CIVILIAN AND POLICE PENSION BOARDS

The Civilian and Police Pension Boards met on August 26, 2004 at 9:00 a.m. with Chairman Salters (Civilian) presiding. Members present were Mr. Mullaney (Police Pension Board Chairman), Mr. Ruane, Mr. DePrima, Chief Horvath, Mrs. Mitchell, Mrs. Braun, Mr. Lucas, Mrs. Rigby, and Ret. Capt. Gray. Ret. Lt. Knotts was absent.

AGENDA ADDITIONS/DELETIONS

Mr. Mullaney requested the addition of item #1-A, Sketch of Fund Summary - Performance Reports.

Mr. Salters advised members that he had received a request from Mr. Charlie Paradee of Edward Jones to address members. Mr. Ruane stated that he felt it would be perceived as showing favoritism, since Mr. Paradee participated in the RFP process. Mr. DePrima stated that since a fund manager had not yet been selected, it would not be improper to allow Mr. Paradee to speak. Mr. Mullaney reminded members that a motion had been passed and a sub-committee had been formed to review funds and provide a recommendation. It was his feeling that if Mr. Paradee were permitted to speak, the other bidders would be entitled to the same consideration.

Mr. DePrima moved to permit Mr. Paradee to address members under item #2 - Sub-Committee Recommendation for Asset Managers. The motion failed for the lack of a second.

Mr. Mullaney moved for approval of the agenda, as amended, seconded by Mr. Lucas and unanimously carried.

Sketch of Fund Summary - Performance Reports

Mr. Shone, Pierce Park Group, reviewed the pension fund performance summaries. He noted that, although fixed income was down only 1%, the funds underperformed across the board. Mr. Shone stated that if the funds had been indexed, earnings would have been 12% instead of .9%.

Sub-Committee Recommendation for Asset Managers

During the Civilian and Police Pension Meeting of June 28, 2004, members moved to proceed with commingled funds and a subcommittee was formed to formulate a recommendation for the commingled manager approach; narrowing down the recommended funds and percent allotment.

The subcommittee meeting was held on July 14, 2004. Mr. Ruane, Mr. Lucas, Mr. DePrima, Mrs. Mitchell, and Mr. Michael Shone were present. Chief Horvath and Mr. Mullaney were absent.

Mrs. Mitchell reminded members that both Pension Boards approved the following asset class allocations during their meeting of February 19, 2004:

            Large Cap                   41%                Government/Credit Bonds                               0%

            Small Cap                   10%                Intermediate Government/Credit Bonds         35%

            International               14%

The subcommittee made the following recommendations:

            •          An allocation of assets by sector of 16% Large Value, 14% Large Core, and 11% Large Growth. The investment policy benchmark is 41% for Large Cap.

            •          Allocating the 10% benchmark for Small Cap to Small Cap Value. Due to the allocation in Large Cap Growth and Large Cap Core, the subcommittee chose not to select a Small Cap Growth Manager.

            •          Allocating 9% to International Value and 5% to International Core. The allocation benchmark for the International Sector is 14%.

            •          Allocating 25% to Short Term Fixed and 10% to Intermediate Fixed. The subcommittee discussed the current interest rate market for fixed income and based this decision on the low interest rates. Any positive changes in interest rates will cause a need to reallocate these percentages. The allocation benchmark for the Fixed Income Sector is 35%.

            •          Based on the number of securities held by the manager (in order to mitigate risk), their performance, and fees, the subcommittee recommended the following:

Large Cap Value. . . . . . . . . . Vanguard Windsor Admiral

Large Cap Core. . . . . . . . . . . Vanguard S & P 500 Index Admiral

Large Cap Growth. . . . . . . . . American Funds Growth Fund of America

Small Cap Value. . . . . . . . . . Dimensional Fund Advisors U.S. Small Value

International Value. . . . . . . . .Dimensional Fund Advisors International Value

International Growth. . . . . . . American Funds Europacific Growth

Intermediate Term Fixed. . . . Vanguard Intermediate Bond Index Admiral

Short Term Fixed. . . . . . . . . .Vanguard Short Term Bond Index Admiral

The average expense ratio is .31%

Mr. DePrima stated that he felt it was important to have the City’s investment policies written in such a way that the investment criteria and methodology are clearly spelled out in order to avoid making decisions based on market movement.

Mr. Mullaney moved to approve the subcommittee’s recommendation for asset allocation, seconded by Ret. Capt. Gray.

Mr. DePrima suggested that since all of the proposals received through the RFP process were rejected, Merrill Lynch, the current fund manager, should be given an opportunity to develop the same approach, using the same list of funds, percentages of funds, and types of funds used by the subcommittee to see if they develop the same strategy with different funds at a different cost basis. He felt that they could possibly propose a recommendation superior to that of the subcommittee. Mr. Mullaney stated that he did not believe that Merrill Lynch should be given the opportunity to develop a better deal in the face of competition. It was Mr. Mullaney’s feeling that, as our fund manager, Merrill Lynch should have provided their best proposal with the RFP.

The motion to approve the subcommittee’s recommendation for asset allocation was carried with eight (8) yes, one (1) no (Mr. DePrima), and one (1) abstention (Mr. Salters) (Ret. Lt. Knotts absent).

Custody of Assets

Mr. Shone advised members that an RFP for Custody was sent to M & T Investment Group, Wachovia, and Wilmington Trust. He reviewed their qualifications, such as amount of custody assets, number of employees, fees, and cost guarantees.

Mr. Mullaney moved to select Wachovia as the custodian for the pension funds, seconded by Ret. Capt. Gray and unanimously carried.

Amendment to Investment Policy

Mr. Shone stated that the inclusion of investments in mutual funds would necessitate the addition of the following to the Investment Policy:

“Every effort shall be made to the extent practical or prudent and appropriate to select mutual funds that have investment objectives and policies that are consistent with this Investment Policy. However, given the nature of mutual funds, it is recognized that there may be deviations between this Investment Policy Statement and the objectives of the mutual fund(s).”

Mr. Shone explained that the language would provide leeway in the case of junk bonds rising to 17% in a mutual fund when the City’s policy only allows 15% in junk bonds. Responding to Mr. DePrima, Mr. Lucas stated that the policy allows for “investment grade” bonds, which would be triple B and above. He noted that a bond fund with investment grade bonds is prohibited by law from buying junk bonds. Mr. Mullaney advised members that the language would also provide the manager time and flexibility to sell bonds which have been downgraded to a rating below that permitted by the investment policy.

Mr. Mullaney suggested reversing the first and second sentences to read as follows:

“Given the nature of mutual funds, it is recognized that there may be deviations between this Investment Policy Statement and the objectives of the mutual fund(s). However, every effort shall be made to the extent practical or prudent and appropriate to select mutual funds that have investment objectives and policies that are consistent with this Investment Policy.

Mr. DePrima felt the investment policy revisions should be reviewed and approved by Council in order to provide a system of checks and balances. Mr. Mullaney stated that the Pension Boards were purposefully set up to include representatives of Council to convey Council’s position on pension issues.

Ret. Capt. Gray moved for approval of the proposed amendment, as revised, seconded by Chief Horvath and unanimously carried.

Mr. Shone stated that the change in the fixed income benchmark would necessitate the addition of the following to Page 12, Item 7 of the Investment Policy:

“The total annualized investment return of all domestic fixed income investments of the Fund is expected to meet or exceed the total annualized return of the blended benchmark of one-half (1/2) Lehman Intermediate Government/Credit Index, and one-half (1/2) the Lehman 1-3 Government/Credit Index for periods of three (3) years or more.”

Mr. Mullaney moved for approval of the amendment, seconded by Mr. Lucas and unanimously carried.

Mr. Shone recommended the addition of the following to Page 13, Item 10:

“The average effective duration of domestic fixed income securities, said average including any investments considered to be reserve or cash equivalent assets specific to any fixed income portfolio, shall never be more than twelve (12) months greater or less than the most recently published average or effective duration of the fixed income policy benchmark.”

Ret. Capt. Gray moved for approval of the amendment, seconded by Chief Horvath and unanimously carried.

Chief Horvath moved for approval of the Police Pension Board Investment Policy, as amended (Attachment #1), seconded by Ret. Capt. Gray and unanimously carried.

Mr. Lucas moved for approval of the Employees’ Pension Board Investment Policy, as amended (Attachment #2), seconded by Mrs. Rigby and unanimously carried.

Mr. Mullaney moved for adjournment, seconded by Mr. DePrima and unanimously carried.

Meeting Adjourned at 10:13 A.M.

Respectfully submitted,

Reuben Salters

Chairman - Civilian Pension Board

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