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Minutes - 01/20/2021 - Police Pension Fund BoardBOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 1 of 9 January 20, 2021 VILLAGE OF OAK BROOK BOARD OF TRUSTEES OF THE POLICE PENSION FUND - Minutes January 20, 2021 UNOFFICIAL UNTIL APPROVED AS WRITTEN √ OR AS AMENDED BY BOARD OF TRUSTEES OF THE POLICE PENSION FUND ON April 22, 2021 1. CALL TO ORDER The Regular Meeting of the Board of Trustees of the Oak Brook Police Pension Fund was called to order by President Vel Torlo at 7:02 p.m. in the Upper Level Conference Room of the Samuel E. Dean Board Room of the Butler Government Center, 1200 Oak Brook Road, Oak Brook, Illinois. 2. ROLL CALL The roll was called with the following persons PRESENT: President Vel Torlo (in-person), Vice President Alan Feldman (in-person), Secretary Ed Caspers (via Zoom), Trustee Hitesh Patel (via Zoom), Trustee Reid Foltyniewicz (in- person) ABSENT: None IN ATTENDANCE: Phil Kosmala of Taiber Kosmala and Associates (in-person), Bruce Heniken of Fifth Third Bank (via Zoom), Bob Rietz of Lauterbach & Amen (in-person), Pension Clerk Rose Kane (in-person) 3. PUBLIC COMMENTS None presented. 4. APPROVAL OF MINUTES a. Approval of Regular Meeting Minutes of October 22, 2020 Motion by Vice President Feldman, seconded by Secretary Caspers, to approve the Meeting Minutes of the October 22, 2020 Regular Board Meeting as presented. VOICE VOTE: Motion carried. 5. CONSENT AGENDA All items on the Consent Agenda are considered to be routine in nature and will be enacted in one motion. a. Approval of October 1-31, 2020 expenditures in the total amount of $268,125.82 b. Approval of November 1-30, 2020 expenditures in the total amount of $256,501.84 c. Approval of Taiber Kosmala & Associates LLC invoice for professional services for investment advisory services for 3Q20 in the amount of $7,000.00 d. Approval of invoice for IPPFA 2021 Membership Dues in the amount of $795.00 Motion by Trustee Foltyniewicz, seconded by Vice President Feldman, to approve the Consent Agenda. ROLL CALL: Ayes: 5 – Vice President Feldman, Secretary Caspers, Trustee Patel, Trustee Foltyniewicz, President Torlo Nays: 0 – None Absent: 0 – None Motion carried. 6. ITEMS REMOVED FROM CONSENT AGENDA – None presented. BOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 2 of 9 January 20, 2021 7. NEW BUSINESS a. Taiber Kosmala and Associates, LLC Report on Fourth Quarter, 2020 Mr. Kosmala remarked that it was an interesting quarter – the U.S. had six of the 50 worst days in the history of the Dow Jones industrial average going back to 1887, the biggest drop in GDP. He stated that the quarter ended, referring to page 2 of the Taiber Kosmala report, with the year-to-date tally up 18.4% despite all the record jump in unemployment, and a drop in GDP, and even then to have that kind of rally. Mr. Kosmala discussed that it was somewhat isolated, though, because half of the return for the year, nine of the 18% was from six stocks: Facebook, Amazon, Apple, Netflix, Google and Microsoft, a relatively narrow market. He stated that the good news was that Fund had exposure to those broad markets as well as other parts of the market that started to finally turn. He discussed that it wasn't just technology, energy was up 27%, financials up 23%, industrials, materials, more economically sensitive names started to participate in a broad rally. So overall, he said it was a healthy quarter and walking into calendar 2021 with some pretty good footing as well. He discussed the likelihood of the Fed staying on the sidelines for the foreseeable future with the new inflation targeting policy - now instead of having a 2% ceiling, the Feds are having a max or an average of 2% inflation, which unfortunately means they'll probably let inflation run hot for a long period of time. Mr. Kosmala said, though, in the short term, that means good things for equity markets because of the generational low interest rates. Mr. Kosmala stated that the 10-year bond yields closed the year at 1% and that there's a bigger fear of premium in 10-year treasuries now than there was in the middle of World War Two. He said that, unfortunately, that means low returns for fixed income for the foreseeable future, as well as rates normalizing, and it's going to take the fed a while to get there. He said that overall, though, great quarter for the portfolio. He then referred to page 6 and stated that they only have one recommendation. He added that for the quarter, the portfolio was up almost 10%, so great participation in the rally, and the good news is that the trailing one, three and five-year returns were all well above average, so the Fund has had a nice participation in the recovery across the board in the portfolio. Mr. Kosmala stated that the fourth quarter was up almost $4 million in appreciation, which is really remarkable given the tumult over the past couple of years, and almost $4.5 million of appreciation in the portfolio for the year. Oak Brook Pension Performance On page 6 of the Taiber Kosmala Report, the portfolio activity was listed as follows: Regarding the one recommendation, Mr. Kosmala referred to the bottom right-hand side of the Asset Allocation vs. Target table on page 6, and discussed that because of the appreciation in the portfolio over the past three quarters, there have been a couple of trips, but that the equity side is getting out of whack a little bit. He said just mathematically the Fund is now 65% equities after the past couple of trading days, all due to appreciation in the portfolio. Summary of Cash Flows Fourth Quarter Beginning Market Value $41,893,795 Net Cash Flow -$ 255,760 Net Investment Change $ 3,971,210 Ending Market Value on 3/31/18 $44,609,244 BOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 3 of 9 January 20, 2021 He continued, referring to page 8, that the Fund is overweight in US Large Cap equities in particular and underweight in fixed income. He directed the Board’s attention to the MFS growth (Large Cap Growth) that has grown because of Facebook, Amazon, Apple, Netflix and Google and the excess appreciation by large cap growth stocks, and stated that it's now grown to a $6 million allocation or 13% of the portfolio. Mr. Kosmala recommends prudent rebalancing by selling $2 million of that $6 million just to bring it back in line with the target and reallocate it back into fixed income. He said that it seems counterintuitive, but the Fund is just getting near that state of at least a statutory concern of being over 65% equity. In reply to a question regarding the Fund’s emerging market exposure, Mr. Kosmala referred to the bottom of page 8 and the top of page 9, stating that the Fund is currently 1.8% in Baron and 1.9% in Harding Loevner, so almost 4% dedicated to emerging markets. He state that what investors know for certain is that the vaccines are going to get distributed, and there is going to be a massive pop in GDP, and problems with new virus strains. Discussion ensued regarding the distribution of vaccines, stimulus payments and raising additional cash. Mr. Kosmala affirmed that the Fund may not go over 65% in equities by the end of the fiscal year, and he reiterated that the Fund is teetering on that line right now. He stated that the excess in equities can be put into fixed income. b. Fifth Third Report on Fourth Quarter, 2020 Mr. Heniken referred to page 5 of the Fifth Third report which was a review of what transpired last year with interest rates dropping substantially in March, at the beginning of the pandemic, as the Fed took an emergency rate cut down to almost zero. He stated that then investors dumped riskier assets and piled into high quality fixed income bonds, so demand and reduction of rates meant that there was substantial appreciation in the fixed income market, led by the government, and treasuries. He discussed that on page 5 in the US Government Yields there was a substantial drop from last year. He stated that their focus is going to be on the high quality corporate bonds. Mr. Heniken then referred to page 10, which shows that money market rates are down to almost nothing. He stated that the appreciation was about 5.5% for the fixed income portfolio, and so for the entire year, 5.1%, which is a very healthy return. Mr. Heniken discussed that in today's low interest rate environment, they are really looking at corporate bonds being the place where there will be opportunities to still get a real return and backing out inflation. He said this will be the challenge to continue to look for good quality investment grade or better corporate bonds that still are priced appropriately to allow the Fund to get a positive real return, on the short and intermediate maturity schedule. He stated that looking forward because the current yields are so low, they won't come anywhere near the 5% that was seen last year. He added that the Fund is in bonds for principal protection, income generation, and that they really represent the diversifier and hedge against the downside risk of equities. Asset Allocation vs. Target Current Current Target Target Range Difference % Within Range Cash & Equivalents $2,199,556 4.93 5.00 0,00 – 10.00 -$30,907 -0,07 Yes Fixed Income $13,515,224 30.30 40.00 30.00 - 50.00 -$4,328,474 -9.70 Yes Large Cap $16,031,391 35.94 25.00 10.00 – 45.00 $4,879,079 10.94 Yes Non-US Equity $7,358,295 16.50 15.00 5.00 – 30.00 $666,908 1.50 Yes Public Real Estate $1,071,614 2.40 5.00 0.00 – 10.00 -$1,158,848 -2.60 Yes Small Cap $4,433,165 9.94 10.00 0.00 – 20.00 -$27,759 -0.06 Yes Total $44,609,244 100.00 100.00 0.00 BOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 4 of 9 January 20, 2021 EQUITY MARKET OVERVIEW Index 1-Month 3-Months YTD 1-Year 3-Years* 5-Years* MSCI ACWI (Net) 4.64 14.68 16.26 16.26 10.05 12.24 S&P 500 3.84 12.14 18.39 18.39 14.16 15.19 S&P 400 Mid-Cap 6.51 24.36 13.65 13.65 8.42 12.32 Russell 2500 7.61 27.40 19.98 19.98 11.30 13.60 MSCI EAFE (Net) 4.65 16.05 7.82 7.82 4.28 7.44 MSCI Emerging Mkt (Net) 7.35 19.70 18.31 18.31 6.17 12.79 *Annualized return FIXED INCOME MARKET OVERVIEW Index 1-Month 3-Months YTD 1-Year 3-Years* 5-Years* BC U.S Intm Gov/Credit 0.21 0.48 6.43 6.43 4.66 3.63 BC Global Agg excl. USD 2.17 5.09 10.11 10.11 4.22 4.89 BC U.S. TIPS 1.15 1.62 10.99 10.99 5.91 5.08 BC U.S. Municipal Bonds 0.61 1.82 5.21 5.21 4.64 3.90 BC U.S. High Yield Bonds 1.88 6.45 7.11 7.11 6.23 8.58 *Annualized return REAL ESTATE AND ALTERNATIVE INVESTMENTS OVERVIEW Index 1-Month 3-Months YTD 1-Year 3-Years* 5-Years* S&P US REIT 3.36 11.51 -7.52 -7.52 3.45 4.61 HFRX Global Hedge Fund 2.45 5.11 6.81 6.81 2.67 3.29 S&P Global Infrastructure 2.99 15.03 -5.80 -5.80 2.66 7.87 S&P GSCI Gold Total Return 6.41 -0.02 24.42 24.42 13.11 12.30 Thompson Reuters/Core Commodity 4.84 13.02 -9.33 -9.33 -3.26 0.18 *Annualized return ALLOCATION SUMMARY: ASSET CATEGORY % HOLDINGS MARKET VALUE ESTIMATED ANNUAL INCOME CURRENT YIELD Marketable Holdings Traditional Asset Classes 100.00% $11,648,527.81 $405.566.72 3.48% Cash and Equivalents 3.54% $411,784.14 $41.18 0.01% Fixed Income 96.46% $11,236,743.67 $405,525.54 3.61% Total Marketable Holdings 100.00% $11,648,527.81 $405,566.72 3.48% Total Holdings $11,648,527.81 $405,566.72 3.48% RECONCILLIATION SUMMARY Total Holdings on 10/01/2020 $11,947,071.58 Beginning Marketable Holdings on 10/01/2020 $11,835,961.26 Beginning Accrued Income $ 111,110.32 Beginning Value $11,947,071.58 Contributions Cash Contributions $529,111.30 Asset Receipts $ 0.00 Other Contributions $ 0.00 Total Contributions $529,111.30 BOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 5 of 9 January 20, 2021 Withdrawals Cash Withdrawals ($777,634.83) Asset Delivery $0.00 Fees ($5,215.98) Total Withdrawals ($782,850.81) Income Earned Interest Collected $ 120,342.59 Dividends Collected $0.00 Other Income $0.00 Net Accrued Income ($ 14,932.12) Total Income Earned $105,410.47 Net Change ($ 54,036.53) Ending Marketable Holdings on 03/31/2020 $11,648,527.81 Ending Accrued Income $ 96,178.20 Ending Value $11,744,706.01 Total Holdings on 03/31/2020 $11,744,706.01 Total Earnings $ 51,373.94 FIXED INCOME INDIVIDUAL HOLDINGS Category % Total Fixed Income Market Value Estimated Annual Income Current Yield Domestic Fixed Income Corporate Bonds 47.76% $5,367,171.10 $170,061.16 3.17% Domestic Fixed Income Government Bonds 37.13% $4,172,689.45 $186,727.00 4.47% Intl Developed Mkt Bonds 15.10% $1,696,791.00 $48,730.50 2.87% Domestic Fixed Income Mortgage Backed 0.00% $92.12 $6.88 7.47% Total Indiv Fixed Income Holdings 100.00% $11,236.743.67 $405,525.54 3.61% Total Fixed Income Holdings 100% $11,236,743.67 $405,525.54 3.61% Mr. Heniken stated that there is a mix between government treasuries, agencies and corporate bonds and that probably as they go into the future, they're going to be primarily corporate debt, and perhaps a little bit on international development as well. c. Approval of Investment Transactions for Fourth Quarter, 2020 Motion by Vice President Feldman, seconded by Trustee Patel, to approve the Investment Transactions for Fourth Quarter 2020. ROLL CALL: Ayes: 5 – Secretary Caspers, Trustee Patel, Trustee Foltyniewicz, President Torlo, Vice President Feldman Nays: 0 – None Absent: 0 – None Motion carried. BOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 6 of 9 January 20, 2021 Motion by Trustee Foltyniewicz, seconded by Trustee Patel, per the recommendation of Taiber Kosmala, to move $2 million from MFS Growth to the Fifth Third fixed income account ROLL CALL: Ayes: 5 – Trustee Patel, Trustee Foltyniewicz, President Torlo, Vice President Feldman, Secretary Caspers Nays: 0 – None Absent: 0 – None Motion carried. d. Ratification of 2021 Pension Increases Motion by Vice President Feldman, seconded by Trustee Patel, to ratify the 2021 pension increases. VOICE VOTE: Motion carried. e. Discussion/Action regarding 2021 Actuarial Assumptions Mr. Rietz began the actuarial discussion and stated that the good news is that they are really not proposing any changes. He reminded the Board that last year Lauterbach and Amen did a large experience study through all the police and fire funds they work with, and that they go back five years and gather all the information and data to come up with specific tables for retirement rates and termination rates. He said that the biggest changes last year were the mortality tables. He discussed that this year they are using those same sets of assumptions for the next four or five years, but there are a few assumptions that they looked at a little bit more independently than the overall package - the first one being the expected rate of return. He stated that this is always an ongoing assumption that they try to target what the best rate is for the Fund, with last year being a 6.5% net of fees. Mr. Rietz stated that they are not proposing to change that rate as they think 6.5% is a pretty reasonable rate going forward, and then also with the ongoing consolidation down the line, whatever is going to happen with that. He remarked that the theory is the Fund might be able to get a better expected rate of return going forward, but that may not be what they want because by getting an expected rate of return higher than that, it could put the Board into a false sense of security of where the Fund stands. He stated that there will be a lower liability and paying less into the Fund in contributions, and then down the road that could actually turn out to be to work against the Fund. Discussion ensued regarding the actuarial assumptions and the impact of the CPI going up significantly in the next 6-9 months, if inflation kicks in, and CPI number goes up and that affects the assumption. Mr. Rietz explained that they are calculating the unfunded liability, that they don’t value or use the market value to come up with an unfunded amount, that they use what's called an actuarial value of assets. He further explained that what that does is it takes investment gains and losses or spikes, such as inflation and market adverse effects, and spreads it over a five-year period. He stated that they are not going to see one event like that really become a critical component to really damage the Fund in one particular year. Mr. Rietz stated that the CPI is a byproduct, more of the salary increases than really the expected rate of return. He said that the only thing that really directly relates to a part of the Fund is the Tier II COLA increases in the salary cap that's provided on those, it directly affects those two numbers. He mentioned that they don't take a one-year bump, and have to change all of the assumptions, because something just happened that's adverse, they look at this at a longer horizon. For example, he said if they had a CPI increase this year, they would blend that in for the last 20 years and still be at a pretty reasonable 2.25% rate. He reiterated that the only direct impact it has to the Fund is the way it's calculated liabilities and is due to the salary cap and the COLAs that are provided to the members, He added that they are all directly related to a component, but that also has a cap of 3% on it - if you have COLA, or if you had CPI go up to five 6%, it is still going to have a cap of 3%. Discussion ensued regarding retirement rates and how the legislation going on right now that is not very beneficial to police may have an impact on pushing a few people out earlier, bringing in Tier II BOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 7 of 9 January 20, 2021 employees. Mr. Rietz stated that the rates proposed here were calculated with experience through 12/31/2019. He discussed that with the events of last summer and the recent legislative changes, that's a discussion that they will have with the Board to ask if there are police officers in the Fund that were going to retire at age 55 and maybe now are considering retiring at ages 48, 49 or 50. He stated that they can work with the Board and come up with rates that would take that into account. He said the same thing applies with a cap age, that everyone is going to retire by the age 65, but that if no one has ever made it that far, that they have always got out by 58 or 59, or something like that, they can take that into account as well. As that is increased or as the cap age is decreased, he added that it's going to increase the liability, increase the costs, but they still want to make the best representation so it is actually funding to the proper target. Discussion continued regarding the effects of the Tier II employees and lateral new hires who are Tier I. Mr. Rietz stated that when they do their experience studies, they are using 100% of their study. Looking at the Fund through that last four or five years, he discussed that the data or the number of exposures, and the number of people that actually retired from the Fund isn't large enough to have a truly credible data set to say they are going to use the Fund’s experience solely. However, he remarked that if the Board thinks that there's going to be some members going out quicker, they will use 125% of these rates to move that rate forward, or they will move the cap age up from 65 to 62. Mr. Rietz stated that he had run some initial calculations, and that they are actually expecting the Fund’s contribution to go up less than what would be expected. He added that it is because they amortize on a level percent of pay basis, expect it to go up to the salary wage increase rate of 3.25%, which in real dollars is about $80,000. However, he stated that with increases that would be expected this year, based on the market returns and the actuarial value of assets and deferred gains, preliminarily, it's really about a $50,000 increase. He stated that the Fund is currently funded at about 60-62%, with the median for all the police or fire pension funds in the state being funded at about 55%. Discussion ensued regarding how consolidation will affect the Fund. Motion by Secretary Caspers, seconded by Vice President Feldman, to accept the Actuarial Assumptions Summary dated January 1, 2021. VOICE VOTE: Motion carried. f. Approval of Contribution Refund request of Noah C. Reyes President Torlo explained that this officer came from the Chicago Police Department, stayed with the Oak Brook Police Department for about six months and then returned to the Chicago Police Department. Motion by Secretary Caspers, seconded by Trustee Foltyniewicz to approve the Contribution Refund request of Noah C. Reyes. ROLL CALL: Ayes: 5 – Trustee Patel, Trustee Foltyniewicz, President Torlo, Vice President Feldman, Secretary Caspers Nays: 0 – None Absent: 0 – None Motion carried. g. Approval of Transfer of Creditable Service for Joseph Kieca from Sandwich Police Pension Fund President Torlo stated that this officer is bringing over Tier II money to the Fund from the Sandwich Police Pension Fund. BOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 8 of 9 January 20, 2021 Motion by Secretary Caspers, seconded by Trustee Foltyniewicz to approve the Transfer of Creditable Service for Joseph Kieca from Sandwich Police Pension Fund. ROLL CALL: Ayes: 5 – President Torlo, Vice President Feldman, Secretary Caspers, Trustee Patel, Trustee Foltyniewicz Nays: 0 – None Absent: 0 – None Motion carried. h. Ratification of Service Retirement Pension Benefit request of David Kolzow President Torlo stated that this officer retired with 20 years of services with the Oak Brook Police Department. Motion by Trustee Foltyniewicz, seconded by Secretary Caspers, to ratify the Service Retirement Pension Benefit request of David Kolzow. VOICE VOTE: Motion carried. ROLL CALL: Ayes: 5 – Vice President Feldman, Secretary Caspers, Trustee Patel, Trustee Foltyniewicz, President Torlo Nays: 0 – None Absent: 0 – None Motion carried. Pension Clerk Kane noted that the Village Board voted to not allow the increases that are included in the union contracts for police and fire. She explained that this is why Officer Kolzow has a revised amount on his application, but both amounts are listed, so that he will receive the increases retroactively when the issue is decided. i. Ratification of Election to Purchase Military Service Served Prior to Employment and Service Retirement Pension Benefit requests of Jason Cates President Torlo stated that the Village paid Deputy Chief for his military time, and all the Board has to do is recognize that the purchase has been paid in full, acknowledge the revised date of hire because his date of hire changes from September 8 1992 to January 8 1991. Motion by Secretary Caspers, seconded by Trustee Foltyniewicz, to accept the purchased military service request to be added to the pension benefits for Jason Cates and to approve his retirement. ROLL CALL: Ayes: 5 – Secretary Caspers, Trustee Patel, Trustee Foltyniewicz, President Torlo, Vice President Feldman Nays: 0 – None Absent: 0 – None Motion carried. 8. PENDING BUSINESS a. Discussion/action regarding consolidation of pension funds Secretary Caspers and Trustee Foltyniewicz reported on the consolidation training that they participated in and stated that the Board will have to have a really airtight cash policy and a significant BOARD OF TRUSTEES OF THE POLICE PENSION FUND Minutes Page 9 of 9 January 20, 2021 cash reserve, because the Board will still be responsible for paying out benefits. Secretary Caspers added that he thinks the Board will have to establish a policy where there is always six months’ worth of bills in cash. Trustee Patel explained that the way it is generally done is similar to a corporation having a reserve like a money market account, where the cash will be reciprocated with the Illinois State Board to do these things for the Board at a fixed interval. He stated that there would be two accounts, one will be for managing something similar to a petty cash account, and the second one would be the six months’ worth investment account. He added that the Board would have no role in current allocation or management of their assets. Mr. Rietz discussed that currently the DOI provides the report for statutory minimum contributions and he suspects that they would have the same sort of thing in place. Discussion ensued regarding less influence, not being able to use a private actuary and whether the pandemic would extend the date past July 2022. Mr. Rietz stated that consolidation is going to help the funds that currently have $2 million of assets and 10% equity, funds that basically all the money they have is in money markets, and will help those funds to now have the ability to invest prudently. b. Discussion/action regarding disability matter President Torlo mentioned that it is up to the attorneys to hold this hearing and suggested that Pension Clerk Kane send an email to the Board’s attorney informing him that the Board is ready to hear this matter when the attorneys are ready. 9. INFORMATION & UPDATES a. Scheduling of second quarterly meeting 2021 Consensus to meet for the second quarterly meeting on April 22, 2021 at 6:15 p.m. There was some discussion regarding having a special meeting regarding having Lauterbach & Amen provide a proposal to take over administrative duties upon Pension Clerk Kane’s retirement. The depth of the services needed/provided was also discussed. Consensus to meet for a special meeting regarding this matter on February 11, 2021 at 6:15 p.m. 10. ADJOURNMENT Motion by Trustee Foltyniewicz, seconded by Secretary Caspers, to adjourn the Board of Trustees of the Police Pension Fund meeting at 8:33 p.m. VOICE VOTE: Motion carried. ATTEST: Edward J. Caspers /s/ Edward J. Caspers, Secretary Board of Trustees of the Police Pension Fund