NONVERBATIM MINUTES OF THE MEETING OF THE BOARD OF TRUSTEES, SHERIFFS’ PENSION & RELIEF FUND, HELD AT THE LOUISIANA SHERIFFS’ PENSION FUND IN BATON ROUGE, LOUISIANA AT 10:00 AM WEDNESDAY, JANUARY 30, 2013.

Retired Sheriff Larry Deen, President
Active Sheriff William Hilton, Sec. Treasurer

Active Sheriff Willy Martin

Active Sheriff Mike Waguespack
Active Sheriff Jeffrey Wiley
Retired Sheriff Charles Foti

Retired Sheriff Wayne McElveen

Retired Sheriff Hal Turner

Active Deputy Calvin McFerrin

Active Deputy Ronnie Morse

Active Deputy Don Rittenberry

Retired Deputy Joey Alcede

Retired Deputy Graham Hendricks

President Sheriff Larry Deen called the meeting to order. Retired Sheriff Hal Turner offered the invocation and Sheriff William Hilton led the pledge to the American flag. Roll was called and those in attendance represented a quorum. Deen then welcomed other guests and thanked the Pension staff as well as Dr. Bill Madden,Russell Consulting, and Robert Klausner, Klausner, Kaufman, Jensen & Levinson, PA, for the work they perform.Others in attendance includedSenator Elbert Guillory; Gary Curran, G. S. Curran, & Co., actuary; Sheriff Jason Ard, Livingston Parish; John Baker, Orleans Parish; and Pension staff members Keith Duplechain, Chris DeWitt, Lacey Weimer, Katie Thiebaud and Ashley Pridgen.

Financial and Market Reports

Executive Director Osey McGee, Jr., along with Dr. Bill Madden and Investment Analyst Chris DeWitt,presented the following:

Performance Highlights

Fiscal Year 2012-2013 1st Quarter:

  • Fiscal Year beginning 7/1/12 started favorably
  • Market rallied through the first quarter
  • Factors contributing to the rally were:
  • July
  • European Central Bank/Fed statements of their willingness to act if necessary
  • Positive employment data
  • August
  • Strong sales numbers
  • Strengthening housing numbers
  • Reaffirmation from European Central Bank/Fed about taking any needed actions
  • September
  • European Central Bank outlined plan to purchase sovereign bonds
  • Fed announced QE3

Fiscal Year 2012-2013 2nd Quarter:

  • The 2nd quarter of the fiscal year was a much more volatile time in the market
  • Starting in October, the market began to react to several things:
  • Worse than expected earnings reports
  • Political uncertainty with the upcoming election
  • Looming “Fiscal Cliff”
  • This lead to a down month in October
  • Market Value Assets at 10/31/12 equaled $2,031,231,197.11
  • Return for October equaled (0.7)% Net of Fees
  • In December, the market remained resilient despite continued uncertainty surrounding the upcoming “Fiscal Cliff”
  • Market Value Assets at 12/31/12 equaled $2,077,318,709.03
  • Market Value Assets rose approximately $132 million since the beginning of the fiscal year
  • Return for December equaled 1.3% Net of Fees
  • Fiscal year to date return equaled 6.8% Net of Fees

Fiscal Year 2012-2013 3rd Quarter

  • The market continued to rise in January
  • Factors leading to this rise included:
  • Congress averting the “Fiscal Cliff”
  • Better than expected economic numbers out of China
  • Housing start at a 4 ½ year high
  • Positive earnings season
  • VIX hit 5 ½ year low
  • S&P 500 and Dow Jones reached 5 year high
  • Market Value Assets at January 29, 2013 equaled $2,158,264,244.26
  • Gain in Market Value Assets since the beginning of the Fiscal Year was approximately $213 million
  • The estimated return for the fiscal year to date was 9.5%
  • New all time high in Market Value Assets at month end

Market Outlook

  • There are reasons for optimism and worry in 2013
  • United States economic numbers look encouraging
  • European economic worries have lessened
  • China is showing signs of stronger growth
  • However, the same political dysfunction remains
  • Upcoming debt ceiling debate
  • There is talk of the Fed stopping QE3 this year

President Deen then thanked the Director and Dr. Bill Madden for their leadership. He also recognized Gary Curran for his work with the Pension Fund. Deen then called on Investment Committee Chairman Don Rittenberry to give the Investment Committee Report.

Investment Committee

Chairman Don Rittenberry reported that the Investment Committee met on January 24, 2013 at 9:30 AM. The meeting began with a detailed performance report for the fiscal year to date. He commented that the Board heard an updated version of the report earlier in the meeting. He also noted that the current fiscal year was off to a much better start than the last fiscal year.

Rittenberry stated that one of the major focuses of the meeting was to study the current asset allocation in view of the recently released capital market assumptions by the Pension Fund’s consultants, Russell Consulting, as well as assumptions from other institutions.

He further explained that the current capital market assumptions are not very optimistic for the intermediate term future, potentially creating challenges and calling to question the Fund’s ability to meet its assumed rate of return on a consistent basis over the short to intermediate term. While the Fund expects some years of good returns, possibly including this fiscal year, the returns the Fund will need may be more difficult to achieve pending further improvement in global economies and changes in the outlook for capital market assumptions.

Since the last Board meeting, the Investment Committee implemented all recommendations approved by the Board to further diversify the Pension Fund’s portfolio. These included the following:

  • Implemented an allocation of $30 million to a defensive equity strategy
  • Increased commodities exposure by $10 million
  • Increased hedge fund of funds allocation by $15 million

Rittenberry explained to the Board that the Fund’s consultants have recommended additional diversification in recent years, and the Committee has continued to implement these changes. The Committee believes the additional diversification will continue to help protect the Fund’s portfolio and offer opportunities in these difficult and changing times.

Historically the Board has operated with a conservative approach, and it has worked well for the Fund. Based on recommendations from consultants, the Fund will need to consider taking on a moderate amount of increased risk in asset allocation to help meet targets, without assuming excessive risk levels.

Rittenberry stated that Bonds, or fixed income, have performed well for the Fund over time, but the intermediate term outlook for bonds is not very optimistic. The Fund’s portfolio currently carries an allocation to bonds of approximately 30%. With the current outlook for interest rates, the Fund’s consultants believe that this is an area that the Board should consider changes to help improve performance over time, especially moving toward a more global economy.

During the meeting, Dr. Bill Madden of Russell Consulting gave a presentation on high yield bonds and emerging market debt strategies that are an option to consider in diversifying the Fund’s fixed income portfolio, with a goal of providing increments of increased performance in this area. Russell’s research papers on these strategies were included in members’ agenda packets.

In addition, the outlook for equity investments is more favorable than bonds, and is another area that the Fund’s consultants recommend the Board consider increasing.

The Committee was presented with information on a new fee schedule for services provided by the Pension Fund’s custodian, BNY Mellon for approval. It was reviewed by the Fund’s consultants and legal counsel

Ronnie Morse proceeded to inform the Board of the following recommendations of the Investment Committee:

  • Consider further diversifying the Fund’s current fixed income allocation by reducing the current strategies from 30%
  • Further examine Russell’s recommendations to add allocations as follows:
  • To add 2.5% to a separately managed high yield strategy
  • To add 2.5% to a separately managed emerging market debt strategy
  • If implemented, these strategies would be funding from a reduction of the Fund’s current three fixed income managers
  • The Committee has asked Russell to provide a search for their top candidates and their statistics for further consideration of this move in the two areas
  • Consider Russell’s recommendation of adding an additional hedge fund of funds manager to the Fund’s two current strategies, again with Russell providing a manager search with statistics for each manager for further consideration of this move
  • This would also be funded from a reduction of current fixed income managers and possible use of funds on hand in the Pension Fund’s in-house treasury fund
  • At the Committee’s next meeting, consider an increase in the equity portfolio from the current target of 55% to a maximum of 60% in equities over time
  • This change would be funded from fixed income and the in-house treasury fund and would be implemented with additional allocations to existing managers

Morse explained that the Committee recognizes that there are no easy ways to substantially increase returns over the Fund’s current portfolio, and the Committee is considering these changes to further diversify and add smaller increments of return without excessive levels of risk.

At the pleasure of the Board, Morse asked that the Committee be allowed to examine these changes, and implement the changes upon approval by the Investment Committee in order to expedite the recommendations.

If approved by the Board, the Committee recommended authority for the Director, in consultation with legal counsel, to enter into contracts for any or all of the changes. President Deen then entertained a motion for the Board to approve of the Committees recommendations. Morse made the motion and Rittenberry seconded. The motion passed unanimously.[1]

Deen asked if there were any questions or comments from the Board. Madden took a few moments to further explain high yield and emerging market debt.

Deen welcomed Senator Elbert Guillory, Chairman of the Senate Retirement Committee, and thanked him for his time and dedication to pensions in Louisiana. He then asked Sheriff William E. Hilton to give the Legislative/Benefits Committee Report.

Legislative/Benefits Committee

Chairman Sheriff William E. Hilton presented the following:

The Legislative/Benefits Committee met on November 28th to plan for the upcoming legislative session. Another difficult session is expected, with the administration and legislators dealing with difficult budget issues and a proposal for tax reform.

The meeting began with a review of the new filing and advertising deadlines due to the passage of the recent constitutional amendment requiring earlier advertisement and filing deadlines for pension legislation. The Committee made arrangements to meet the new deadlines, and appreciated the assistance received from the committee chairmen and staff of the Senate and House Retirement Committees.

Again this year, the Committee’s primary efforts will be to amend requirements that regulate the granting of cost of living requirements, specifically the “target ratio” provisions. COLA provisions are a problem for all state and statewide retirement systems, as they continue to recover from the effects of the severe recession. Continued recovery is important in the Fund’s ability to meet targets. The Fund last granted a COLA in 2008. Some systems have not granted a COLA in ten years or longer.

The Committee has revised the changes that were proposed last year, and believes the legislation that has been designed for this session may have a reasonable possibility of passage. One of the important requirements the Fund will have to meet in order to be successful is to bring down the cost of granting an adjustment for retirees, with the possibility of meeting the requirements more consistently to help these retirees.

In addition, the Fund has another bill that provides a slight cost savings that will help over time has a “clean up” bill for the Fund’s provisions.

The Committee also reviewed the Russell Capital Market Assumptions for expected investment returns over time that will be needed to accomplish the Fund’s goals. The latest assumptions provide challenges that are being addressed by the Investment Committee and the Funding Study Committee.

Sheriff Hilton then called on the Director to present the proposed legislation in detail.

Director McGee began by explaining that the Fund’s major piece of legislation this year deals with COLAs. He explained that there is currently a “target ratio” requirement systems must meet to grant COLAs in the law which goes back to 1986, a time when retirement systems were funded differently than they are now. The Pension Fund, along with Senator Guillory and Gary Curran, has drafted legislation which aims to remove the target ratio requirement, but retain other requirements that are currently in the law. The proposed legislation would replace the “target ratio” with three different funding levels. A system’s ability to grant a COLA would depend on their funding ratio. Another aspect of the bill would be reducing the amount of a COLA from the current 3% to 2 ½% of a retirees benefit, and should not exceed 5% of the average monthly benefit in payment to service retirees as of the end of the preceding fiscal year. McGee explained that this would greatly reduce the cost of granting a COLA, and increase the likelihood of it happening.

Sheriff William Hilton then moved to approve of the Legislative Committees recommendations to the Board and the proposed legislation for the upcoming session. Retired Sheriff Charles Foti seconded, and the motion carried.[2]

President Deen then asked Sheriff Mike Waguespack to give the Funding Study Committee Report.

Funding Study Committee

Chairman Sheriff Mike Waguespack reported the following to the Board:

The committee met on January 24th, 2013 at the conclusion of the Investment Committee meeting, which was held on the same day. The meeting began with a presentation on Capital Market Assumptions provided by Russell Consultants. The assumptions reflected that in the intermediate term future, the Fund cannot expect to consistently meet its target assumed rate of return.

The Committee also viewed a presentation by the Director outlining the history of the 8% rate, the recommendations for reducing the rate, and the impact on contribution rates and the funding of the System.

In addition, the Committee studied a presentation by the Director and Actuary on the results of this year’s valuation. The Board is asked to reduce the 8% assumed rate of return to 7.9% effective 7/1/12, with gradual further lowering at 0.10% to 7.5% over a five year period. The 2012 valuation was run at 7.9%.

The actuarial valuation results reflected that the Fund was at a unique position to gradually reduce the assumed rate. This avoids a larger impact on the upcoming fiscal year’s contribution rate. Some systems were moved from 8% to 7.5% this year, with much larger contribution rate increases.

The impact of lowering the rate increases the contribution rate to by.6468% the initial year implemented. Future increases in the contribution rate depend on investment experience in meeting or exceeding the target rate, the fund’s liability experience, and help from the annual increase of cost savings from the Pension Reform Bill.

The Pension Reform Bill was implemented 1/1/12 and has only been in effect for 6 months of this fiscal year. The first year’s savings from the Bill were .6228%, nearly enough to offset the increase of lowering the assumed rate. Future savings from the reform should continue to increase each year and assist in lowering or offsetting the impact of the changing valuation rate.

Potential positive impacts include

  • Enhances the Fund’s ability to achieve the assumed rate of return
  • Increases actuarial gains in favorable years
  • Reduces actuarial losses in unfavorable years
  • Now 8% is breakeven point, with change creates gain
  • More consistent favorable gains provide potential to reduce contribution rates over time
  • Increases likelihood of providing additional reserves in Funding Deposit Account
  • Combined with 2011 pension reform annual savings
  • May enhance the Fund’s ability to assist retirees more reliably in sustained periods of favorable markets

Sheriff Waguespack then presented the following recommendations of the Funding Study Committee to the Board for approval:

  1. Adopt 2012 actuarial valuation using the valuation interest of 7.9%
  2. Valuation interest rate be reduced by 10 basis points each year until the rate reaches 7.5%
  3. Consider the option of increasing the employee contribution rate from 10% to 10.25%, which is already authorized in the law.

A discussion amongst the Board members about the contribution rates followed. Sheriff Jeff Wiley entertained a motion to approve the Committee’s first two recommendations: adopting a valuation interest rate of 7.9% and the interest rate being reduced by 10 basis points each year until the interest rate reaches 7.5%. Sheriff Wiley also moved that the Board make a decision on the employee contribution increase at the next Board meeting, after a presentation regarding the contribution rate increase is heard at a future Louisiana Sheriffs’ Association meeting. Sheriff Willy Martin seconded and the motion carried. [3]