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April 13, 2013

New Castle Finances: Investments key to pension fund’s health

NEW CASTLE — Investments play an integral role in the health of New Castle’s employee pension fund.

The performance of the investments has a significant impact on the size of the city’s minimum municipal obligation, or MMO, the annual payment the city is required by state law to make toward the pension fund.

When the stock market crashed in 2008, the value of the fund dropped by approximately $6 million. While different factors figure into the MMO, the drop in value was a chief element in causing an increase in the fund’s liability and, therefore, increasing the size of the MMO.

The investments are monitored by a nine-member Comprehensive Municipal Pension Trust Fund Board of Trustees made up of the mayor, the five members of city council and three city employees, one each representing the police, fire and non–uniformed personnel.

In 2004, the board named Ameriprise Financial and Huntington Private Financial Group as the investment managers for the fund.

As of Dec. 31, the value of the fund was $25,905,576. Ameriprise Financial’s value was $11,602,020, while Huntington Private Financial Group’s was $14,303,556.

While the managers have some flexibility as to which individual stocks and bonds to invest in, they must follow an investment policy established by the board.

“The investment policy is set in stone by the trustees,” said Eugene Gabriel of Ameriprise.

The policy states that investments in stocks can range between 53 percent and 73 percent of the total portfolio. Bonds can range between 22 percent and 42 percent and cash, a maximum of 15 percent.

Both firms are always within the guidelines, but to different degrees.

For example, in the last report issued for the fourth quarter of 2012, Ameriprise had 69 percent of its portfolio in stocks, 23 percent in bonds, 2 percent in enhanced fixed income and 6 percent in cash. The investment policy allows a maximum of 5 percent in enhanced fixed income.

City pension attorney Randall Rhoades explained that enhanced fixed income is a small portion of the bonds portfolio that permits the investment manager a little more leeway to produce greater returns “without taking undue risk.”

Huntington had 68.56 percent in stocks, 28.7 percent in bonds and 2.74 percent in cash.

Gabriel said his company “monitors our investments. If they see something they’re not satisfied with, they would let me know.”

The company vets the funds, then Gabriel selects from that pool of funds. However, Gabriel said, he can’t do anything until Rhoades vets the funds.

Gabriel said he makes recommendations to Rhoades, who then makes the recommendations to the trustees.

There are investments that are prohibited, such as hedge funds or derivatives. Also, the managers cannot invest in any bonds with ratings below AA, he said.

Joseph Sniezek of Huntington said his firm has a different approach from Ameriprise.

Huntington contracts with managers who buy individual stocks for the city.

“They are totally independent of Huntington.”

Sniezek said he has input with the company on which managers to select.

“We’re hiring them to manage based on their performance.”

Plus, he added, “Which one fits best for the city?”

Once the managers are on board, Huntington evaluates them on their performance with the investments they are making, Sniezek said.

When the two investment managers present their quarterly reports, the values of the portfolios are net of distributions to retirees and fees.

Rhoades said the fee for both Ameriprise and Huntington figures out to slightly under 1 percent — 0.9585 percent — of the fund’s assets per year.

Each quarter, each investment manager distributes approximately $125,000 to the city, which then writes the checks for beneficiaries collecting retirement benefits. The distribution currently totals about $1 million a year.

(Email: jmanna@ncnewsonline.com)

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