CIVILIAN AND POLICE PENSION BOARDS

The Civilian and Police Pension Boards met on June 28, 2004 at 9:10 a.m. with Chairman Mullaney presiding. Members present were Mr. Ruane, Mr. DePrima, Mrs. Mitchell, Chief Horvath, Mr. Lucas, Ret. Capt. Gray, and Ret. Lt. Knotts. Mr. Salters, Mrs. Braun, and Mrs. Rigby were absent. Others present were Mr. Slavin (departed at 10:20 a.m.) and Mrs. McDowell.

AGENDA ADDITIONS/DELETIONS

Mr. Lucas moved for approval of the agenda, seconded by Mrs. Mitchell and unanimously carried.

PERFORMANCE REPORT FOR QUARTER ENDED MARCH 31, 2004

Mr. Michael Shone, Pierce Park Group, reviewed the Police and Employees Pension Board Investment Performance Analyses dated March 31, 2004 (as on file in the Office of the City Clerk).

Mr. Shone, referring to the Cumulative Performance Comparisons, stated that the funds consistently under performed over the last 10 years. He noted that this was due to the fund being less diversified across asset classes than some other funds were. Responding to Mr. DePrima, Mr. Shone stated that the funds were compared to other pension funds and endowments of $20M or less.

CONSULTANT’S RECOMMENDATION - ASSET MANAGERS

During their Regular Meeting of February 19, 2004, the Pension Boards requested Mr. Shone to perform an asset manager search. Mr. Shone advised members that a Request for Proposals was advertised soliciting responses for pension managers and custodians for the Police and Civilian Pension Funds. He stated that he was also requested to cull through his list to see if there were any that he would include for consideration. Mr. Shone noted that he and the Finance Director, Mrs. Mitchell, reviewed the responses and compiled a list of Commingled Fund Managers (as on file in the Office of the City Clerk) for each of the fund types, Large Cap Value, Large Cap Core, Large Cap Growth, Small Cap Value, Small Cap Growth, International Value, International Growth, and Fixed Income for members’ consideration.

Mr. Shone noted that most firms responded with a “manager of managers” approach with a wrap fee arrangement. He stated that the total price of a wrap fee arrangement would include management service, brokerage, and custody. Mr. Shone advised members that, although returns and expense ratios are important, they should not be the sole criteria for decision making. He reviewed the proposals of all fund managers for each group.

With reference to the Large Core Fund, Mr. Shone stated that Merrill Lynch submitted a response for International Equities and Large Core. He noted that, due to the City’s longstanding relationship with Merrill Lynch, he was requested to review other areas of Merrill Lynch for possible inclusion. Mr. Shone recommended adding their Large Core product to the portfolio because it is a good product. He noted that it would be in a small, separate portfolio which would not include mutual funds.

Mr. Shone advised members that a local broker recommended R-4 shares in the American Funds Family. He noted that R-4 shares include a .25 % commission for the broker when R-5 shares could be purchased directly without a commission, which would produce a savings of approximately $62,000 per year.

Referring to Fixed Income managers, Mr. Shone noted that three (3) were selected for consideration as follows: Wilmington Trust, PNC Bank, Vanguard, and Towersall (owned by Wachovia). Mr. Shone noted that neither PNC Bank nor Wachovia were selected due to their high expense ratios and the fact that they offered only mutual funds.

Mr. Shone provided members with information on the State of Delaware Retirement Program (as on file in the Office of the City Clerk). He noted that municipalities have the ability to have some or all of their money managed as a part of the State program. Mr. Shone advised members that Sussex County and Elsmere participate in the program, which co-mingles their funds with State funds and the State prorates the total cost. He noted that last year the cost was approximately .33 %, which is very competitive. Mr. Shone cautioned that funds could only be withdrawn twice a year so it would be necessary to budget accordingly. He also advised members that the State Program is managed more aggressively than the City has chosen to manage its funds in the past.

Mr. DePrima asked if, with a commingled approach, they would have the ability to move funds from Large Value to Small Value, etc. and who would decide how the funds were allocated between the various fund types each quarter. He noted that, with a single manager approach, one person would make those decisions. Responding, Mr. Shone stated that the Boards have set an asset allocation mix of 65% stocks and 35% bonds, as well as allocation percentages for the various fund types as follows: Large Cap - 41%, Small Cap - 10%, International - 14%, and Bonds - 35%. He also noted that the investment policy will be reviewed every few years, which may result in the decision to change the percentages.

At the request of Mr. DePrima, Mr. Shone explained that a single fund manager would oversee all of the funds and decide which stocks to invest in, when it is time to re-allocate the percentages of stocks and bonds, and when and how to re-allocate international, growth, and value percentages. With commingled funds, the City would have its own portfolio with different managers for each type of fund within that portfolio. He noted that the difference between the single fund manager and the commingled fund option is the commission earned by the fund manager. Mr. Shone stated that, if a commingled fund approach was selected, he would provide quarterly reports on the earnings of each fund.

Councilman Slavin, noting that he was a member of the Legislative, Finance, and Administration Committee, stated that the committee found itself hamstrung due to their lack of knowledge of the Pension Board issues. He stated that, due to unintended impacts such as additional fees, he requested Chairman Mullaney, as a courtesy, to have a similar presentation to brief the Legislative, Finance, and Administration committee on overall pension issues prior to the Boards taking action. Chairman Mullaney indicated no opposition to the request. Mr. Shone also suggested that the Actuary be invited to explain the difference between the rate of growth in the assets and liabilities. He stated that it would be helpful to learn about the components which increase liabilities and how to interact the assets with the growth in liabilities.

Chairman Mullaney recommended scheduling a future meeting in order to provide members the opportunity to review the information presented by Mr. Shone. He said that, in the meantime, they could look at scheduling a presentation to the Legislative, Finance, and Administration Committee in order to provide them with the history behind the decisions. He noted that the Boards have been concerned about the funds and have been discussing these changes for several years. Chairman Mullaney stated that he felt it would be instrumental for the Legislative, Finance, and Administration Committee and Council to understand the issue to avoid confusion.

Ret. Capt. Gray moved to proceed with commingled funds, seconded by Ret. Lt. Knotts.

Mr. Charlie Paradee, Edward Jones Investments, stated that he submitted a proposal for the pension plan and requested to address items in his proposal. Chairman Mullaney explained that the RFP’s had been received and it would be unfair to all the other bidders if he were permitted to comment on his proposal at this point. Mr. Paradee stated that he only wanted to clarify what he viewed as a misrepresentation of part of his proposal. Chairman Mullaney stated that Mr. Paradee should correspond with the Finance Director, Mrs. Mitchell, regarding the matter.

Mr. DePrima asked whether it would have been better for the Boards to have selected the best proposal for the single manager approach and request that firm to provide a presentation on their approach versus the commingled approach. Chairman Mullaney stated that a similar presentation was made by the Smith Barney Group a few years ago and his recommendation was against a single manager at that time. Mr. DePrima stated that many firms responded to the RFP and, instead of choosing one of those firms, they are cherry picking funds through the commingled approach and asked why they did an RFP at all. He requested that they choose the best of the single manager proposals, listen to their proposal, and then make a decision. Mrs. Mitchell advised members that three (3) RFP’s were sent out: domestic, international, and fixed income. Firms could answer all RFP’s as a single manager. She noted that returns for commingled were as good as the single manager returns; however, the basis points for single managers were higher. Mr. Shone stated that some of the funds included in the recommendation were obtained through responses to the RFP’s. He noted that some funds that did not respond to the RFP’s were also included. Mr. Shone advised members that Wellington and Vanguard were the only firms which submitted proposals for all three RFP’s. Responding to Mr. Ruane, Chairman Mullaney stated that the Boards recently set the ratios, revised the Investment Policy, and performed an allocation study. He also noted that Mrs. Mitchell kept he and Chairman Salters advised of the review process that she and Mr. Shone were conducting on the proposals received. Mrs. Mitchell stated that the firms were aware that they had the option to submit a single manager or commingled approach and that they were competing in those terms.

The motion to proceed with commingled funds was unanimously carried.

Mr. DePrima moved to form a subcommittee, to be appointed by the Chairman, to formulate a recommendation for the commingled manager approach; narrowing it down to the recommended funds and percent allotment, seconded by Chief Horvath and carried with Ret. Capt. Gray voting no.

Mr. Ruane, noting Mr. Slavin’s request for a presentation before the Legislative, Finance, and Administration Committee, and in order to avoid mis-communication, suggested that a workshop, including a presentation by the actuary, be held before Council. Chairman Mullaney stated that, according to his earlier conversation with Mr. Slavin, the presentation was to be informational only due to the fact that there are many new members and to address concerns regarding any collateral effect the Boards’ decision may have on City finances, which he did not anticipate at all. Mr. Ruane stated that Council would like to have a better understanding of the pension and its unfunded liability. He stated that he was impressed that the Boards were trying to better manage their assets so that there is less impact on the General Fund.

Mrs. Mitchell advised members that the most recent study indicates that there is a $16M unfunded liability for the civilian pension plan. She noted that 21% is contributed to the Civilian Pension Plan and a lump sum contribution of $95,000 is made to the police pension. Mrs. Mitchell noted that the $500,000 unfunded liability for the Police Pension Plan has been fully funded.

Chairman Mullaney recommended reviewing the recommendation of the subcommittee with the actuary to determine the level of risk they should be considering.

Chairman Mullaney appointed Chief Horvath, Mr. DePrima, Mr. Ruane, and Mr. Lucas to the subcommittee. He also requested them to touch base with the consultant and the actuary regarding a workshop/presentation.

CONSULTANT’S RECOMMENDATION - CUSTODY

Due to time constraints, it was the consensus of members that this item be deferred until the August meeting.

Ret. Capt. Gray moved for adjournment, seconded by Chief Horvath and unanimously carried.

Meeting Adjourned at 10:45 A.M.

Respectfully submitted,

Timothy Mullaney

Chairman - Police Pension Board

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