CITY OF NEWBERG

PENSION SUBCOMMITTEE

THURSDAY, March 8, 2018

5:00 PM MEETING

PUBLIC SAFETY BUILDING TRAINING ROOM (401 EAST THIRD STREET)

I.  CALL MEETING TO ORDER

The meeting was called to order at 5:00 PM.

II.  ROLL CALL

Members Present:  Denise Bacon, Chair  Patrick Johnson      

 Mike Corey  Mayor Bob Andrews, ex officio

Staff Present:  Matt Zook, Finance Director

 Anna Lee, Human Resources Director

 Joe Hannan, City Manager

Others Present:  Mary Caballero, Impact Benefits

 Elizabeth Martinis, Impact Benefits

 Tonya Hirte, Principal Retirement Plan

 Ben Miller, Principal Financial Advisors

III.  NEW BUSINESS

Finance Director Zook said the subcommittee last met in 2017 and decided to change the investment structure to 60/40. For tonight’s meeting they would look at investment performance.

Mary Caballero, Impact Benefits, said this was the first routine review meeting of the subcommittee. She had been working with Principal who would be giving the presentation.

Ben Miller, Principal Financial Advisors, said February was the first month the markets went down in over a year. In 2017 the markets were up every month and people forgot that investments went down. So when the markets pulled back 10% in February after going up 7% in January, it felt like they were down 50%. The first thing that happened in the beginning of February was very good hourly wage data came out and unemployment was low. That sent the stock market down because inflation and interest rates went up. When interest rates went up, equity markets went down because investors were fearful that interest rates would go too high too fast and put pressure on lending. The second thing that happened was the Secretary of the Treasury and President were in the news talking about letting the dollar trade as it will which caused a lot of international fear. The third thing that happened was an automated trading fiasco. People were taking more risk than they should have and some funds lost 35-40% in one day and announced they were going to liquidate. Since then the market had been more resilient. The actual fundamentals of the market were good, cash flows were extremely positive, and most businesses, balance sheets, and consumers were strong. There were still a lot of unknowns which was causing volatility. He thought the rest of 2018 would be strong, but it would not be as strong as 2017. Interest rates had spiked. As of today it was 2.85%. Long term, the interest rates going up helped the funded status of the pension plan, but short term it hurt some of the performance of the fixed income. So far this year most bond funds were down 2%. He explained the investment returns for the bond and stock markets in 2017. International stocks and emerging markets were up last year, and the only asset class that went down was the US dollar, which went down by 10%. Because different markets went up and down every year, it was important to be diversified. Their economists were predicting 3.1% growth in 2018. European growth was predicted at 2-2.5% and China’s growth was predicted at 5.5-6%. One change had been made to the City’s investment in the fourth quarter by eliminating Principal Global Investor’s large cap value account. That portfolio had a rough 2016 and bounced back in 2017. They let it bounce back, then got it out of the portfolio. A few other changes that were made in the spring included increasing the weight to some of the international portfolios and decreasing weight to some of the US portfolios. They ended the year last year at $20.6 million. The City’s portfolio last year was up 14.01%. The benchmark they used was up 11.9% and they had outperformed the benchmark by 2%. They were extremely happy with the performance last year. No one predicted that the US Equity Fund would be 24% and that International would be up 27%. For the last two months, the planned return was slightly negative. January was very good, but February was pretty bad, and that was why they were marginally negative. For the current fiscal year, they were still around 7%.

Mayor Andrews said the five year projection was 7.25%, so they were where they needed to be. Ms. Caballero explained the target in the actuarial calculation was 6%. Some years they would be below and some they would be above.

Mr. Miller said the rest of the report was in regard to the underlying investments. Some changes had been made, including firing JP Morgan from a high yield account and hiring EJ Mellon to replace them.

There was discussion regarding how often people looked at their investments, which was typically quarterly.

Mr. Miller said they were going to make a change later in March. Currently the equity in the plan was split 70% US and 30% foreign, and they were going to change that to 65% US and 35% foreign. This was based on what they thought would happen with the market. Their overall exposure to equity would be the same.

Human Resources Director Anna Lee pointed out there would be several retirements in the next three years which also needed to be taken into account.

Mr. Miller discussed last fiscal year’s return which was 9.67%. It was a strong year that outpaced the expectations; however he cautioned them that these returns were probably not going to happen again this fiscal year.

There was discussion regarding fixed income account returns and liquidity restrictions.

Tonya Hirte, Principal Retirement Plan, said it was difficult for them as advisors because for the last several years if they wanted to be safe they could go with fixed income which gave a nice 5% rate of return, but it was not that environment anymore. She thought they should go with the real estate fund because it acted like fixed income because it owned property, not stocks, and did not have as much risk.

Mr. Miller said 34% of the City’s plan was in bonds. If they were 1% this year, two-thirds of their plan needed to be 10% to get to the 6% range.

Ms. Hirte said with the change last year to 60/40, they were in a good position. Diversifying the portfolio was important for the long term.

Elizabeth Martinis, Impact Benefits, discussed the current plan expenses which were about .9% per year or $89,000 for services. She had taken a look at the plan, assets, and services and found a way to reduce the record keeping fees and make changes to the underlying mutual funds which would be a $22,000 per year savings. The motivations for the reductions were the growth of the plan, strong advocacy, the City’s longevity with Principal, and market data. She explained the current fee summary and the way the fees were being paid through the revenue sharing that was collected on the investments. They were going to switch the mutual funds to a different share class and the money would come out of the plan assets. This would help with transparency and would be a benefit to the investment management side in giving more flexibility.

HRD Lee asked about the 62 current active participants in NERPS and if they were employees that were vested in the system and were now receiving contributions from the fund. Ms. Caballero explained retired were the ones collecting and vested terminated were the employees that had left and were not receiving funds yet. She clarified those who had liquidated their retirement were not included in the 62.

HRD Lee appreciated Impact Benefits talking with employees about these funds through one on one meetings. Employees understood now what the retirement program was.

Ms. Caballero said they did not have any recommendations right now for any major asset allocation changes. Mr. Miller said they roughly had 34% in bonds, 14% in international, 10% in real estate, and 33% in US stocks.

CM Hannan asked if any of their other public clients had union representatives on the investment committee.

Ms. Caballero said they did have union representation, but they were employees of the organization and were union liaisons.

CM Hannan said they did not have that representation on this subcommittee.

Mr. Miller said some groups had union representation, but it was because someone from the union was interested and they didn’t always have voting rights but they sat in as an advisor.

Chair Bacon was comfortable inviting a union representative to attend the meetings.

IV.  ADJOURNMENT

 The meeting was adjourned at 6:02 PM.