Loading...
HomeMy WebLinkAbout1995 01 31 Board of Trustees Regular Minutes r- BOARD OF TRUSTEES WINTER SPRINGS PENSION PLAN MEETING MINUTES JANUARY 31, 1995 1 . Call to Order: The meeting was called to order by Chairperson Hoffmann at 7:30 P.M. 2. Attendance: Art Hoffmann, Chairperson, Present Brian Fricke, Present Joel Berk, Present Ralph Bowman, Present Seymour Berman, Present Ci ty Officials: John Govoruhk, City Mgr. Tom Lang, City Attorney Philip G. Robert, Trust Investment Officer - SunBank 3. Approval of the October 27, 1994 Meetinq Hinutes~ Chairperson Hoffmann wan ted to cl ari fy tha t Fi re and Pol i ce do not have their own plan, and that all employees are covered under the same plan. r- The City Manager provided clarification of the retirement age for ALL CITY EHPLOYEES which is (65) and early retirement at age (62). Mr. Berman moved to approve Seconded by Mr. Fricke. Vote: the minutes of October 27, All Aye; motioned carried. 1994. 4. Quarterly review of the Pension Fund with the Pension Fund Investors. Mr. Robert distributed the Performance Report for the three (3) months ending December 31, 1994, and the Favored Sector Performance in the Business Cycle sheet depicting 1989 to 1995. Mr. Robert said he would explain the quarterly report and focus on where they (SunBank) believe things are headed in "1995" and what they are doing internally to provide what they feel to be substantially better than average returns for "1995". ~ Section 1 of the Performance Report for the last three (3) months, shows a minus 1.4%; the asset allocation has been kept in line with about a 60/40 split between stocks and bonds. There was a substantial portion in cash though at 3.6% is not reflective of the investment that was purchased at the end of the month. The funds purchased at the end of the month do not settle until five (5) business days later. A contribution was obtained at the end of the month and invested. Mr. Robert explained, "typically, you won't see more than one half of a percent in the Money Market Fund. r Board of Trustees/Winter Springs Pension Plan Meeting Minutes - January 31, 1995 Page 2 The big contributor to the performance of the fund for the quarter was the loss in the Hi gh Grade Equi ty Fund, and the growth discipl ine whi ch was down 3%. The Va I ue Fund on the other hand also lost and was down about 2 1/2%. The quarter was more indicative of the overall market in 1994 than anything else. There has been a tremendous amount of industry consolidation in the past six months, as seen in Standard and Poors 500, particularly in the food and drug area. This cropped up the market averages and was not reflective of the individual stock. On a bottom line basis, we did not perform as expected in the fourth quarter of 1994. We did very well on the fixed income side. We positioned the Bond Portfolio in a way that really mitigated the effects of interest rates. There were positive returns in the Bond Market the second consecuti ve quarter. He expl ained that the investor psychology has turned more positive when it relates to Bonds, Bond Funds and interest rates which he felt will lead into 1995. r The annualized rate of return over the sixteen (16) months we have had the portfolio before fees was down 0.11%; a slight negative return over the sixteen (16) months. After fees, roughly 1.1% over the period of time. Over this period of time, the Growth Portfolio has under-performed the market by approximately 1 1/2%. The Value Fund in 1994 (the High Grade version) came in with a 3.9% positive return. The Mutual Fund version of that fund ranked fifth by Lichter Analytical Services in its category. If a 3.5% return ranks fifth among its style of funds, you know that it was a tough year in the markets. The S & P 500 came in at 2.15%. The Bond fund lost less than the market during that time period, which is the main contributor to the overall portfolio. Bonds have had a very difficult time over the past sixteen (16) months and the City came in right as interest rates had reached bottom, so the City experienced a difficult time period for the financial markets. He explained that SunBank has continued with the philosophy that Growth Stocks will out-perform Value Stocks in the next eighteen (18) months. He felt that the Asset Allocation set down is where we want to be going, being that we have seventy (70) percent of the equity portfolio in Growth Stocks, and thirty (30) percent in Value Stocks. r Mr. Robert explained they have maintained close to the forty (40) percent level in fixed income, and can probably expect that going forward, not to exceed sixty (60) percent. That would be toward the high end of the range of where we want to be. He didn't feel the risk reward was there for stocks. We still want to have good exposure to fixed income in 1995. r Board of Trustees/Hinter Springs Pension Plan Meeting Minutes - January 31, 1995 Page 3 If we feel stocks are up 8 to 10%, bonds on the other hand should be up 6 to 8%. If interest rates move down as far as long term rates as we expect them to, we feel bonds can go a long way and we could see 9%. We are going to stick with the philosophy that 6% is really a conservative estimate and 8% is more in line with what we can expect from bonds this year. Since we feel lot of assets meaning that portfolio. this is the last move in interest rates, we have a in the short end and the long end of the market we have both short and long maturi ties in the We will be moving to what we call a bullet shape, meaning we are going to concentrate in the middle ranges of the portfolio in the 2 to 5 year and 5 to 10 year range as far as the average maturity of notes that we are buying. This is to take advantage of falling interest rates at the end of the year. You want to move in early and buy inexpensively. Mr. Robert referred to Section 3 and explained that the S & P 500 "....., declined 5.87% from its 52-week high a year back from November 1994, and declined 2.74% from January 1, 1994. The stocks that declined less than 10% in 1994 was only (114) stocks out of the S & P 500. Only (114) stocks out of the (500) stocks contributed to the overall return of the portfolio. Point being that there have been very good quality companies that have done very poorly in 1994. The Wal-Mart Store is a prime example. Mr. Robert discussed the "Favored Sector Performance in the Business Cycle". He explained that in their philosophy on the business cycle is where growth stocks versus value stocks come in to play. The chart is timed according to the last recession in the current economic cycle we are in, beginning in 1989 where the decline started. In 1991 we came out into a recovery. This study was done by S.E.I. Corporation, a very large consulting firm in the investment business. The corporation takes the average growth manager in their universe (about a 2000 manager universe) and the average value manager in their universe and plot their performance. In 1989 through 1991, the average growth manager out-performed the average value manager. That happened during an economic decline. In 1992 and 1993, value stocks dramatically out-performed growth ,"'" stocks as a whole. He explained it didn't happen too often, but felt that we are at the peak of the economic cycle. He felt this would be the continuation, and from here, it will go down hill although the economy will slow, slowly. He didn't feel we were going into a recession as yet, but are on the down side peak. I"""" Board of Trustees/Winter Springs Pension Plan Meeting Minutes - January 31, 1995 Page 4 If we are right and true to our discipline (meaning the type of stocks selected), we will add substantial value to the City's portfolio by our asset allocation and our portfolio in 1995 and 1996. The business cycle shows the dramatic difference in value stocks versus growth stocks and why growth stocks are emphasized at this particular stage of the economic cycle. The value manager has done phenomenal earnings during this time period and continue to do so. The favored sectors' will be the food and drug area; they felt they would continue to see consolidation in this area. If you look at a pure growth index, the food and drug stock still fit into a growth characteristic based on price to book, but if you look at earnings growth, they only grow at 7 to 9%. They really don't fit our model of what growth stock is. We are looking to see if growth rates are starting to come back up. I"""" Another thing we see is a rotation from these cyclical stocks for economically sensitive stocks back into your dependable earnings growth companies, i.e., Gillette, Kellogg's, etc. Mr. Robert felt these type of stocks wi 11 support us for the next twel ve to eighteen months. The favored area of our CEO when it comes to research is the food, beverage and tobacco area. Our CEO is well versed in those type of companies, and has covered that sector for the last fifteen years. We have made a definite decision to focus in on quality earnings, growth companies in our Growth Portfolio. Hr. Robert stated that 1995 will be a critical year, but we would come through. The markets typically do very well in the middle year of a decade, and certainly after a year like 1994's performance. He felt that there will be much better returns in 1995. Our largest holdings are with General Electric with close to a 5% posi tion where we are about at our maximum posi ti on. AT&T is another favorite. We will be looking at companies like Proctor & Gamble and Gillette to move back in. These companies are very important and we follow them very closely. Mr. Robert felt they have the portfolio structured in a way that the portfolio is positioned very well for the rotation back into growth stocks. I"""" Inflation is very moderate, (under 3%) for 1994 and will probably continue into 1995 although there may be spikes up in labor prices. The economy will be fairly strong moving into the first quarter (about 3%), then slowing down to the 2% range for the following six (6) months. r Board of Trustees/Winter Springs Pension Plan Heeting Hinutes - January 31, 1995 Page 5 Hr. Berk, referring to what happened to Orange County, California, asked Mr. Robert why it couldn't happen to a Community like Winter Springs? Hr. Robert explained that a number of things specifically happened to Orange County. Mr. Citron, the Treasurer for about 20 years, provided above average yields to the City and the County, during a falling interest rate environment. Secondly, because he had such an excellent track record, two of the main supervisors on the Board of Supervisors told the auditors to 1 eave this person alone, even after the audi tors reported tha t there were problems. Third, there was no strict investment policy guidelines by which this person was working under, and no secondary authori ty to answer to. r Mr. Robert explained that when you put all this together, there was no oversight, no responsibility and most of all, a lack of attention to the person who had done well for the County for a long time. Orange County will probably not be the last to see this problem, but what it has done, has spurred a tremendous amount of insight into counties of what their Bond issue revenues will be like. Many municipalities are setting up guidelines, policies and oversight committees so this will not happen. Hr. Hoffmann asked if stocks have been higher this year than last year. Hr. Robert said he knows the stocks have been lower because our commission generations were much less this year. Secondly, we established the position of the portfolio where we wanted it to be. We only had to make slight adjustments rather than waiting until mid year to make a big move either way. What we have seen is a very dramatic increase upwards of 20 to 25%. There is less turnover in the portfol i os overall, and much I ess of a trading year. Hr. Hoffmann asked Mr. Robert if he had any recommendations to change or better our mix to the portfolio. ~ Hr. Robert said he went through the growth versus value philosophy, and from a fundamental evaluation, didn't feel we could come up with a better mix. He explained that we could go to a 50/50, but suggested we wait until the next cycle to go to a 50/50 blend. As far as stock versus bond allocation, we favor stocks over bonds, particularly since we have had about the last increase in interest rates. That should move us to a very positive year in stocks. ",....... Board of Trustees/Winter Springs Pension Plan Meeting Minutes - January 31, 1995 Page 6 In the morning paper, bonds were reported as being up 1.5%; the Value Fund was up 3.6%, and the Growth Fund was up about 2.7% since the beginning of the year. We have made back a substantial portion of January which is positive. 5. Old Business: At the previous meeting, Mr. Hoffmann explained that the subject of discussion was the evaluation plan for employees. When an employee 1 eaves employment for any reason, it takes a number of months before an employee can receive their vested pension. Also, there are no earnings on it. The amount that woul d have accrued from the previous evaluation to the time an employee retires, is not the employee's money. The Board was concerned about this, and talked about having an evaluation of member accounts twice a year instead of once a year. It will add about $500.00 a year to the cost. I""" Mr. Hoffmann expl ained it was necessary to make changes in the wording of the plan because in the plan itself, it states they must wait until the evaluation date for distribution. He said something must be added in to cover all the different situations. Mr. Fricke questioned, if they go to a semi-annual distribution or evaluation dates, must the plan document itself be amended? Mr. Hoffmann said that was correct. We must also place specific language such as,.. . "the amount that was accumulated trom the time of the last evaluation",.. . because tunds accummulated at the very time and date (month) would accrue to them, and not go back into the total funds of the plan. This would effect the distribution amongst the remaining employees. In another words, today what the employee does not get, is not given back to the City, but stays in the plan for the remainder of the employees. Mr. Fricke said his understanding was that it had always been a function of Federal guidel ines for Pensi on PI ans. Forfei ted moni es? ..-..- Mr. Hoffmann said the Ci ty is tollowing guidel ines, but if we correct it so that as of the month the employee retires then, the amoun t accrued in thei r pI an wou1 d be thei rs, provi ded they a 11 owed the money to stay in the plan until the next evaluation date. Let us assume the evaluation date is twice a year, and April is one of the dates, if an employee left in February, and waited until April for that evaluation, then the employee could have what has accumulated through the month of April. ,""'" Board of Trustees/Winter Springs Pension Plan Heeting Hinutes - January 31, 1995 Page 7 Hr. Hoffmann suggested the Board recommend those changes to the Commission. The way it is now, if someone retires in August, they lose everything from the previous September. Hr. Fricke asked what the current annual evaluation date was. Hr. Hoffmann stated it was September 30th. Hr. Govoruhk, City Hanager explained that every two weeks, the City deposi ts money into employee accounts; however, if an employee were to leave in June, July or August they would not receive any money because it is distributed only to employees who remain until the end of September. Further discussion with regard to the "Retirement Plan", and it's wording. r- Hr. Fricke questioned who was responsible for making amendments to the Plan. Mr. Hoffmann explained that the Board makes a recommendation to the Commission, and they act on it appropriately. The City Attorney would then have Tom Lang act on it as he is the Bond expert. Di scussi on wi th reference to a let ter recei ved by former Ci ty Manager, Richard Rozansky regarding the "Retirement Plan", and his circumstance. Hr. Hoffmann said he would draft a letter to the Commission recommending that there be a plan evaluation twice a year. Secondly, a method whereby employees', (if they wish) can leave their money in the account until the next evaluation date, or if they wish to have their funds immediately, we'll proceed as it is now, and it will revert back to their previous evaluation date. Further discussion of the "Retirement PI an" wi th regard to benefi ts to survivors, distribution of monies, etc. Hr. Govoruhk suggested that it would be a good idea to have a copy of the plan with all pertinent forms in a binder so when questions come up, whether by an employee, or a new Board member, they can go right to the information. Mr. Berk asked, at the time of an employees retirement and r- distribution of money, doesn't the municipality have to let the government know that this person is receiving a certain amount of money and that person then has a certain period of time to roll it into something? ,.-... Board of Trustees/Winter Springs Pension Plan Heeting Hinutes - January 31, 1995 Page 8 Hr. Hoffmann said yes, they must do this. Hr. Govoruhk explained that an employee will be subject to a 20% income tax withholding if payment is made out to them personally unless the employee rolls their distribution over into an IRA, or some other type of plan. Hr. Hoffmann commented that the present form is legal, but because there is so much in it, the average employee would take one look at it and say,... "just give me my money". He suggested a more simplified form that would still meet all the requirements, but the employees would read. Hr. Berk asked if SunBank would ofter guidance. Hr. Hoffmann said he believed that particular form came trom SunBank; however, SunBank is merely administrators of the fund. ,,-.. Hr. Fricke felt that Sunbank would forward wi th this type of material, They view themselves as strictly the area of tax. be very rei uctant to come whether verbal or printed. investment, and this in an Hr. Bow.man mentioned that at a previous meeting, the Board talked about pamphlets to be distributed to the employees which we haven 't seen. That came up in discussion with SunBank. After further discussion, Hr. Hoffmann conveyed to the Board the wording he was looking for to present to the Commission. Number one,..."to explain why we want to have a second evaluation period"..., secondly... "to have the accounting done every two weeks rather than once a period"..., and three,... "to allow the employee to let their money accumulate until the next evaluation period, if they prefer". Hr. Hoffmann asked if anyone would make a motion to that effect. Hr. Seymour moved to accept and recommend to the city Commission the above wording that Mr. Hoftmann offered. Seconded by Mr. Bow.man. Vote: All aye; motioned carried. Hr. Berk offered as just an idea, to re-evaluate our present situation with SunBank relative to putting it out for evaluation by ~ other companies or sources. Hr. Hoffmann reminded the Board that we have only been with SunBank a year. /""'" Board of Trustees/Winter Springs Pension Plan Meeting Minutes - January 31, 1995 Page 9 Mr. Berk questioned whether we should let other sources take a look at it and see what they come up with. Mr. Berman felt it was too soon, as did Mr. Fricke. Mr. Hoffmann mentioned that there aren't many mutual funds, and others have done much better. After some discussion, Mr. Govoruhk asked if the bank or someone was suppose to make an information pamphlet for the employees as to what the plan was all about. Mr. Fricke was also under this assumption. Mr. Bowman clarified that the meeting before last, the pamphlets were discussed, and SunBank said they could not participate in that. That was something the City was going to have to generate. Mr. Hoffmann suggested working this through with the city attorney ~ and Mary Wilson, the Employee Relations Coordinator. Mr. Seymour suggested that we allow employees' to participate in a "401K" Plan. Mr. Govoruhk reported that the employees' are offered a plan called "Deferred Compensation". He briefly explained how it worked. 6. Adjournment: Meeting adjourned at 9:00 P.M. Respectfully Submitted, ~M(fC~.Nu-i1~~ Shirley A. Frankhouser, Administrative Secretary Prepared April 1995 I""" THE NEXT SCHEDULED MEETING OF THE BOARD OF TRUSTEES/PENSION PLAN WILL BE HELD ON TUESDAY, APRIL 25, 1995 AT 7:30 P.M. This document is a summary of the Board of Trustees/Winter Springs Pension Plan. The audiotapes of all meetings are maintained in the permanent records of the City of Winter Springs.