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Minutes 03-19-92 MINUTES OF THE JOINT WORKSHOP MEETING OF THE CITY COMMISSION AND THE BOARD OF TRUSTEES EMPLOYEES' PENSION PLAN HELD IN COMMISSION CHAMBERS, CITY HALL, BOYNTON BEACH, FLORIDA ON THURSDAY, MARCH 19, 1992 AT 4:00 P,M, PRESENT Edward Harmening, Vice Mayor Jose Aguila, Commissioner Lillian Artis, Commissioner Lynne Matson, Commissioner BOARD MEMBERS PRESENT Carrie Parker, Asst. City Manager Grady Swann, Finance Director Carol Beasley, Vice Chairwoman William Dobbins Charles Frederick Sue Kruse, Secretary J. Scott Miller Bill Sullivan Nathan Sussman ABSENT Arline Weiner, Mayor CALL TO ORDER Vice Mayor Harmening called the Joint Workshop of the City Commission and the Employees Pension to order at 4:05 p.m. The purpose of the workshop meeting was to discuss some of the pro- posed Ordinance investment policies. Vice Mayor Harmening announced that Commissioner Matson would have to leave this workshop meeting at 5:00 p.m. Vice Mayor Harmening referred to a letter from City Attorney Jim Cherof to City Manager Miller dated February 26, 1992. Mr. Cherof's memorandum pointed out four areas where the proposed investment policy would differ from what is specified in the City Charter. Vice Mayor Harmening stated that at least one of the investment counselors has possibly been in violation of some of the Charter provisions of the Employee Pension Fund. These violations include the investment in foreign stocks, those which have not been listed on the New York Stock Exchange or American Stock EXchange for at least one year prior to purchase, acquisition of stocks without a ten-year dividend record and those for which we must pay a conversion premium plus opening the investment to NASDAQ which consists of some very small and very new companies where the volatility is quite high. Vice Mayor Harmening pointed out that the Pension Board authorized that these changes be made - 1 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION AND BOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 and advised the counselors to go ahead with one or two of them. Charles Frederick asked that Mike Callaway be allowed an oppor- tunity to inform the Commission of the work which was performed in reviewing the recommended policy regarding the investment changes. Mr. Callaway was asked to provide a brief summary of the changes and how the changes will affect the plan. Mike Callaway referred to his letter of April 19, 1991 to the Pension Board. The contents of that letter describe the recom- mendations. Section 20.1(4)(a) prohibits investment in foreign securities. He stated there are many foreign securities which are safer than U.S. securities. Where the company is domiciled usually has very little effect on its quality. By restricting the managers from investing in securities such as Sony and British Petroleum does not add a safety feature to the investment policy. It ties the hands of the investment managers and limits them as far as what they can do. Mr. Callaway suggests that the .investment manager should be able to decide if he should or Should not buy stocks listed on the New York Stock Exchange but domiciled overseas. The investment managers will be monitored on .a quarterly basis and they are limited to investment of no more than 10% of the equity portfolio. This 10% figure was clarified by Mr. Callaway as an up to 10% investment of the stock portfolio in foreign stocks. Charles Frederick further clarified that-only 2~% of any one equity stock may be purchased. Continuing, Mr. Callaway reported that the current policy pro- vides that bonds must be graded "A" or better when they are acquired. The policy does not require them to remain "A" or better. Mr. Callaway suggested this policy be tightened to require that the bond be maintained at an "A" rating. Mr. Sussman stated that investment in the bond market must be done carefully and wondered if an "A+" rating should be required. Mr. Callaway feels an "A" rating is sufficient. with regard to convertible securities, the Ordinance states that no conversion premium shall be paid on purchase. Mr. Callaway feels the investment manager should make that decision since most of the higher quality convertibles carry a premium. Another requirement specifies that all stocks must be listed on the New York and American Stock Exchanges for at least one year prior to purchase. There are many good companies which are not listed on either of those Exchanges. Mr. Callaway suggested the elimination of this requirement. The investment managers are being paid for their expertise. Vice Mayor Harmening pointed oUt that when foreign companies are permitted, investment could possibly be made in a company which does not pay a dividend in U.S. currency. - 2 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION AND BOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 Mr. Callaway requested the elimination of the requirement whereby a common stock investment is limited to companies with ten years or more of uninterrupted dividends, vice Mayor Harmening pointed out this provision was included to make certain income came into the fund. Mr. Callaway feels these decisions should be made by the investment managers. They are closely monitored. Mr. Dobbins pointed out that the investment managers have been given an outline. When that outline is widened,~ the investment mana- gers may choose investments which are not proper for this Fund. They should be given enough leverage to maximize the fund without incurring unreasonable risk. Vice Mayor Harmening stated that the primary consideration of most pension funds has been safety of principal and a moderate return. He pointed out that in 1990, a loss was incurred in the amount of $967,000 between the Employees' Pension Fund and the Fire Pension Fund. Nearly 40% (19) of the portfolio is not rated. There are nine (9) more which are "B-" or lower. Vice ~.ayor Harmening asked how Mr. Callaway feels about this port- £%1io. Mr. Callaway feels if the guidelines are adopted, he will be comfortable with the portfolio. If the guidelines are not ~dopted, a violation exists. Vice Mayor Harmening pointed out that in the event the managers violate the guidelines and lose substantial funds, they will be sued. With regard to the risk being taken, Mr. Callaway stated that suggestions were made to change the policy. The Ordinance allows up to 65% of the funds to be invested in stocks. The new policy calls for only 50% to be invested in stocks. He pointed out the asset allocation has more effect on the risks than whether you have one out of 100 stocks invested overseas. Vice Mayor Harmening agreed with these statements. Vice Mayor Harmening pointed out that the City is not in a posi- tion to make up any loss in the Pension Fund. Mr. Callaway stated that liabilities are taken into consideration. He explained that the contributions are adequate to pay the require- ments of the fund and for that reason, a longer term investment can be made. In response to Vice Mayor Harmening's question, Mr. Callaway stated that the overall Beta (a measure of the volatility rela- tive to that of the market) of Mr. Hamilton's stocks has histor- ically been 30% more volatile than the S & P 500 which is 1.3%. Mr. Dobbins said he did an analysis of one portfolio he received from Davis Hamilton. There were forty-seven (47) common stocks in the portfolio. Of the 47 issues, two were rated S & P, two were rated "A+", 4 were rated "A", three were rated "A-", five were rated "B+", five were rated "B" which is below average, nine were rated"B-" and 19 were not rated. Seventeen (17) of those - 3 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION AND BOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 stocks pay no dividends. The dividend yield of all 47 stocks was 1.7% for the year against the Standard & Poors 3%. Mr. Callaway questioned what the policy will be and explained that he believes Davis Hamilton was hired for this type of portfolio. Mr. Dobbins stated that when one is responsible for making investment deci- sions, the exposure is always in retrospect. If the results are favorable, one will receive a pat on the back. If the results are unfavorable, one might receive a lawsuit. When foreign stocks are permitted, a great number of stocks can then be selected. Mr. Callaway explained that he understands the concerns for safety. However, the suggestions made are within the confines of other pension funds. Mr. Callaway further explained that the investment managers operate at the City's discretion. He. asked for guidance in what the Board feels is appropriate and will draft some other guidelines. Commissioner Matson stated that she hoped she would be able to Vote on this issue before leaving the meeting since it is such an important issue. All of the members believe that the prime goal of the City's policy is to keep the Fund safe. Commissioner Aguila stated this is not an area in which he is very informed, but he is in favor of protecting this Fund. He agreed that the City is not in a position to make up a loss. He wants to be certain that the Fund is diversified. Mr. Frederick pointed out that the guidelines have not been loosened up. A proposal was suggested. Vice Mayor Harmening said they were loosened up when the Board directed the advisors that they could do this and the Board would recommend the changes. Mr. Frederick disagreed and stated Mayor Weiner asked the City Manager how the Board Should proceed with these changes. The answer was to forward it to the Attorney for the purpose of drafting an Ordinance which would be forwarded to the Commission for approval. Mr. Sussman requested a comparison of the analyses of Davis Hamilton & Jackson and Barnett Bank. Mr. Callaway distributed copies of the Merrill Lynch Summary Report as of December 31, 1991. Mr. Callaway proceeded through the Report by page. (A copy of the report is on file in the City Clerk's Office.) As of December 31, 1991, the total market value of the Fund was $24,027,920. This value represents an increase from the previous quarter of $3,115,740. By hiring two investment managers, the benefits of two different styles of management are reaped. Mr. Callaway again stressed the asset allocation as the most impor- tant decision to be made. At this time, between the two mana- gers, only 42% is invested in stocks. - 4 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION ANDBOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 In response to Vice Mayor Harmening's question, a representative from Barnett Bank stated that most of the equities are in a co- mingled municipal fund and there is a special provision regarding co-mingled funds with respect to 90% of the fund complying with the requirements of the individual stocks. In this case, that provision is met. There are no convertibles in the fund and no answer was available on whether or not any of the stocks had not paid a dividend during the last ten years. During the review of Page 5 of the Merrill Lynch report, it was pointed out that Boynton Beach is more conservative than 95% of the other funds used for the comparison. Vice Mayor Harmening pointed out that this chart does not consider the quality of the equities. In Mr. Callaway's opinion, the asset allocation com- parison is more important than the quality of the equities. He stated that if the investment managers act responsibly, that will have less impact than how much is invested in stocks. The rate of return of the total fund over the last quarter has been 8%. Equities returned 12.0% while Bonds returned 5.8%. This has been a profitable quarter. Page 11 of Merrill Lynch's report reveals that Barnett Bank was given $10,837,200 which they turned' into $12,050,140 during the qUarter. Barnett Bank has a more conservative asset allocation pOlicy, while Davis Hamilton has a more aggressive policy. The rate of return of the fund handled by Barnett Bank over the last quarter has been 6.9%. Equities returned 9.7% while bonds returned 5.9%. In reviewing Page 17, it was reported that Davis Hamilton began with $10,575,337 which they turned into $11,977,780 by December 3I, 1991. Davis Hamilton has a more aggressive policy with regard., .t° asset allocation which is 46.5% in stocks and 51.2% in fixed income. During the last quarter, the rate of return of the fund handled by Davis Hamilton was 9.1%. Equities returned 14% while bonds returned 5.6%. Mr. Sussman stated that when the Pension Board became aware that Davis Hamilton invested in foreign stock back in November, they asked for reasons for this type of investment. He was upset about the investment in foreign stocks as well as the investment in stocks of a poor quality. He feels there was poor performance in adhering to the guidelines. He stated that this performance cannot be continued and was embarrassed he was not aware of this situation sooner. Mr. Callaway stated that at the time of the last report, lengthy discussions took place regarding which direction to take. He asked for clarification on the guidelines. - 5 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION AND BOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 Commissioner Matson said that she is not happy with the fact that seventeen out of forty-seven stocks pay no dividends and that thirty-eight are rated below "A-". She concurred with Vice Mayor Harmening and Commissioner Aguila that the City is in no position to make up any losses which might occur. It is her opinion that a conservative line be held to protect the fund. Vice Mayor Harmening stated the world economy has changed drastically since the guidelines were written. In many respects, they are not as valid today as they were when they were originally written. Commissioner Matson left the meeting at 5:15 p.m. Carol Beasley left the meeting at 5:15 p.m. Vice Mayor Harmening stated that revised guidelines must be for- mulated in order to provide instructions for the investment mana- gers and the Pension Board. He pointed out that the investment managers have done a wonderful job during the quarter and he is ~appy that it turned out that way. City Manager Miller stated that with regard to the equity percen- tage, 65% is too much. He feels 50% is a bit high and would prefer between 30%-40%. He explained that during 1982-83 and 1985-86, the two former cities he was employed with needed to make up substantial payments to their funds to keep them actuarially sound. Mr. Miller stated he had expressed his feelings on this subject back in 1990 and has not changed that position. City Manager Miller stated he has no problems with the COde revisions of "C", "D", "E", and "F", but does have concerns in the domestic corporations. He would like the precentage mini- mized to between 5%-10% if investments are to be made outside the United States. In Nathan Sussman's opinion, Mr. Miller's remarks are not answers toi the questions at hand. Too many issues are being purchased which are below standard. They are gambling. He feels there needs to be better, stronger guidelines. Mr. Miller suggested lowering the percentages in the equities. The two managers have go!od records and are being held accountable for their actions. Vice Mayor Harmening explained that it would have been difficult for either of these managers to make a mistake in the current market. Mr. Swarm stated that Davis Hamilton was hired as a growth manager and that is exactly what they have been.doing. Vice Mayor Harmening feels a great deal of money can be lost if the manager cannot perform in a down market. Mike Callaway advised that data was used to determine how each of these managers would perform in a down or up market. Both of the managers have per- formed well in both markets. Jack Hamilton Stated Davis Hamilton has done better than average in both markets. - 6 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION AND BOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 Commissioner Aguila wondered if the securities issued by the United States government are all American companies and was advised that they are securities issued by the United States government. They are Treasury Bonds, notes, bills, etc. which are government guaranteed. Charles Frederick said that a great deal of time was spent on the selection of these managers. Davis Hamilton is a growth manager and as such was expected to perform. He feels there might have been miscommunicat~on with regard to the foreign stock issue. He feels Davis Hamilton thought permission was given to go ahead in this area. Once we realized it had happened, we asked that this practice stop until we could investigate. He further stated that the Board now has a monitor and the quarterly report now provides a better understanding in terms of the purchases. Mr. Frederick is comfortable with the changes recommended by the Board. Mr. Frederick wondered if there is a way to allow foreign stock investment and still make sure good stocks are purchased. Vice~ Mayor Harmening thinks guidelines can be established to allow such investment. With regard to the premium for conversions, Vice Mayor Harmening has no problem with this premium. The premium is a cheap price to pay if a good selection is made. However, quality and volati- lity are major concerns of his. Commissioner Aguila suggested the reports be written so that they are more easily understandable. Mr. Callaway pointed out that the easiest way to understand the report is by presentation. Vice Mayor Harmening explained that the Commission is generally not involved in this process; however, there have been violations of the Ordinance. Commissioner Artis agreed that it is difficult to understand these reports. Vice Mayor Harmening agreed with Mr. Callaway that presentation of the report is the easiest means of clarifying the report for most people. Bill Sullivan wondered how many of the five municipalities are comparable in size to Boynton Beach. They range from $1 million to over $300 million. The dollar amount has little impact on how much the asset allocation should be. As the funds get larger, the ability to diversify becomes easier. Jack Hamilton asked to clarify the background of this situation. He stated there was a misunderstanding on his part when he was hired. He thought the guidelines were changed when the issue was brought up at the meeting. He pointed out that at the first meeting with Davis Hamilton, their deviation from the policy was discussed. They stated they would conform with the policy. The Board encouraged that the policy would be changed. He further - 7 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION AND BOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 stated that someone made the statement not to change anything unless the manager felt there was a need to do so. He said that Davis Hamilton is attempting to give their best judgment as to how to get the best return. However, Davis Hamilton will follow the guidelines of the policy. Davis Hamilton is aware of the City's fiscal problems. They try to provide the best idea of an asset mix which will maximize the return, with the least amount of risk. They will manage under whatever guidelines are set. Mr. Dobbins is particulary concerned with the individual stocks. Mr. Hamilton stated that of the 443 stocks which are ranked by S & P, over 50% are not rated. This does not imply less than investment quality. It only implies that a ten-year history is not available. Mr. Hamilton explained that just because a com- pany is highly rated from an S & P standpoint does not imply anything about future performance. Vice Mayor Harmening agreed. Mr. Dobbins stated that a Trustee has personal responsibility ~hich is retrospective. He would not want the market to drop, a~nd have to attempt to defend against the ratings in the port- fOlio. The S & P rating must be considered as a defense of his actions. Mr. Hamilton feels that the most important decision a Trustee must make is the type of asset allocation in the fund. 85% or more of the fund is akin to the asset allocation. Stock selection is minuscule compared to the asset allocation. Mr. Callaway said that when these managers were hired, they accepted fiduciary responsibility. The Trustee is not required to know what securities to buy or sell. The fiduciary respon- sibility is shifted to the managers. While Vice Mayor Harmening agreed with this point, he stated that the managers have not been adhering to the guidelines. Mr. Hamilton admitted to uncomfortable feelings since the last meeting. He has spoken with Mrs. Kruse, Mr. Swann and Attorney Cherof regarding getting this subject on the agenda as soon as possible in order to make a determination. Vice Mayor Harmening stated that with the current mix, quality and volatility, the possibility of a very large loss in a down market is very great. That risk is more than the City should assume. He wants guideli- nes which will prevent such an occurrence. Mr. Hamilton stated that the City has a conservative asset mix compared to other pen- sion funds throughout the country. This was created by capping out the manager at 50% stock. When the market is the most bullish, the manager can never be bullish and when the market is bearish, not even one stock must be owned. That is the reason for hiring a professional. Vice Mayor Harmening pointed out that mistakes can be made and he does not want the City at risk. He is pleased with the return which was produced by Davis Hamilton, but does not want the City suffering in the long haul. Mr. - 8 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION AND BOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 Hamilton stated he is not an aggressive investor. The quality of the stocks in the portfolio is good and the quality of the bonds is exceptional. If he remains at 50% over a reasonable period of time, the odds of losing money are not very great at all. It is his job to provide his best thoughts. Mr. Sullivan wondered how the guidelines under F.S. 175 and 185 compare to the current policy. The guidelines under F.S. 175 and 185 are less conservative than the City's current guidelines. They do not have any time requirements; however, no investment in foreign stocks is permitted. Vice Mayor Harmening asked that Carrie Parker check with the Department of Administration to get a synopsis of their guideli- nes. From that, something can be created which the Board will be happy with and the managers can live with. Mr. Hamilton pointed out that when the guidelines were written, most Florida cities did not have a performance monitor. Having Mr. Callaway report on a quarterly basis keeps the Board informed as to what the managers are doing. Vice Mayor Harmening pointed out that perhaps Mr. Callaway is the one who should be criticized more than Davis Hamilton since he was aware of what was contained in the Charter with regard to investment guidelines. Mr. Callaway explained that a policy was recommended to the Board in April which the Board adopted. The policy included all the pro- visions now being discussed. The violations were discussed at the last meeting. He explained this is not something which was done without the knowledge of the Board. The policy was written to comply specifically with the Ordinance which was in place. They suggested the policy and Ordinance be changed if the Board and Commission agreed. He expressed his desire to get to the bottom of any dissatisfaction which might exist with regard to his performance. Vice Mayor Harmening said his statement was made half facetiously. Commissioner Aguila does not have a problem with five of the six proposed changes to the Ordinances. He would vote in favor of those five. He would like the foreign investments to be no greater than 10%. Commissioner Artis stated she is in favor of a small percentage investment in foreign stocks. She also favors an investment of not more than 40% in securities. Vice Mayor Harmening stated that a policy has been set for investment of no more than a maximum of 50% even though the number says 65%. He has no problem with that figure. Commissioner Aguila would favor changing the Code to reflect the change from 65%. Commissioner Aguila further pointed out that a - 9 - MINUTES - JOINT WORKSHOP OF CITY COMMISSION AND BOARD OF TRUSTEES EMPLOYEES' PENSION FUND BOYNTON BEACH, FLORIDA MARCH 19, 1992 new system exists with the monitoring and diversification and perhaps there is not enough history at this time. He feels they should be given more time before any changes to that system are made. Since this is a workshop meeting, no official action can be taken; however, Vice Mayor Harmening pointed out that sufficient guidelines have been discussed in order to provide instructions to the City Attorney. Charles Frederick asked for clarification on the foreign invest- ment. Vice Mayor Harmening has no problem with foreign invest- ment but feels additional guidelines are necessary. Jack Hamilton stated that the guidelines already require foreign investments to be listed on an American exchange. ADJOURNMENT There being no further business, the workshop properly adjourned at 6:08 p.m. THE CITY OF BOYNTON BEACH ATTEST: Ci~ Cle'fk- - ~ .... g Secretary (Two Tapes) Mayor Commissi~r Commissioner Commissioner - 10 -