MINUTES
HULL CONTRIBUTORY RETIREMENT BOARD MEETING
July 28, 2004
The regular meeting of the Hull Contributory Retirement Board, duly posted to be held in the Selectmen's Meeting Room, Town Hall, Hull, MA on the above date was called to order at 9:03 a.m. Present were Leonard Colten, Chairperson, Members Donald Brooker, Chris McCabe and Ann MacNaughton, and Retirement Administrator Marcia Bohinc.
The Board read and attested to the minutes of the June 30, 2004 regular board meeting without correction.
The Board signed all bill warrants for July 2004.
The Board signed the contributory payroll for July 2004.
Chris McCabe made a motion, seconded by Donald Brooker, to approve Joseph Cole's Superannuation Retirement, Option A, with a retirement date of June 30, 2004. Mr. Cole retired after 36 years and 1 month of service to the School Department in the Town of Hull. Voted unanimously.
The Board reviewed the request from School Department employee Barbara Stanley to make-up contributions for the period from her date of hire of September 9, 1996 until the date of her membership of August 2004. She was hired as a permanent part-time employee, working 25 hours per week. Therefore, she was required to be a member of the system from date of hire. On a motion by D. Brooker, seconded by Ann MacNaughton, the Board voted unanimously to approve a make up contribution of 96 months.
Hull Housing Authority
In the latest update on the status of the negotiations for the receipt of the outstanding appropriations from the Hull Housing Authority (HHA), the Board was informed that the current negotiations between M. Bohinc and HHA Executive Director Paul Daley have stalled. Mr. Daley maintains that he is still not satisfied with the information from Stone Consulting regarding the method of appropriation to governmental units. He is looking for an additional actuarial breakdown of exactly what the retirement system cost is for the HHA, as if they had a separate actuarial valuation system.
The Board consulted their actuary Mr. Lawrence B Stone on this point and was advised that the actuarial cost per governmental unit is not normally produced because it is not the method outlined in Chapter 32. He went on to state that unless the Board was planning on using this calculation, his recommendation is to not go through the expense and the time to produce it.
Mr. Stone agreed with Mr. Daley's assertion that that the current calculation is not "fair", primarily due to the fact that the cost of benefits is generally more expensive in the unit that has group 4 members, and the calculation is simply based on current salary. However, because the Authority receives other services from the Town, the increased appropriation because of the calculation can be justified.
A. MacNaughton agreed with Mr. Stone's statement that the Board does not need the increased cost, and asserted that the additional calculation is not something this Board wants or will use. The Retirement Board has directed that the valuation be done in accordance with Chapter 32, and if the HHA wants something different, it is up to them to produce. The Board agreed and did not request Mr. Stone to proceed with the additional calculation.
C. McCabe requested that the Department of Housing and Community Development (DHCD) be contacted regarding budgeting and payment of the appropriation by the agency in order to verify the accuracy of the information the Retirement Board is receiving. He suggested that the DHCD be informed of the current situation in Hull prior to making any decisions regarding legal action. Mr. Stone elaborated on other systems with housing authority problems, and when given the specifics, it was clear that those other authorities do not have the same situation as the Hull Authority.
Mr. Stone also reminded the Board of their fiduciary responsibility to collect all the money due to them. At this, Lenny Colten reiterated that the time has come to do something. He stated that if there were no results by the next meeting, he would make the motion for legal action.
The Board reviewed the current year-to-date trial balance and cash accounts' reconciliation without discussion.
Investments
The following investment materials were provided to the Board:
-Investors Fund Performance - Updated through June 2004
-PRIM Board Update - June 30, 2004
-PRIT - Summary of Plan Performance - June 30, 2004
-SSgA - Total Return through June 2004
-SSgA - Executive Summary - 06/30/04
-SSgA - Town of Hull - Tactical Asset Allocation Investment Commentary, 2nd Quarter 2004
L. Colten requested that the performance information provide cumulative performance each three months, instead of the current three-month snapshot. This will be changed beginning with the July reporting.
The Board engaged in a lengthy discussion regarding the assets, asset allocation, investment consultant and the investment policy. All members are aware of and agree to the need to increase the assets; however do not agree on how to achieve this. This discussion will continue throughout the Request for Proposal for an Investment Consultant process.
Consultant Process
The final Request for Proposal for an Investment Consultant has been completed and is ready for distribution. The Cambridge Retirement System was contacted in response to the Board's questions in the June meeting regarding how best to distribute the RFP. Cambridge stated that they are currently using Segal as their investment consultant and are very happy with them. However, their retirement system is going through this process to fulfil the PERAC requirement of a periodic review of service providers. They determined that the most efficient way for them to distribute the RFP was through Pensions & Investments. They stated that they have had interest in the RFP from 25 to 30 providers, however so far only two responses have been received, with the deadline in two days (Friday, July
30). P & I was their only source for advertisement.
Weymouth also advertised in P & I and had approximately ten responses, with the choice being Segal Advisors, Inc. Quincy uses Meketa Investment Group, and Plymouth uses Wainwright Investment Counsel, LLC. The RFP will be advertised in P & I, with all the named providers sent a copy directly.
Investment Review
The Board received an 18-month (January 1, 2003 through June 30, 2004) Investment Review presentation from Sarah Scranton, Senior Portfolio Manager and Vladimir Velkov, Fixed Income Manager at Freedom Capital. The presentation included:
-Performance Summary
-Investment Outlook and Strategy
-Portfolio Specifics
-Diversification
-Holdings
Ms. Scranton reviewed Freedom Capital's investment process, how the Hull Retirement System's money is invested, and how the Freedom Capital investments fit in with the entire Hull portfolio. Currently, the Freedom Capital holdings are invested approximately 60% in domestic equities and 40% in fixed income. As detailed by Mr. Velkov, the domestic equity portion is invested in a value style, in which inexpensive stocks with undervalued companies that are under appreciated by the market and have the potential for high earnings are held. This provides a strategy for managing a down market; i.e. investment in companies with limited downside and great potential for upside.
Ms. Scranton reported for performance measurement, the measurement of this investment must be against other value stocks. Comparing the Freedom Capital Equity Value fund performance with the S&P is not a true comparison. The S&P is a combination of growth and value stocks. SSgA is managing the Hull Retirement System's equity assets towards growth stocks. This includes the other side of equity market, and with the Freedom Capital Equity Value, then can be compared to the S&P. Domestic economics will determine when the market is better for growth stocks, and when it is better for value stocks. The first six months of 2004 has been much better for value stocks, therefore the performance reported by Freedom Capital far exceeds that of SSgA and the growth stocks. A
portfolio must contain both value and growth to capture the upside of both and mitigate the down markets.
The Freedom Capital Fixed Income is a 'core plus' fund, meaning a core fixed income plus a small exposure to high yield (non-investment grade corporate). The additional exposure is not a set percentage, but rather an investment only when that asset class is favorable. In comparison, the SSgA fixed income product is a straight core fund; thereby the Freedom Capital investment gives a balance and additional exposure to another component of the fixed income market. Investment returns for fixed income funds are much more moderate than equity funds, both on the up and down sides.
Ms. Scranton reviewed the economic environment for 2003 and the first half of 2004 and how that affected the investment strategies and returns. In looking ahead for the remainder of 2004, the Board questioned on how to increase the asset level (and actuarial funding level). Both Ms. Scranton and Mr. Velkov stressed the requirement of a balanced portfolio between fixed and equity, and also a balance within the equity portion. They made it clear that before any changes are made, there must be an understanding of the assets currently held and how they measure up to the investment objectives. They stressed that the Board must focus on all the pieces to make sure there is a proper asset allocation, and that all the individual pieces of that allocation are doing what they are suppose to - when all the
manager's pieces are put together, the investment objectives are being met. They also cautioned that increased returns come with increased risk - that the best strategy is to set an asset allocation and stick with it, with a properly diversified portfolio as far as investments and managers.
The final question put to the speakers was that of the need for and/or benefit of having an investment consultant. Ms. Scranton stated that all through her history with the Hull Board, the asset mix has been a concern. Approximately half of the systems she works with have consultants, however a consultant will not affect their investment style, strategy or returns. Nevertheless, if the Board would feel more confident with someone choosing the asset mix and doing the monitoring, then yes, it would be worthwhile. That being said, she did state that Hull currently has good diversification, between Freedom Capital and SSgA with the two different equity styles and enhanced fixed income, and the additional exposure of being invested in the Pension Reserves Investment Trust (PRIT).
January 1, 2004 valuation
The Board participated in a discussion with Actuary Lawrence B. Stone of Stone Consulting, Inc. regarding the January 1, 2004 valuation.
Mr. Stone presented an overview of the current actuarial position of the system:
-The last valuation was as of January 1, 2003
-The schedule is at the maximum length (Fiscal 2028) and the maximum amortization (4.5%)
-Hull has a poor cash flow position
-The funding ration (Assets/Accrued Liability) at January 1, 2003 was 31%, compared to 37% at January 1, 2002
-There was an estimated actuarial gain of $2.6 million in calendar 2003, which was an excellent return compared to the assumption
In reviewing the current status, and following a lengthy discussion, the Board made the following decisions regarding the assumptions to be used in the January 1, 2004 valuation:
-Keep the Interest Rate Assumption at 8.00% (2003 was 8%, 2002 was 8.25%). For comparison purposes and at the request of the Board, the funding schedule will also be produced using an interest rate of 7.75%.
-Change the Salary Assumption from 5.00% to 4.75% (Mr. Stone noted that Hull historically has had high salary increases, which has a direct effect on the required funding.)
-2004 COLA increase for retirees is 3.00%.
-No changes to the non-economic assumptions - Hull should stay consistent with the PERAC local experience study.
-Asset Smoothing will not be used.
-There are no other anticipated changes that would affect the system, such as ERI or a contribution holiday.
When asked the question of how to increase the funding level, Mr. Stone remarked that there were limited things the Board could do, the most significant of them being to enhance the rate of return. Other factors include the Town appropriating more money than required by the funding schedule, and limiting the liabilities for as much as they are in the Board's control, such as disability retirement and additional credited service.
Mr. Stone agreed to present the final January 1, 2004 valuation at the September 29, 2004 regular scheduled board meeting.
On a motion by Don Brooker, seconded by A. MacNaughton, the Board voted unanimously that D. Brooker, L. Colten, A. MacNaughton and M. Bohinc will attend the 12th Annual Prim Client Conference on Tuesday September 14, 2004 at Bentley College, Waltham, MA.
New Business
Regarding Eligibility Requirements for membership in the Hull Retirement System, D. Brooker presented Chapter 100 of the Acts of 2004 for review and consideration. The Board took under advisement for discussion in the next meeting.
A. MacNaughton requested an invitation to Joe Connarton, Executive Director PERAC be extended to a future meeting.
The Board read all informational mail:
-MACRS Memo - FY05 Budget Highlights
-MACRS Memo - 2004 Fall Conference Notice
-PERAC Memo #22/2004 - Submission of Disclosure Forms
-PERAC Memo #23/2004 - Updated Actuarial Equivalent Factors
-PERAC Memo #24/2004 - Cost of Living Increase for Supplemental Dependent Allowance Paid to Accidental Disability Retirees
-PERAC Memo #25/2004 - Fiscal Year 2005 Budget Items Relating to Public Retirement (with referenced PERAC Memo #35/2000)
-PERAC Memo #26/2004 - Investment Manager List
-PERAC Memo #27/2004 - Tobacco Company List
-PERAC Memo #28/2004 - New Notice of Potential Benefits Pursuant to G.L. c. 32 § 4(l)(h) Form
-PERAC Memo #29/2004 - Interest on Buy-back Repayments
-Segal Bulleting - June 2004 (2)
-The Babson Staff Letter - June 25, 2004
-The Babson Staff Letter - July 9, 2004
-Corporate Governance Bulletin
-The PERAC Financial Bulletin - Financial Market Review, 2nd Quarter 2004 - July 2004
-Corporate Governance materials from the PERAC June 15th Corporate Governance Forum in Worcester
-Letter to Retirees - Dated July 20, 2004
The next two regular Board Meetings are scheduled for Wednesday, August 25 and Wednesday, September 29, both at 9:00 a.m. in the Selectmen's Meeting Room.
The Hull Contributory Retirement Board meeting adjourned at 12.06 p.m.
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