Fire & Police Pension & Retirement Board

February 24, 2014

MINUTES OF THE REGULAR MEETING OF THE CHARTER TOWNSHIP OF SHELBY FIRE & POLICE PENSION AND RETIREMENT BOARD HELD ON MONDAY, FEBRUARY 24, 2014 AT FIRE STATION #1, 6345 23 MILE ROAD, SHELBY TOWNSHIP, MICHIGAN.

The meeting was called to order at 5:08 p.m. by Chairman Matt Stachowicz.

Members Present: David Diegel, Michael Flynn, Jerry Moffitt, Mark Semaan,

Matt Stachowicz

Also Present: Brian Green, Graystone Consulting

Lewis Thumm, Pension Board Attorney

Franklyn Pierce, Fire Department

APPROVAL OF MINUTES

MOTION by Moffitt, supported by Semaan, to approve the minutes of the Regular Meeting of the Fire & Police Pension and Retirement Board held on Monday, January 20, 2014, as submitted and waive the reading.

Motion carried.

PRESENTATION

Graystone Consulting – Review – Asset Allocation Distribution 1-31-2014

Mr. Green briefly explained the submittal entitled “Cash Flow – 1/31/2014”. It indicates what the Pension Board was receiving from Merrill Lynch. It also shows the Disbursement Summary for the month of January.

The Asset Allocation Distribution as of 1/31/2014 reflects the market values of securities held by the Pension Board vs. the respective policy targets.

Mr. Green advised that with regard to the cash flow, the world markets were in negative territory with the exception of fixed income and real estate during the month being reviewed. We were off nearly $1.2 million from a change of value standpoint.

Mr. Semaan asked that next month, Graystone provide us with the end of the month report and also the values as of the close of business on the Friday prior to the meeting.

Graystone Consulting – Global and Core Fixed Income Search/Infrastructure Review – February, 2014

Mr. Green reviewed the submittal in detail addressing questions of the Pension Board.

Mr. Green advised that currently there are four funds in the marketplace that they identified as potential candidates that aren’t energy focused.

McMorgan

This group was present at the last meeting.

IFM Global Infrastructure - An Australian based fund

JP Morgan

Macquarie Infrastructure Fund III – Australian Bank

Infrastructure investing in the United States is relatively new. It has come about during the last five years. It has become even more popular in the last 12 to 18 months because of issues from a fixed income standpoint. Outside of the United States, primarily from a European or Australian standpoint, it has been around for 30 plus years.

There are funds that are designed and set up like McMorgan that are trying to generate yield and consistent income. They are trying to generate 80% to 90% of the return goal that they want to meet by generating income. Price appreciation is a nice bonus but their primary goal is to underwrite these assets and find assets that they think will generate consistent income in line with what they expect. The counter to that are holdings from McQuary and JP Morgan that have more private equity structure. They will go out into the market and raise funds from institutional investors around the world, public funds, foundations, pension systems, corporate pension systems, sovereign wealth funds, etc. There is minimal investment on the part of the company. JP Morgan and McQuary will say they may kick in 2% of the fund. They are saying they will charge a management fee and a promo. Once they hit a certain return, they will split profits above that. This gives investors a little peace of mind. They will pay a management fee and that will cover the cost of the operation of the business but your wealth is 20% of any profits above a certain rate of return. That worked very well in private equity; however, not from an infrastructure standpoint because of the length of this, the time involved and the nature of the projects, and because there are other competitors in the marketplace that aren’t doing that.

The JP Morgan portfolio had a lower yield target and a lower return estimate but had a higher fee where we charge a promo.

For them, it came down to looking at McMorgan and the IFM. IFM – International Fiduciary Management is owned by 30 Australian pension funds. This is 30 Large Taft Hartley and Sovereign Wealth Funds all in Australia that have collaborated to create IFM to manage infrastructure assets on their behalf. From an ownership standpoint, for Morgan Stanley the big part of the attraction of McMorgan is the fact the brains behind the operation is the infrastructure arm of the Ontario Municipal Employees Retirement System. These are investment professionals that are investing their own pension dollars in infrastructure and have been doing it for a number of years. IFM is owned by a number of pension funds but members of the actual staff are not participants in the pension fund.

From a fee schedule standpoint, McMorgan’s fee schedule is 1% of invested assets. IFM is within 3 basis points. McMorgan doesn’t charge any promo or have any type of profit sharing arrangement. The IFM charge a fee, and it is an 80/20 split. Once you get your 8%, anything above that 8% is 80% to the Township and 20% to the manager. If they generated a 10% return, you get the first 8% and the additional 2% is split 80/20. If they generated a 10% return, the Township will get 9.6% and they will get .4% plus their management fee.

With McMorgan they go out and fundraise today with March 31 being the drop dead date. If you’re in, you’re in. They are done on March 31. That is something set up and they won’t continue fundraising after that. With IFM, there is a slightly different structure. You can add money at a later date. They do offer some liquidity terms but it is on the best efforts basis.

Morgan Stanley is leaning toward McMorgan and making a firm recommendation to clients from an infrastructure standpoint to the extent that you are comfortable with the asset class and comfortable with the timeframe and the liquidity involved. Another reason is the idea the investment arm is raising an almost $12 billion fund, and $5 billion of that is their pension dollars that they are investing. That tipped the scales in favor of McMorgan.

Mr. Diegel questioned the 15-year term. Mr. Green said on the 15-year anniversary, they have to list the property for sale. It doesn’t necessarily mean that they can but they have to offer it for sale. We are talking about investments that will cost between $1 and $2 billion.

Mr. Green said that the close is March 31. He would expect that they would start to call money in the second half of 2014. They will probably use April, May and June to collaborate to make sure they have everything together and then start to call capital down from investors in the second half of 2014. By offering a memorandum, they can’t call down any more than 30% in a given year.

Mr. Moffitt questioned if there are opportunities for us to get bought out. Mr. Green responded to his inquiry.

Mr. Green advised if we get everything invested and we are only yielding 5% we want out. It is based on an individual asset basis.

Mr. Diegel believes we need to look at some alternative investments to help us in fixed income.

Mr. Stachowicz asked Mr. Green if anyone he deals with uses this fund. Mr. Green said that everyone McMorgan was presented to has used this investment. Not every one of their clients has seen McMorgan because they have some clients that say they don’t want any real estate or illiquidity. They want the S&P 500, a little International and Fixed Income.

Mr. Stachowicz asked for the lock-in period if we invest with them. Mr. Green advised it is something that the Pension Board would be in for 15 to 20 years.

Mr. Semaan added that we can always find someone to buy us out. Mr. Green said there is that potential.

Mr. Moffitt indicated there are opportunities for them to petition the general partner to buy you out.

Discussion followed among the members.

Mr. Moffitt said there are liquidity concerns especially if the plan is going to close and what does that mean long term. Twenty years is a long time, and these are not easy assets to sell. There are very few funds that do this and very few organization type funds that can buy these. Another question is how do they depreciate over 20 years and what effect will that have.

Mr. Stachowicz asked if inception is 2008. Mr. Green responded that it goes back further than that. Mr. Stachowicz asked to see some numbers as far as track record. Mr. Green said that is possible.

Mr. Stachowicz would like to go back 10 years. Over the last week, he reviewed the Hancock book and he doesn’t see one investment that generated 11% in 2008.

Mr. Semaan would like to go back to 1999.

Mr. Green said he would be surprised if they didn’t do somewhere between 7% and 12%.

Mr. Diegel asked Mr. Green if he plans on bringing any other asset classes to us for the fixed income slot. Mr. Green asked as far as a replacement standpoint. Mr. Green asked if the Pension Board is trying to replace returns that they used to get out of fixed income. If they expect that 5% to7% return, that is very conservative real estate and hedge funds. The Pension Board has made an allocation from the real estate standpoint. Alidade has done a successful job that is not conservative real estate. That is more of an opportunistic approach and that is exactly what they said they would do and they have done that to a tee. They have done a very good job so far. That type of real estate is not a replacement for fixed income. That is more a replacement of what you would normally expect from an equity standpoint.

Mr. Diegel asked if we can increase the real estate allocation and reduce the fixed income allocation as an option. Mr. Green said with a plan of our size, you can legally go up to 10% in real estate. That was the revision that was put in place with Public Act 314. With a plan of our size, it was 5% of real estate. With the revision, it is now up to 10% in real estate. Mr. Diegel said we can double the allocation that we currently have in our plan.

Mr. Green said if the Pension Board is comfortable to commit $3.5 million, that amount is invested over the next 3 ½ years. We don’t wire $3.5 million on April 1. That amount will be $1 million a year over the next 3 years. If we are a year out and they invested $1 million, there is another $2.5 million to invest. That $2.5 million is invested in everything else in the portfolio.

Mr. Semaan believes we can invest 5% without hurting the fund. It appears to be a stable fund.

Mr. Green advised that they wouldn’t bring this fund forward as a recommendation if they weren’t comfortable with it, especially given the lack of liquidity, asset class and all of the potential pitfalls.

Mr. Stachowicz asked if there is a risk factor. Mr. Green stated any number of things could potentially happen.

MOTION by Semaan, supported by Flynn, to invest $3.5 million in the McMorgan Infrastructure Fund.

Motion carried.

Mr. Green continued his presentation by providing information with regard to Global Fixed Income Search Summary, Global Fixed Income Finalist Summary, Core Plus Fixed Income Search Summary and Core Plus Fixed Income Finalist Summary and explained the process used in selecting managers.

MOTION by Moffitt, supported by Diegel, to invite Brandywine Global Investment Management and Franklin Templeton Investments.to the March meeting.

Motion carried.

The members agreed that the next Pension Board meeting will be held on Monday, March 17 at 5:00 p.m.

OLD BUSINESS

Review of Policies and Procedures with Pension Board Attorney and Investment Consultant

Mr. Thumm, the Pension Board Attorney, advised the members that the following documents should be considered for adoption this evening.

Policy Resolution

Exhibit A to Policy Resolution

Record Keeping Policy

Policy and Budget for Retirement Board Members Annual Education, Training and Travel

Service Provider Fee Policy

He briefly reviewed the documents presented.

MOTION by Flynn, supported by Semaan, to adopt the required Resolutions and Policies as submitted.

Motion carried.

The only policy that needs to be reviewed is the one entitled “Itemized Budget for Projected 2014 Expenditures of the Retirement System.

The submittal was explained in detail by Mr. Thumm.

Mr. Diegel provided his input based on prior year figures.

Mr. Thumm advised the members of his findings according to current statutes and public acts.

Discussion followed among the members.

MOTION by Semaan to include the recommended dollar amount on the budget as our income, which includes employee contributions, employer contributions, the tax levied to pay the pension and the differences made by both the Police and Fire Department budgets with the line item to indicate the amount invested. Also, to adopt the proposed expenditure budget in the amount of $4,732,500 and to add the revenue item to reflect the actuarial requirement for the year.

MOTION by Diegel, supported by Semaan, to adopt the 2014 operating expenditure budget in the amount of $4,732,500 and a 2013 operating budget in the amount of (x) to be provided by Allan McDonald, Finance Director.

Motion carried.

Mr. Thumm questioned if Financial Management has been notified of the policy regarding confidentially. Mr. Semaan responded that they received a copy of the minutes where this was discussed together with the attachment describing what can be disclosed as far as calculations.

Mr. Semaan had a question regarding an annuity withdrawal. He wanted to clarify if a patrolman was a command officer and he got demoted back to patrol, it doesn’t matter how long he was in patrol, he can take his annuity withdrawal when he leaves and it is for the entire time that he was employed.