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07-07-2010 - Joint Special General Employees’ and Police Pension Boards of Trustees Minutes - Joint Special Meeting June 7, 2010 Page 1 of 6 CITY OF EDGEWATER GENERAL EMPLOYEES’ & POLICE OFFICERS’ PENSION BOARDS OF TRUSTEES SPECIAL MEETING MINUTES Monday, June 7, 2010 CALL TO ORDER/ ROLL CALL/DETERMINATION OF A QUORUM The Edgewater General Employees’ and Police Officers’ Pension Boards held a special meeting on Monday, June 7, 2010 in the City Hall Council Chamber at the City of Edgewater, Florida. Members Present (General): Bobby Laramore Tyna Hilton Tim Sopko Brenda Dewees John Brackin John McKinney Members Absent (General): Gigi Bennington Members Present (Police) : Dan Blazi Gary Conroy Lawrence Leaf Members Absent (Police): Ferd Heeb (for 9:30 portion only; in attendance at 4:00 p.m. portion of the meeting) Kevin Seymour Plan Attorney: H. Lee Dehner Milberg Attorneys (via telephone): Andrei Rado Roland Riggs Anita Kartalopoulos Plan Actuary: Brad Heinrichs, Foster & Foster Performance Consultant: Mike Welker, Jack Evatt, The Bogdahn Group Plan Administrator: Sheila Hutcheson City Staff: Julie Christine, Personnel Department Donna Looney, Personnel Director Tracey Barlow, City Manager Principal (via telephone): Cathy Besh, Client Relationship Coordinator Karen Brunscheen, Assistant Director Don Koehler, Attorney Mark Konrad, Attorney Tonya Niday, Client Service Manager The special meeting of the General Employees’ and Police Officers’ Boards of Trustees was called to order at 9:35 a.m. by Vice-Chairman Dewees and Chairman Blazi. Both Boards had a quorum. Discussion: Principal contract termination issues (9:30 a.m.) The Milberg firm’s attorneys were in attendance via telephone and stated their preliminary analysis. They think the approach with Principal later today should be fairly aggressive, stating that Principal may have breached fiduciary responsibility in its representations to the Boards as to the benefit index General Employees’ and Police Pension Boards of Trustees Minutes - Joint Special Meeting June 7, 2010 Page 2 of 6 and explaining its ramifications, especially the burden of contract termination. This raises the issue of Principal proposing a contract that would inure to their benefit. Chairman Blazi asked if any other plans are in this position besides Edgewater and the only plans that are for certain are the Auburndale and Haines City plans that Attorney Dehner represents. This helps the Boards’ position and it is understood that there are more plans that are most likely in the same position with Principal (such as a Jonesboro, Arkansas plan that Attorney Kartolopoulos had discussed with Actuary Brad Heinrichs which she would like to have a meeting to further discuss later). Ms. Kartalopoulos said taking an aggressive approach may result in Principal agreeing to the Boards’ position. Mr. Blazi then mentioned that Principal is disavowing that Jack Ascherl was a representative of Principal and asked how this would affect the case. The Milberg attorneys said this is an important issue: that Mr. Ascherl was paid by Principal and is an agent for the company (clearly, he was not an independent analyst). Mr. Ascherl had a financial interest in promoting Principal’s product. Attorney Dehner said there is no question that Mr. Ascherl was clearly a representative of Principal. The Milberg attorneys said they would want to see minutes showing Mr. Ascherl’s relationship to Principal and his representations to the Boards. Chairman Blazi said that Mr. Ascherl was at every meeting and represented Principal and always strived to present Principal’s performance in a more favorable light than the returns actually showed. Ms. Kartolopoulos said she was also concerned about the over-concentration in Principal’s equities based on ERISA provisions. The Milberg firm has investigated Principal as a company and will continue to look into this. Attorney Dehner stated that fraudulent inducement into an unconscionable contract and fiduciary responsibility issues would be the basis of any litigation. Attorney Kartolopoulos asked Mr. Dehner about the conferences with Principal regarding the Auburndale and Haines City plans and he advised that the issues were the same as in Edgewater. Mr. Heinrichs, Actuary, said he was also present at the other teleconferences and his role was to discuss that the Actuary with Principal was in violation of actuarial standards in developing funding requirements. Attorney Kartalopoulos asked if Mr. Heinrichs would make the same arguments today and he said he would first consider the others’ input. The Actuary mentioned the client in Arkansas and that Principal told them that the company had never allowed a client out of the benefit index, which was clearly untrue (based on action taken with the Auburndale and Haines City plans). Ms. Kartolopoulos said that it was a good move by Attorney Dehner to discuss filing a complaint with the Florida and Iowa Insurance Commissioners, as Principal will be very concerned about this action. Attorney Rado said to emphasize the decision Principal has already made with the other two plans and that the Boards will sue if necessary. Mr. Dehner asked the Milberg attorneys about contingency fee arrangements and Milberg said they would have to analyze what the contingency arrangement/fees would be based upon. They did say that no expense was being incurred at this time. The Milberg attorneys stated that the firm would like to also represent the General Employees’ Board. Attorney Dehner then advised Milberg that he had contacted two litigation firms and both had declined to take the case on a contingency basis and said that this litigation could be lengthy and expensive. Chairman Blazi asked Mr. Dehner if there was a holdharmless agreement in the resolution with Haines City and Auburndale and was told there was not. He then asked Attorney Kartolopoulos if the Boards could continue to examine the impact of losses from Principal’s investment strategy if the contracts with Principal are just terminated. This was based on the analysis by The Bogdahn Group demonstrating that had the changes the Boards wanted been implemented, the funds would have had improved returns. The Milberg attorneys said that could be considered too. Actuary Heinrichs asked about certain information in Principal’s December, 2009 letter with respect to the release of liability and Attorney Rado said he would have to check more closely on that. Attorney Dehner asked Milberg to play a large part in the conference with Principal later today, and said he would open by summarizing the past issues. The Plan Administrator asked about the effect of termination of the contracts with Principal and then filing suit. The attorneys said that would not be the optimal situation. Ms. Hutcheson expressed concern about the ability to produce records under discovery if litigation is filed. The attorneys said General Employees’ and Police Pension Boards of Trustees Minutes - Joint Special Meeting June 7, 2010 Page 3 of 6 that the court can’t penalize the City’s good faith efforts to produce the records it has. Actuary Brad Heinrichs said that if the approach taken is to ask if Principal is a fiduciary to the fund and they respond that they are, he believes that Principal will maintain that their fiduciary role is limited to investments and does not relate to the Boards’ decisions on the benefit index. Principal will say the Boards had their own experts in this regard. Attorney Dehner pointed out that the Boards did not, in fact, have their own attorney or other consultants at the time the benefit index went into effect. The Milberg attorneys said the strategy should be to say that Principal is a fiduciary to the Plans and it is obvious that what is in the best interest of the Plans is to allow an avenue out of the benefit index. It was also noted that it was Principal itself that recommended about ten years ago that the plans be changed from benefit index to direct funding. Chairman Blazi said that the Police plan has only six retirees who are subject to the benefit index and Principal wants to maintain that. Attorney Kartolopoulos asked about Principal having said that the Insurance Commissioner doesn’t allow this release (for benefit index retirees) and suggested that we tell Principal that we will check with the Insurance Commissioner, since this action was taken on the Haines City and Auburndale Plans. Principal should be asked to explain why this is different now than with the other two plans. Chairman Blazi stated that having the Milberg firm involved should provide an additional incentive to Principal to settle this issue. Attorney Kartolopoulos said that the goal for the conference later today with Principal is to have Principal say they will reconsider the Boards’ position and engage in further discussion shortly. Ms. Kartolopoulos will confer with Attorney Dehner at 3:30 p.m. today to discuss further the approach for the 4:00 p.m. teleconference with Principal. Mike Welker, The Bogdahn Group, said that FINRA.org shows that Jack Ascherl is a broker for Principal, which is contrary to Principal’s assertion in their letter to Attorney Dehner that he was not affiliated with Principal. Police Trustee Gary Conroy advised the Boards that he had researched a public relations firm that will write copy regarding these issues with Principal for nationwide distribution, if the Boards are interested. The cost would be approximately $800.00, which could be split between both the Boards. It was noted that if the Boards proceed in this regard, Attorney Dehner would review any information to be published to ensure that no separate cause of action is created. General Employees’ Trustee Bobby Laramore asked Attorney Dehner to explain ERISA; Mr. Dehner advised that most of the provisions in ERISA don’t apply to public sector plans. Chairman Blazi said he recommends that Milberg continue to examine the issues regardless of how the Boards proceed to determine if monies can be recouped from Principal. General Employees’ Trustee Tim Sopko asked if Milberg’s services are on a contingency basis and was advised that this is the fee arrangement. Mr. Welker stated that he had previously prepared a ten-year retrospective of past losses based on a passive benchmark; Principal’s investment strategy had resulted in significant underperformance in both Plans. The Actuary noted that from the Milberg Firm’s standpoint the issues with Principal may potentially be a large, class action suit. Attorney Dehner said that Police Members Conroy and Heeb and General Employees’ Member Hilton would best be able to provide historical information during the teleconference later today with Principal. The meeting recessed at 10:48 a.m. and it was noted that the meeting would be continued at 4:00 p.m. Teleconference: Boards, Attorney, Consultants and Principal’s Attorneys/staff (4:00 p.m.) The meeting re-convened at 4:00 p.m. with Police Member Heeb in attendance (in addition to the attendees from the first part of the meeting at 9:30 a.m.). The call to Principal was placed by Tim Sopko. Attorney Dehner opened by asking that the parties other than the Boards be noted for the record: General Employees’ and Police Pension Boards of Trustees Minutes - Joint Special Meeting June 7, 2010 Page 4 of 6 Attorneys Roland Riggs, Anita Kartalopoulos, and Andrei Rado participated in the call on behalf of Milberg LLP; Attorneys Don Koehler and Mark Konrad, Karen Brunscheen, Cathy Besh, and Tonya Niday participated in the call on behalf of Principal. The Boards’ Actuary Brad Heinrichs, Foster & Foster, and Consultant Mike Welker, The Bogdahn Group, were also present. Also in attendance were City Manager Tracey Barlow and Personnel Department members Donna Looney and Julie Christine. Attorney Dehner then began the discussion by asking Principal how the Edgewater plans’ contracts are any different than those in Auburndale and Haines City; Attorney Konrad responded that he could not discuss other clients’ agreements, but he said that the benefit index feature has been around since early in the 1980’s, with Principal having very few clients desirous of terminating the contracts and noted that termination had occurred in only two cases. Principal has said to participants that these are guaranteed benefits (under the benefit index) and, if Mr. Dehner does find contracts that are identical, he should let Principal know. Attorney Dehner responded that, for today’s purpose, only the Edgewater Boards’ agreements should be looked at and also the role of Jack Ascherl. Principal has said (in its correspondence) that Mr. Ascherl is not an agent of Principal; Mr. Dehner referred to an internet listing defining that Jack Ascherl is employed by PrinCorp Financial Services. Attorney Dehner continued by saying that Mr. Ascherl presented the benefit index product to the Boards (who did not have an attorney at that time), but never explained the onerous termination provisions. and he later recommended changing to direct funding. These Boards should have the same relief as the other two plans (Auburndale and Haines City). The discussion continued that both The Bogdahn Group and Foster & Foster have issues as well. Mr. Dehner said the Boards are asking only that Principal release the funds if the retirees under the benefit index execute releases, in the same manner as the other two clients. The Principal attorney said he would review the documents with their senior management, as he does not have authority to resolve this issue today. Mr. Dehner asked that he proceed to do so. He continued by stating that the Boards’ position is that there has been a breach of fiduciary responsibility and a failure to disclose the burdensome termination provisions on the part of Principal. Mr. Dehner then asked Board members who had personal recollections of these issues with Principal to share them so that this could be relayed to Principal’s senior management as they consider their decision. Police Trustee Gary Conroy discussed the presentations on the benefit index by Mr. Ascherl and Mr. Felts, confirming that they did not explain the difficulty of termination of the agreement. It was also noted that Mr. Ascherl later recommended to change from the benefit index to direct funding. Mr. Conroy continued by stating that Mr. Ascherl attended the Boards’ meetings and presented the reports on behalf of Principal. He said that it was only rarely that Principal would send another representative besides Mr. Ascherl and this was done only when requested by the Boards. Attorney Dehner said that it was clear that Mr. Ascherl was viewed by all parties as the representative of Principal. General Employees’ Board Member Tyna Hilton emphasized that Jack Ascherl was always viewed as Principal’s representative to the Plans/Boards. Next, Consultant Mike Welker discussed that Principal had said the firm would no longer be a named fiduciary to the Plans/funds, if The Bogdahn Group specified an asset allocation, so the Boards didn’t make a change in this regard. He also pointed out that certain of Principal’s current investments are in violation of Florida Statutes, Chapter 185 (for Police) and Chapter 112 (for General), noting that Principal was not ensuring that investments were made in accordance with statutory provisions. This was a breach of fiduciary responsibility by Principal. Attorney Dehner next asked Attorney Andrei Rado, Milberg LLP, for his comments; Mr. Rado said that Principal was acting as a fiduciary; Mr. Ascherl was certainly a representative of Principal and was viewed as such by the Boards. He pointed out that the onerous termination provisions of the agreements were not disclosed to the Boards so they could make an informed decision in this regard. Actuary Brad Heinrichs then discussed that the benefit index in the contract is a proprietary calculation that isn’t disclosed and is difficult to replicate. The benefit index is supposed to provide for benefits for the retirees’/beneficiaries’ lives, but it seems to Mr. Heinrichs that its cost is General Employees’ and Police Pension Boards of Trustees Minutes - Joint Special Meeting June 7, 2010 Page 5 of 6 arbitrarily high and does not reflect the annuity purchase cost/amount. He also stated that the purchase of annuities has a low interest rate and costs more than what is actually required to pay these benefits from the ongoing trust. The City would, therefore, incur higher contribution costs due to forced annuity purchases. If this had been disclosed prior to a decision being made, the Boards would not have chosen the benefit index option. Client Relationship Coordinator Cathy Besh said there was a floor arrangement in place prior to the benefit index, so she opined that there was nothing unusual about the Boards going into the benefit index. Actuary Heinrichs said that the Boards made the decision based on Mr. Ascherl’s representations and recommendations. He continued that no municipality in Florida would need the benefit index as Florida statutes require that cities fund their pension plans to ensure actuarial soundness for the payment of all benefits. If the provisions of the benefit index had been adequately explained, there would have been no reason for the Boards to enter into this arrangement. The provisions are adverse to the Plans and not in their best interests. It was again pointed out that it was Mr. Ascherl who later recommended discontinuing the benefit index in favor of direct funding. Attorney Rado asked for Principal’s response. Principal Attorney Don Koehler said that Jack Ascherl was not necessarily a representative of Principal; Attorney Dehner reiterated that he was certainly viewed as Principal’s representative by the Boards and he asked if Principal paid Mr. Ascherl and/or if he received a commission from Principal. Mr. Rado said the courts would look at how the Boards viewed Mr. Ascherl in determining if he was Principal’s representative. Police Chairman Blazi said that Principal’s other representatives, when they did attend any meetings, always came with Mr. Ascherl and any reasonable person would conclude that Jack Ascherl was Principal’s representative to the Boards. Attorney Dehner said that the Boards will file complaints with the Insurance Commissioner in both Florida and Iowa if this issue is not resolved and will file litigation, which is why Milberg LLP is in attendance today. Ms. Besh asked what would be done in the case of any retirees under the benefit index who decided not to sign releases; Mr. Dehner said that the Boards understand that annuities would have to be purchased for those retirees. Milberg Attorney Anita Kartalopoulos said that she would like to reconvene in a week to further discuss this matter after the Principal attendees have conferred with their senior management. She said that she would coordinate with Attorney Dehner so that the attorneys/consultants could have a teleconference among themselves. Attorney Konrad said he would call Mr. Denher next week to advise him of Principal’s decision. The teleconference ended at this point. Police Chairman Blazi asked about the timing of the retiree releases and Attorney Dehner said to wait until Principal’s decision is known. He will notify the Administrator of the outcome of his follow-up call from Principal. Both Boards concurred with the decision to proceed to terminate the contracts and, if Mr. Dehner is successful in this regard, he will submit the settlement agreement for approval by the Boards and by the City of Edgewater as the plan sponsor. STAFF REPORTS, DISCUSSION, AND ACTION/TRUSTEES’ REPORTS, DISCUSSION, AND ACTION/REQUESTS FROM THE PUBLIC/EMPLOYEES PRESENT It was noted that the General Employees’ Board may wish to consider retaining Milberg LLP, as the Police Board has done. Attorney Dehner pointed out that the Police Board’s contract with Milberg is for securities monitoring at no cost (contingency basis). If there is litigation, Milberg then receives a contingency fee. It was the General Employees’ Board’s decision to consider this item when it is included on a meeting agenda. General Employees’ Board Vice-Chairman Dewees asked how the Police Board found out about Milberg’s services and was advised that the firm was at an FPPTA conference and then made a presentation to the Police Board. General Employees’ and Police Pension Boards of Trustees Minutes - Joint Special Meeting June 7, 2010 Page 6 of 6 ADJOURNMENT - The meeting was adjourned at 4:48 p.m. for both Boards. Respectfully Submitted: Approved: _____________________________ _____________________ Sheila Hutcheson Dan Blazi, Chairman Plan Administrator Police Officers’ Pension Board Approved: _________________________ Gigi Bennington, Chairman General Employees’ Pension Board