MINUTES
HULL CONTRIBUTORY RETIREMENT BOARD MEETING
November, 29, 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 8:33 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 October 21, 2004 special Board meeting without modification.
The Board read and attested to the minutes of the October 27, 2004 regular Board meeting without modification.
Responding to a concern that the fiscal year 2006 contribution was stated in Jim Yacobucci's motion in the October 27, 2004 meeting to accept the new actuarial funding schedule, Chris McCabe made a motion to rescind the original motion and make a substitute motion. C. McCabe's substitute motion was to accept the funding schedule with an interest rate of 7.75%, amortization percent of 3.25 and 23 years remaining. Seconded by Donald Brooker. Voted unanimously.
Note: The timing of the payment of the annual appropriation to the Retirement System is at the discretion of the Town, not the Retirement Board. Therefore the Board did not think it appropriate to state the amount of the payment in the motion. The Town may elect to make a payment at the beginning of the fiscal year at a discount over the mid-year payment detailed in the funding schedule and the PERAC Appropriation Notice.
The Board read and attested to the minutes of the November 2, 2004 special Board meeting without modification.
The Board signed all bill warrants for November 2004.
The Board signed the contributory payroll for November 2004.
The Chairman recognized James Yacobucci in attendance at 8:55 for a full Board.
Consultant Process
PRIM Portfolio Review with Senior Client Service Office Michael Reardon
As part of the process of engaging an Investment Consultant, the Board invited Pension Reserve Investment Management (PRIM) Board Senior Client Service Office Michael Reardon to present the PRIM alternative.
Mr. Reardon began with an overview of the PRIM organization, highlighting the built in layers of fiduciary oversight, with nine appointed and elected trustees of the management board, and the component committees. Understanding the Hull's Board need and desire for guidance from a consultant, Mr. Reardon described PRIM's relationship with five consultants, all of whom are used in the decision making process regarding the investment direction of the Pension Reserve Investment Trust (PRIT) Fund. This process includes asset allocation, manager selection and monitoring and compliance with the many regulations. He explained that through PRIM, Hull would have the benefit of these consultants' expertise. He also pointed out that the fee for these consultants would be significantly lower than those incurred
by the Board engaging a consultant on their own.
To this point, Mr. Reardon distributed the Wilshire Research Report on Funding Levels and Asset Allocation (Wilshire Associates is PRIMappropriation amount. The actuarial rate drives the asset allocation, and with most rates being between 7.75% to 8.25%, it would be expected that the asset allocations would be consistent.
Mr. Reardon addressed why PRIM and why now:
- Lowest fees for tremendous resources - total average cost for core participation is approximately 42 basis points (bp). For Hull's total portfolio, the consulting portion would be about 2 bp, or just over $3,000, with a total fee, including investment management and indirect fees of approximately $70,000
- Downside protection through diversification - an aggressive portfolio with 68% equity like investments and 32% fixed income like investments, however the further diversification through 15 sub-asset classes provides protection in all markets
- Parallel funding goals - all systems must be funded by a certain date and all have approximately the same target return, representing what the systems should return each year for the next ten years
- Performance - on the average, PRIM has reliably come within less than 100 bp of the projected return for every one of the ten-year projections in the history of PRIM - the portfolio has matured to perform in all markets
- One job - investment in a complex world and today's complex market require a consultant or partner
Consultant vs. PRIM
Regarding the asset allocation, Mr. Reardon explained that approximately 50 to 100 individuals, both PRIM professionals and consultants, were involved in the process of developing the current asset allocation. He challenged the Board to duplicate that level of expertise with any single consultant or firm.
Responding to a Board question of whether it would be wise to invest in PRIT and hire a consultant, Mr. Reardon stated that he currently does not know of any system with all assets in PRIM and with a consultant. He went on to say that by doing both, there would be a duplication of efforts. A consultant will create an investment policy and develop an asset allocation - PRIM's experts have developed their investment policy and asset allocation. He explained that Hull could piece together their own asset allocation within PRIM using the segments available for individual investment. The core investment is only available as the core, with the asset allocation set forth by PRIM. He stated that he would not recommend any other investment in PRIT other than the core investment.
Mr. Reardon opined that for Hull, a consultant would reduce the overall risk by investing a large percentage of the portfolio in fixed income, which in turn would produce a low return. He questioned from where the offset of return to meet the actuarial assumption would come. An asset allocation different from PRIM would lower the risk, but would not get the job done. PRIM has done both - lowered the risk but also created a portfolio for the required return. He commented again that the best way to invest with PRIT is using the core fund; the addition of a consultant would be a waste of money. The primary reason to hire a consultant is to develop the asset allocation. Investing in the core fund makes the statement that the Board has confidence in that asset allocation, so he questioned
why the Board would expend the money for an outside consultant for services that are no longer required.
In speaking to downside protection, because of PRIM's investment in Absolute Return and Timber, two asset classes with low risk, the total risk of the portfolio is lowered, which makes the total portfolio less risky than the current Hull portfolio. These are two segments that are only available through the core investment. Regarding the fixed income asset class, the portfolio is set up that four out of five of the high yield debt managers do not invest in junk bonds. This is not a usual investment strategy for high yield debt. Further, of the two new managers, one has never had a default on a high yield bond; the other only has two in eleven years. This completes a set of three portfolios to take a lot less risk. Also, in these portfolios within each asset class an asset allocation is
done for risk and return. The downside protection is in taking less risk. Mr. Reardon stated that he thought that the Board would be hard pressed to put together a portfolio with this level of risk and still meet the actuarial assumption for return.
Explaining that PRIM annually reviews the asset allocation, which is based on the actuarial rate. Every January, the managers and consultants, plus the PRIM staff review new assumptions by asset class. Also, PRIM conducts a major study for the asset allocation every three years. The allocation is challenged by the investment committee to come up with an allocation. Using a team effort including the investment committee, staff and board provides the checks and balances to create the most optimal investments. PRIM is being used as a model for other public funds around the country by one audit firm.
Mr. Reardon presented performance returns of both the core funds and by asset class. He returned to the discussion of downside protection by using the five year return as an illustration, pointing out that PRIT outperformed the benchmarks by 196 bp (150 bp net of fees) in one of the toughest, most volatile investment periods in US history. This is true in both in the total core fund and specifically in the domestic equity portfolio. He presented the U.S. rankings of PRIT investment returns relative to public pension funds with over $1 billion in assets. The PRIT fund consistently returned in the top quartile of performance over the past ten years, including being in the top 10% for the past three years. Mr. Reardon attributed this to the asset allocation creating the appropriate
diversification, investment manager selection and oversight.
Regarding managers, Mr. Reardon reported that there is a constant review and evaluation of the investment managers. Every manager in the portfolio meets at PRIM once per year, and PRIM goes to their shops twice per year, for an average of one manager review per day. In the wake of corporate scandals, PRIM includes an analyst, senior investment officer, the CFO and an audit analyst to review the firm, including the back office operations for compliance and operational procedures. He explained that the hiring of managers is not based totally on return, but on the entire operation.
After a brief review of each portfolio's structure, investment managers, expense ratios and historical performance, Mr. Reardon summarized with a few personal remarks regarding his feelings toward the Board. Because he initially presented to the Hull Board after first joining PRIM, and responding to the Board's requests for direction on whether PRIT was the proper place, he stated that he feels that it is a good solid move for the Board to invest fully in PRIM. The PRIM Board members do not care if additional systems join; it is up to the Hull Board. He reminded the Board that they must be comfortable with the fact that the PRIM asset allocation will work for the system - that that is where the decision lies. He stated the relevant point in the derivation of the asset allocation is the target rate. The funding level is used to calculate actuarial target, but the Board has done that work. The decision has been made that the Board must make 7.75% over the next 23 years. PRIM
has a target is 8%. Once the target and the time frame have been developed, what is left is to hit the target. Is the PRIM asset allocation proper for this Board? If the assets do better than 7.75%, the Town pays less, if not, the Town pays more.
He summarized by saying that the diversification, price and returns are all in black and white. The Board must sleep every night with the allocation, remembering that diversification is the key. As has been said before, 80 to 90% of the return is due to the asset allocation; i.e. diversification. After that, everything else is giving the boost.
Reminding the Board that PRIM is under the same pressures as the Board, with actuarial valuations, funding schedules and appropriations, they are unique to other investment managers.
With that, the Board thanked Mr. Reardon for his presentation.
Due to a conflict, Chris McCabe excused himself at 10:10.
With the absence of C. McCabe, and after discussion, the Board decided that they would defer all further discussion and a vote on the hiring of an Investment Consultant until the December 21, 2004 meeting. The Board declined an offer of any additional information or review of the tape of the consultant interviews in preparation for the next meeting.
However, the one point that was debated was whether it made sense to invest both in PRIT and hire an investment consultant. With a 100% investment in PRIT, the asset allocation will be in the core PRIT, according to the PRIM consultants. It is most likely that a Board hired consultant would disagree with the PRIM allocation in an effort to prove their worth. Therefore, the Board must make a fundamental decision:
1. Accept PRIM with their asset allocation, accepting the fact that the PRIM staff and Board has experts to provide the service, and consultant on top of that would be a duplication of effort and fees, or
2. Hire a consultant for Board control over the assets, if the Board is uncomfortable with all the assets invested in one place (albeit across several investment managers and assets classes), or that, with all the investment products and managers in the market, feel that they could find a better package their own asset allocation.
The Board must decide which is the best alternative. With that, the discussion was suspended until the December meeting.
The Board reviewed the current year-to-date trial balance and cash accounts' reconciliation without discussion.
Investments
The following monthly investment materials were provided to the Board:
- Investors Fund Performance - Updated through October 2004
- PRIM Board Update - October 31, 2004
- PRIT - Summary of Plan Performance - October 31, 2004
- SSgA - Total Return through October 2004
There was a brief discussion regarding the returns of SSgA and a decision regarding those assets. Following a presentation by SSgA in September and a pursuing discussion to change that investment, the Board was reminded that they elected to defer any decisions on moving the assets out of the current investments at SSgA to an index fund within SSgA or move outside of SSgA. SSgA can only take direction from the Board regarding the investment, or changing of the investment of the assets. This topic will be addressed again in the next few months.
The following quarterly update materials were also provided to the Board:
- SSgA - Total Return for Selected Periods
- SSgA - Executive Summary
- SSgA - 3rd Quarter 2004 Tactical Asset Allocation Investment Commentary
- Freedom Capital - Third Quarter Report
- Freedom Capital - Portfolio Summary (2)
Budget
To comply with M.G.L. c. 32 §20(4)(f), and further detailed in M.G.L. c. 32 §22(5) and §22(7)(c), a budget analysis for 2004 and 2005 was presented to the Board for review and approval. The Board was reminded that there is a requirement to present to the governmental authority 30 days prior to the enactment of the budget. The chairman requested that a calendar year budget be presented to the Retirement Board in the next for meeting for approval.
Hull Housing Authority
On November 2, 2004, the Board received a check from the Hull Housing Authority (HHA) in the amount of $6,033.00, representing the remainder due for the fiscal year 2004 appropriation. The Board is still waiting on the fiscal year 2003 appropriation of $16,577. HHA Executive Director Paul Daley reiterated that upon state budget approval, the fiscal year 2005 of $10,896 will be paid. This amount is due to the Retirement System by December 31, 2004.
ADP Payroll Errors
The process of gathering calendar year 2002 data for all affected members has begun to begin the corrective action the errors in the calculation and deduction of required retirement contributions of 2% for all compensation in excess of $30,000 while ADP was providing payroll services. At this time, there are no numbers available to report.
Old Business
At the request of the Retirement Board, two memos from Town Counsel James B. Lampke to Board of Selectmen and Town Manager relative to former Police Officer David Leary's request for additional compensation from the Town were presented. This compensation included Educational Incentive Pay (EIP) while on injured on duty status and receiving M.G.L. c. 41 section 111F benefits for the period January 2002 through April 15, 2003. The Town remitted the educational incentive allowance under the Quinn Bill to Mr. Leary in December 2004. The Board is evaluating this payment to determine if it should be considered regular compensation under 840 CMR 15.03, thereby necessitating a retirement allowance adjustment. Further review and discussion is required. Board attorney Michael Sacco will be consulted.
Two letters from Attorney Sacco regarding the upcoming DALA hearing requested by former highway department employee Gary Taylor were reviewed by the Board without comment. The hearing is scheduled for Wednesday, December 8, 2004.
The Board read all informational mail:
Mail:
- Segal - Thank you letter - November 4, 2004
- Boston Herald Article (2) - November 19, 2004 - William Bulger pension
- Pension & Investment Article - November 1, 2004 - The future of public DB plans
- PERAC Pension Newsflash
- PRIM - Memo, November 8, 2004
- Segal Bulletin (2) - October 2004
- Segal Public Sector Letter
- Babson Staff Letter - November 12, 2004
The Hull Contributory Retirement Board meeting adjourned at 10:55 a.m.
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