Annual Budget Proposed. Steve Shaw, Police Department, Vice Chairman of the Board of Trustees

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1 Pension Update A Publication of the Dallas Police and Fire Pension System Volume , July Annual Budget Proposed The operation of the Dallas Police and Fire Pension System is a business, and like any other multi-billion dollar business, has significant operating expenses. And, just as individuals must operate within Steve Shaw, Police Department, Vice Chairman of the Board of Trustees budgets, so does the Pension System. To this end, the staff prepares, and the Board approves, an annual budget, which is presented for review twice prior to formal approval. The first reading of the budget was held during the July 11th The second and final reading of the budget for Pension System Members will be August 8. No changes were made to the budget at the July 11 Board meeting. The proposed budget may be changed or amended at the August meeting. The meeting will be held at approximately 10 a.m. at the Pension System office, 2301 N. Akard Street, Suite 200. If you have questions or comments about the proposed budget, you may call the Pension System office at , call your Board Members, see our Web site at regular monthly Board meeting. During the August 2002 regular Board meeting, the Trustees will hold a second reading. The budget is read during two consecutive monthly Board meetings to ensure that all interested Members and Pensioners have an opportunity to attend one (or both) of the meetings and provide any input they may have. All Members are encouraged to review the line-item budget presented in this newsletter, and to contact any Trustee about questions or concerns. Steve Shaw, Vice-Chairman of the Board Pension System Budget Second Public Hearing August 8 or attend the August Board meeting. This article contains details of the proposed budget. Overview The Police and Fire Pension System had $1.897 billion in assets as of April 30, In 2001, the Pension System received $ million in contributions and paid out $ million in benefits and refunds. The proposed Administrative Budget is $2.39 million, and the proposed Professional Services and Investment Management Budgets total $13.59 continued on page 2

2 Budget, continued from page 1 educational program, adding a social worker position, and implementing a business continuity plan. million. The proposed budget represents an overall increase of 1.1% from the previous year. Explanations and details follow. Administrative Budget The proposed Administrative Budget for fiscal year includes an increase of $216,198 or 9.9% from the budget for fiscal year The increase results primarily from an expanded Some line items in the budget are reduced from the current year amounts resulting from the reduced need for some services and changes in providers. For details, see the Administrative Budget table below. continued on page 5 Administrative Budget Salaries and benefits: Salary 1,300,670 Overtime 2,000 SIP 22,063 Employer pension contributions 145,721 Insurance 153,510 Medicare 14,592 Unemployment 4,500 Workers comp. 3,550 Other benefits 801 Sub-total, Salaries and benefits 1,647,407 Supplies and materials: Office supplies 57,500 Postage 78,173 Educational supplies 28,000 Service pins 19 Sub-total, Supplies and materials 163,692 Services: Printing 106,470 Medical 4,200 Communications 51,960 Repairs and maintenance 17,500 Copy machine 22,507 Office insurance 2,715 Errors and omissions ins 4,500 Memberships 19,000 Subscriptions 3,250 Continuing education 90,000 Mileage reimbursement 2,000 Staff development 30,000 Data services * 15,744 Indirect costs * 26,870 Business continuity 45,000 Contingency reserve 50,000 Employment expenses 5,020 Sub-total, Services 496,736 Fixed assets general 120,470 Revenue from supplemental 37,670 Total =================================> 2,390,635 * City of Dallas services Professional Services Budget & Investment Management Budget Professional Services: Accounting software 20,000 Audit of actuarial assumptions 100,000 Buck Consultants, Inc., actuarial 150,000 City Attorney, legal 170,000 Custodial services 300,269 FCS, financial monitoring 42,000 First VPN, network security review 15,000 Frank Russell Company, transition management services 100,000 Hill Co. Partners, legislative consultant 60,000 Independent audit 8,000 Investment research expense * 125,000 Lawson, Fields, McCue, Lee & Campbell, P.C., legal 315,000 Levi, Ray & Shoup, Inc., enhancements and maintenance 202,000 Locke, Liddell and Sapp LLP, legislative consultant 56,450 Management consulting 45,000 Misc. professional services * 7,000 Office computer upgrade 13,000 Research Institute of America, legal data services 5,100 Safesite/Inwood Security, records management 14,645 Silver Communications, benefits survey 35,000 The Townsend Group, real estate consulting * 132,000 Voice Retrieval, election telephone voting 15,000 Wilshire Associates, investment consultant 225,000 Winstar, Internet services 25,000 Sub-total, Professional services 2,180,464 Investment Management: Investment managers, avg. 55 basis points 11,410,881 Total ================================> 13,591,345 * Line items include adjustments as presented 2

3 Theft Investigation Completed With Favorable Results As I informed you in earlier newsletters, a System employee was terminated in March when we discovered that the employee had stolen System funds. The Board of Trustees hired the accounting firm KPMG to conduct a comprehensive investigation of the System s financial processes and internal controls to determine the full extent of the loss and to assure the safety of System funds. Lieutenant Gerald Brown, Fire Department, Chairman of the Board of Trustees When I told you about the theft back in March, I promised that we would provide a full report when the investigation was completed. The Board appreciates your patience and is now pleased to say that KPMG has completed its examination with very favorable results. The KPMG findings are as follows: No fraudulent or improper transactions were detected in the system from which benefit payments are made. No fraudulent or improper transactions were detected in the system from which employee paychecks are issued. We verified the internal findings of System staff of $18, , in altered checks and unauthorized purchases impacting the Operating Accounts Payable system, all made by the Former Employee between February 20, 2001, and February 20, We found no evidence that a material number of accounts payable documents were either stolen or destroyed. We found $ in losses to the Petty Cash system arising from misappropriations by the Former Employee. We did not find any indication of involvement or collusion of other employees or any additional fraudulent transactions occurring since the termination of the Former Employee. The Petty Cash fund has been terminated. The former employee stole small amounts during the previous year, but the major theft occurred during a two and one-half month period before the theft was discovered through normal internal controls. The System has recovered from our bank all of the $9, that the Former Employee obtained by altering payees on System checks for vendor payments. After this reimbursement, the actual loss to the System was about $10,000. KPMG s examination also identified a few internal control issues that helped make the theft possible. The System has implemented all recommendations by KPMG to improve the controls and the Board is confident that the System s financial controls are sound and your retirement funds are safe. A police investigation of the theft is ongoing. I will report the results of this investigation when completed by the Dallas Police Department and the District Attorney s Office. We did not find any indication of involvement or collusion by other employees or of any additional fraudulent transactions occurring since the termination of the Former Employee. Gerald Brown, Chairman of the Board 3

4 Board Investment Research and Continuing Education Protect Your Pension The primary obligation of the Pension System is to assure the financial soundness of the System so that we may provide you and your survivors the benefits to which you are entitled. In order to meet this fiduciary responsibility, it is part of the job of each Trustee to obtain and maintain the expertise necessary to make the prudent decisions required to operate the System proficiently. Investment of Plan Assets Most experts in the investment business emphasize that diversifying a System s assets is the best way to protect those assets while earning the rate of return needed to pay the promised benefits. The Board uses two nationally recognized investment consulting firms. On their recommendations, the System invests in equities, real estate, and fixed income both domestically and internationally. (See Asset Allocation chart.) As prudent investors, the Trustees must meet with investment managers to assure the System s assets are professionally and prudently invested. Because our global holdings of $700 million in overseas investments are diversified in many countries, some of these meetings with managers occur in foreign countries. Our holdings are in almost every large country in the world. Some of the countries where we have had profitable investments include Germany, the United Kingdom, Ireland, Spain, Sweden, Japan, Australia, Hong Kong, Singapore, Brazil, Hungary, Israel, Malaysia, and Mexico. Trustee first-hand knowledge outside the United States pays off. For instance in 2002, two System representatives attended a conference in Moscow. Their meeting with high-ranking government officials and new capitalist business people convinced them that there had been many improvements to the Russian economy since 2001, but that it was not a place to invest large amounts of the System s assets at this time. Real estate holdings also help diversify our investments. Your Pension System has approximately Texas law requires trustees of government retirement systems to educate themselves and to carry out their duties as prudent experts. 4 Asset Allocation as of December 31, 2001 Real Estate 16.4% Global Bonds 21.1% Domestic Bonds 5.2% Cash Equiv. 0.6% Domestic Equity 34.1% Int'l Equity 22.6% $270 million invested in real estate throughout the United States in such areas as Los Angeles, San Diego, Phoenix, Washington, D. C., and New York. The System also has farmland in Australia, growing macadamia nuts, citrus, grapes, and other crops. System representatives find it prudent to inspect potential and current real estate investments to evaluate the new or ongoing potential of the investments. Plan Management To maintain their knowledge level, the Trustees also attend various pension and investment related programs. Prudence requires that they go where the programs are presented to keep up with the cutting edge of the ever changing investment and pension industry, whether this may be a new type of U.S. Treasury bond linked to inflation, private equity instruments from India, or a new type of benefit option. It is through the extra effort on the part of the Trustees that brought new ideas to the System, such as our very successful Deferred Retirement Option Program (DROP). Now, other pension plans from around the country seek out our Trustees for advice and our Trustees often are invited to lead discussions at many programs that facilitate industry-wide learning. Ongoing educational and investment research are essential to ensure that you and your survivor receive your benefits. If you have any questions about the issues discussed in this article, please contact one of your Trustees.

5 Budget, continued from page 1 Professional Services Budget The Professional Services Budget lists professional services provided by outside organizations, including consultants that monitor investment performance and assist the Board in developing and implementing investment strategies. These strategies assure the Pension System s financial health and its ability to pay benefits. As part of the Professional Services Budget, the Pension System retains the services of an actuarial consultant to advise on the actuarial soundness of the plan, outside legal advisors to augment legal advice provided by the City Attorney s Office, and a custodial bank to track the Pension System s assets and hold the investment securities. In addition, the Board retains a financial control firm to audit all investment transactions. The Board enters into other contracts as necessary to assist the Board and staff in carrying out the functions of administering the Pension System. The Professional Services portion of the budget reflects a decrease of 0.3% compared to the budget for fiscal year The details for contracted and expected Professional Services are in the table on the right on page 2. Investment Management Budget The Investment Management Budget includes fees for investment advisors that manage and invest the Pension System s assets. The Board has hired approximately 24 investment managers to invest the Pension System s assets. In addition to the fees paid for these services, the Pension System also pays performance fees to some of its active investment managers. This means that the fee will August Calendar August 8 Board of Trustees meeting Second reading of the budget for fiscal August 21 PREP session be higher if our account performs better than its assigned benchmark. Investment management fees for other managers vary according to the market value of the invested assets. Therefore, if the market value increases, so will the fees. The total investment management fees are estimated at $11.4 million depending on the managers performance. The expected cost for Investment Management services is at the bottom of the table on the right on page 2. Summary Budgets and operating costs for defined benefit plans, such as the Dallas Police and Fire Pension System, are measured as a percent of the market value of the assets. The goal of pension systems like ours is to operate at 1.0% or less. The projected total of all costs (administrative, professional services, and investment management services) is approximately $15.9 million, depending upon the fees paid to the investment managers. The total costs of operating the Pension System will be approximately 0.84% of the System s approximate market value ($1.897 billion). Questions If you have any questions about the proposed budget or if you would like to see the complete budget packet as presented to the Board at the June 13 Board meeting, please check our Web site at or call the Pension System office at This Month s Retirees Congratulations! Police Department Daniel L. Johnson Charles H. King, Jr. David W. Peters Marvin K. Swofford Fire Department Guadalupe Alvarado James E. Carlin Brian E. Dorethy Michael R. Roach 5

6 2301 North Akard Street, Suite 200 Dallas, Texas FIRST CLASS MAIL Serving Those Who Protect the Dallas Community Second Public Reading of the Budget Thursday, August 8 10 a.m. Dallas Police & Fire Pension System 2301 North Akard Street Suite 200 Dallas, Texas Pension System Assets Are Safe You may have read about the recent events concerning WorldCom stock. First, rest assured that your pension assets are safe and that your defined benefit plan is strong. The System s assets are very diversified as evidenced by the mix of assets that include stocks, bonds, and real estate. WorldCom stock represented approximately 14/100 of 1% of the value of the entire investment portfolio. Your Board of Trustees actively reviews the investment professionals that are safeguarding your Fund s assets and quarterly reviews the assets with our nationally recognized investment consultants. Board of Trustees Gerald Brown, Chairman Gary W. Edge Donald W. Hill John Mays Rector C. McCollum Steve Shaw Maxine Thornton-Reese George Tomasovic Steve Umlor Richard Wachsman Published by the Dallas Police and Fire Pension System, 2301 North Akard Street, Suite 200, Dallas, Texas Call us at or Visit our Web site at or us at info@dpfp.org.