Police & Fire Pension

POLICE & FIRE PENSION BOARD MEETING DATE: OCTOBER 19, 2022 CITY HALL, ROOM 302A TIME: 1:30 P.M. Present: Stan Chubinski, Tammy Giannunzio, Ed Guzzo, Jake Martin, and Chris Rabbitt. Also Present: Aaron Kuhn (Assistant Revenue Services Director), Lily Vardell (Police & Fire Pension Administrator), Linda Morrison (Revenue Services Director), Jeremy Tollas (CAPTRUST), and Chris Love (Fire Retiree.) Chair Chubinski asked for approval of the agenda. Motion Guzzo, seconded by Giannunzio. On a voice vote, motion carried. Presented minutes of the regular meeting from September 7, 2022. Motion Guzzo, seconded by Martin to approve the regular meeting minutes from September 7, 2022. On a voice vote, motion carried. Bank Summary of Assets & Expense Report: As of 9/30/2022, the market value of the portfolio was $147,917,937.00, a loss of $10,552,114.22 from the 08/31/2022 balance. For the month of August, the following expenses were deducted: Expense Type Payee Amount Frequency Additional Details Administrative Fee City of Battle Creek 3,050.00 Quarterly 6/30/22-9/30/22 Auditing Fee Rehmann 7,450.00 Annually FY 2022 Misc Fees 10.00 As Needed x1 Class Action Handling Fee Total Admin. Fees 10,510.00 Motion Giannunzio, seconded by Rabbitt to accept the financial reports and quarterly bank summaries submitted for September. On a voice vote, motion carried. Board Reports Chubinski - none Giannunzio – none Guzzo - none Martin – none Rabbitt – none Page 1 of 6 Vardell • Paul Green, former Police Officer, terminated 08/19/22. A letter regarding his options for withdrawal was mailed 08/26/22. He has requested to have $1,478.10 rolled over to Edward Jones. Sent this request to Comerica on 9/19/22. • New Fire employee hired: o William Beaty, Fire Chief, hired on 10/17/22. • Death Notice feedback from MAPERS: o Majority of municipalities that responded use a company called PBI Services. PBI conducts a daily review of Pension Plan members across multiple platforms and provides a report of any deceased member findings. o Reached out to Comerica to inquire about their process. Found out they already use PBI services and pass the notification along to us as soon as they are aware. o If we ever changed banks and no longer had access to this service, it currently costs $3,000.00 per year based on the number of members in our pension group. • GRS Response to the Rate of Return question from Ed: o Question: It would be helpful to ask GRS what asset allocation would be necessary to make a +6.25% assumed growth rate "reasonable" in their model. Once we know that asset allocation, we could ask CAPTRUST to provide scenarios that would get us to that asset allocation and let us know how that would affect the risk profile of our portfolio. o Response from Derek at GRS: Since we are not investment experts and do not want to appear to be giving investment advice, I would reframe the question in the following way: What information if provided to GRS would move their “upper bound” from 6.00% to 6.25% for the June 30, 2022 valuation?  Firstly, the analysis in our report is based on the recommendation to include administrative expenses in the contribution rate. Since the Board did not adopt this, in order to maintain the assumption that administrative expenses are paid from investment earnings, the recommended rates of investment return shown in the experience study report would need to the lowered by 0.13% to account for this. All else being same, this would move our upper bound to 5.87% which is 38 basis points lower than 6.25%.  Therefore, if the Board were to adopt an asset allocation that would increase CAPTRUST’s return expectation by roughly 38 basis points, we would revise our “upper bound” from 6.00% to 6.25% for the 6/30/2022 valuation. There are surely multiple allocations that would achieve this, and we will leave it to CAPTRUST to make those kinds of recommendations. Page 2 of 6 New Business • Policy Review – Education and Travel Policy o Revision added to review this policy on an annual basis. o Revision added to clarify that all expense records shall be retained for six years by the Police & Fire Pension Administrator. Motion Guzzo, seconded by Martin to revise the Education and Travel policy to include an annual review of the Policy and to include the Administrator as the responsible party for retaining the expense records for six years. On a voice vote, motion carried. • CAPTRUST: Tollas provided a September investment update: o Large-Cap, Small-Cap, and International Stocks down over 9% in September. U.S. Bonds down over 4%. Historically, when stocks are down typically bonds perform better. So far, that has not been the case year-to-date. o Interest rates continue to rise and inflation is still a concern. o 2022 Year-to-date performance shows U.S. Bonds down 14.6% & U.S. Equities down 25.5%. Looking at a Stocks and Bonds performance chart from 1976 to present shows how unique this year has been for stocks and bonds. o As the Pension plan is a long-term investment portfolio, when interest rates rise, over the long-term that is not necessarily bad for the plan for two main reasons:  When interest rates rise, liabilities typically fall.  Bond managers will now get more returns over the long run without taking as much risk. o Within the Pension Plan investment portfolio, year-to-date bonds are down 12.21% and stocks are down 24.86%. • CAPTRUST: Tollas provided an Expected Rate of Return Analysis for various Asset Allocation scenarios: o The Pension Plan’s current asset allocation of 45% bond/55% stock shows an expected return over ten years to be 5.68%. o A 40% bond/60% stock allocation shows an expected return over ten years to be 6%. o A 35% bond/65% stock allocation shows an expected return over ten years to be 6.32%. o A 30% bond/70% stock allocation shows an expected return over ten years to be 6.64%. o Looking at 20-year and 30-year expected returns, the Pension Plan’s current asset allocation shows an expected return over 8% (as opposed to the 10-year expected return of 5.68%), so that is something for the Board to keep in mind. However, in the long-term, more aggressive portfolios will typically out-perform the less-aggressive portfolios. Page 3 of 6   Comment from Morrison: GRS will use the 6.25% rate of return the Board approved for the Actuarial Report from a funding perspective. GRS will only use their recommended 6% rate of return when creating the government-wide financial statements.  Comment from Guzzo: If we change the plan’s Asset Allocation, then GRS would not have to use their recommended 6% rate of return in the financial statements and would use the 6.25% instead.  Comment from Guzzo: The Pension Plan relies heavily on investment returns, and we haven’t been investing as aggressively as we could be. My instinct is to change our allocation and invest in more stocks.  Comment from Martin: Is there a more aggressive asset manager we could adjust to in order to help with our investment returns? I am also in favor of investing more heavily in stocks, but do we have the ability to adjust the sub-asset allocations? Then maybe we wouldn’t have to put as much in stocks to reach our investment return goal?  Comment from Chubinski: I believe CAPTRUST decides the asset manager allocation, the Board just decides the overall stock/bond percentages.  Comment from Tollas: Yes, each year CAPTRUST will review the investment managers and look at return potential and risk to determine if we need to adjust asset manager allocations.  Comment from Guzzo: Adjusting our asset allocation by investing 10% more in stocks will slightly increase risk, but it is a good trade-off considering the return potential.  Comment from Guzzo: Stock prices are very low relative to the real earnings of companies. It is a great time to make the switch as this situation with the stock market rarely happens.  Comment from Tollas: The other side to that is we are selling bonds at a really low point, too.  Comment from Guzzo: It seems less important that both stocks and bonds are down right now, but more important that stocks will recover faster.  Comment from Tollas: CAPTRUST will draft a trade sheet that will propose trades to get to the asset allocation the Board decides on. We will send this trade sheet to the Board to sign which will allow us to execute the change in asset allocations. Motion Guzzo, seconded by Martin to change the Pension Plan’s investment target from 55% stock/45% bond to 65% stock/35% bond. On a voice vote, motion carried. Page 4 of 6 Public Comment • Question from Chris Love, retired City of Battle Creek firefighter residing at 32 Maurer Drive: What is the time-frame to implement the new asset allocation? o Answer from Tollas: typically within a week or two. • Question from Love: Do we have more information about the State making billions of dollars available to supplement pension funds? What does the City have to do to qualify for these funds and was that a consideration when we were looking at changing the Pension Plan’s asset allocation? Would having a lower return assumption have helped us in qualifying for this State supplement? o Comment from Linda Morrison, Revenue Services Director: The State has not determined what the qualifications are yet, so we don’t know that information. But, for example, the MERS plan is currently under the State’s threshold of what is considered minimally funded, so we expect those types of Pension Plans to be the first to receive the State’s supplement. However, the State has said there will be funds available for all pension plans, and the City is watching closely so we can apply for the State supplement whenever it becomes available. • Question from Love: What rate of return is MERS using for their assumption? o Comment from Aaron Kuhn, Assistant Revenue Services Director: MERS recently reduced their rate from 7.35% to 7%. • Comment from Love: Public Act 314 states that whenever a pension benefit changes, there must be a supplemental actuarial analysis performed. I think this has been overlooked somewhat. For example, when the firefighter’s union changed their Final Average Compensation from best 5 out of 10 years to best 3 out of 5 years, we had an actuarial analysis performed. So basically, any change that impacts the pension benefit payments, we need to make sure this analysis is being done so that its impact on the pension plan is accounted for. o Comment from Chubinski: I can’t think of a time when the Pension Board was made aware of these types of changes. I can remember receiving questions from the Mayor in the past. But, if a union contract is approved and it changes benefits, the Board has no control over that. o Question from Guzzo: Is the City’s Finance Department made aware of these types of benefit changes?  Answer from Morrison: Yes, Finance is made aware of these changes, but very infrequently is there a change to a pension benefit where something is added that enhances their benefit. In the case that there is a significant change made, we are aware that a supplemental actuarial analysis will need to be done. It would be either the Labor Attorney or the Revenue Services Director’s responsibility to present that type of change to the Pension Board. We would typically not be involved in any changes presented during union negotiations that are taken to the City Commission. That is handled by the Labor Attorney. Page 5 of 6 Next regular meeting: Monday, November 21st at 1:30 PM Meeting adjourned at 2:50pm Respectfully submitted, Lily Vardell, Recording Secretary __________________________________ __________________________________ Board Member signature Board Member signature Page 6 of 6