Pension Board - meeting_joint_regular

I'd like to call the meeting to order. Can we have roll call?

Josephine? Ted Isaacs is absent. Nate Mahoney is absent. Alan Robbins?

Here.

Chassie Smith? Here. And Kent Burke Bugler is also absent and Mayor Luce is here as the liaison.

Great. So has everybody reviewed the minutes from the last meeting? Are there any corrections? If not, do we have a motion to accept the minutes? Okay. Do we have a second?

I'll second it.

Great. Approved. The minutes are accepted.

You have to vote. You actually have to vote.

Okay.

Let's vote. You've had a motion. You have a second.

And then I can say all in favor.

Aye.

All opposed? Motion carries.

Your motion carries.

Okay. Marquette, you were up.

Good evening, everyone. Good evening. Want to kick it off, Tom?

Sure. So we have the second quarter with us today. So bumpy ride, but higher than we started, which is good. So we'll run through that. A little bit of rebalancing, as always. And that's about it. No real heavy items this particular time.

All right, great. Well, if you all can flip to exhibit one up, Jennifer's already there. Perfect. So as Tom mentioned, we have your second quarter report this time around. You can flip open to page one. That's called our manager status page. And you will notice one manager here marked in red. It's Partners Group. They're your private equity manager. It's an open-ended fund. There have been some concerns from our research team regarding their performance. It has started to lag. You are still beating the benchmark since inception, but those more recent time periods, they have been starting to lag behind. So primarily they're now on alert due to performance concerns. So just monitoring them closely going forward the next few quarters. Secondary concerns, cashflow wise, they are seeing less inflows from outside participants or existing investors and actually starting to see more outflows. So redemption requests flowing in probably more so due to those performance concerns I already mentioned. And that is starting to create a concentration in vintage years. So the point of an open-ended private equity fund is that over time, more money flows in, more distributions come out of the old vintages, and they can invest those distributions and further contributions into newer vintages as time goes on. They are starting to become a little more concentrated due to what I just mentioned, primarily concentrated in 2021 and 2022 vintage funds. So just want to see how this progresses. No recommendations at this point in time on any direction to head toward. Just want to keep a little closer eye on them going over the next few quarters.

Flip again. Has your management been in contact with them to find out what the issue is? Yeah, the issue has been the flows.

Strictly cash flow, that's the issue. Well, in terms of the concentration issue. Yeah, so those 2022 and 2021 vintages aren't as performing as well as newer ones or even some older ones as well. They're hot out the gate. When we did hire them, they were doing really well. And you'll see once we get to the performance section, they are still outperforming for you all since inception. But their underlying portfolio still seems pretty solid, but that concentration in those vintage years is concerning to us. So we'd like to see them turn that around, maybe get some more distributions out of those ventages and start allocating more to newer ventages as they become available.

We have quarterly touch points. Our research team has quarterly touch points with them just to get an update on all these different kind of factors. Okay.

Yep. Page three is just a nice summary page. If you just want to look at one page and see how the fund did over the quarter and other time periods, for instance, this is a nice page just for reference, but we'll go into more detail here. So flip into page four. This is, I call it your market value page. it does kind of show you how you started out the quarter, how you ended the quarter snapshot in time, where your, uh, allocation sits compared to your target allocation. So end of the quarter with 26,158,924 dollars, uh, as Tom mentioned higher than you were, but March was a pretty terrible, uh, month to end last quarter on. So, um, you'd hope you'd be higher from that point in time. Waiting-wise, your allocation compared to your targets, pretty much in line, a little over on equities, just given the way April and May shaped up. Um, yeah, pretty much in line with your targets. So flipping ahead to page six, this, I won't spend any time here, but this just shows you, um, from an asset allocation perspective, how the plan looks compared to other public defined benefit plans, specifically under the $50 million mark. Page seven shows you how the allocations changed over the last five years. Been pretty steady for the most part. Page eight, I will spend a moment on. The top chart there shows you the change in market value over time, over the last 10 years. And below that is a summary of cash flows for that same period of time as well, but just for different timeframes. So specifically for the quarter, I'll show you how you arrived at that ending market value I mentioned earlier. Started out the quarter with just under $24.3 million, had $116,000 in outflows, primarily for benefit payments, most likely, some expenses as well. and had positive net investment change of just a little under $2 million. And that's how I arrived at that 26.2 million roughly down the quarter. And you see that same information going back in time, year to date, all the way back through 10 years. You'll notice that the cash flow has been negative, but this is a very mature plan. This tends to happen. You do see negative cash flow over time, but thankfully your investments have more than made up for that negative cash flow. Page nine, and I'll just spend a moment here on the top line here because this is just the total fund return as well as the underlying asset class composites. So a lot of this will get repeated in later pages. But at the very top line there for the total fund, you can see not a bad quarter. You were behind the benchmark slightly, but 8.3% in three months is nothing to sneeze at, I would say. Ranking was fairly low. But as you go back in time, you see you are beating – Your actuarial rate of return of 7%, except for the five-year timeframe and since inception. All other timeframes, you're just slightly behind the benchmark for the most part. 10 years, you're in line with the benchmark. Rankings for the most part have been in the middle to low range. And I'll explain why 10%. Pretty much most of the underperforms can be attributed to U.S. equities. We've always had a slight tilt toward mid cap and small cap equities. And historically, those are a little more higher volatility, higher risk. But typically, you would expect more return for that risk you're taking on. The last five to 10 years, that's not been the case. It has flipped around more recently. Non-US as well, underperforming, and that's partly been due to overallocation, but a tilt toward non-US small cap and emerging markets. But I'll dive into that more here once we get to looking under the hood. We'll up again to page 10. That's just a visual representation of what we just went over for the total fund. Page 11 is looking at calendar years going back 10 years. We'll go ahead and skip that for the sake of time. Page 12, this is where we're looking more under the hood here. So you look, we already hit the top line, but next we have the fixed income composite. Over time, that's done well. You've outperformed all time frames except since inception, just a little bit behind there. Rankings typically in the top third of your universe. And then the underlying managers, first we have principal core fixed income. They're outperforming all timeframes. Rankings are a little mixed, stronger on the bookends, lower to middle in the middling periods, three through seven years there. This account, we tend to replenish quite often because they pull money from there. shift it into the principal core plus account, and then pay benefits out from there, which I'll actually get into that in more detail here later when we have a miscellaneous item to discuss. Next, we have a principal core plus bond fund, and you have started to shift away from there. Actually, we're pretty much out of it for the most part at this point in time. Return-wise, it's not been that bad, but you can see underperforming for five years and three years there. Rankings, very low. So that's kind of what prompted us to make that change to shift those funds away from principal core plus to Baird core plus. And speaking of Baird, they're next on the list. Started out with them in September, 2025. So not a huge amount of time there, but you can see for the quarter year to date and since inception, they are outperforming rankings more toward the middle, a little higher since inception, but again, just not a very long timeframe to look at there yet. But so far out the gate, they're doing pretty well. Principal high yield. This one, you can see underperformance going back to since inception and low rankings. This one is kind of a weird one. You had what's called the principal high income fund. Principal decided to... completely take that off the shelf and forced you into principal high yield, which we actually believe is a better product. But since you've made that shift, they have not done well, at least relative to their benchmark. But high yield has been doing pretty well so far this year. You can see it's the highest contributing return year to date. So high yield and floating rate, more high octane fixed income assets have done better than core and core plus. Next on the list is Aristotle Pacific. They are your bank loan manager. So it's a floating rate portfolio. So as rates go up, those rates will adjust. As rates go down, they'll adjust downward. So they tend to do better in an increasing rate environment. So we've had an increasing rate environment the last few years, so they've done pretty well. And then from a relative perspective, They're outperforming since inception and looking back one year, pretty much in line with the benchmark for the other periods. Rankings typically in the top half of their universe, so they're doing pretty well. Page 13 is the U.S. equity composite, and you're all indexed there, so you're fully passive. You have large cap, mid cap, and small cap exposure, but as I mentioned before, you do have a slight tilt to mid and small cap, and that has actually benefited us more recently. So you can see for the quarter, a little bit behind, but year-to-date, you're well ahead of your benchmark. One year, you're also ahead of your benchmark. Rankings are looking pretty good for those time periods, typically top third. But we do still have some lost ground to make up for the past. So the past five years in particular, large caps have just dominated, especially with those magnificent seven stocks and the large cap space. So. Large caps have just tended to outperform mid and small, and that's hurt us relative to the benchmark over time, but it's nice to see a little bit of a turnaround there more recently. Your large cap exposure is with the Vanguard S&P 500 Index Fund. As you can see, you're getting the S&P 500 return for very low fees there. From a rankings perspective, doing pretty well. Rankings are pretty high across the board. So active managers have just really not been able to keep up, especially over the last five years in that space. Vanguard mid-cap, again, getting you the benchmark, or sorry, the index return. Rankings more recently have been low, but since inception, it is above the median. Then lastly, your small cap exposure. And this is what's really been the main driver for outperformance so far this year. Small caps have just really taken off. In particular, the S&P 600 is a little more quality biased. They're only going to invest in companies that have positive cash flows, proper revenues, whereas some of these more speculative small cap stocks, they're really not making any money, but the stocks are taking off just due to speculation. A little higher quality there than like the Russell 2000, for instance. And rankings for them have been pretty good. Next, page 14, we have the non-US equity composite. And unfortunately, we do have underperformance there. Going back in time across the page, rankings are, for the most part, low. More recently, they're mid, kind of in the middle. That has primarily been to a tilt to non-US small cap and emerging markets, but we kind of got a double hit on emerging markets, unfortunately, which I'll explain here in a moment. But first, we have the Vanguard Total International Stock Index. That's just a – Global XUS Index. That's done pretty well. Ranking has been pretty high. And that's really been what's carried the water for your non-US equity portfolio. The Vanguard FTSE All World XUS Small Cap Index. Again, getting you close to the index return. Rankings for the most part have been on the lower side, and that has been an attributor to that lower performance for the total non-US equity composite. Emerging markets, similar situation, and you can see the rankings are very low for that. And unfortunately, that can be attributed to the last six months. Korea and Taiwan have been the primary drivers for emerging market performance so far year-to-date just due to very tech-heavy sectors there, so semiconductors for Taiwan, memory stocks for Korea. Vanguard uses the FTSE indexes, not the MSCI indexes, and the FTSE indexes consider Korea to be a developed market, so they did not have that exposure to Korean stocks the last six months.

Thank you very much. You have exposure to Korea in the Vanguard total international index because it's considered developed there. If you just look at this, these numbers are all over the place. You have 12 percent for that Vanguard total stock, During this time period, it underperformed the benchmark. Whenever there's high volatility, it could be higher, it could be lower in the long run. As you see, it'll, you know, it'll track a lot closer. You're like, the ranking is great. The ranking is great because that has South Korea exposure. And then, you know, further down the EM, even though it was a percent off for the quarter, the ranking is terrible. because it doesn't have South Korea. So you have like a shift there compared to others that track MSCI IFA. And MSCI IFA, all these acronyms I know, is what we kind of, that's kind of the standard what we compare non-US equity to. So that's what we have the composite against. So that's another thing. reason why there's a difference there. The MSCI IFA getting all nerdy with all the different indices, the way that they weight things, um, there's just more tech, more AI exposure in that versus the FTSE. The FTSE is more restrictive on the weights of these individual companies. So when these companies go up 400% or a thousand percent, like some of these very large South Korea companies, MSCI takes all of that where FTSE is doing rebalancing to kind of limit that. Actually have one, Do you go back to, we never really talk about this, but if we go to the first section before exhibit one, page 33, we should do one that compares the two, but 33 on the bottom there. There we go. So that is looking at that MSCI EM index. That's more often used than the one that Vanguard uses. So the weighting of the top 10, 10 years ago, versus in June. So you can see 40% is basically worse than the weightings in the U.S. overall. And you see those three large TSMC, that's Taiwan Semiconductors, Samsung, and SK Hynix. Those are the two South Korea stocks there. So there's been a lot going on in South Korea from a return standpoint, and that's kind of created this time period of decline. a little dislodging. I would assume if we add July in here, July, we saw South Korea go down. So you'd probably see a little bit of a flip there. So while it's indices, passive investing isn't always boring. There's a lot of different things going on within it. Back to page 14 in that section.

Yeah. And we don't have much left here. So we have the real estate composite. You just have one manager and there's the principal USPA account. And they've done well over time, just more recently for the quarter and year to date matching the benchmark. But I'd say they've probably been one of the more consistent real estate managers that we employ. Private equity, there's partners group, and it gets a little distorted because partners group is lagged. So the most recent statement we have is for May. The benchmark's also lagged. That's as of March. So not really comparing apples to apples here, but as you go back in time, the longer timeframes, those distortions don't affect them as much. But you see for three years, it's lagging. Since inception, you are still ahead of the benchmark there, and that's going back to February of 2022, so... Really just more concerned with that recent performance and how they are going to address it. And lastly, you have cash, and cash is actually, it's a small section of the portfolio. It's typically for operating purposes, but higher rates on the short end of the curve have helped out there. Next, we have a calendar years for all the underlying composites and managers, but we'll skip those for the sake of time. We have some risk statistics here, but we'll skip those as well. Go to page 20. And what this is, is this shows the plan from a risk return perspective. So the crosshairs, On the page there is the median of the public defined benefit plan universe for plans under the $50 million threshold. The plan is the blue square. The benchmark is the black diamond. And all those little dots all over the page is not a shotgun scatter pattern. It's all your peers within that universe.

So what we're doing is we're getting less return, but we're also getting less risk.

Correct. Yeah. You're behind, and this is looking back five years, but yeah, you are behind the return for the median of the universe in your benchmark, but you are experiencing less volatility.

And for those that don't understand, we want to be in the Northwest Quadrant because we're getting a higher return with less risk.

Yeah, so if we could just move north a little bit from where we are, we'd actually be in a pretty good spot. But we've addressed a lot of issues in the portfolio the last couple of years, but it'll take some time to see how those work out. But I think we've positioned the portfolio pretty well over the last couple of years. Page 21 is we always like to look at fees. We just want to make sure we're not overpaying. And if we are overpaying, we need to ask, why are we overpaying? So this just shows you all your lineup of managers based on the market value as of the end of June, what we estimate you're paying them on an annual basis. And then we equate that to an expense ratio. And then we compare that to the industry median. So what we would expect you on average, for the most part, to be paying a manager for that mandate. And then we total that all up in the middle blue row on the page there. So we estimate that you're paying $89,052 annually to these managers. Equates to an expense ratio of 34 basis points, so a little bit over a third of a percent, but compares favorably to the industry median, which is 35 basis points. And then below that, for transparency purposes, we also put down our fee as well as your custodial fee at Regions. And after that, we just have some pages showing you what your index is made up of for the total fund, and then some characteristics pages for all your underlying managers. But with that, I'll open you all up. Any questions for us regarding the quarterly report?

Just what would you say is a timeframe you want to use to basically look at private equity?

Yeah, for Partners Group, I'd say we want to give them a few quarters, see what comes out. So by the end of the year. Yeah, and if we feel like they haven't addressed the situation properly, we'll probably want to start seeking an alternative.

But you won't be able to get the funds out.

Yeah, that's another problem.

So the question is, could you always put something in the queue and then say we don't want it?

Yeah, you can do that.

Yeah, you could always get in line and rescind it.

So my question to you would be better to be more proactive as opposed to reactive?

Usually, yes. As of right now, that particular fund, we know you're not going to get anything out in the near term, like next year. You're not gonna get anything. Um, as they're kind of recycling within their fund and hopefully right sizing it with the right investments, then hopefully they're positioned kind of go forward, go forward basis. Cause you're right at that 25 million asset level. So. if markets were to not be favorable and obviously we'll talk, talk about, you know, there's always money coming out, right? So you have to get at least six, six, 7% just to stop. float, then that would pretty much eliminate private equity as an option within there. Because anything new you did, you would not be in that $25 million.

Yeah. And that's what Tom's referring to is it's a qualified purchaser or accredited. I forget. It's one or the other. But you have to have a total asset value of $25 million or above to essentially invest in those securities. Right. Okay. But yeah, we'll keep a close eye on them and know if we feel the time comes that we do need to start pulling out i mean the the weight's been drifting lower and lower as that public equities have outperformed i'm not saying that's going to be the on a go-forward basis that's what we should expect but um maybe it'll come to a time where we can at least maybe look at some other options while you are above that 25 million dollar threshold to maybe start lagging into something else okay but we'll monitor them closely

I'm just curious, and this may not be the right group, but do we have a glide path for estimated pension per year based off what we know is going to be polled versus retirement expectations versus return? To show us 10 years out, we're going to be still okay. Kind of, sort of?

I think that's in the report, isn't it? I just looked at something about that.

I'm not sure I would call it a glide path. From a contribution perspective... Can you come to the mic, please? Oh, I'm jumping in. You're right. I would say we don't have a glide path. We have a – we look really at one-year increments. So for funding purposes, we know what the tax revenue is to be collected, and we're comparing that against a projection that's 30 years. We're looking at a full career of participants. Okay. funding requirements are kind of annualized. And we know that pensions are backloaded, and we pull those costs earlier into careers to try and create some sort of leveling of the contribution requirements. But there's no real glide path. So we expect a 7% return forever into perpetuity for the pension plan. And that... basically right now keeps you level at your current funded position, right? You're not making headway towards improving your funded position without outperformance above that 7% bogey.

Well, I guess another way to say it is, I mean, I know you don't know when people are going to retire. So that's always an unknown. But you could run Monte Carlos to just kind of say like, hey, based off normal retirement age, we would assume that, you know, in one year from now, five years now, we'd still be okay based off the 7% return. Based off this, we're not going to run out of money, basically, just to put it bluntly.

Yeah, so what I would say is looking at a one year basis, and I think we've got that in the report, the expected contribution is less than the recommended contribution. So you'd have to continually increase your contributions to get caught up. So when I look at the recommended contribution, we have a 20 year payment of your unfunded liability. And I'm jumping in, I don't know, by page five of the Val report, you have an accrual that participants are earning $600,000. You have an amortization payment, basically paying your mortgage of your unfunded liability of 476,000. So we're calculating kind of a recommended contribution of a million dollars with interest. It's $1.2 million. And we're seeing contributions come in of roughly a million dollars. So there's a $200,000 kind of delta. that is a lot smaller this year than it was the last three years because of the outperformance of the investment returns. But that's gonna continue into perpetuity if you don't get outperformance of that 7%. We're doing our best to pull costs in the projection earlier into a participant's career so that we're not backloading the costs to when participants, and you have kind of like a steep, We're trying to pull those costs earlier into the career, but there's still going to be a bit of an acceleration that you continue to have to meet in order to maintain your current funded status.

Based upon my experience, we're going to go into a down year in the next two years, and it's going to basically put us back underwater. It's just the way it's been going on.

Yeah. And that's, and that's what I was looking at. So if we have adults of 200,000, like, unless we have good years, I mean, that's something that it's, it's, you can give on that based off the numbers, but it's like, if we had 200,000 every year and we saw that 10 years at a time, we'd run into, we'd have to do something. So, okay.

As you get better funded, right? So two years ago, you dropped, the market dropped and you, I'm not at the mic again. two years ago, the market dodged. So you were above 100%. You were right at the 100% funded market. And then all of a sudden you were in the 70s because of the market. And now you're coming back up and you're almost to the part where you're going to be 100% funded again on this basis, which is going to shrink your mortgage payment. So that outperformance has shrunk that mortgage payment and your cost, your contributions are in line with the benefits that you're providing. And so that kind of shrinking and increasing of that unfunded liability is kind of what's driven some of the short-term hikes in recommended contributions.

Any other questions? Marquette, thank you.

All right. Yeah. So to Exhibit 2, last exhibit in our report, we do have a recommendation for rebalancing the portfolio. Did we not send it to you, Jennifer?

You did send it to us. I don't think it got loaded.

Okay, well, we can always readjust it, but...

It's in the hard copy, though.

Yeah, it is in the hard copy. So what we do is we always pull the values ahead of the meeting just to give us a better idea of, you know, where do you really currently sit? Because looking back in June, that's an eternity ago in market speak. So pull the values as of July 31st. You can see the total down there on the bottom. It's about $25.7 million almost. as of the end of July. But you can see, if you look at that current mixed column, that's the third column over, that's your current weightings of assets in the portfolio. And then to the right of that is your target. So you can see you're pretty over your target for public equities, 59.6 versus 57.5. You're underway for your fixed income. So really, you know, hard to explain why the markets are moving the way they are these days. So never look a gift horse in the mouth. Always rebalance. That's kind of just our motto when it comes to when we meet with you all. So, uh, recommendations or suggested changes are in the middle column there. So we just kind of want to get you back more online with your target allocation, pulling some from equities and contributing to fixed income. So the detailed recommendation is we want to pull $250,000 from the Vanguard S and P 500 fund, $100,000 from the Vanguard mid cap fund, $90,000 from the I shares, uh, S and P small cap, uh, ETF, uh, $65,000 from the Vanguard Total International Index. Contribute $40,000 to the Vanguard International Small Cap Index because it's underweight. Contribute $170,000 to principal core fixed income. We always have to replenish that one because you guys pull benefits from there. Contribute $615,000 to Baird Core Plus, mainly just to shift more away from Principal Core Plus. And in line with that, we're recommending you pull $350,000 from the Principal Core Plus account. And lastly, contribute $30,000 to the Aristotle Pacific Bank Loans account.

Do I hear a motion?

to the adjustments.

Do I hear a second? Do we have any conversation? All those in favor?

Aye.

Anybody opposed?

All right. Thank you. And then lastly, this is another miscellaneous item, but as we've been lagging out of Principal Core Plus and lagging into Baird Core Plus, just because we have a lot more faith in Baird as a Core Plus manager than Principal, spoke with Principal regarding how your benefits are paid out. As I mentioned, most of it comes out of the Principal Core Fixed Income account, but there's a complication there. Because benefits are always coming out on the first, for whatever reason that might be at principal, they have to use certain accounts to get that done. So what they're actually doing every month, they're shifting money out of principal core into principal core plus and paying the benefits out of principal core plus. And I asked, well, why can't you do it out of the core account? It's because the underlying is mutual funds and it wouldn't work because the first day of the month is not always a day that the market is open. So we're at a crossroads, but we're recommending, unfortunately, we can't fully lay out a principal core plus. We can get most of the way out, but we're going to recommend keeping about $200,000 in there. They'll still shift money out of the core account to the core plus account to pay benefits on a monthly basis. But there's only like four or five different accounts they can pay benefits out of on the first of every month. and Core Plus is one of them. So rather than finding a new investment there, because the goal is to get away from Principal, so most likely don't want to open a new account there. It's not really a recommendation. We're just kind of informing you that we can't fully get out of Principal Core Plus because it is operationally important for just paying benefits and expenses on a monthly basis.

And there's no other option for that then?

We did ask. They have another account that is a money market account. But for whatever reason, they said, well, you'd have to fund it more than you have the Core Plus account funded.

Can you just let us know at some point in time what the management fee is on the Core Fixed versus the Core Plus? We have it. Okay.

So the principal core account has a expense ratio of 49 basis points. The core plus account has an expense ratio of 72. And that's part of the reason why we started getting out of there because from a fee perspective, we have core plus managers that do a better job and charge a lower fee. That doesn't sound right, Todd.

No, I mean, it's high and they're playing games with our money is the way I look at it. They're playing games with everybody's money.

Yeah, the other option was to be able to access your money on the first of the month was either a money market fund, obviously having to add to that. having more in the money market fund than you would want, which would affect your return, or reopening U.S. equity accounts, which is what we stopped years ago.

So let me ask you this. How much do they have to shift into the Core Plus on a monthly basis to cover? It's like 160,000 for the last few months.

Currently 160,000 is what they shift each month to pay benefits.

Okay. Yeah, they're kind of just using it as a go-between just due to the liquidity of that account versus the core account.

So not the most ideal situation, but you know, I can do our best to keep it as low as possible.

Yeah. My target was try to maintain maybe $200,000 in there. They're still going to be moving that 160 out.

Yeah. The money market or equity account. Yeah.

And after this, after this move, we'll have estimated 372,000 left in the principal core plus account. So we're almost there. Okay. Great.

Tangled web.

Yes. Eventually, you can leave. I don't know if we'll all still be alive, but...

I probably will.

And lastly, we always include this page here. There's a calculation they do to ensure you're maintaining enough at principle for the annuity. So we just kind of, they give us numbers and we do our own calculation just to make sure they jive really. And after this move, I always like to double check like, well, hey, are we moving too much out or are we not moving enough? We'll still have a cushion of about 1.25 million. We've been trying to do about a million dollars, but with the volatility in the markets recently, I'd say, you know, a little extra cushion can't hurt.

Okay, good. Well, that's all. Thank you. Appreciate it.

Thank you all.

Now I think. Next.

Yay.

AJ Stoll with EconBenefits. We provide actuarial services here and we're going to present the January 1st, 2026 valuation report for the pension plan. On page three, we have the highlights of the entire report. What we're going to see through the report is that the investment return of 13.89% exceeded the actuarial expectation of 7%, which is going to improve the funded status of the plan. So throughout the report, we're gonna see elevated funded status measures because of that positive investment return. We are still making some headway recovering from the negative investment return that occurred in 2022. But the plan on various measures is going to start to look a lot healthier than some of the reporting we've done over the last two years. We do show the funded status several different ways. So I get the pleasure of discussing why the plan is both 95% funded and 82% funded because of the different measures that we use. So overall, the investment return is gonna drive the story. So I'll just keep going through on page four. This is the development of assets. At the beginning of the year, there was 22.9 million of cash, a small amount of accruals, which was just contributions, employee contributions that were deposited just after the beginning of the year for the prior year. And then we work our way down. We saw contributions coming into the plan. of $983,000 split between employer and employee contributions. That's strong earnings of $3.1 million coming into the plan versus benefit payments and expenses coming out of the plan. And the ending balance at 12-31-2025 is $24.9 million. On page five, this is going to be our summary of our contribution recommendation. And we have the 2025 column on the right and 2026 column on the left. When we're looking at your recommended contribution, it's comprised of two components, a normal cost. and an amortization. The normal cost is what we are calculating to be the cost of providing benefits to your active participants. So this is accruing benefits in the plan for an additional year of service and additional year of compensation in the plan. And we can see on a year to year basis that that is pretty level. There wasn't too much change year over year on the value of accruals coming into the plan. The amortization component, we show three different ways, a 30-year amortization, a 20-year amortization, which is our recommended contribution funding methodology, and a faster 10-year amortization period. And so this is taking a look at your unfunded liability and amortizing it and getting you funded over that time period. So to fund your plan over a 20-year period, That's a mortgage payment of $476,766. So the recommended contribution, we apply interest because we usually collect that tax revenue really at the end of the year or kind of the year following to pull into that prior year funding measure. So we add a interest component to that. The employer portion, which we take out in expected employee contributions is $863,279. So it's a substantial decrease from the prior year, again, driven by that mortgage component, your funded status improving from investment returns. We can compare that to the estimated tax revenue that we expect to come into the plan. employer tax revenue is expected to be $700,000, right? So there's a little bit of a gap there still between the recommended and the expected contributions coming into the plan on that basis. When we add in the employee contributions, you can see that that maintains that same level of expected underfunded versus the recommended contribution. Moving to page six, Well, before we go to six, back on page five, this unfunded liability represents what I call more actuarial gymnastics. We take a look at an entire career for a participant and we calculate what we expect participants' salary growth to be, what their service and their ultimate benefit is going to be. And then we pull some of those costs, as I was mentioning earlier, earlier into a participant's career because we don't want a steep funding curve on providing these benefits to participants, which are typically backloaded in nature. So we pull some of the costs and make it a little bit more flat in terms of funding their benefit as a percentage of their pay. And so that unfunded liability, really, you're currently about 82% funded on that basis, where we pull those costs earlier into a participant's career. When we go to page six, we'll look at a different measure, which is the present value of accrued benefits. This ignores the future. This says, what are benefits earned to date based on service and pay as of right now. So we're not projecting pay into the future. We're saying the benefits earned to date, this is the benefit liability that we have. And on this basis- Can I stop you for a second?

Yeah, absolutely. So what we're saying is that if we were to basically stop the program right now, we're 5% underfunded to basically meet all those future obligations.

If you continue to earn 7% on assets through the entire projection period- Correct. 40 years, yes. Correct. If you were to try and say terminate the plan and try and pay these benefits out, you would use a lower interest rate, which would create a bigger liability and more underfunded. So this assumes that that 7% kind of exists forever on the asset side. But you would be correct in your statement with that one caveat.

Stopping not terminating.

freezing benefits and allowing the assets to continue, not allowing new entrance into the plan as well.

No more stopping new entrants.

Correct. And so the plan here saw a 13% improvement in the funded status. And again, that's being driven by that investment return performance. On page seven, we have the active, we have the participant summary. We started with 58 active participants as of the 1-1-2025, and we're ending the year at 70 active participants. So a growth there in your overall active headcount. 77 retired participants and ending the year at 78 retired participants, 33 deferred vested participants. So participants that have a benefit, but have yet to commence their benefits. So they're still on the books in terms of liability to commence at a future date and ending the year at 30 deferred vested participants. If we move to page eight, so this is going back to the unfunded accrued liability. So I mentioned the present value of accrued benefits, you're 95% funded. On this basis, you are around 82% funded. So if I just look at the bottom left number, 30.282 million, that is your accrued liability compared to 26.25 million, which is your accrued benefit, your present value of accrued benefits. So that $4 million or so is associated with pulling the active liability costs earlier into a participant's career. That's the magnitude of what we're doing in terms of pulling those costs earlier into a career. What we're doing here on page eight is we're reconciling the liability and assets from 1-1-2025 to 12-31-2025. Numbers one through four are all expected to occur every year. We expect that your assets and liabilities will grow with that 7% investment return expectation. So your unfunded liability is also going to grow because you're in a deficit position. We expect participants to earn that normal cost for you to have administrative expenses. The contributions that were deposited, both the employee plus the employer contributions are coming into the assets and we're paying benefit payments out. So that's all expected to occur as a natural course of business. And we can see that the unfunded liability is expected to grow from $1,125 of $9.165 million to $9.2 million. So there's expected to be a little bit of a growth in the unfunded liability without any other considerations based on these benefit accruals and these contributions coming into the plan. Line six is the unexpected. So what occurred during the year that we didn't assume or see coming? And there are a couple items. So there was a large gain on the liabilities. And the reason there is we were forced to use a lower discount rate than previously we're able to. We couldn't use the full 7%. We were limited to a slightly lesser number. Got that in our comments here. We were using 6.28%. And that was because at your funded status level, you were projected over that 50, 60 period to eventually run out of assets. And so now using the methodology that they require, you are no longer projected to run out of assets for your current employees. So you are now again able to use the full 7%, which is something that in the last five years since that 2022 downturn, you have not been able to use. So that is a huge bump to the unfunded accrued liability that's gonna improve your position on this basis back to using that long-term 7% return assumption. There were some demographic changes that drove a small liability loss. And then on the asset side, we saw that heavy investment return improving overall funded status. So going from a $9.2 million expected unfunded to a $5.4 million actual unfunded liability with those changes. On page nine, this is just, again, summarizing that liability measure on an accrued liability basis. So here's where you're going to see that funded status of 82%, going from 71.51 to 82% during the year. Again, two main drivers here is changing the interest rate for liabilities, and now the asset returns doing well during the year. Pages 10 and 11, I really like because it just provides historical context, which I think is very important. On page 10, we're looking at that recommended contribution over the past 10 years. And we can see that 2016, we were at $486,000. and we've grown to 2026 now at $863,000, those ebbs and falls of the contribution recommendation are going to tie very closely to the investment return performance that you see summarized below. So years following bad investment return years, you're going to see increases in your costs, and years following good investment return years, you're going to see decreases in your recommended contribution. To the right of that recommended contribution is the actual employer contributions. So again, you can see that the 2016, kind of 2018, you are contributing in excess of your recommended contribution. And then when things spiked, your recommended contribution was a little bit higher than actual. And then over that 2023 to 2025 year period is when those recommended contributions reflected the full extent of that 2022 downturn. And that 2022 downturn really had two components. It forced you to use a lower interest rate on your liabilities and it reflected lower assets. So your funded status was kind of double hit and really impacted that recommended contribution for that short period of time. On the next page, page 11, this is going to, again, provide a lot more context, again, over that 10-year period. I sometimes refer to this as the actuarial report card. There is a line in the top section, which is the liability summary going from beginning of year to end of year, that shows actuarial losses and gains. So what you can do here is just kind of look over the past 10 years or so, how have our assumptions changed? fared compared to actual experience with the liabilities. And so we can see over the 24 and 23 period and really 2022 as well, there were some sizable losses. So we've had liability gains. I'm sorry, liability losses. The liability grew by more than we were expecting it to grow. And the primary driver of those losses was salary increases that were more than the expected salary increases built into the valuation. What we'd love to see is if there are gains and losses, right? You have some years that you have some small positive amounts and some years where you have some small negative amounts and they all balance out. We ultimately aren't dictating the actual experience. We're just trying to estimate it. And so we're using our best assumptions to come up with retirement ages and salary scales. And this will just reflect to the extent that they're off from actual experience.

Do you check with the city as to what you're using from a percentage for increases in salary?

I think our assumption is longer term in nature. So it's not necessarily dictated in the short term. I wouldn't change if you told me next year we're going to have a six percent salary across the board. That doesn't necessarily mean that I should increase my salary. forward-looking annual increases for a participant's career to that level. Really what we're looking at is the gains and losses on this report card to see whether or not in aggregate our assumptions are in line, and then making sure that each assumption is what we would consider our continued best estimate. There's a link between salary scale and a lot of the other assumptions like inflation and tax revenue, and we assume a 4% salary scale assumption. which has an inflationary component built in there, as well as promotional increases. And so I don't expect everyone to have a 4% salary growth each year. Your budget may only be 2%, but some individuals will have 6%, 7% salary growth when they get promotions, and others might have a more modest inflationary increase.

Because I know we ran into a problem back after 9-11. Okay. Because we had a situation where, as a result, everybody, all cities, all municipalities, all governments looked at what they were paying their fire department and police department. And we gave an across-the-board increase of, I think, about $7,000 per person. And that had a significant impact on what was going on.

Yeah, I would say if there is ever consideration of substantial compensation increases, we can certainly run an estimate of what the impact would be on the pension plan to provide the costing of that.

On top of that. Dave Kuntz, Before that took place because we were, I think we were underpaying our our people I increased with the board i've made the recommendation board accepted it that we increase the multiplier on the pension and then I said we'll only keep that in place if we can afford it and then. The city made the increase and we reduced it back like about 18 months to 2 years later. Okay, so just watching.

Yeah, I think in general. Fire districts and government entities have a similar issue across the board. Their tax revenue is growing generally with inflation and inflationary increases could be. two and a half to 3%, and salary scale assumptions are 4%, right? So there's already a pull that the salary is growing by more than the revenue. And that's something that needs to be addressed, right? Eventually you will continue to eat up more and more of your budget with that salary. And so if you do find yourself in a situation where the liabilities, again, or the assets tank, one of your levers that you have is compensation. If you have lower than 4% salary growth, you will see gains naturally come through the pension plan. But that's a great question. And if we feel like that salary needs to be reviewed in more detail, I think we've been comfortable at that 4% level in aggregate. But if we need to do any more, if you have more information, you have the most control over that assumption, right? You can't necessarily control when people die, but you certainly can control how much your compensation growth is on a year-to-year basis. The next section, 12 and 13, we'll skip through. This is really more for the accountants. And then page 16 is the last page. One of the last pages I wanna go through. This is now taking a look forward looking. So we noted that the plan on an accrued liability basis is 82% funded. Looking forward, we're seeing that our expected contribution for the year, 999,000, that's both the employee and the employer components together. Participants are earning an expected $592,000 with the same level of expenses as the prior year. So you have a net excess contribution coming into the plan of $389,000. And the deficit is expected to grow by that 7% return expectation because the assets and liabilities are both growing at that same clip. So ultimately, we're expecting your funded status to remain flat year over year based on a 7% return. As reported earlier, you've already hit the 7% return. So there's no guarantee that that maintains. You can still have negative returns for the rest of the year, but you've already hit that actuarial bogey if you maintain that return for the rest of the year. So any additional growth from here to there is going to further push that funded status up and again, go a long way towards improving the trajectory of the plan. The last page that I will go through, and maybe an interesting page, page 19 is our expectations of asset returns. So right now we're using a 7% investment return, and that's a very impactful assumption. when we have several good investment return years, what we start to see is downward pressure on our capital market assumptions. So the question that we have is, did we just pull that investment return from the future or did we truly improve what our future expectations are. And with AI and a lot of the other factors going on, there's a little bit of both happening. AI has certainly improved the trajectories of a lot of the revenue and cash flow streams of the companies that you're invested in. But we do feel like there's a bit of acceleration of some of that cash flow and revenue streams. So we are anticipating to see some downward pressure on AI. mostly the equity components of our capital market assumptions. So this is as of 1-1-2026. We won't look at this really again until we do the valuation 1-1-2027. But to the extent that we're no longer projecting those capital market assumptions, we may need to start pulling back again on that expected return on asset assumption. So that can have a substantial impact. Roughly a 25 basis point reduction would impact your funded status by about 3%.

So when you do that, for example, with our portfolio, do you take the percentages... For each asset class and multiply it out, and that's how you come up with that?

Yeah, we use your target allocation, and we compare it to our version of a 30-year review of our capital market assumptions by asset category to come up with our 30-year view of what your investment returns can be. And this assumption has a pretty wide range of expectations and the volatility, but we're looking at coming up with our best estimate of what that could be.

Anybody have any questions? Anybody want milk and cookies for their nap?

Same time next year? I think so. Perfect. Well, I'm happy. If you ever have questions, you can feel free to reach out to our office. We'd be happy to discuss any of the assumptions in more detail. Or if there's any salary expectations that you'd like to see reflected proactively, we'd be happy to consider them. We don't see that, but they do.

Thank you. Thanks. With that, do I hear a motion? Do we have anything else we have to cover?

I do not have anything else. Good.

Do I hear a motion?

Do I hear a second?

All in favor? Anybody opposed? Six o'clock and we're done.

Okay. Bang the gavel. Make it official.

Thank you very much. Thank you.