LEGISLATIVE, FINANCE AND ADMINISTRATION COMMITTEE

The Legislative, Finance, and Administration Committee meeting was held on September 21, 2004, at 5:00 p.m. with Chairman Salters presiding. Members present were Mr. Hogan, Mr. Slavin, Mr. Shevock, and Mr. Shelton (arrived at 5:16 p.m.). Members of Council present were Mr. Carey, Mr. Pitts, Mr. Sadusky, Mr. Ruane, and Council President Williams. Mayor Speed was also present.

AGENDA ADDITIONS/DELETIONS

Mr. Hogan moved for approval of the agenda, seconded by Mr. Slavin and unanimously carried.

Information on Pension Plan Investment Strategy/process

During the Civilian and Police Pension Board Meeting of June 28, 2004, Councilman Slavin requested that the Legislative, Finance, and Administration Committee be provided an informational presentation on the pension plan investment strategy and process related to the recent Request for Proposals (RFP) for asset managers. Chairman Salters advised members that the meeting was being held to provide information and clarify the RFP process. He stated that the committee did not intend to challenge the action taken by the Pension Boards and there would be no debate or inquisition.

Mr. Slavin stated that the efficacy of the investment decision by the Pension Boards and the process they used needed to be clarified. He stated that he believes that the Pension Boards have the authority to make their own decisions and Council has no role in that authority and they were not attempting to vacate, reopen, or otherwise undo the decision of the Pension Boards, only to review the information presented.

Mr. Slavin noted that the City Solicitor, Mr. Rodriguez, was requested to provide an opinion regarding members of Council who may have investments with some of the firms that responded to the RFP. He noted that he has a conflict in that he has investments with both Merrill Lynch and Fidelity. Mr. Slavin stated that if discussion led to any of those issues, he would recuse himself from voting.

Mrs. Mitchell, Finance Director, provided an informational presentation of the Pension Plan Investment Strategy/Process (as on file in the Office of the City Clerk). She explained that Mr. Michael Shone of the Peirce Park Group provided a presentation of all of the proposals and reviewed each with the Pension Boards. Mrs. Mitchell noted that Mr. Shone was also requested to provide a customized proposal for review. A sub-committee was formed to further evaluate each fund in order to make a recommendation to both Boards.

Responding to Mr. Shevock, Mrs. Mitchell, Finance Director, stated that the RFP’s were in compliance with the City’s Investment Policy, as well as the receipt of the responses. She noted that the Investment Policy was revised in August to include the term “Mutual Funds”. Although the policy allowed for investment in individual stocks and bonds, it did not specifically include having them grouped in mutual funds. Mrs. Mitchell stated that she did not believe adding the clarification was a violation of any policy.

Responding to Mr. Shevock, Mrs. Mitchell stated that the allocation was determined with the help of the consultant. She noted that, in the future, the rolling cash flow percentages will be monitored and the portfolio will be re-balanced in conjunction with the cash flow. Mrs. Mitchell stated that although Council had the fiduciary responsibility for the fund, both the Council and the Boards were responsible for the pension funds.

Responding to Mr. Slavin, Mrs. Mitchell stated that she and Mr. Shone issued the RFP’s after they were reviewed by Mr. Pete Greg, the City’s Purchasing Agent, for compliance with the Purchasing Policy. She noted that 15 RFP’s were sent out and they received 10 responses for management and three (3) for custody. Mrs. Mitchell stated that each proposal was evaluated and it was determined that the fees were high and the performance was low. She noted that they then selected funds from several of the proposals and developed a mix that was lower cost with higher performance than any of the stand-alone proposals. Mrs. Mitchell advised members that the process was within the scope of work that the consultant was hired to perform. Mr. Slavin stated that he was uncomfortable with the process since the purchasing agent did not issue and receive the RFP's and since none of the proposals were selected. Responding to Mr. Hogan, Mrs. Mitchell stated that Mr. Shone recommended using the commingled approach after the RFP's were received.

Mr. Ruane stated that, as a member of the Pension Boards, he was asking similar questions throughout the process and was assured that everything was being done according to policy. He noted that the members acted with due diligence and the motion to proceed with the commingled funds approach was unanimously carried by both the Civilian and Police Pension Boards. Mr. Ruane advised members that there was nothing in the Investment Policy which prohibited investments in mutual funds. Referring to Mr. Shevock's concerns regarding Mr. Shone being a licensed broker, Mr. Ruane noted that members were provided a letter from Mr. Shone clarifying that there was no conflict of interest.

Mr. Steve Enss, City of Dover employee, stated that he served on the Civilian Pension Board for two (2) terms, ending approximately four (4) years ago. He noted that the process of selecting a manager and diversifying the funds began during his term when the Boards noticed that other funds were making more money.

Mrs. Frances Hettinger, City of Dover retiree, stated that prior to her retirement Mr. Karia, the former Finance Director, discovered that they were paying outlandish fees to have the funds managed. She stated that Mr. Karia advised them that they had lost thousands of dollars and recommended diversification of the funds, which the Boards supported. Mrs. Hettinger stated that she did not want to see the Pension Boards lose control of the Pension funds to City Council.

Mr. Charlie Paradee of Edward Jones stated that he submitted two (2) proposals for the opportunity to manage the pension plan. He advised members that the figures presented for Edward Jones in the analysis of the proposals were not correct. Mr. Paradee stated that his proposal indicated a return of 7.411% for 5 years, 6.635% for 3 years, and 28.528% for one (1) year. He also noted that those figures were net of fees, not gross of fees as indicated on the analysis presented by Mrs. Mitchell. Mr. Paradee stated that Mr. Shone should not have been put in the position of evaluating his proposal since he is a broker himself.

Mr. Doug VanSant, former City employee, stated that when he served on the Pension Board in 1980 they tried for reform, revise, and improve the pension plan. In 1982, a new pension plan was developed. At that time, the fund was managed by an insurance company and they began losing money; therefore, they began looking for a different manager and Merrill Lynch was hired. It was his feeling that the current Pension Boards are noticing that they are losing money and seeing other managers and brokers who have better performance records and they want their fund to do better also. Mr. VanSant stated that the Board members are honest, decent, responsible people who are looking out for themselves, current City employees, and future retirees and requested that the decision of the Pension Board members be affirmed so that they can proceed.

Mr. Sherman Townsend of Merrill Lynch stated that he felt the media had been misinformed about the past performance of the City’s pension plans. He reminded members that 2000 through 2001 were the worst in market history. Mr. Townsend stated that when they were hired in 1983, their mandate was to exceed the actuarial assumption of 7.5%, which they have done over the length of time they have managed the plan. He indicated that their average annual return from 1983 to date is 9.9% for the Civilian plan and 10.1% for the Police plan. Mr. Townsend noted that there was a significant unfunded liability when Merrill Lynch assumed the plan and it has never been recovered. He noted that money has not been added to the savings account of either fund since 1991 in either plan, only withdrawals in the amount of $9.1M. Mr. Townsend stated that they have exceeded what they were hired to do and he would defend their performance any time.

Mr. Salters stated that he felt the process had been clarified and misconceptions had been dispelled.

Mr. Shelton moved for adjournment, seconded by Mr. Salters and unanimously carried.

Meeting Adjourned at 6:27 P.M.

                                                                       Respectfully submitted,

                                                                       Reuben Salters

                                                                       Chairman

RS/jg

S:ClerksOfficeAgendas&MinutesCommittee-Minutes20049-21-2004-LF&A.wpd