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HomeMy WebLinkAbout2004 11 22 Regular 501 112204_ COMM _ Regular_50 1_ Retirement_System _Portfolio_Composition .doc COMMISSION AGENDA ITEM 501 Consent Informational Public Hearing Regular X November 22.2004 Regular Meeting r2--- @ Dept. Mgr. / Authorization REQUEST: City Manager and Pension Advisory Board are requesting the Commission to consider amendments to Section VII. Portfolio Composition of the General Employee Retirement System Investment Policy Statement, as originally adopted by the Commission on September 24, 2001. PURPOSE: This agenda item is needed to consider the advisability of amending the investment guidelines for the General Employees Retirement Plan (the "Trust") Investment Manager. CONSIDERATIONS: On September 24, 2001, the City Commission adopted the investment guidelines in the document entitled General Employee Retirement System Investment Policy Statement (the "Policy"). Trusco Capital Management, the City's Trust Investment Manager and Public Financial Management Inc., the City's Investment Advisors, have recommended changes to Section VII of the policy entitled Portfolio Composition in the portfolio target asset mix to provide what they believe to be more a flexible portfolio policy that will better protect the City's Trust investments during a period of volatile market performance. 112204_ COMM _Regular_50 1_ Retirement_System ]ortfolio _ Composition.doc The final recommendations resulting from the collaboration of Blake Myton of Trusco Capital Management and Steven Alexander of Public Financial Management, Inc., the City's Financial Advisors, is as follows: 1) The Fixed Income range be reduced to 25% to 35%; in other words, a 5% range on each side of the neutral position of 30%. In addition, it should be stated in the revised policy that the Cash Equivalents allocation is part of the Fixed Income category. 2) There should be another constraint placed in the policy that the ratio of large cap value to large cap growth, or large cap growth to large cap value, should not exceed 2:1, which would not be applicable to the other asset classes. 3) A statement of the rebalancing policy be added, with the plan's asset allocation be reviewed no less frequently that quarterly, in order to rebalance assets such that the percentage of assets once again falls within the range specified by the policy. 4) The System should have the opportu~ity to review any changes in proposed investment options. If any new options have higher fees than those originally proposed, the Investment Manager should not pass these higher fees along to the System. Any lower fee options employed should result in a fee reduction. The table below provides a comparison of current and recommended portfolio categories and target allocations: Section VII: Categories and Target Allocations Current Recommended Changes Stock Cateeories Tareet Ranee High Grade Equity 10% - 30% High Grade Equity Income 15% - 25% Small Caps 15% - 30% Mid Caps 15% - 30% International 5% - 15% All Cateeories Large Cap Growth Large Cap Value Small Caps Mid Caps International Fixed Income Cash Equivalents Fixed Income Cateeorv 30% Tareet Ranee 10% - 30% 10% - 30% 5% - 20% 5% - 20% 5% - 20% 25% - 35% 0% - 10% The overall requirement is for 70% of the Plan's assets to be allocated to equity investments (stock) and 30% to be allocated to fixed income securities (bonds) with no more than a 5% deviation. The range of 65% to 75% for equity investments and 25% to 35% for fixed income securities will remain unchanged. The Board of Trustees considered all of the recommendations at the November 9, 2004 Special Meeting, at which time they voted to recommend all of the policy revisions outlined above by Mr. Myton and more fully defined by Mr. Alexander (see attached letters). Section VII of the Policy entitled Portfolio Composition is attached, which includes the recommended policy revisions discussed above. 112204_ COMM _Regular_50 1_ Retirement_System ]ortfolio _ Composition.doc A Scribner's error was also corrected in Section IX: Expected Annual Rate of Return. The word various has been changed to varies. FUNDING: Not applicable. RECOMMENDATION: It is recommended that the Commission consider changes to the policy as recommended by the City Trust's Investment Manager, Mr. Myton of Trusco Capital Management, as well as the City's FinanciaVInvestment Consultant, Mr. Alexander of Public Financial Management, Inc. as contained in attached revisions to Section VII: Portfolio Composition of the General Employee Retirement System Investment Policy Statement. It is also recommended that the Commission approve the correction of the Scribner's error in Section IX: Expected Annual Rate of Return. ATTACHMENTS: 1) Trusco Capital Management Recommendation Letter dated October 29,2004 2) Public Financial Management, Inc. Recommendation Letter dated November 8, 2004 (revised) 3) Section VII and Section IX of the General Employee Retirement System Investment Policy Statement 4) Entire General Employee Retirement System Investment Policy Statement COMMISSION ACTION: ~4tflW'rY\tf1+ \ , TRUSCO CAPITAL MANAGEMENT Blake My ton Investment~anager October 29,2004 Mr. Ronald W. ~cLemore City ~anager 1126 East State Road 434 Winter Springs, FL 32708 Re: Recommended changes to the Investment Policy Statement for the Winter Springs General Employee Retirement System Dear Mr. ~cLemore: I am writing you regarding the recommended changes to the Winter Springs General Employee Retirement System's current investment policy we discussed at this week's pension meeting. It is our belief that these recommended changes will allow for greater flexibility in the investment of plan assets and as a result will allow Trusco Capital management as the plan's investment manager, to more effectively manage the assets of the plan. In today's increasing volatile market, it is our belief that requiring relatively high minimum requirements to specific asset class, ie minimum 15% in Small Cap equities, can lower the chances for the plan to achieve the actuarial assumed rate of return. Our recommendations will focus on the specific asset classes outlined in the IPS and not result in any changes to the plan's overall target allocation of70% in a diversified portfolio of equity securities and 30% in more stable fixed income instruments. We would strongly suggest the trustees consider the following amendments to the IPS: 1. Section VII, #1 Stock Category Large Cap Growth Large Cap Value Small Caps ~id Caps International Fixed Income Cash Equivalents Target Range 10% - 30% 10% - 30% 5% - 20% 5% - 20% 5% - 20% 15% - 35% 0% - 10% The intention of these changes is allow for less exposure to the more volatile equity assets classes of small caps, mid caps and international equities. In addition it will allow for less exposure to the fixed income asset class when the manager deems appropriate. This will not effect the plan's target allocation of70% stock and 30% bond target or the allowable +/- 5% variance already in the IPS. If you have any questions or comments, please do not hesitate to contact me by phone at (407)-237- 5816 or by email atblake.mvton@truscocapital.com. Sincerely, Blake ~yton Investment~anager Trusco Capital ~anagement Cc: Winter Springs General Employee Pension Plan Trustees ~ichelle Greco, Finance Director, City Winter Springs 300 South Orange Avenue, Suite 1600, Orlando, FL 32801 Phone: 407-237-5816; Fax: 407-237-4726; E-mail: blake.myton@truscocapital.com ...-::r- ==PFM$ A--U--alA'I m U1 i-9v One Keystone Plaza 717-232-2723 Suite 300 717-233-6073 fax North Front & Market Streets www.pfm.com Harrisburg, PA 17101-2044 The PFM Group Public Financial Management. Inc. PFM Asset Management LLC PFM Advisors November 8, 2004 (Revised) Ms. Michelle Greco, CPA Finance Director City of Winter Springs 1126 East S.R. 434 Winter Springs, Florida 32708 Dear Ms. Greco: On behalf of PFM Asset Management, thank. you for the opportunity to review the proposed Investment Policy Statement changes for the City of Winter Springs General Employees Pension System. We have carefully evaluated the proposal from Blake My ton of Trusco Capital Management from his letter dated October 29,2004. Mr. My ton's proposed changes are below; our opinion follows. Current Policy Recommended Changes High Grade Equity 10% - 30% High Grade Equity Income 15% - 25% Small Caps 15% - 30% Mid Caps 15% - 30% International 5% - 15% Large Cap Growth Large Cap Value Small Caps Mid Caps International Fixed Income Cash Equivalents 10% - 30% 10% - 30% 5% - 20% 5% - 20% 5% - 20% 15% - 35% 0% - 10% The overall requirement is for 70% of the Plan's assets to be allocated to equity investments (stock) and for other 30% to be allocated to flXed income securities (bonds) with no more than a 5% deviation. The variance of between 65% to 75%for equity investments and 25% to 35%for flXed income securities will remain unchanged. PFM's position: Overall, we believe these to be positive changes for the Systems' Investment Policy and have potential to realize the benefits that Trusco identified -lessening of the requirement to have assets invested in the generally more volatile mid-cap, small-cap and international equity asset sub-classes and the flexibility to change the fixed income allocation from a fixed 30%. The current policy percentages were developed in conjunction with Trusco and we think it appropriate to seek its counsel in any changes. ..=- ':::PFM" Ms. Michelle Greco November 8, 2004 Page 2 We would however recommend that the System consider some modification to the proposal. 1) A range of fixed income assets from 15% to 35% is very broad and puts a great deal of discretion in the hands of the manager. We recommend that the Fixed Income range specified in Trusco's chart (reproduced above) be reduced to 25% - 35%; in other words, a 5% range on each side of the neutral position of 30%. In addition, it should be stated in the revised policy that the Cash Equivalents allocation is part of the Fixed Income category. 2) The large cap growth and value ranges are very broad which can permit a very strong tilt in favor of one strategy over the other. We recommend that there be another constraint placed in the policy that the ratio of large cap value to large cap growth, or large cap growth to large cap value, should not exceed 2:1. This ratio does not apply to the other asset classes. 3) A statement of the rebalancing policy should be added. We recommend that the plan's asset allocation be reviewed no less frequently that quarterly. If the percentage of assets invested in any of the asset classes described above falls outside the applicable range, we recommend that they be rebalanced such that the percentage of assets once again falls within the range specified by the policy. 4) The System should have the opportunity to review any changes in proposed investment options. If any new options have higher fees than those originally proposed, Trusco should not pass these higher fees along to the System. Any lower fee options employed should result in a fee reduction. Please do not hesitate to contact me or John Molloy if you have any questions or would like further clarification on any of the points we raised above. Thank you again for the opportunity to be of service to the City of Winter Springs and the City's Retirement System. Sincerely, PFM Asset Management LLC Steven Alexander, CTP, CGFO Managing Director C: John Molloy, PFM ~~Gl0J1 m m+ 3 VIT. Portfolio Composition The Board has adopted the following long-term target asset mix for the Plan as shown below. I. 70% of the Plan's assets market value will be allocated to equity investments. Based on market fluctuations, the Board will accept variances of up to five percent (between 65% and 75%) from the above asset target. This target is further allocated as follows: Stock Cateeorv Large Cap Growth* Large Cap Value* Small Caps Mid Caps International Tareet Ranee 10% - 30% 10% - 30% 5% - 20% 5% - 20% 5% - 20% *2 to 1 Ratio Constraint: the ratio of Large Cap Growth to the Large Cap Value or the ratio of Large Cap Value to Large Cap Growth can be no larger than 2 to 1. This ratio does not apply to the other stock asset categories. 2. 30% of the Plan's asset market value will be allocated to fixed income securities. Cash equivalents are considered part of this asset category and have a target range of 0% to 10% of the allowable 30%. Based on market fluctuations, the Board will accept variances of up to five percent (between 25% and 35%) from the above asset target. 3. Quarterly, the Investment Manager will review the investment portfolio for the purpose of rebalancing assets within the individual asset class target ranges. Ifthe percentage of assets invested in any of the asset classes within the stock or fixed income categories described above falls outside their applicable ranges, the categories would be rebalanced such that the percentage of assets once again falls within the range specified above. The Investment Manager will provide a quarterly rebalancing report to the Board detailing any changes that were required to be made. In addition, the Board will also review the investment portfolio for the purpose of potentially reallocating assets within the individual asset class target ranges based on changes within the capital market environment. 4. Annually, the Board will review these asset allocation targets and will revise the targets if any significant changes occur within the capital market environment. 5. The Plan should have the opportunity to review any changes in proposed investment options as described above. If any new options have higher fees than those originally proposed, Investment Manager should not pass on these higher fees along to the Plan. Any lower fee options employed should result in a fee reduction. Retirement System Investment Policy City of Winter Springs Page 7 VID. Risk and Diversification A. The Board has adopted a strategy, described in Section VII, whereby the Plan's assets will be diversified to the extent practicable in order to control the risk ofloss which might result from an over-concentration of investments in a specific security, maturity, issuer, dealer, or bank through which financial instruments are bought or sold. B. In a further effort to control the risk of loss and assure adequate diversification, the following limitations are imposed upon the investment of the Plan's assets: 1. A maximum of 5% investment in the outstanding common stock of anyone company or organization. 2. A maximum of 5% investment in the outstanding debt issuance of anyone company or organization. IX. Expected Annual Rate of Return The Board has set the Plan's current expected rate of return at 9% and to the extent the actual rate of return varies from the expected rate of return the gains or losses will be spread over a 5 year moving average period. The short term expected rate of return is 9%, and long term expected rate of return to be at least the actuarial interest assumption rate of 9% along with an additional annualized return that exceeds the rate of inflation measured by the CPr. X. Third-Party Custodial Agreements All securities will be held with the custodial bank under a contractual agreement with the Board. All securities purchased by and all collateral obtained by the investment managers and/or the Board are designated as assets ofthe Plan. No withdrawal of securities, or transfer of funds, in whole or in part, can be made from safekeeping except by authorization of the Board and written execution by anyone of the following: the Board Chairman, Vice-Chairman, or the Plan Administrator. Securities transactions between a broker/dealer and the custodial bank involving the purchase or sale of securities by transfer of money or securities must be made on a "delivery vs. payment" basis, if applicable, to ensure that the custodial bank will have the security or money, as appropriate, in hand at the conclusion of the transaction. XI. Master Repurchase Agreement All approved institutions and dealers transacting repurchase agreements will execute and perform as stated in the Master Repurchase Agreement. All repurchase agreement transactions will adhere to the requirements of the Master Repurchase Agreement. XII. Bid Requirements Each investment manager shall obtain competitive bids and offers on investment transactions to the fullest extent possible. The investment managers will make periodic reports to the Board reflecting purchases, sales, or other activity. Retirement System Investment Policy City of Winter Springs Page 8 >; I ~ttCl0hmtnt ~ GENERAL EMPLOYEE RETIREMENT SYSTEM INVESTMENT Pouley STATEMENT APPROvED ON 11.'109/04 BY THE PENSION BOARD AND t'; . F CITY COMMISSION ~ > ii'i BYTHEi T able of Contents Page I. SCOPE......................................................................................... 3 II. INVESTMENT OBJECTIVES ............................................................3 III. PERFORMANCE MEASUREMENT.................................................... 3 IV. INVESTMENT AND FIDUCIARY STANDARDS ...................................4 V. A UTH 0 RIZED INVESTMENTS......................................................... 5 VI. MA TURITY AND LIQUIDITY REQUIREMENTS.................................. 6 VII. PORTFOLIO COMPOSITION............................................................ 7 VIII. RISIC AND DIVERSIFICATI()N .........................................................8 IX. EXPECTED ANNUAL RATE OF RETURN .......................................... 8 X. THIRD PARTY CUSTODIAL AGREEMENTS....................................... 8 XI. MASTER REPURCHASE AGREEMENT.............................................. 8 XII. BID REQUIREMENT....................................................................... 8 XIII. INTERNAL CONTR()LS ..................................................................9 XIV. CONTINUING EDUCATION.............................................................9 XV. REPORTING.................................................................................. 9 XVI. FILING OF INVESTMENT P()LICY ................................................... 9 XVII. VALUATION OF ILLIQUID INVESTMENTS ....................................... 9 Retirement System Investment Policy City of Winter Springs Page 2 CITY OF WINTER SPRINGS GENERAL EMPLOYEES' RETIREMENT SYSTEM INVESTMENT POLICY STATEMENT I. Scope A. The City Commission of Winter Springs ("City") has adopted this investment policy statement for the investment of the General Employees' Retirement System ("Plan") assets to be administered by the Board of Trustees ("Board") of the General Employees' Retirement System in accordance with applicable Florida State Statutes and City Ordinances. To that end, this investment policy is intended to set forth the investment objectives and parameters for the management of those assets in a manner designed to fulfill the requirements of the Board's fiduciary investment responsibilities. B. The Board recognizes their responsibility for the investment of the Plan's assets, and in order to implement this function, the Board is authorized by law to retain the services of Investment Managers who possess the necessary skilled personnel and facilities to provide the expertise with respect to the investment of the Plans funds. C. This investment policy will be reviewed annually by the Board and may be revised upon the City's approval. II. Investment Objectives A. The foremost objective ofthis investment policy is the proper investment of the assets of the Plan in order to provide ongoing pension benefits to the Plan's members and their beneficiaries. B. The Board will strive to increase the Plan's total rate ofretum through capital appreciation and income while limiting the amount of risk exposure to the Plan. The methodology to determine the Plan's risk/return characteristics is through a diversification of investments across various asset classes detailed in Section V. C. Additionally, the Board will try to keep losses at a minimum due to erosion of market value or from security defaults. To that end, investment managers will trade securities from time to time to improve yield, maturity, quality, credit risk, and total return potential. D. The assumed actuarial rate of return, over a market cycle (3-5 years), along with the annualized total return for the Plan should exceed the rate of inflation as measured by the Consumer Price Index ("CPI") by 4 percent. ill. Performance Measurements A. The Board shall adopt performance measurements for the Plan's assets to be reviewed on a quarterly basis and evaluated based on a market cycle of 3-5 years. The Board may retain the services of an independent investment consultant to assist in monitoring the investment Retirement System Investment Policy City of Winter Springs Page 3 performance of the Plan's individual investment managers. Such performance is measured to determine the following: 1. If the investment manager has performed according to this investment policy. 2. If the investment manager has performed within the appropriate investment style. 3. How the manager has performed in relation to the performance measurements for the appropriate asset class. B. The performance measurement indexes on the asset categories are as follows: 1. The Plan's total fund return will be compared to the CPI Index as an inflationary measurement and the actuarial interest assumption as described in Section IX. 2. The Plan's fixed income portfolio return will be compared to the weighted average return of the Lehman Aggregate Bond Index or equivalent. 3. The Plan's domestic equity portfolio return will be compared to the weighted average return of the Standard and Poor's 500 Index or equivalent. 4. The Plan's international portfolio return will be compared to the weighted average return of the Morgan Stanley Europe, Australia, & Far East (EAFE) Index or equivalent. 5. The Plan's emerging markets portfolio return will be compared to the weighted average return of the MSCI Index for Emerging Markets or equivalent. IV. Investment and Fiduciary Standards A. The Plan's assets will be invested in a manner consistent with the standards set forth in: 1. The Employee Retirement Income Security Act of 1974 at 29 D.S.C. s. 11 04(a)(1 )(A)- (C). 2. Chapters 112 and 518, Florida Statutes. 3. City of Winter Springs Ordinances. 4. The Plan's Investment Policy Statement. 5. The Pension Plan document. 6. In the event of a conflict within these provisions or any other provisions of law authorizing investments, the investment and fiduciary standards set forth in Section 112.661(4), Florida Statutes and item 1 above shall prevail. B. The Board will adhere to the Prudent Person standard and this standard shall be applied in the context of managing the overall Plan. The Prudent Person standard is as follows: Retirement System Investment Policy City of Winter Springs Page 4 "Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived from the investment." C. Any person or firm hired or retained to invest, monitor, or advise concerning these assets shall be held to the higher standard of Prudent Expert. The standard shall be that in investing and reinvesting moneys and in acquiring, retaining, managing, and disposing of investments of these funds, the contractor shall exercise: the judgment, care, skill, prudence, and diligence under the circumstances then prevailing, which persons of prudence, discretion, and intelligence, acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims by diversifying the investments of the funds, so as to minimize the risk, considering the probable income as well as the probable safety of their capital. v. Authorized Investments A. Funds placed with investment managers are to be invested only in those authorized classes of investments as contained in this investment policy. Investments should be made subject to the Plan's cash flow needs and such cash flows are subject to revision due to changes in the Plan's needs and market conditions. Investments not listed in the investment policy are prohibited. B. The authorized classes of investments for the Plan are as follows: 1. Obligations guaranteed as to principal and interest by the United States government. 2. Bonds, securities, and certificates of indebtedness of United States government agencies. 3. Obligations guaranteed as to principal and interest by government-sponsored agencies of the United States government. 4. The Florida Local Government Surplus Funds Trust Fund (SBA). 5. Commercial Paper rated in the highest category by a nationally recognized rating service. If a Letter of Credit (LOC) backs the Commercial Paper, the long-term debt of the LOC provider must be rated A or better by at least two nationally recognized rating servIces. 6. Bankers Acceptances of United States banks or a federally chartered domestic office of a foreign bank, which are eligible for purchase by the Federal Reserve System, rated in the highest category by a nationally recognized rating service. 7. Corporate bonds or notes, registered or unregistered under Rule 144A, issued by firms organized and operating within the United States or by depository institutions licensed by the United States rated (A) or equivalent by a nationally recognized rating service at the time of purchase. Rule 144A bonds or notes must include rights of registration. Any bond or note that falls below investment quality must be eliminated immediately. Retirement System Investment Policy City of Winter Springs Page 5 8. General Obligation and/or Revenue Bonds of state or local government taxable or tax- exempt debt rated A, for long term debt, by a nationally recognized rating service or rated MIG-2 or SP-2, for short term debt, by a nationally recognized rating service. 9. Intergovernmental investment pools authorized pursuant to the Florida Interlocal Cooperation Act provided in Section 163.01, Florida Statutes. 10. Common and preferred stocks from domestic or foreign corporations. 11. Real estate and real estate securities as deemed proper investments by the Board. 12. Repurchase Agreements a. The Plan's investment managers may invest in repurchase agreements composed of only those investments authorized in numbers 1, 2, and 3 (above). All firms are required to sign the Plan's Master Repurchase Agreement prior to the execution of a repurchase agreement transaction. b. A third party custodian with whom the Plan has a current custodial agreement will hold the collateral for all repurchase agreements with a term longer than one (1) business day. A clearly marked receipt that shows evidence of ownership must be supplied to and retained by the Plan's investment manager. c. Securities authorized for collateral must have maturities less than 10 years with a market value for the principal and accrued interest of 102% of the value and for the term of the repurchase agreement. Immaterial short-term deviations from 102% requirement are permissible only upon the approval of the Pension Plan Administrator. 13. Mutual funds registered under the Investment Company Act of 1940. VI. Maturity and Liquidation Requirements A. The Plan's maximum investment maturities for the following securities are as follows: 1. The overall duration of the principal return for the Plan will be less than 140% of the Lehman Aggregate Bond Index. 2. For commercial paper, 180 days or less from the date of purchase. 3. For bankers' acceptances, 180 days or less from the date of purchase. 4. For repurchase agreements, 90 days or less from the date of purchase. B. On a quarterly basis, the Plan's Actuary will notify the investment manager of the plan's liquidity requirements for the payroll and administrative expenses. Retirement System Investment Policy City of Winter Springs Page 6 VII. Portfolio Composition The Board has adopted the following long-term target asset mix for the Plan as shown below. 1. 70% of the Plan's assets market value will be allocated to equity investments. Based on market fluctuations, the Board will accept variances of up to five percent (between 65% and 75%) from the above asset target. This target is further allocated as follows: Stock Cateeorv Large Cap Growth* Large Cap Value* Small Caps Mid Caps International Tareet Ranee 10% - 30% 10% - 30% 5% - 20% 5% - 20% 5% - 20% *2 to 1 Ratio Constraint: the ratio of Large Cap Growth to the Large Cap Value or the ratio of Large Cap Value to Large Cap Growth can be no larger than 2 to 1. This ratio does not apply to the other stock asset categories. 2. 30% of the Plan's asset market value will be allocated to fixed income securities. Cash equivalents are considered part of this asset category and have a target range of 0% to 10% of the allowable 30%. Based on market fluctuations, the Board will accept variances of up to five percent (between 25% and 35%) from the above asset target. 3. Quarterly, the Investment Manager will review the investment portfolio for the purpose of rebalancing assets within the individual asset class target ranges. If the percentage of assets invested in any of the asset classes within the stock or fixed income categories described above falls outside their applicable ranges, the categories would be rebalanced such that the percentage of assets once again falls within the range specified above. The Investment Manager will provide a quarterly rebalancing report to the Board detailing any changes that were required to be made. In addition, the Board will also review the investment portfolio for the purpose of potentially reallocating assets within the individual asset class target ranges based on changes within the capital market environment. 4. Annually, the Board will review these asset allocation targets and will revise the targets if any significant changes occur within the capital market environment. 5. The Plan should have the opportunity to review any changes in proposed investment options as described above. If any new options have higher fees than those originally proposed, Investment Manager should not pass on these higher fees along to the Plan. Any lower fee options employed should result in a fee reduction. Retirement System Investment Policy City of Winter Springs Page 7 VIII. Risk and Diversification A. The Board has adopted a strategy, described in Section Vll, whereby the Plan's assets will be diversified to the extent practicable in order to control the risk ofloss which might result from an over-concentration of investments in a specific security, maturity, issuer, dealer, or bank through which financial instruments are bought or sold. B. In a further effort to control the risk of loss and assure adequate diversification, the following limitations are imposed upon the investment of the Plan's assets: I. A maximum of 5% investment in the outstanding common stock of anyone company or organization. 2. A maximum of 5% investment in the outstanding debt issuance of anyone company or organization. IX. Expected Annual Rate of Return The Board has set the Plan's current expected rate of return at 9% and to the extent the actual rate of return varies from the expected rate of return the gains or losses will be spread over a 5 year moving average period. The short term expected rate of return is 9%, and long term expected rate of return to be at least the actuarial interest assumption rate of 9% along with an additional annualized return that exceeds the rate of inflation measured by the CPl. x. Third-Party Custodial Agreements All securities will be held with the custodial bank under a contractual agreement with the Board. All securities purchased by and all collateral obtained by the investment managers and/or the Board are designated as assets ofthe Plan. No withdrawal of securities, or transfer of funds, in whole or in part, can be made from safekeeping except by authorization of the Board and written execution by anyone of the following: the Board Chairman, Vice-Chairman, or the Plan Administrator. Securities transactions between a broker/dealer and the custodial bank involving the purchase or sale of securities by transfer of money or securities must be made on a "delivery vs. payment" basis, if applicable, to ensure that the custodial bank will have the security or money, as appropriate, in hand at the conclusion of the transaction. XI. Master Repurchase Agreement All approved institutions and dealers transacting repurchase agreements will execute and perform as stated in the Master Repurchase Agreement. All repurchase agreement transactions will adhere to the requirements of the Master Repurchase Agreement. XII. Bid Requirements Each investment manager shall obtain competitive bids and offers on investment transactions to the fullest extent possible. The investment managers will make periodic reports to the Board reflecting purchases, sales, or other activity. Retirement System Investment Policy City of Winter Springs Page 8 XIII. Internal Controls A. The Plan Administrator will establish a system of internal controls and written operational procedures to be a part of the Plan's operational procedures. The internal controls should be designed to prevent losses of funds, which might arise from fraud, employee error, and misrepresentation by third parties, or imprudent actions by employees. The written procedures should include reference to safekeeping, repurchase agreements, separation of transaction authority from accounting and record keeping, wire transfer agreements, banking service contracts, collateral/depository agreements, and "delivery-vs. -payment" procedures. No person may engage in an investment transaction except as authorized under the terms of this investment policy. B. Independent auditors, as a normal part of their annual financial audits, will conduct a review of the system of internal controls to ensure compliance with policies and procedures. Additionally, the Plan's Actuary, Investment Consultant, and the City auditors will complete an annual system reVIew. XIV. Continuing Education Annually, members of the Board have the responsibility for completing continuing education programs in matters relating to the Plan's investments by reading the appropriate materials and by attending the appropriate local and national conferences and seminars as authorized by the Board. xv. Reporting On an annual basis, the Board will provide the City with an investment report regarding the Plan's investment portfolio. The annual report shall provide all, but not limited to, the following: name and type of securities in which the funds are invested, the amount invested, income earned, the book value and the market value of the investment portfolio. Investment reports shall be available to the public. XVI. Filing of Investment Policy A. Upon adoption, the Board will promptly file this investment policy statement with the State of Florida's Department of Management Services, the City of Winter Springs, and the Plan's Actuary. B. The effective date of this investment policy shall be the 30th calendar day following the date filed with the City of Winter Springs. XVII. Valuation of Illiquid Investments All illiquid investments for which a generally recognized market is not available or for which there is no consistent or generally recognized pricing mechanism will be given an actuarial valuation by the Plan's Actuary on an annual basis. For each actuarial valuation, the Board must verify the determination of a fair market value for those investments and ascertain that their determination complies with all applicable state and federal requirements. The Board will disclose each illiquid investment to the State of Florida's Department of Management Services and to the City of Winter Springs. Retirement System Investment Policy City of Winter Springs Page 9 APPROVED AND ADOPTED BY THE GENERAL EMPLOYEE'S RETIREMENT SYSTEM BOARD OF TRUSTEES ON 11/9/04 AND BY THE CITY COMMISSION. Retirement System Investment Policy City of Winter Springs Page 10