MUNICIPAL PENSION BOARD MINUTES
Special Meeting of Tuesday, October 7, 2008
The special meeting of the Municipal Pension Board was called to order at 5:15 p.m. by Chairman John Ivers.
Present were John Ivers, Gerard Adelman, Brian Kogut, James Suzio, Brian Daniels, Martin Lilienthal, Corinne Eisenstein.
Also present: Michael Lupkas, Director of Finance; Lawrence Kendzior, City Manager; Lori Canney, Council Clerk acting as Recording Secretary; Patrick Sheehan and Gerald Glass, Vice Presidents Investments, A.G. Edwards & Sons, Inc.
Chairman Ivers explained the purpose of the meeting. A.G. Edwards/Wachovia stated it was imperative to transfer funds to a different trust fund. The second item was the committee had a resolution that had a provision to vote on re-upping A.G. Edwards agreement. There were many questions in regard to that, should they have the contract reviewed by Hooker & Holcombe, should we re-up the agreement for that long a period of time. Those are the two separate issues and Ivers would like to keep them separate. He wanted to address the most imperative item first and A.G. Edwards would address that. Ivers stated Kendzior had asked the board not to vote on the contract extension because he suggested they either do an RFP or apply for a bid waiver to go forward with such an extension.
Hooker & Holcombe will be here to tell us what they think of the proposed contract. Ivers wanted to discuss the movement of the funds first.
Sheehan stated a year ago they started a process that was a review of what the fees were. The year that was looked at by Hooker & Holcombe, the hired consultant, was an extraordinarily active year. Historically this board has been on a pay as you go plan which is commissions would be paid when transactions were made. The board did not pay an asset based fee. Hooker & Holcombe came in with a recommendation that said that everyone is on an asset based fee and that way you wouldn’t have the confusion when making changes. Even though our commissions were at five cents a share, they do add up. During the course of the fee study that was brought back to the board in January, we asked Ivers, in particular and Lilienthal if they would like us to go to a fee based model.
Currently there are three contracts, custodial, management contract(s) with different independent managers and you are paying custody fees at the A.G. Edwards Trust Company whose assets have gone to Wachovia Bank. Sheehan stated they were concerned and remain concerned about the assets coming from a five star bank to a two star bank. Although Sheehan doesn’t feel there is a danger to those assets, they were concerned what happened with the transition. That is not the urgency that is in here. The urgency that is built in with us meeting with Ivers and reaching out to Lilienthal and trying to get the board together comes from the rest of the progression. When we got into April we came forward with the first proposal which involved putting a fee based percentage to the assets so that you would be paying no commissions, you would be paying a fee based on the size of the assets. Ivers asked them at the time to go back and see if they could
do any better. We went back and started looking and he told us to look at everything else and Sheehan felt that was a wise direction. We went back and looked at the manager fees which are between 65 and 70 basis points. We went back and looked at the wrap fee which Hooker & Holcombe had in their report. The report stated the average broker dealer charged 72 basis points. Sheehan stated he came back with a price of 75 basis points. The average broker comes in quarterly or semi-annually and gets you a report. We felt that the activity and performance that we provided warranted doing 75 basis points. We made that presentation in a letter that was sent to Ivers on May 24th and said at that time and on
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numerous occasions since that we’re stuck in an ethical dilemma here. The ethical dilemma is as long as we are considering going to a wrap fee or in other words a unified asset based fee, rather than a per condition trade basis it would be wrong for us to come and recommend that we make changes that might cause 100,000-200,000 dollars of commissions. That would create a lot of commissions, if in fact you were going to adopt a fee based model. Starting back in May we had that problem of trying to get a decision based on whether or not they would be on fee based or on a commission basis. During this time the changes that we made in the portfolio have all been of the non-commissionable kind of things. For example when we recommended selling back the managed futures in July, there was no
commission. That was just bring cash back, put it in the treasuries because we were waiting for a decision on whether or not we were going to have a fee based or a commission based platform. During all of this we basically put forward the selected advisor contract which is the model that A.G. Edwards and now Wachovia used as a fee based wrap fee which would take away your custody fees, take away your transaction fees and cover the advisory fees and portfolio management fees. Ivers said he would distribute the proposal to everybody and act on it in July and asked us to please hold off on making a presentation. This also would mean hold off on making any other changes. Ethically Sheehan stated it is difficult to come in and say let’s make changes that cost money if in fact you are then going to put a fee base on it, that would eliminate paying those commissions. That would have been wrong for them to do. In July we made the
recommendation and no action was taken on that. We were told that they will wait until August and then we’ll have a meeting and do this. We prepared for the August meeting and it was cancelled. We sent an email out following that saying there are changes that need to be made to the portfolio and we need to resolve this matter of fee based vs. commission based discussion. By September we had met with Ivers at his office and gone through a series of resolutions that would firm up what the fee model was going to be, are we going to be on an asset based fee and at the point because Lehman Brothers had collapsed. They had been removed as the asset manager and we had to replace the fixed income manager. At last month’s meeting you replaced that manager. We put the new manager onto the selected advisor platform which is the same contract that we’re talking about for the other money managers. They’ve gone onto an asset based
model so there is no cost involved in selling out the bonds and rebuilding of that portfolio by the new manager but you held off on doing anything regarding changing the other managers from the multiple contract to the single contract formula. We’re back here again today and we’re saying no matter what you do, there is no master contract. The contract is with each money manager. We’re just part of the package. Sheehan stated back in the early 90’s there was a master agreement which was done by Mr. Marinan, the chairman at the time. All the money managers fell underneath that. Since then because of a lot of things that have happened in the market and the way that our business has gone there is a separate contract on each one of these funds. There are 22 different accounts, 18 are what are called private advisors (a dual contract system), money manager that you’re paying 50, 75 or 100 basis points to and you are
then paying commissions when they make changes. We don’t have any control over when they make changes. The only control we have is by making recommendations to the board to re-position the portfolio for the markets. That is how you’ve had the extraordinary performance. Last year’s performance was a 1000 basis points better than the average manager. You ranked in the top percentile of public funds. You’ve had that type of performance because the board was actively engaged and you’ve taken steps along the way and yes, as Ivers likes to say, it is because we are coming to you and asking you to, but you’ve taken steps along the way. For example last year got you out of an oncoming freight train. We ended up having positive returns when everyone else had negative returns. We’re very proud of that but again, that is because the board is willing to interact on this and make changes appropriate
to the environment. We’re going back now to May and asking if we can resolve this fee matter so that
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we can then come to you and say here is the rebalancing we need to do in the portfolio. On July 15th the commodities market turned south from a very extraordinary run. This is the reason we came in July and asked to take the profits out of AIS. We don’t have to worry on voting on that now because there are no profits, they are gone, the market took them away. If the hesitation to deal with this has to do with us, this isn’t about us. This is about the fund and how you have to address making appropriate changes to the market place. The market is down 500 points today. We have been trying to position, to become more and more defensive. We can’t come in here and say we’d like to sell out all of your, pick a manager Armstrong Shaw or Neuberger
and take more of that money and put it into treasuries because we know based on a study that has been going on for the past year that somebody is going to say what is it going cost us. Sheehan stated he said that to Ivers who said it was “the board’s job”. What it is going to cost you could be on how much money is being raised. It could be $50, $60, $70,000.
Ivers stated there is definitely some confusion as to the issues. The email that he forwarded to everyone said there was an urgency to getting away from Wachovia. That was the impetus to get us all into this room tonight. Sheehan stated select advisor has to be headquartered in the securities company, not in the bank. Ivers stated he understands that. Sheehan stated that is the urgency as to moving from the bank into the securities company because of balance sheet issues. Ivers stated he felt he’d be safe in saying to operate under the old fee structure and keep us safe, make the move you would want to, never mind the ethical dilemma. Do what you think is best for us at this point while we figure out what we want to do with the contract, fees, etc. Ivers stated maybe
Sheehan was right and the board did drag their feet, that is our problem and we are trying to address it the best way we know how. Without having knowledge within the industry which is why Hooker & Holcombe are here, when you say there is no master contract that is fine. We feel like we need a contract with you so we know a whole bunch of issues as it pertains to us and you. Sheehan stated that is in the disclosure documents which are the same documents that you already have. Ivers stated again that is why Hooker & Holcombe are there, you’re saying we have a separate contract with each money manager which suggests we have a contract with the money manager. When we say we want a contract with you, you say that is included. Sheehan stated these are dual contracts. Sheehan stated we’ve taken their recommendation and put it back in front of you as of May 24th, right out of Hooker & Holcombe which stated we
would do a wrap fee, we’ll put everything into that single, unified fee. We won’t have a separate contract with your money manager, currently you do. When you hire a manager, you’ve signed a management contract with the manager and you’ve signed a contract with A.G. Edwards. Those are both put together and basically the manager is hired by our firm and you’re just paying one fee and that fee is based upon percentage.
Glass stated the other part of the urgency is under the old system before the merger. We had clear visibility to these assets and since the merger, we don’t have the same visibility. We can’t go in and look at the accounts live because part of our due diligence and our scope was to go in and look at the various accounts every single day, look to see the trades, look to see what the manager is doing, just monitor the accounts. Under the new system we haven’t had the ability and they’ve been telling us eventually we’ll get that visibility. Sheehan stated when the assets were held in trust fund that was very visible to us. We could see the daily activity. When that lifted and moved, the funds are safe, it is just that we can’t see them. That is more
of a personal problem for them. They sent you a letter, as the client, and said we’ve moved your assets as part of this merger from one company to another because they acquired the bank and that went into the banking side of this. In the securities firm we have total visibility to this so we looked at it. The
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board would rather have a wrap fee, they rather not have to make decisions based on how much it is going to cost to make a change, he understands that. Sheehan stated he liked how the trust company was reporting. We went to Wachovia securities and asked about their reporting and came away convinced that they could provide a similar reporting on the securities side so there was no reason to pay the additional $77,000 custodial fee to have somebody else basically do that end of year accounting. Ivers stated that we can’t address the first issue without addressing the second. Sheehan stated you can say to move the funds over to the securities firm from the bank. Sheehan stated they wanted the ability to come in and rebalance this portfolio in a more defensive way as we started to in May,
June and July and asking for us to take back some of the gains that we had and put them into treasuries so that we would be more secure. Ivers stated again, watch out for us, we’ll handle the fees. Glass stated we can’t move into select advisor if the assets were in the bank. They have to be on the securities side. That would be a good first step. Moving it to select advisor on the securities side means moving it to a wrap fee.
A question came up regarding an email that asked for a period of time from 2008-2011. That is where some of the concern came from. It came across that they were asking for a contract of three years. Sheehan stated when we were coming up for renewal every 2 years you would vote to continue the relationship with A.G. Edwards. We have no formal contract with you. Glass and Sheehan have no formal contract with you. What we were asking is are we going to have to go through this every year. It has been an extraordinary amount of time that you have spent so you can image what we’ve put into this just trying to answer the questions that are out there concerning the structure so we tried to address the structure. Sheehan stated he didn’t care if the board put them in the
resolution or not. He feels they should go to select advisor and a wrap fee model. We’ll stay with you one month, three months, whatever it is that you decide. We were looking for a gesture coming back saying we’ve come through this process and we feel that what you’ve done has been above board and would like to continue the relationship. This board has been very open in saying that to us and we are very appreciative. Sheehan stated he doesn’t feel anyone has ever doubted the sincerity of what they do. The pricing structure was questioned because we did look at an extraordinary year. By the way, nobody asked but this past year, it is in the books, you’ve paid about half of what you paid the year before in commissions. Why? Because there wasn’t as much activity. Why? Because we parked a lot of that money in treasuries. There was less activity. If you had been on a wrap
fee during last year, you probably would have paid more than you would have if you did it on a transaction basis. We’ve always felt the transaction basis was a fair way to do it or else we wouldn’t have been doing it. That is what we inherited when we came in.
Suzio stated we felt a sense of urgency that some transactions needed to be done and you couldn’t do them based on that email unless we agreed to keep you on for three years. If there is something we need to do to protect the assets of the Pension Board, he is all for saying go ahead and do that. Do what you need to do. Sheehan stated we’ll take out the first paragraph of the resolution and basically what you’re doing is moving the pricing model which then allows us to come in and say we have significant changes to make but it will be done without a commission. You’ll be paying a fee on the assets but you’d be doing it without paying commissions for trades.
Lilienthal asked if we wanted to move all the assets so you could see them, can we do that without setting up the 75 basis points. Sheehan stated yes. He stated he understands why they want to be get those assets so they can see them on a daily basis. It makes a lot of sense to him.
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Glass stated from an operational point of view he felt it was paramount to make sure the assets were in a place where they could watch them, especially with the overlay of what is going on in the markets. Regarding the question about the resolution on us…when you hire a manager you usually give them a market cycle which is anywhere from 3-5 years to work out their discipline, to prove themselves to you.
Sheehan stated you have extended our contract agreement by 1 year, 2 years and 3 years over these past 14 years. Ivers stated in an email he didn’t have any problem with this and stated the same last month, he just wanted the whole board to be involved in this. We’re looking for a gesture where you want us to continue to do this. Sheehan stated Lilienthal is correct. This is the motion – end the custodial relationship with the bank and have those assets transferred back to the security accounts. Not to confuse things but when your money managers make trade they make trades in securities firm, the assets that settle out of the bank. We’ve had an external custodian. We can sever that relationship and just say we’re dropping that. Ivers just signs a
letter of instruction that says under paragraph 4 of our custodial arrangement we’d like to have those assets moved back into the account and list those accounts where those trades take place in. It would then become visible and would be acquired as part of the securities. Sheehan feels that is the first step the board is looking for.
Daniels asked if there was any cost to transfer from the bank site to the security site and Sheehan stated not that he was aware of. Daniels asked if these funds insured on the bank side and is it comparable protection. Glass stated they are segregated and protected. Daniels asked if that protection was the same whether we’re at the bank side or the securities side and Glass stated yes.
A motion was made by Adelman, seconded by Lilienthal and carried unanimously, that the Board agrees to authorize Ivers to terminate the custodial contract with A.G. Edwards Trust Co. and transfer assets into appropriate securities accounts at Wachovia Securities, LLC.
Sheehan stated if he is hearing correctly the Board is saying to operate under the old system. Ivers stated for the short term just protect us the best you can and you are operating under the existing fee agreement. Ivers stated there are a lot of questions. Lilienthal asked how would they handle an RFP vs. applying for a waiver. Ivers stated he doesn’t feel an RFP is worth it based on the historical performance as long as they get confirmation from Hooker & Holcombe that the fees are in the ballpark for our size and type of pension. He feels it would be disingenuous of us to have an RFP. Ivers stated it would be the board’s decision if they would do an RFP or waiver. Kendzior stated if we chose to do something long term with A.G. Edwards we would just need to do a bid
waiver through them according to the City Charter.
Sheehan stated they were willing to look at the 75 basis points and say we took it right off their report as to what seemed to be appropriate. In the spirit of full disclosure and transparency he feels going to a fee base and asset based fee, even if it costs you a little more some years there will be other years that cost you less. Last year it did cost you less on the transactions. In terms of the comfort of the board is to have an understanding. If you know what you’re paying and basically how does that break down, 50 basis points goes to the manager, 25 basis points goes to our firm and that is for doing the accounting, the oversight and all of the transactions and everything else. That is what the fee is. In the Hooker report they are going to tell you.
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Hooker & Holcombe gave their presentation.
Lilienthal stated they had a dilemma of what they were going to do regarding managing this account. If they were to go ahead and come in with a recommendation to take x number of dollars and put it into something else that there would be fees involved in the current plan. They stopped doing things. We want them to continue to look out for our best interests and the sooner this happens that problem will be eliminated from them. Sheehan stated he was going to ask for Lilienthal’s endorsement on this. Sheehan stated their first recommendation came last spring to make a change over to a wrap fee and go to this type of a model. We have faced the concern that making changes was difficult because we didn’t want to be making changes that would cost thousands of dollars in commissions
and then the next month come in and adopt a fee schedule. We had an ethical dilemma which we’ve already talked about.
Daniels asked in Hooker & Holcombe’s opinion, based on comparisons to what the rest of the market is doing and all the work you’ve done for us, you’re not losing sleep over this being the new deal. They stated they weren’t. They stated 75 basis points is pretty close. It is not the lowest they’ve seen but it is in the neighborhood. If you feel that these guys have done an excellent job you may feel comfortable giving them the additional fee. As long as you’re in the neighborhood you’re fulfilling your responsibilities.
Kogut asked what the neighborhood was. Hooker stated between 68-72 for wrap accounts. Kogut asked how much that equated to. Sheehan stated to Kogut’s point Aurel and Armstrong show combined $30,000,000. Sheehan asked for those companies charging 68-72 if they were coming monthly or quarterly. Hooker & Holcombe stated they were coming quarterly. Glass stated we meet every month, have subcommittee meetings between the monthly meetings and devote 5 months just sitting down with our managers, reviewing everything again, going over procedure. Glass stated this is the added value. One basis point is $15000.
Sheehan stated the board did not have a single contract that you are bound to. All you need to do is remove your assets and you’re not paying anybody. These are your assets.
Ivers stated he would like to be prepared to vote at our next regular meeting which is October 14th, 2008. Daniels asked if that vote would be to either do an RFP or to ask for a bid waiver and Ivers stated yes. Sheehan stated the board should consider whether off they’d be better off doing a re-balancing on a fee basis as opposed to on a commission basis. Hooker & Holcombe stated you’d be better off with a fee basis. Daniels asked how quick could a bid waiver be done. Eisenstein stated about a week because she does them all the time. Ivers stated it has to be justified. Daniels asked if we went bid waiver and it took a week to turn around how quickly after that would we have a signed contract. Hooker & Holcombe stated it is an agreement and you
can sign it whenever you want. They reminded the board that it have the language regarding co-fiduciary responsibility.
Lilienthal stated everyone is here to pass a resolution asking for a bid waiver to get this off the table and into the City Manager and Finance Director’s office tomorrow. Eisenstein stated the bid waiver has to be written and then presented. She usually takes it to Petro in Purchasing who would gather the signatures from the City Manager and Finance Director. She usually will call Petro and ask her what she wants it to say and she helps wordsmith it. Eisenstein stated she can start the process tomorrow and work with Petro on it. She would then email it to everyone
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and if everyone is in agreement, give it back to Petro and have her walk it through.
Kogut stated he has a very difficult time with the bid waiver in terms of the actual cost. We’re hearing that the neighborhood is 68-72 and we’re talking about overpaying. We’re going to talk about a contract and there are obviously two sides to the agreement and we as a board should be talking about our side among ourselves.
Ivers entertained a motion to go into Executive Session.
A motion was made by Daniels, seconded by Adelman and carried unanimously, to go into Executive Session.
The meeting went into Executive Session at 6:25 p.m.
A motion was made by Daniels, seconded by Adelman and carried unanimously, to come out of Executive Session.
The meeting came out of Executive Session at 6:45 p.m.
Chairman Ivers left the chair and Vice-Chairman Adelman assumed the Chair.
Vice-Chairman Adelman entertained a motion to authorize Eisenstein to do preliminary work on a bid waiver to be presented at the next meeting.
A motion was made by Daniels, seconded by Lilienthal and carried unanimously, to authorize Eisenstein to do preliminary work on a bid waiver to be presented at the next meeting.
The Vice-Chair entertained a motion to adjourn.
A motion was made by Lilienthal, seconded by Daniels and carried unanimously, to adjourn.
The meeting adjourned at 6:45 p.m.
Respectfully Submitted,
Lori N. Canney
Clerk of the City Council
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