the last quarterly meeting, Mindy Johnson from Salem Trust indicated that they would give the Board an analysis of its investment expenses in comparison to previous years. Mr. Killgore has handwritten in the current year-to-date expenses for comparison. Mr. Killgore stated that it was expected for the management fees to be higher than in the past as well as the Salem Trust custodial expenses. The expectation was that the increase in expenses would be more than offset by additional returns. Mr. Williamson recalled that Ms. Johnson was going to investigate whether there was an alternative method of charging the pension Plan as opposed to the way it's done now. She was to look at maybe a basis -points charge, and she was going to answer the POLICE PENSION BOARD PAGE 3 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 question as to whether they could block trades or not. Mr. Killgore stated he would follow up with Ms. Johnson on that question, as that was not addressed in her email. Mr. Williamson stated that the way it is now being done the pension fund is being charged for each of the trades, and it's adding up to quite a bit. C. Presentation of Experience Study Performed by the Actuary — Doug Lozen, Foster & Foster Mr. Lozen reviewed the purpose for the actuary's report and how it is compiled. He stated that every year this exercise is required, as this is a defined -benefit Plan, and those benefits are calculated by a formula and are paid out for the lifetime of the retiree. The job of the actuary is to make sure that assumptions are selected properly to make sure that the monies are flowing in to pay for those future benefits. He listed the factors that go into making those assumptions. Every five years or so the actuary studies how true the assumptions have been and whether they need slight changes that will be in place for the next five years or so. Mr. Lozen presented the Board members with copies of a report that he brought for review and went through the report item by item. The first part of his presentation he described as "Scenario A." He explained how the City funds the Plan as a percent of payroll of 23.1%. This percentage changes some from year to year. How the unfunded liability is paid down was also explained. The actuary is now recommending that, to accelerate the funded status improvement, the Plan go to a strict principal and interest on the unfunded liability, which is called level -dollar amortization. By doing that, it will cause the City's requirement to go up 2% of payroll from 23.1 % to 25.1 %. It doesn't change the unfunded liability, but it will change in the future. If the Board approves the level -dollar amortization going forward, the funded ratio grows faster. He then called for questions or comments. Mr. Wood inquired where the money comes from for the 2% increase. Mr. Lozen stated it will come from the City. Mr. Williamson inquired why is it recommended to accelerate the funding if the Plan is presently at 80% funding. Mr. Lozen stated the Plan is not required to increase it, but by doing this the Plan will become healthier because the funded status grows faster, but this is entirely the Board's decision. Extended discussion was had among the Board members, Ms. Jensen, and Mr. Lozen as Mr. Lozen explained in depth other assumptions that are made and how they affect the Pension Plan. Mr. Lozen then went on to describe "Scenario B." POLICE PENSION BOARD PAGE 4 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 He explained that by not adopting the amortization method change and choosing all of the assumptions as listed, including an immediate reduction to 7% investment, the City's requirement would increase from 23.1 % to 27.7%. He also explained that the 7.3% being phased down to 7% is also an option. He stated that he will be asking the Board to make some decision, because he intends to be back in December with a valuation report. This would be built into the 10-01-2019 report. So this would not affect the City's budget, whatever the Board's decision is, until beginning October 1st of 2020. So the City would have a lot of advance notice to make any budget changes. Right now it's 23.1%. Any change the Board would make would go into the next valuation which the City would not be required to start funding until October 1st of 2020. Mr. Killgore asked Mr. Lozen to keep in mind that the effect all these matters would have on the City's contribution would mean going from 14% before those benefit changes were enacted. The City is already at a level that exceeds the history. Mr. Lozen asked if the Board has a good understanding of what they are being asked to decide and what the implications are. He is aware this is complicated. Ms. Jensen also asked if none of this takes into account this year's actual experience. Mr. Lozen stated it does not, that this is all forward looking. When he presents the December report, he has to factor in everything that happened this last year on investments, turnover, salaries, etc. He does not expect any big differences from the 23.1 % when he presents that report. He feels it is going to be fairly close. Mr. Williamson asked how often the Board is to make changes to the Plan. Mr. Lozen stated the recommendation is about every five years or so. Mr. Williamson asked if the Board is asked to make a decision today. Mr. Lozen stated yes, because he is typically here in December with the valuation report, so if the Board is comfortable with it, today would be the best time to make that decision. For example, the Board could adopt everything, leaving the amortization methodology alone, and decide to do a three-year glidepath into that, with the first being the next report which would be 7.2%. The City's requirement is estimated to be almost a push. The City is currently at 23.1%. If the Board adopted all the assumptions with no change in the amortization method with the next report but begin the glidepath on investment so it would be 7.2% in the first year, the initial change to the City would be virtually no change. It would still be right around 23.1 %. Mr. Williamson asked if, with doing that, the Plan would still be 80% funded. Mr. Lozen stated yes, it would be. POLICE PENSION BOARD PAGE 5 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 It was the consensus of the Board that they would like to hear from the investment representatives before making a decision. D. Report on Results of Manager Search for Alternative Investments Mr. Owens then reviewed manager performance Highland Capital has a little bit lower return short term, but over the longer term has a larger return. Boston Partners shows SMID value, which is small and mid in the value style. For the quarter it is somewhat better. The one-year number shows a decrease due to volatility. Fiera Capital is a lower -risk manager. The return is lower, but it is actually beating the benchmark because of the level of risk. Renaissance had a large negative, and the monitor has had quite a few conversations with Renaissance about this. He reported that Renaissance has adjusted their model to put more weight on the volatility of an asset class. The monitor is watching this investor closely. Center Coast, the master limited partnership, responds to the market differently. They have a negative correlation with bonds and a correlation of about a half percent with equities. They struggled during 2018, but they are starting to recover nicely. Intercontinental, which is private real estate, has been very positive. They have been one of the better performers since this Plan diversified its portfolio. Mr. Owens reviewed the balance of his handouts, and an extended discussion ensued among all parties with questions by the Board and explanations by the Monitor. Mr. Owens stated he was asked to conduct a review of the large -cap growth manager, Highland Capital. He presented an information packet which summarizes the differences in the managers, shows what the differences are in risk, return, fees, how they go about it, etc. The Board members asked for input from Mr. McMurray from Highland Capital. Mr. McMurray reviewed the history of his company's theories and management practices. He suggested that it would not be a mistake for this Pension Plan to get a growth stock manager, in spite of the fact that it will take money away from Highland. POLICE PENSION BOARD PAGE 6 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 Ms. Vicars asked, if the Board decides to lower the assumptions, the expectation is that the City is going to have to budget for more. However, if the rate of return comes in better, the City is not required to contribute at the same level. Mr. Lozen stated that long-term what Ms. Vicars stated is how all assumptions work. An assumption is your best guess. Mr. Williamson is in favor of keeping the Plan funded at the 79%-80% level. He likes going down one -tenth of one percent. The other Board members agreed. Mr. Moyer suggested doing it for one year and then revisit it each year thereafter. That rate would not go into effect until October of 2020, which would allow the City time to budget for it. Mr. Williamson asked how often the actuary gives the Board a report on this matter. Mr. Lozen stated that every year the Board is provided with a report on how the Plan did on its assumptions. He also explained that the impact of every tenth of a percent is about 1.3% or 1.4% of payroll. Discussion was held among Mr. Lozen and the Board members regarding this matter. Mr. Lozen stated he is very comfortable with the one -tenth of a percent change. Mr. Williamson made a motion that the Board adopt the changes that Mr. Lozen has recommended with the exception of the UAAL amortization method change, and also the Plan will go down from 7.3% to 7.2% as the assumed rate of return. Mr. Moyer seconded the motion. The motion carried unanimously by voice vote. After hearing all the information from Mr. Lozen, Mr. Owens and Mr. McMurray, it was the consensus of the Board members that they should study all the material a bit more and address this matter at the next meeting. E. Information on Divorcing Members/Spouses Alimony Tax Rules Ms. Jensen called attention to a memo that was talked about at the last meeting that can be provided to members who are going through a divorce. The memo just describes that the Plan is a governmental Pension Plan and therefore not subject to the Employment Retirement Income Security Act (ERISA). So the rules regarding qualified domestic relations orders, which is the most common way to divide up a pension, do not apply to this Pension Plan. This is intended for the member and for the member to give to his/her lawyer, who will understand in Florida there are income withholding orders (IWOs). So the Plan can honor those for purposes of paying alimony and/or child support. Members are also provided with the case law in Florida that has decided those types of issues. There are also explained the changes in alimony and the treatment of alimony for purposes of these types of payments. The last item is that they are provided with a copy of an order that her firm can accept. This is a way to streamline the payments that are POLICE PENSION BOARD PAGE 7 MINUTES OF REGULAR MEETING OF SEPTEMBER 17. 2019 being made to the surviving spouse which doesn't require a qualified domestic relations order or an income withholding order; it just allows the parties through agreement to make these changes. The order would make, subject to contempt, the requirement that the member keep in place the payments to their spouse. She stated the Board does not have to take any action unless the Board doesn't want this memo to go out. Ms. Vicars asked if the Board members had any question about this matter. No one did. 2018-19 BudgeUActual Expenses and Proposed Budget Adjustment Mr. Killgore stated there is contained in the agenda packet a schedule showing the current year expenditures as compared to the amended budget. The driving force in the adjustments has been the disability cases, attorney fees, and capacity assessments that were necessary during that process. The year began with a $15,000.00 contingency. So those funds have been used to shift to the accounts so that the various line items are shown to be within budget for the year. He asked for a motion to amend the budget. A motion was made by Mr. Williamson and seconded by Mr. Moyer to approve the adjustment to the budget. The motion was approved unanimously by voice vote. G. Initial Election to Use Deferred Retirement Option Plan (DROP) Mr. Killgore reviewed that the Plan has its first DROP participant. He is scheduled to go into the DROP on October 27th. The actuarial calculations are not available until the participant's final check. The Board has been asked to approve the calculations. Mr. Killgore stated this matter will be on the agenda for December's meeting. Full Execution of Military Time Buyback Contract Mr. Killgore stated that the calculations are done. The Plan did receive the payment and deposited it to the trust fund. The member bought back three years of service. Mr. Killgore stated the participant can come back at a later time and buy another year if desired. VI. Public Input Mr. Todd Wishnia, a representative of Highland Capital, introduced himself as beginning to provide the services that have been handled by Mr. McMurray. Mr. McMurray will be retiring soon, and Mr. Wishnia will then be working with the Pension Plan. POLICE PENSION BOARD PAGE 8 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 VII. New Business A. Notification of Charles Mulfinger's Retirement from Morgan Stanley Mr. Killgore stated he wanted to make note that Charlie Mulfinger from Morgan Stanley has retired, and everyone wished him luck. B. Report from Investment Monitor — Scott Owens, Morgan Stanley Mr. Owens recapped the activity to date. He stated that the quarter that he is reporting on now has been about middle of the road, in the 3% to 4% range. The manufacturing index was below 50. Anything above 50 indicates that the economy is expanding. The trade issues with China are having an impact on that. The service index is continuing to do well. The consumer index remains strong. Presently, the attitude is cautiously optimistic. He described what causes volatility in the market. He expects lower equity returns going forward. Morgan Stanley's recommendation is to lower the assumption rate. It is expected that in the nextfive to seven years a 7% range will be at the high end of the range. They are not suggesting going to 7% right now. His company's goal is to build an efficient portfolio --a portfolio that pays for the level of risk that you're comfortable with. In recap, he is of the opinion that the economy is going to continue to go higher. However, it is also his opinion that the market is going to have a lot of volatility going forward. Unless there is a "Black Swan" event, he expects the market to remain stable. Mr. Owens reviewed the handouts that were presented to the Board. He pointed out that the value of the portfolio as of June 30th was $15,564,589.00, which represents a gain net of fees and transaction costs of $451,900.00. C. Report from Investment Managers — Grant McMurray, Highland Capital Mr. McMurray is of the opinion that it's time to lower expectations as to what the market can do. He stated it is very difficult to preview what the markets are going to do. He suggested the Board be as informed as possible, and that is the best that can be expected of them. D. Vote on Approval of Proposed 2019-2020 Budget Mr. Killgore reviewed the spreadsheet included in the agenda packet which shows what is being proposed for next year's budget based on actual experiences. The grand total is POLICE PENSION BOARD PAGE 9 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 at the same budgeted amount as it was for this year. He asked for a motion on this matter. Motion was made by Mr. Williamson, seconded by Mr. Moyer, to accept the proposed budget. Motion passed unanimously by voice vote. E. Scheduled Quarterly Meetings Set for Calendar Year 2020 Mr. Killgore reviewed the schedule that is included in the agenda packet. This schedule was proposed by Ms. Jensen's firm: March 17th, June 16th, September 15th, and December 15th, 2020. Other special meetings can be scheduled as necessary. Legal Updates -- Klausner, Kaufman, Jensen & Levinson Recommendation on Cyber Liability Insurance Ms. Jensen addressed this subject. Cyber hacking has become a huge problem for municipalities. She discussed examples of certain municipalities who were held hostage. These municipalities were out for a significant period of time. They did not have cyber liability insurance, so they were not able to buy themselves out of the situation where their information was held hostage. This year many municipalities in Florida were held hostage. Some of these municipalities had liability insurance and were able to pay the ransom and get themselves back in business quickly. She reviewed that Georgia and Texas have been the victims of widespread attacks, which has been widely reported. She reiterated that the League of Cities is taking a position of examining whether the ransom should be paid and whether that is encouraging the hackers to repeat their actions. As a result of these instances, her firm is recommending that the Board take a look at the City's circumstances and how is it protected, how the entities that house the Plan's information is protected, how much insurance do they have, and should the Board have a discussion about backups versus paying a ransom. The City has the Plan's information, as well as Highland Capital, and the actuary has a fair amount of the Plan's information. Her firm has some information. Her firm has cyber liability insurance of $1 million. They are looking at increasing it to $5 million. That's basically their recommendation at this point. She stated at this point they are not really sure what the appropriate number is, but this Plan has a responsibility if its information is hacked, regardless of where it's hacked. Within 30 days of knowledge of that hack it must get information out to its participants letting them know that their personal identifiable information has been exposed, giving them the opportunity to have access to a credit reporting bureau for a year. The cyber liability insurance that her firm is recommending would have notification POLICE PENSION BOARD PAGE 10 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 coverage, would cover that incident, would bring with it some people who are experienced in getting that information out, and experienced with getting the Plan access to those credit reporting bureaus for its members. Whether the Plan would ultimately be responsible for the expense of that or whether it would be able to pass it on to the City, to Salem Trust, to wherever it was hacked, is another question. Her firm feels it is important to make sure that the Plan is prepared to respond to any kind of hack that happens to its members' information. Some Plans are considering more widespread coverage. The reason they're doing that is because a municipality in Florida about a month ago got a fake email from a person who was providing work for the municipality. The email said to send them $700,000.00 to a certain bank account, and someone did it. So that money is gone. It is possible to buy insurance against those types of claims. She said that some of the Plans she looked at are pretty expensive, have high deductibles, and don't cover as much as $700,000.00. So it's a business decision. Her firm is recommending that if any of the Board members gets an email that isn't something that was talked about at a meeting, or if he or she just has a question about it, give Mr. Killgore a call, give her a call, give Salem Trust a call, wherever it's coming from, to make sure that it's valid, and don't use the telephone number or link in the email. She is recommending: • that the Board find out about the insurance that its various vendors have. • that the Board make some business decision about how much insurance it has or is needed. The minimum amount that it should have is enough to cover the notification process. She stated it's not if it happens, but when it happens. Its not necessary to do it immediately, but as you renew your insurance and talk to the various service providers, to make sure to be included in that process. Ms. Vicars asked Mr. Killgore if the City has cyber liability insurance that covers not only this Board, but all the Boards of the City, and if the insurance that Ms. Jensen mentioned would be in addition to that. Mr. Killgore could not answer that, but he stated he would investigate that question. Ms. Jensen stated that, if the City is providing coverage to the Pension Board, that you are added as an additional insured. State statutes say that the Pension Board is separate from the municipality for purposes of operation of the pension fund. This needs to be verified. POLICE PENSION BOARD PAGE 11 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 Mr. Williamson suggested Mr. Killgore get an explanation of what Salem Trust/TMI has for cyber security protection, and if they have any liability insurance that would cover this Plan for that. 2. Status on Update of the Summary Plan Description Ms. Jensen stated the summary plan description is due to be updated in December. She is hoping to have it out to Mr. Killgore by November 1 at. 3. Other Legal Matters Ms. Jensen asked Mr. Killgore about the status of the annual report and whether it has been received from the State. Mr. Killgore said he has received it, and the report is in order. Vill. Board Member Reoorts and Comments — None IX. Plan Administrator Reoorts and Comments -- None A. TMI Trust Company Acquisition of Salem Trust Company Mr. Killgore reported on TMI acquiring Salem. B. 2018 Comparative Analysis of Other Plans Mr. Killgore reviewed that Foster & Foster has made the comparative analysis of other plans of their clients. C. Review of Annual Calendar of Board Activities Mr. Killgore stated those items that were due to be covered have been covered at this stage. D. Other Administrative Matters -- None X. Next Scheduled Quarteriv Meetino A. December 10, 2019 XI. Adjourn POLICE PENSION BOARD PAGE 12 MINUTES OF REGULAR MEETING OF SEPTEMBER 17, 2019 Ms. Vicars called for any further business. Hearing none, the meeting was adjourned at 12:56 p.m. Jason Gillette 19