Loading...
HomeMy WebLinkAbout2017-05-09 NEERB MINUTES.. • NONEMERGENCY EMPLOYEES RETIREMENT BOARD MEETING May9,2017 Chairperson Woodward called the regular meeting of the Englewood NonEmergency Employees Retirement Plan Board to order at 3 :01 p.m. in the Public Works Conference Room of the Civic Center, 1000 Englewood Parkway, Englewood, Colorado. Members Present: Members Absent: Others Present: A quorum was pre se nt. David Henderson, Employee Representative John Moore, Council Appointee Mahendra Patel, Employee Representative (arrived 3:21 p.m.) James Phelps , Council Appointee Kathleen Rinkel, Director of Finance and Administrative Services (left 4: 17 p .m .) Jim Woodward, Chairperson, Council Appointee Carol Wescoat , Recording Secretary Steven Yates, Council Member (Notice) Wendy Dominguez, Innovest Portfolio Solution s Jerry Huggins, Innovest Portfolio Solutions Leslie Thompson, Gabriel Roeder Smith and Company Kerry Bush, Ben efit/Risk Analyst * * * * * • Approval of Minutes • MR. PHELPS MOVED TO APPROVE THE MINUTES OF THE FEBRUARY 14 , 2017 REGULAR MEETING. MR. MOORE SECONDED. Ayes: Nays : Absent: The motion carried. Phelps, Henderson , Moore , Rinkel , Woodward None Patel, Yates MR. PHELPS MOVED TO APPROVE THE MINUTES OF THE FEBRUARY 7, 2017 SPECIAL MEETING . MR. MOORE SECONDED . Ayes : Nays: Absent: The motion carried. Phelps, Henderson, Moore, Rinkel, Woodward None Patel, Yates Gabriel Roeder Smith and Company (GRS) a. Discussion of the January 1, 2017 Actuarial Report Ms. Thompson reviewed the prese ntation handout of the January 1, 2017 Actuarial Report and the requested study on changing the mortality tables. She reviewed the amortization layering methodology that was adopted by the Board previously. • • • The total annually required contribution for 2018 is 26.3%. This is an increase from 25.4%. She commented that the payroll declined , so when you are looking a percentage of pay , it doesn 't mean that dollar for dollar it increased that much, but the declining payroll does increase the contribution percentage. The employee contributes 3% so the City's contribution will be 23.3% of pay . Ms . Thompson said the investment return was 8.9% on market value. That is one of the highest returns reported from her clients . The return was 7 % on the actuarial value of assets. The funding ratio improved to 77 %. She reviewed the Summary of Contribution Requirements, the Member and Plan data, and the change of the Market and Actuarial asset values. She complimented the Board on the 2016 decision to reset the Actuarial Value of Assets to the Market Value and by doing so recognized the years of losses at one time. This provided an improved position for the Plan going forward. This year the Plan has deferred gains that helps keep the pressure off the potential increase of the contribution rate. She outlined how using a smoothing technique allows for fewer fluctuations on the returns and helps the Board when making decisions that are not predicated on spikes or downs of the market. That is the theory behind using asset smoothing and about 95 % of the plans in the public sector use smoothing for that reason. Ms. Thompson pointed out the accrued liability increased from $42.2 to $43.2 million. She said the accrued liability should always increase because it is the past normal costs and that is why people talk about the accrued liability being a desired level of assets. If you always pay normal costs, then the assets should equal the accrued liability . It does not now because of the gains, losses and other things can happen. This year, GRS has provided on their report, the sources demonstrating what has happened and the impact to the accrued liability. GRS outlined the areas where the accrued liability did not meet the assumptions such as, the Plan had a loss for salaries because the salary increases were bigger than expected. Mortality had a gain becau se retirees were not living as long as expected and other things that were les s of an impact such as retirements, di sabilities or other issues that could cause a demographic loss . Ms. Thompson reviewed the actuarial report and presented the Mortality Change Study using the RP-2014 tables projected with 2-dimensional Improvement Scale MP-2016 . Ms . Rinkel asked about a forecast of future contributions . Ms . Thompson said that GRS does forecasting for the next 30 years and would bring it to the next meeting . Ms . Rinkel clarified she wanted to know what the 2018 contribution will be and it was explained that the results of the January 1, 2017 Actuarial Report provide the contribution percentage for 2018 because of the year of lag after the report is prepared. The Board discussed the Mortality Change Study . The improved mortality table includes the assumption that people are living longer and that adds years to the life expectancies. Ms . Thompson gave the example of a fifty year old today , will not live as long as a fifty year old twenty years from now. Each generation gets a bit of improvement of mortality. She reviewed the Mortality Study on page 14 of the presentation handout. She said that retirees do not have normal cost. Normal costs are for active participants because normal costs are for benefits accrued during employment and retirees are no longer accruing benefits . When you change mortality tables , you are saying the retiree could receive benefits for a longer period of time . Chairperson Woodward asked about the chart on page 22 of the Actuarial Report that demonstrates the ages and years of service for the Members . The last three rows with ages 55 to 65+ is about half of the active membership . That would indicate the probability of about half of the employees retiring during about a ten year period . He is concerned about how that would affect the fund . Ms. Thompson said there is the probability of those retirements, but it should not affect the fund a lot because the Plan has been accruing and funding the benefits for a long time. Mr. Moore referred to page 8 that has the ten year cash flow projection including projected retirement payments . The number of actives escalates rapidly over the next five years and then appears to level off while the total of funds expended it does not appear to escalate in the same manner. Discussion followed about the number of active participants in the Plan after the aging group of employees retire and that impact on the Plan. Mr. Patel arrived 3:21 p .m . NonEmergency Employees Retirement Board Meeting 2 of7 • Ms . Thompson does not recommend changing the mortality table now based on results in the gain/loss by source details. She does not see a pressing need to change the mortality tables and the Board could wait to make a change and it would be fine . Changing to a more current table is a prudent move because eventually the Board will want to change to a more current mortality table . Mr. Moore said if the Board does not make the change this year, he would like to review the mortality table issue again next year. Ms. Thompson said it is important that whatever table is used , they continue keeping it calibrated to the Plan's experience. The Board agreed to wait until next year to revisit changing the mortality table . MR. PHELPS MOVED TO APPROVE THE JANUARY 1, 2017 ACTUARIAL REPORT. MS. RINKEL SECONDED. Ayes: Nays: Absent: The motion carried. Phelps, Henderson , Moore , Patel , Rinkel, Woodward None Yates b. Discussion of 2017 GASB Report Fees Ms. Thompson explained that new requirements by the Government Accounting Standards Board (GASB) began during 2016. GRS prepared the required GASB report as requested by Kevin Engels, City of Englewood Accounting Manager, this year that provides necessary NERP information to be included in the City of Englewood's 2016 Comprehensive Annual Financial Report (CAFR). Mr. Engels requested and received the GASB report for the 2015 CAFR during 2016. She explained that GRS did not quote a fee prior • to doing the work either year and the City was not told there is a fee for the GASB report until now. • Ms . Thompson recognizes that it is their mistake that there was not the usual fee approval process . The GASB report is new and there is additional numbers that must be prepared beyond the actuarial report. She said that the fee quoted in their letter is about half of their standard fee because Mr. Engels prepares much of the information. His efforts allow GRS to complete the work in a shorter period of time. The Board discussed that the work is outside of the scope of the GRS engagement letter. Mr. Moore asked if it was appropriate to use Plan assets to pay for a report for the City's benefit. Ms. Thompson said many of her plans have declined paying for the report and require the employer to pay for the report. Discussion followed regarding what expenses are permitted to be paid by the Trust. Mr. Moore would like for a legal opinion regarding who should pay the fee . Ms. Wescoat will submit a request for an opinion from the City Attorney's office regarding whether the City or the NERP should be billed. Approval of payment will be postponed until counsel responds . Retirement Approvals and Notifications: a. b. c. d. e . f. g. h. Consideration of Delayed Retirement Benefit for Barbara Archuleta Consideration of Early Retirement Benefit for Joe Youngren Notification of DROP Application for Michael Renner Notification of DROP Application for Debra Moomaw Notification of DROP Application for Kevin Hill Notification of DROP Application for Terry Tadlock Notification of Retirement Benefit Application for Dale Southworth Notification of Early Retirement Benefit Application for Lee Gallegos 3 of7 NonEmergency Employee s Retirement Board M eetin g • • • I. J. k. I. m. Notification of Death of Terrance Maki, Retiree (February 8, 2017) and approval of benefit for Sandra Maki Notification of Death of Bonnie Poole, Beneficiary of John Poole Consideration of Refund of Accumulated Contributions for Kassandra Hedgecock Consideration of Refund of Accumulated Contributions for Kenneth Tunson Consideration of Rollover of Accumulated Contributions for Brad Hess MR. HENDERSON MOVED TO APPROVE THE BENEFIT APPROVALS AND NOTIFICATIONS . MS. RINKEL SECONDED. Ayes: Nays: Absent: The motion carried . Phelps, Henderson , Moore, Patel, Rinkel, Woodward None Yates Innovest Portfolio Solutions, LLC a. Discussion of Expense Reduction Analysts (ERA) Report Ms. Dominguez reviewed the discus s ions from the last meeting related to using passive management. The Board agreed at the prior meeting to have Innovest look at using passive management for a portion of the mid and small cap allocation of the portfolio. Ms. Dominguez said that ERA report shows how index funds are cheaper. She agreed and compared various funds fees . The Innove st NERP Indexing Analysis handout has charts that present a historical comparison of the Plan's current funds. She referred to the graph on page 18 that compares splitting the current fund s allocation of John Hancock and Harbor Small Cap funds either in thirds with the Vanguard Extended Market Index Fund, or 25 % percent each of the current funds and 50% to the Vanguard Extended Market Index Fund , or to index all of the allocation. She said that the graph shows over the last 10 years what would have been lost in performance and in these two investments alone, the los s would be approximately $1.2 million. It is important to not just make decision based on cost alone . These two investments have dramatically outperformed the index over the last ten year time period . Ms. Dominguez continued, emphasizing that it is important to control costs. The Innovest analysis looks at how the index has performed and what if the index fund were included in the mix. On page 18, the graph lines that reflect the inclusion of the index fund allocation would be even higher if they had not included a portion for the index . The index fund is weighing down those funds because there is a portion of the allocation added to the index in the mix. Innovest also takes issue with the ERA recommendation use of Exchange Traded Funds (ETF) instead of mutual funds to implement index fund s. The ETF/mutual fund comparison is outlined on page 5 of the NERP Indexing Analysis . Ms. Dominguez explained how ETFs trade versus mutual funds and the issues occurring when rebalancing the portfolio. The NERP portfolio is rebalanced each month when cash is raised to cover Plan benefit payments or expenses . She said there could be some liquidity issues with ETFs as well because they can trade with premiums and discounts to th e ir net asset values based upon supply and demand trading volumes. Innovest's recommendation if index funds are chosen that the Plan uses a mutual fund rather than an ETF. Ms . Dominguez presented the Vanguard Extended Market Index Fund, page 10 of the Index Analysis. This would be the recommendation Innovest would consider including in the allocation with John Hancock and Harbor funds. The examples are allocated one-third to each John Hancock, Harbor and Vanguard Extended Market Index Fund or 25 % to each John Hancock and Harbor and 50% to the Vanguard Extended Market Index Fund . Discu ssion followed explaining that the S&P Completion Index is not a product that can be NonEmerge ncy Employees Retirement Board Meeting 4 of7 • • • purchased and that the Vanguard Extended Market Index Fund closely mirrors that index. The Vanguard fund has fees that the index does not. Ms . Dominguez continued to explain the peer group analysis on page 14 and 15. Mr. Moore questioned the results represented for 2016 . Ms . Dominguez said that 2016 was a year the indexes performed very well. Discussed followed relating to the events of 2016 that impacted the market and the cycles that fluctuate when either active or passive managers may outperform. Ms . Dominguez commented that it is interesting that in a cycle when passive managers are outperforming, that both the John Hancock and Harbor funds have outperformed the index. Chairperson Woodward commented that if you were only looking back at the Plan's funds' past performance , there would be no reason to move to index funds. Ms . Dominguez reviewed the risk adjusted performance charted on pages 16 and 17. Mr. Moore commented that he would like to see where the charts would be if the one-third were not included and it were only fifty- fifty on the current two funds compared to the S&P Completion Index. He noted the more ideal place to be is the upper left quadrant. The Board discussed where the fifty-fifty mix would be on the charts . Ms. Dominguez indicated it would higher and on the left. Ms . Dominguez said the fifty-fifty could be added to the chart and sent to the Board . Ms . Rinkel asked if it shows the current mix in the upper left, why change? Ms . Dominguez said that history has shown that active management has done very well so the Board could absolutely make the case that it is not necessary to change. She also said that changing to passive is a way to reduce costs going forward but it could potentially reduce performance. Ms . Thompson commented that it is interesting that if you go to indexing, you pay a fee to ERA, but if it reduces overall returns by using index funds then you also have to contribute more to the Plan. The Board discussed the need to make the change if the current funds provide good returns. Mr. Moore commented that he did not see any compelling reasons to move the funds, but he sees extremely compelling reasons to not make the changes . He would support supplementing the graphs by adding the current portfolio choices. Discussion followed regarding the ability of using this information in the future to help determine the right opportunities, but with strong performing funds until the "hot streak" was over, there is not a need to change. Chairperson Woodward said the current monitoring of the active funds allows an opportunity to make changes when there is an indication and using a passive fund leaves it to the mercy of the market. The Board reviewed the ERA proposed funds, past discussion on the passive funds and where there may be potential to reduce costs. Ms. Dominguez referred to page 20 of the Performance Report to demonstrate the funds' performance since inception compared to their appropriate benchmarks. She illustrated amounts that would not have been earned if the index were to have been used. Chairperson Woodward added that the index is for comparison purposes does not have fees that would increase the earnings difference. Mr. Moore reviewed how the ERA fees are structured if the Board agrees to move to a one-third each of the two current and the new Vanguard fund. He questioned when the ERA two year clock begins? He does not want the two year clock to start somewhere down the road if the Board decides to make the passive management changes later. Discussion followed regarding how the ERA contract is structured. Mr. Moore suggested that if the Board elects not to the use the ERA funds proposed, the Board should formally reject the ERA proposal and consider it done. He does not believe that the ERA report should be hanging over their heads indefinitely as they make funds choices later. Ms. Rinkel said she wants to be sure they are within the terms of the contract. Mr. Moore is willing to make the motion to make no changes today, but he is also willing to wait for more information. He wants to be sure that the Board is not left open to the ERA contract that two years from now, they could be starting a two year clock. Ms . Dominguez said the ERA recommendations were specific ETFs, which Innovest is not accepting and if the Board were to use index funds, the argument could be made that the Plan is not using the ERA recommendations and not specifically using the products that outlined. NonEmer genc y Employees Retirement Board Meeting 5 of7 • • • Ms. Rinkel wants to review the ERA contract, in detail, to see if there will be nuances on this because she does not want ERA to come back, saying you used their idea. Mr. Moore said that he thinks a Board motion may actually give the City Attorney something to work with ... if the Board is wrong, they can always undo it. Ms. Rinkel suggested that the Board wait for the supplemental report from Innovest with the current funds information. Mr. Moore said he will hold his motion until the information is received. The Board discussed passing the motion by telephone/email poll. Mr. Moore ask if there is a process that he would make the motion and table the vote pending the additional information. Ms. Bush said he could make a motion, get a second and then table the motion to the next meeting. MR. MOORE MADE THE MOTION THAT AFTER CAREFUL ANALYSIS OF THE EXPENSE REDUCTION ANALYSTS (ERA) REPORT AND EXTENSIVE CONSULTATION WITH THE BOARD'S CO-FIDUCIARY ADVISOR, INNOVEST PORTFOLIO SOLUTIONS, THE BOARD IS NOT CHANGING ITS CURRENT BALANCE BETWEEN ACTIVE AND PASSIVE MANAGEMENT AT THIS TIME OR MAKING OTHER CHANGES DUE TO ERA'S RECOMMENDATIONS, AND THEREFORE THE BOARD CONSIDERS THE ERA PROPOSAL TO HAVE BEEN REJECTED. MR. PATEL SECONDED. The Board agreed that if the supplement information provided additional information that was not consistent with the presumed data, the Board would reject the vote or never bring it off the table. MR. HENDERSON MOVED TO POSTPONE THE MOTION TO THE NEXT MEETING . MR. MOORE SECONDED. Ayes: Nays: Absent: The motion carried . Phelps, Henderson, Moore, Patel, Rinkel, Woodward None Yates Ms. Rinkel left at 4: 17 p.m. Mr. Huggins presented the Share Class Review . He explained that funds periodically add share classes to the existing fund. Innovest provides this review as part of their own going services . Mr. Huggins reviewed the past custodial fees and how the revenue sharing is used to reduce the custodial fees and to cover the cost of those fees. He said if the share class of a fund is changed and reduces the amount of revenue sharing, there is the possibility that the Plan will be invoiced for the custody fees quarterly. Discussion followed regarding how custody fees are currently paid and how it might be potentially handled by Schwab in the future. Mr. Huggins reviewed the funds and where Innovest recommends a share class change. He explained each of the different funds' gross expense ratio, recordkeeping offset and the net expense. Ms. Dominguez said many of the reporting processes used usually only report the Gross Expense Ratio even when the Net Expense of a share class may be less using another share class. Market reports often give the impression that a Plan is not using the best fund to reduce costs because only the Gross Expense Ratio is reported . She said that Innovest thinks from a fiduciary best practices that if you can reduce the Gross Expense and at the same time reduce the Net Expense, that is when you should make a move. Mr. Huggins said that if the share classes changed for the three funds recommended, the revenue sharing will change from approximately $5,200 to about $3,200. The revenue sharing could be less than the typical quarterly custody fees. There may be times when Schwab sends an invoice and that may mean selling assets to cover the custodial fee. When the investment expense reduction is greater, it should provide increased earning potential. Mr. Huggins clarified that the discussion is about two different costs, investment costs and custody costs. NonEmerge ncy Employees Retireme nt Board Meeting 6 of? • • • Ms. Wescoat asked since Schwab currently sweeps the custodial fees from cash through their current practices, would they continue to do that if there is a sufficient balance to cover the fees? Mr. Huggins said there is enough of a balance, for a time, to cover the fees with incomjng revenue sharing and they will ask if that can continue . MR. PHELPS MOVED TO CHANGE THE SHARE CLASS FOR THE AMERICAN FUNDS TO AMERICAN FUNDS GROWTH F2, THE JPMORGAN STRATEGIC TO JPMORGAN STRATEGIC INCOME OPPS RS AND OPPENHEIMER STEELPATH TO OPPENHEIMER STEELPATH MLP ALPHA I. CHAIRPERSON WOODWARD SECONDED. Ayes : Nays: Absent: The motion carried. Phelps, Henderson , Moore, Patel, Woodward None Rinkel , Yates b. Performance Evaluation Ms. Dominguez suggested reviewing only the highlights of the first quarter's Portfolio Review. She said the total fund 's return for the quarter was 4.35 percent which was .49 percent more than the Custom Benchmark and over the past 12 months, the total fund was 14.05 percent compared to the Custom Benchmark of 12.44 percent. She continued reviewing the markets and the 2016 market conditions highlighting the incidents that had an impact during the quarter. Mr. Huggins reviewed the performance of the funds for the quarter compared to the fund's benchmark and the Plan's Strategic Allocation. He reviewed the Manager Score Card on page 17, noting the reasons where there are areas of minor concern . Mr. Huggins reviewed each fund's performance for the past quarter and the reasons for the over or underperf ormance for each. Member Choice No further items were discussed . The next Board meeting will be August 8, 2017 . The Board adjourned at 4 :52 p.m. {}µof lJJMe thi{- Carol Wescoat Recording Secretary NonEme rge ncy Employees Retirement Board Meetin g 7 of 7