LOCAL CHURCH MINISTRIES (A Covenanted Ministry of the United Church of Christ) BUDGET & FINANCE COMMITTEE Thursday, October 4, 2012 2:00 5:00 p.m. Minutes Members on the phone: Sue Artt, Geneva Butz, J. Bennett Guess, Jane Haubert, Constance King (Chair), Nancy Lawrence, Adrian Maxey, Warren Orikasa, Wade Schemmel, Anthony Stoik, Carol Williams-Swoope (LCM Board Chair) Members absent: Lynda Bigler, Robb Brown, Adrian Maxey Staff: Chris Cheline, Kathy Houston. The meeting (held via conference call) was called to order at 2:15 pm by Carol Williams- Swoope, LCM Board Chair. The opening prayer was offered by Ben Guess. Following review of the proposed agenda, the committee adopted the agenda by consensus. Following a review of the March 14, 2012 minutes, it was voted: To approve the minutes of the March 14, 2012 meeting of the Budget and Finance Committee of the Board of Directors. m- T. Stoik s-n Lawrence Kathy Houston gave an update on the hotel. There has been a $600,000 turnaround from the prior year and the hotel is making a profit! Capital improvements, maintenance and upgrades have been required since they had been deferred by the prior management company. This was funded partially by a loan from LCM and from profits from the hotel. Kathy is hopeful that all money will be repaid to LCM by the end of this year. Ben Guess reminded everyone that last fall we were approached by the hotel management recommending that we add a restaurant to the hotel. The proposal that the committee was given was around $600,000. LCM and the LLC management thought that we first needed to see a year of increased profits before we would request that the LCM board consider investing in a restaurant. The hotel will most likely come back to the LCM board in spring 2013 with this request.
Chris Cheline provided an overview of the Unrestricted Reserve Report for the period ended July 31, 2012 noting that this represents funds that have originally come in as unrestricted that the board has designated to be funds held and invested as funds functioning as endowment, but they can be released and used for any purpose of the board s choosing. Chris Cheline presented the Report on Bequests and Endowments Received for the period January 1, 2012 through August 31, 2012 noting that this is included in the board minutes so there is a secondary record of the funds received. Chris Cheline presented the LCM Schedule of Investments as of August 31, 2012This report states the market value of the investments. Chris informed the committee that she will be transferring the balance of the Key Bank Money Market account to our UCF Moderate Balanced Fund where it will be paid out as part of the draw for 2013. The money market account at Key Bank is currently only earning.17%. Chris Cheline provided a brief overview of the 2012 Year to Date Financials Report for both LCM and UCCR (as of August 31, 2012), giving the Committee the opportunity to ask questions about specific items. Ben Guess mentioned that UCCR was just informed this morning that their lease was not going to be renewed in their current location and that they needed to be out of the space by December 31, 2012. Different options were discussed. Following the review and discussion, it was voted: To recommend that the Board of Directors receive the 2012 Year to Date Financial Report, the Schedule of Investments, the Report on Bequests and Endowments Received for the period January 1, 2012 through August 31, 2012, and the Unrestricted Reserve Report as of July 31, 2012. m- J. Haubert s- W. Schemmel Chris Cheline reviewed the LCM and UCCR 2013 Proposed Budgets. After discussion, it was voted: To recommend that the Board of Directors approve the 2013 programmatic budget of $8,087,297 and the 2013 United Church of Christ Resources budget of $902,486. m-: N. Lawrence s- G. Butz The committee elected a Vice Chairperson to the Budget and Finance Committee To elect Nancy Lawrence as Vice Chairperson of the Budget and Finance Committee of the LCM Board of Directors. m- S. Artt s- G. Butz
Chris Cheline provided an explanation on the background of the annual Clergy Housing Allowance vote. Following the explanation, it was voted: To recommend that the Board of Directors of Local Church Ministries approve that the Clergy Housing Allowance under Section 107 of the Internal Revenue Code and the regulations promulgated thereunder ( Section 107") during calendar year 2013 for each ordained minister in good standing with his or her respective denomination and any other Minister of the gospel within the meaning of Section 107, who is in the employ of Local Church Ministries (a Covenanted Ministry of the United Church of Christ), shall be a sum equal to such employee s good faith estimate of the amount which will be excludible under Section 107 with respect to the providing of a home by such employee for such year; however, unless and until such employee shall provide in writing the estimate described above, the amount of said Clergy Housing Allowance for such employee shall be a sum equal to one third of such employee s gross salary compensation. Each eligible employee will be instructed to submit a signed statement of his or her designated Housing Allowance for calendar year 2013, which shall conform to the requirements of the above resolution. The deadline for submission of the statement is established by Human Resources on an annual basis. m- W. Schemmel s- T. Stoik There was a follow up to the March discussion concerning the LCM investments and why LCM is so heavily invested in UCF and Cornerstone. History was presented by Chris Cheline: Prior to the year 2000 the Pension Boards managed the investments for the United Church Board for Homeland Ministries, the United Church Board for World Ministries, and the United Church Foundation. In 2000 the United Church of Christ restructured the organization and it was determined that the best course of action would be to merge the invested funds into a common investment fund for all of the ministries. This would allow for lower fees and the larger asset base of the combined ministries would allow for more diversification among management styles. It was also discussed (on page 10 of the 2000 memorandum) that it is possible that UCF would consider a tiered fee structure like the one that is found in the open market, which would charge a lower percentage to higher market value accounts. In other words if you have a large amount of money you pay less of a percentage in fees. Kathy Houston questioned the benchmark for one of the asset managers that names the same as that used by UCF but has a different return percentage. She also noted that the asset manager had a higher risk than their noted benchmarks which could result in higher losses.
Committee members questioned UCF s historical performance as well as how reliable the proposal from Merrill Lynch was as an indicator of future performance if they had our funds. It was decided that it was important for this committee to perform its fiduciary duty to investigate the best options for the investments then to pass along those findings to the new unified board s investment committee. It was agreed that the committee should ask Don Hart the following questions: 1.) How has LCM s money done over the same period of the proposal, October 1, 2004 through June 30, 2012? 2.) The committee would like to know if the historical information presented by Merrill Lynch can be relied upon as an indicator of how Merrill Lynch would perform with our money in the future? 3.) How might UCF improve performance returns? Chris said that she would send the questions to Don Hart and send the reply along to the committee. The meeting was adjourned at 3:32 p.m. Respectfully submitted, Chris M. Cheline
Amendment 1 Follow up to October 4, 2012 board meeting: From: Christina Cheline [mailto:chelinec@ucc.org] Sent: Friday, October 05, 2012 4:19 PM To: Donald G. Hart Cc: J. Bennett Guess Subject: Questions from the LCM Board Budget and Finance Committee Don, I hope that you are doing well on this Friday afternoon! I ve been corresponding with you this spring and a little bit in the summer trying to gather information for LCM s Budget and Finance Committee concerning our investments. The board is doing their fiduciary duty in asking the questions at the spring meeting. They asked why is LCM so heavily invested in UCF and the Cornerstone Fund. I sought a proposal from Merrill Lynch as well as researched the history of the investments. I presented the history as well as the rationale as to why the LCM board is so heavily invested in United Church Funds and Cornerstone and how each of these organizations help our local churches. The board had further questions that they wanted me to send to you. 1.) How has LCM s money done over the same period of the proposal, October 1, 2004 through June 30, 2012? 2.) The committee would like to know if the historical information presented by Merrill Lynch can be relied upon as an indicator of how Merrill Lynch would perform with our money in the future? 3.) How might UCF improve performance returns? Thank you very much for your continued patience! Chris Reply concerning the LCM investments at UCF: From: Donald G. Hart [mailto:hartd@unitedchurchfunds.org] Sent: Tuesday, October 16, 2012 3:47 PM To: Christina Cheline Cc: J. Bennett Guess Subject: RE: Questions from the LCM Board Budget and Finance Committee
Chris and Ben, It was great seeing you both last week in Cleveland and having the opportunity to discuss your email a bit with you. As I mentioned to you, in order for us to fully and carefully respond to these questions, we will need some time to gather the appropriate data. I do have a few observations to make but these are based on a very brief review of the proposal. It is difficult to compare performance retrospectively without knowing what changes in asset allocation would have been made during the time period. I am assuming the model used by Merrill Lynch was a static allocation with no rebalancing done. Also, since they are proposing mutual funds, LCM would have given up its use of investment screens. The reason UCF attempts to utilize separate portfolios is that it gives us the ability to impose our investment screens on the portfolio, which we are unable to do in mutual funds. There are screened mutual funds available, but these funds usually carry substantially higher fees. UCF does have two mutual funds, but these are used in cases where we do not have sufficient assets to meet the minimum requirement for a separate portfolio or where the likelihood of there being companies in the portfolio that would exceed 2% of the total portfolio value is small. UCF would welcome the opportunity to speak directly with the committee about our investment program and how the relationship between UCF and LCM has evolved over the last 20 years. I hope you have a good meeting this week. Regards, Donald G. Hart President United Church Funds 475 Riverside Drive, Suite 1020 New York NY 10115 Direct: 212-729-2610 Toll-free: 877-806-4989 Fax: 212-729-2601 ----------------------------------------------------------------------------------------------------------------------------- --------------
From: Donald G. Hart [mailto:hartd@unitedchurchfunds.org] Sent: Wednesday, October 17, 2012 9:56 AM To: J. Bennett Guess; Christina Cheline Subject: Additional Response Chris and Ben, Please see the following comments sent to me by Dave Klassen, chief investment officer. I wanted to be responsive to LCM! In my role, as yours, it is extremely important to me to generate the type of performance they deserve and will not relax until we do. Even though I would like to spend much more time on this, I would start with the following that may be of help to the Committee and Chris for their discussions this week. In answer to question 2, I would say this: I have been involved in looking at many of these programs, and actually created one at Dean Witter (now Morgan Stanley) back in 1986. I don t want to say all negative things, because it appears that the fees have come down. If the.67 basis points is all they charge, it is not too bad. There used to be a practice of layering a fee on top of this for reporting, and to pay for the people who are analyzing these managers. I would suggest that the analysis provided in this example is completely with the benefit of hindsight. Yes they are selecting managers they trust and who have done a good job historically. However, it might be instructive to see the performance for this PROGRAM. In other words, how did the managers they selected 6 years ago fare. Again, I want to be balanced but looking at more of a proof statement would be helpful. In response to the question on UCF performance, you know my stance. In part: 2012 has been an extremely good year thus far and we are committed to good performance looking forward. The three year performance is being positively impacted by this year s outperformance. We also plan to continue to build in and show risk adjusted performance, which will come from protecting on the downside / building a favorable Sharpe ratio. In addition, we want to show our clients like LCM relevant peer universes for context. As the bulk of the underperformance in the past came from the small capitalization manager and portfolio, we are committed to fixing that, and have. It appears that the IC underestimated the impact of Foster Friess, the founder of his fund, stepping away. I should add that identification and anticipation of negative culture change or executive level influence within investment firms has generally been my own area of expertise. A few more strategically placed managers in the portfolio should enable us the flexibility to strategically
adjust the weightings all within the ranges set by our Committee. My own view is that these bands can be used to benefit the performance. I like our existing managers, the asset allocation and the flexibility to adjust to changing market conditions. I do believe we can get great leverage from one other important aspects of our program the ability to select the managers in concert with the environmental, social and governance (ESG) issues that are relevant and important to the UCF. Additionally, our growing presence in organizations like the US Social Investment Forum, ICCR, and our commitment to stay on the front lines of this increasingly sophisticated movement builds on the already strong foundation that Katie our CSR Director and her predecessors have established. As you know I am very happy to discuss this in greater length! Dave David A. Klassen, CIO United Church of Christ 475 Riverside Drive, 10 th Fl. New York, NY 10115 ph: (212) 729-2630 f: (212) 729-2631 c: (646) 812-8605 dklassen@pbucc.org Donald G. Hart President United Church Funds 475 Riverside Drive, Suite 1020 New York NY 10115 Direct: 212-729-2610 Toll-free: 877-806-4989 Fax: 212-729-2601