Regularboard Meeting Minutes

CHARLOTTE FIREFIGHTERS’ RETIREMENT SYSTEM
428 East Fourth Street  Suite 205  Charlotte, North Carolina 28202(704) 626-2728 Fax (704) 626-7365

REGULARBOARD MEETING MINUTES

October 27, 2016

PRESENT:Ms. Vanessa Heffron -Chair, F. Traylor Renfro,Mr.John Carr,DC Kevin Gordon (via phone),Mr. Robert Campbell, Ms. Lydia Crutchfield, Ms. Cheryl Brown, Mr. Scott Greer, BC David F. Moore and Marvin O. Wilson

OTHER: CFRSAdministratorMs. Sandy Thiry;CFRS Counsel Mr. Jason Kay;Mr. Todd Green,

Cavanaugh McDonald; Ms. Gwelda Swilley-Burke, Callan Associates (via phone); and active

firefighter ShaneNantz.

ABSENT:BC Tim Ramsey

AGENDA

1. CALL TO ORDER by Ms. Vanessa Heffron at 7:37 am

A.Welcome to the Board to Marvin Wilson.

1. CONSENT CALENDAR

1. Ms. Brown motioned to approve Consent Agenda. Mr. Carr seconded motion. Motion carried. Consent Agenda consisted of Board Meeting Minutes April 28, 2016; Expense Reports; Schedule of Retirements; Cash Draw for Operating Expenses; Receipt of Real Estate Dividends in Lieu of Re-investing; and the Hire of a New Investment Manager.

1. REPORTS

A.Actuary Report- Todd Green explained Funding Equation: Contribution +Investment Income= Benefit Payments +Expenses. Also reviewed funding methodology. Present value of future benefits split into two pieces. Normal cost – City pays 11.07%, 1.58% of payroll goes to paying off accrued unfunded liability. Level Dollar vs Level Percent of pay – plan is funded at Level Percent of pay financing. Experience Study this past year with new assumptions adopted by the Board (Economic and demographic changed) had biggest impact to funded status. Asset returns – market return .47% vs. 7.75% expected resulted in 7.28% less than anticipated. Actuarial asset incorporates smoothing method. Anytime an asset return exceeds the assumed rate it gets banked, if less than assumed rate the savings is used to offset the loss. Actuarial asset returns 7.59% versus 7.75% (.16% less than expected) is slightly less than the assumption but close to it because of the built up unrecognized investment gains in the smoothing method. Pay increases- Individual pay increases average 3.7% versus expected 6.6%. Average salary $64,851.00 and average benefit is $45,475.00. Total payroll increase by 1.48% versus 3.25% assume rate. Total payroll for the year $66.8M. Benefit payments $29.4M. Average age is just under 39.6 and average service is just over 13.2 years. Be aware of future trend. In prior years the market value was higher than the actuarial thatmeant there was unrecognized asset gains. Market returns are volatile. Actuarial returns more consistent. Negative cash flow is only 2% which is very good, generating enough cash to pay benefits without having to sell investments to pay benefits. Results for statutory rate plan(contribution rates are fixed): Normalcost, the cost to provide benefit to member, is 23.72%. Employee cost of 12.65% leaves Employercost of 11.07% to total 23.72%. Total statutory rate of 25.3% less normal cost of 25.30% only leaves 1.58% to pay towards unfunded liability which is not enough to pay it off.

$36M of the $73.6M of unfunded liability is due to the recent Experience Study’s assumption rate changes, mainly the mortality rate and the drop in assumed rate of return to 7.5%. Contribution rate is 17.74% based on arbitrary amortization period, currently 30 years. Comparing actuarial value to market valuation over next 4 years with assumed rate of return, the System would be trending toward 84.2%. To amortize on market value would be slightly higher at 18.85% of pay. Unfundedliability will continue to grow absent of investment performance and the unfunded portion has potential to grow over time. If Board adopteda different amortization period as in a shorter period, could reduce negative cash flow closer to zero.The whole point of an amortization period is just a tool to manage your cash flow requirements. Most conservative is to amortize everything over to the future working lifetime, least conservative is picking 30 years which may or may not work. Most systems have looked at shortening the amortization periods. If keeping 30 year amortization periods don’t use payroll growth assumption but rather use level dollar; the whole idea is to eliminate negative amortization.Thereis a way to track how much in contributions is going toward unfunded liabilitybut would have to go back to older valuations; deficit came after 2008. Vacation policy changed-Cavanaugh will look at it every Experience Study. Has potential to increase the load for service but not something that has to be addressed today and will continue monitoring; would really impact new people coming in. Load could go to .7 years from .67 year- negligible at the point but has potential to grow. Actuarial Standards of Practice being utilized. Assessment and disclosures of risk in the spotlight. Actuary try to be midline, 50% chance things could be better and 50% chance could be worse. Actuaries working with public sectors to disclose more info on report as being required but for valuation report it will add more confusion for a lay person to understand. Keeping message simple is better but as an actuarial firm will follow protocol set. From a funding perspective won’t be any changes. Mr. Greer asked about average age/service of firefighters. Mr. Green stated once make it past first few years will typically hang in until their retirement. Could be seeing a demographic shift but actuary already taking into consideration theretirement- it’s all built into the valuation process. As more people retire it could affect the negative cash flow. Accrued Liability =Actual Value of Assets plus Unfunded Liability. Funded Ratio is 86.9%; in 2008 nearly 100%, then 2008 market losses. Saw some improvement since but in 2016 there was a change in assumptions which made it drop from about 93% to 86%. Actuarial Gains & Losses for the period- slight liability loss of $2M where actual and assumed did not align, offset by slight salary gain of $4.6M due to payroll increase not as much as assumed, investment performance just under assumed rate so small offset. Biggest factor was the assumption changes. Mr. Green mentioned different ways to pick your actuarial determined rates. Trend of systems changing from the 30-year amortization periodbased on the old GASB rules to a shorter amortization period. Board has ability to adopt period of amortization. Not recommending a retiree bonus at this time since unfunded liability not being reduced but rather growing. Anything paid out will just increase unfunded liability. Mr. Wilson asked Mr. Green if the Board could ask the City for a bonus. Mr. Green stated he could provide costs if informed of amount given. Fiscal letter will be provided after Board approves valuation report. Mr. Renfro offered more data statistics and trends not included in actuarial report. Mr. Green mentioned that actuarial valuation takes into consideration demographics. If negative cash flow gets bigger say up to 4, Investment Managers will have to work harder for market returns. Mr. Carr motioned to adopt annual valuation. Mr. Greer seconded motion. Motion carried.Mr. Green will send 13 copies of final report. Mr. Green left at 8:30 am.

Ms. Heffron noted guest active firefighter Mr. Shane Nantz who joined late.

1. Benefits Committee Report- DC Kevin Gordon (via phone). Benefits Committee discussed rules and policies with vacation and rollover policies set by the City; working on a concept of a policy definition of vacation and sick days and review of cost study presented by Mr. Renfro, and discussed the need to communicate with the City the future of funding. Mr. Wilson made comment that his understanding was

that this Board cannot define work week schedules and it is up to City Council.DC Gordon stated that City determines the work schedule. The System takes the data and factors in the provisions within the Act and policies approved by the Board to determine the Final Average Salary. Ms. Crutchfield motioned to accept the BC report. BC Moore seconded report. Motion carried.

1. Investment Committee Report – Mr. Scott Greer reported in absence of BCRamsey.Fund performance had been reviewed by Callan. Committee met this past quarter with Barings, UBS Realty and JPMorgan Chase. UBS Dividends to be sent as cash instead of reinvesting. UBS has been updated to make withdrawal and JPMorgan Chase is in process of being updated to dividend distributions. Reviewed Barings as an Investment Manager and their performance compared to Colchester, Brandywine and Wells Capital. Colchester is the closest to Barings style in the way that they manage their funds. Reviewed quarterly asset growth, down turn in 2015 has not been fully realized yet in returns. Reviewed total fund investment performance. Total 3 and 5 year periods ending 6/30/2016 equaled or outperformed their respective indices while 10-year return outperformed the Custom Index by 30 basis points with 12 month rolling returns all positive except for Q1 2016. Mr. Wilson motioned to accept the IC report. Mr. Carr seconded report. Motion carried.

A.Administrative Report –Ms. Thiry stated that the April 2016 minutes had edits on them and were pulled of the consent agenda. Mr. Renfro motion to approve as corrected, 2:02 am to 2:02 pm for April 2016 minutes. Mr. Carr seconded motion. Motion carried. Office has been fitted for cabling, had a soft transfer with the phone system amid challenges, obtained more bandwidth and a switch with Time Warner Cable (not expected). Handbook is being put on hold because of other issues with the City and possible decision adjustments. Minute retention process has been tabled to the January Board meeting- not been able to do research as suggested at last meeting. Annual retiree reunion went well. Publicly thanked Mr. Greer for his help with the retiree reunion video. Introduction of new employee Tony Bass. Quarterly financial report-Insurance at 95% of budget; it’s paid annually and will receive a rebate for workmen’s compensation policy. Postage is at 95%; up a little more than expected because of change of the annual statements for mailing process improvement. Other professional services is up to 41% because of Tegrit paid a year in advance to reap discount, so that’s half a year instead of a quarter of a year. Ms. Thiry will have an idea to how much she may need to amend/raise the budget for the postage and office supplies by the January 2017 Board meeting. Mr. Carr motioned to accept the Administrative Report. Mr. Greer seconded the motion. Motion carried.

1. BOARD GOVERNANCE

A.Committee Assignments as of October 1, 2016. Investment Committee will consist of BC Tim Ramsey as Chair, Scott Greer, Robert Campbell, John Carr and Traylor Renfro; Mr. Renfro replacing Ms. Heffron. Benefits Committee will consist of DC Gordon as Chair, Lydia Crutchfield, Cheryl Brown, BC David Moore and Marvin Wilson; Mr. Wilson replacing Bobby Davis. Mr. Greer motioned to accept the committee assignments. BC Moore seconded motion. Motion carried.

Recess 9:03 am

Return from recess: 9:09 am

B.Roles and Responsibilities-presented by CFRS Counsel Mr. Jason Kay. Ms. Heffron reminded the Board from last quarterly Board meeting that Mr. Kay’s report is a follow up request. Mr. Kay’s legal perspective on how to operate not practical of day. It’s meant to give aspiration of how things can look, not meant to evaluate particular situations or interactions from choosing sides. The law, often times, doesn’t work that way. Couple of levels of legal understanding when curious about the law. Level 1) Vague understanding of what a document says; Level 2) When reading a document and it says ”…..”; Level 3) Where courts interpret words and statutes. Example: Congress means government. Mr. Kay trying to hit between level 2 and level 3 as he will navigate through his explanation to the Board.

Mr. Kay will break down roles and responsibilities for 1) the Board of trustees and its members; 2) Officers of the Board, and; 3) certain employment contracts and relationships. All answers to questions are for educational purposes only. Education being presented is not legal guidance, not based on legal research, just for education purpose only. Board is a corporate form; it is artificial and a created thing. Entity itself speaks with one single voice (even if votes are not unanimous) all of the time. The power that a public Board has, has important fixed limitations on it. Board can only exercise power based on rules. When doing public business, public has the right to participate. Board cannot change law but rather prerogative of General Assembly. An individual Board member is different than the Board. Individuals have relatively less specific powers to the Board. Individuals can take oath of office; sworn oath of loyalty is to protect and support this organization not interest and organizations that would seek to steer this organization. That’s a breach of your fiduciary duty. Avoid and disclose conflicts of interest, receive notice of meeting, attend meetings, vote on all meetings properly, ensure applicable laws are followed. Do have fiduciary liability insurance, however if you go outside the body and have breach of loyalty, not covered and can be personally liable. Primary role of this Board is to exercise a governance role. 1) General oversight not administration given to an Administrator; 2) Interpretation and enactment. Interpretation is normal because you can’t always conceive every instance. Committees are “mini boards” but don’t have ultimate power that the Board has. Committees make recommendation up to the Board. They generally operate consistently with their charters. Officers of the Board have roles and responsibilities. Chair is appointed by resident superior court judge and is selected citizen trustee. Primary obligation to call and preside over meetings. The Chair is the Chair at all meetings that the chair attends. Vice Chair functions as the Chair when the Chair isn’t there. Treasurer is designated in law as the City’s treasurer. The treasurer is the custodian of said funds in a heightened way. The Secretary oversees records and recordings of the meetings. In absence of the Administrator, Secretary is responsible for providing notice and coordination of Board meetings. Employment of vendors and staff – Board is authorized as general matter to employ persons for professional and secretarial assistance. Certain positions are created and assigned specific duties and powers by law. Some of those positions are appointed by the Board and some are designated by statute. Appointed by Board –1) auditor (has to be CPA); 2) Administrator – responsible for administration and coordination of all system operations and activities that are not otherwise specified in the Act; 3) Medical Board- appoints 1 or more physicians as the medical board and serves at the pleasure of the Board; 4) Designated by law/others – the actuary- technically an employee of the City. Board may request Actuary to perform studies or evaluations that are necessary or desirable by either Board or the City. The City pays the cost of the Actuary. 5) Legal Counsel – City counsel designated by the City. Can have additional legal counsel, may be hired by the System as deemed advisable. Outside City Counsel ultimately reports through and is supervised by the City Attorney. Legal opinions are not exact science. Kevin (via phone) left meeting at 9:53 am) Recommendation is not to go back in time but rather consider going forward. Questions opened for discussion. Mr. Renfro questioned who pays for actuary fees and who pays for what. Budget for actuarial service. Mr, Greer stated the City pays for annual valuation and one of the GASB reports but if the City or the System wants something above and beyond, the respective party pays. Mr. Carr asked about Outside Legal Counsel and who pays for it- System pays for it and hires outside counsel. Ms. Thiry asked about Administrator’s legal counsel and if System pays for this counsel does the Administrator have any influence on selection of counsel. Mr. Kay to take offline and research.

C.Conferences- Mr. Greer motion and Mr. Renfro seconded to approve the following conference attendance:

(a)Callan Conference- Mr. Carr, Mr. Renfro, BC Moore, Mr. Greer, Ms. Crutchfield, Mr.Kay, BC Ramsey, Mr. Bass, Ms. Thiry

(b)NCPERS Jan 29-31-Mr. Wilson

(c)NAPPA Feb 22-24- Mr.Kay

Motion carried.

Ms. Crutchfield motioned to adjourn. Mr. Greer seconded. Motion carried.

ADJOURNMENT

Meeting adjourned at 10:45 am

Next Regular meeting is scheduled for Thursday, January 19, 2017.

cc:Jason Kay, Senior City Attorney

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