Minutes

CIVILIAN PENSION BOARD The Civilian Pension Board meeting was held on August 15, 2012 at 4:06 p.m. with Councilman Bonar presiding. Members present were Mr. Lynn, Mr. Koenig, Mrs. Mitchell, Mrs. Hettinger, Mr. Blakeman, and Mr. Clendaniel. Councilman Perza was also present. AGENDA ADDITIONS/DELETIONS By unanimous consent, the agenda was approved as presented. ADOPTION OF MINUTES - CIVILIAN PENSION BOARD MEETING OF MAY 9, 2012 Mr. Blakeman moved for adoption of the Civilian Pension Board Minutes of May 9, 2012, seconded by Mrs. Mitchell and unanimously carried. ORGANIZATIONAL ISSUES - ELECTION OF CHAIR Mrs. Mitchell moved to nominate Mr. Bonar to serve as chair, seconded by Mr. Koenig. Mr. Blakeman moved to close nominations, seconded by Mrs. Mitchell and unanimously carried. The motion for Mr. Bonar to serve as chair was unanimously carried. QUARTERLY PERFORMANCE REVIEW (QUARTER ENDING JUNE 30, 2012) - MILLIMAN, INC. Mr. Jeff Marzinsky, Principal and Employee Benefits Consultant, Milliman, Inc., reviewed the Quarterly Performance of the General Employees Pension Plan as of June 30, 2012. He noted that the Plan ended the quarter at approximately $22M, resulting in a -2.27% net return. He indicated that some investments were trailing their benchmarks; therefore, Milliman would be reviewing them more closely over the next couple of months. He advised members that no changes were being recommended at this time. DISCUSSION - LIABILITY TO ASSET ALLOCATION STUDY (MILLIMAN, INC.) Mr. Jeff Marzinsky, Principal and Employee Benefits Consultant, Milliman, Inc., reviewed a Presentation - City of Dover DE - General Employees Pension Asset Liability Study dated July 31, 2012. He reminded members that the plan was closed to new participants in 2008; that there was a target actuarial return of approximately seven percent (7%) on the plan; and that the plan was following a 24-year amortization schedule to better fund and make contributions to the plan to reach a fully funded status. As indicated on Page 4 of the Presentation, Mr. Marzinsky stated that the target (expected) return for the General Employee Pension Plan, based on the allocations, was 6.7%. He indicated that since the actuarial valuation interest rate was 7%, the portfolio, as allocated, may not meet the target return for the actuarial valuation; therefore, the liability valuation may increase and the portfolio may not increase as quickly. He reviewed three (3) alternative options that were developed to allow members to consider which would add different asset categories and also different allocations within those asset categories and noted that the allocation scenarios presented had slightly better potential return and a slightly lower level of risk than the current portfolio. He also noted that if Options #1 or #2 were selected, the variability of expected outcomes would be slightly less than the current portfolio.

CIVILIAN PENSION BOARD MEETING OF AUGUST 15, 2012 PAGE 2 Referring to Page 7 of the presentation, Mr. Marzinsky stated that data was provided regarding the actuarial valuation and the future pension benefits being paid out to plan participants. This allowed development of a statistic called duration, which indicated that, on average, the core of the payments from the plan would be due in approximately 18 years. On Page 8, the duration of the liabilities and the duration of the assets were tied together, and the duration of the portfolio reflected an 18-year duration (on the actuarial liability side), a 3.92-year duration of fixed income investments, and an overall portfolio duration of 1.27 years. The results indicated that the liabilities (payments from the plan) would occur in approximately 18 years and the assets of the plan have a duration of only approximately one (1) year; therefore, Mr. Marzinsky noted that there was a large mismatch in the asset to liability mix within the plan. Responding to Mr. Blakeman regarding the unconstrained curve in the mean/variance efficient frontier graph (Page 5 of Presentation), Mr. Marzinsky explained that constraining the three (3) options meant that some maximums and minimums were set on the asset category. The unconstrained curve reflected the model being run with no constraints, as if the computer were allowed to allocate, resulting in two (2) asset categories: long-term bonds and mid-cap value, since they have a good risk to return number. In reality, he indicated that this would not be a good allocation since it would amount to “putting all your eggs in one basket,” and noted that an investment that is good today, may not be good tomorrow. Mr. Marzinsky noted that the graph also indicated that letting the computer run by itself would not yield a better return than putting some limitations on the asset categories. Mr. Marzinsky noted that Page 9 of the Presentation depicted how the portfolio could be changed slightly by utilizing Option #2, which would modify the expected return to become closer to the actuarial expected return. It also depicted how the fixed income portion of the portfolio could be changed for a better duration match between the liabilities and the assets of the portfolio. Mr. Marzinsky advised members that as the plan grows to a better funded status, it would go into a “de-risking” mode, where some of the equities would be taken from the allocation and more fixed income investments would be put into the fund. By adjusting the portfolio to increase the allocation to longer-term fixed income, some of the duration could be matched on the fixed income side and the duration of the overall portfolio could be increased from one (1) to approximately five (5) years, which would be a better match in the asset to liability duration. In addition, he stated that adding a couple of asset categories to the plan would give it more diversity and consequently lead to a slightly better expected return by cutting down the volatility of the portfolio (expected standard deviation). Mr. Marzinsky cautioned members that the information provided was based on capital market assumptions or expectations, explaining that in the investment world, particularly with fixed income and equity investments, there were no guaranteed returns. The information provided was based on long-term expectations of what the market could return over the next 10-15 years on an annualized basis. Mr. Marzinsky requested that the Board consider adjusting the asset allocation, based on one of the scenarios presented, and adding some additional asset categories. If it were determined that some of these changes should be made, he stated that a follow-up meeting would be scheduled to discuss

CIVILIAN PENSION BOARD MEETING OF AUGUST 15, 2012 PAGE 3 the possibility of adding asset categories, how they would be allocated within the investment policy and, if additional investment managers were added, Milliman, Inc., would recommend managers for the Board’s consideration. Mr. Lynn moved to adjust the portfolio by adopting Option #2, as outlined on Page 4, Portfolio Options, of the City of Dover, DE General Employees Pension Asset Liability Study dated July 31, 2012 (Attachment #1). The motion was seconded by Mr. Clendaniel and unanimously carried. Mr. Lynn suggested that, in the future, material be provided to members in electronic format, in an effort to “go green.” Mr. Bonar requested that paper copies be provided for those who prefer them or do not have electronic capability. DISCUSSION - COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) AS IT RELATES TO PENSION FUNDS At the request of Mr. Blakeman, Mrs. Mitchell provided information included in the Comprehensive Annual Financial Report (CAFR) as it relates to Pension Funds. Mr. Blakeman stated that he had not understood some of the information, such as writing off previous debt; however, he had met with Mrs. Mitchell and now had a better understanding. Elaborating, Mrs. Mitchell explained that when there are large losses, they do not have to be recognized in one (1) year but can be amortized over five (5) years; therefore one-fifth of the losses were reported in the market value portfolio. However, she noted that the true market value was reflected in another section of the CAFR. She emphasized that these losses are not written off but are reported differently in different parts of the CAFR. DISCUSSION - ADJUSTMENT TO THE MINIMUM PAYMENT FOR PENSION On behalf of the elected members of the Pension Board, Mr. Blakeman reviewed information relating to the discussion regarding an adjustment to the minimum payment for pension including three (3) proposals, along with historical information. Considering the current financial condition of the City, Mr. Blakeman suggested that members consider approving Proposal #2, which would increase the minimum pension payment to $400 per month. Responding to Mrs. Mitchell regarding spouse coverage (periodic death benefits), Mr. Blakeman stated that the intent was that the minimum monthly payment would apply regardless of the type of benefit received (retiree or spouse). Mr. Koenig noted that the material provided did not reflect a distinction between those who retired at age 50 with 20 years of service, those with 25 years of service, or those at age 65 with 10 years of service. Responding, Mrs. Mitchell stated that these distinctions could be provided and that she could also look into the date provided for periodic death benefits to determine whether this was the date of the employee’s retirement or when the spouse benefit began.

CIVILIAN PENSION BOARD MEETING OF AUGUST 15, 2012 PAGE 4 In response to Mr. Koenig’s concerns, Mrs. Mitchell explained that the actuary would consider the life expectancy table and age to determine the actuarial costs involved. She also confirmed that the actuary would determine not only the true budgetary costs each year, but also how this change would affect the actuarial liability. Mr. Bonar suggested that staff forward the information, including the three (3) proposals, to the actuary for a report by the next quarterly Board meeting, which would provide staff enough time to include it in the City’s budget. Mrs. Mitchell felt that Proposals #2 and #3, when broken down by fund, would not have such a financial impact on the budget that action should be delayed. Mrs. Hettinger questioned why an actuarial review would be required, noting that a fee would be incurred for conducting such a review and considering that there would only be a minor impact on the budget. Mrs. Mitchell suggested that just one (1) of the options be chosen and sent to the actuary. Mrs. Hettinger stated that she preferred Proposal #1. Mr. Koenig explained his reluctance to support the recommendation, noting that due to the City’s current financial situation, he had requested active employees to contribute to their healthcare premiums. Mr. Lynn moved to recommend adoption of Option #1 (as outlined in the information provided by Mr. Blakeman in reference to the Discussion - Adjustments to the Minimum Payment for Pension) (Attachment #2), increasing the minimum payment for pension to $500 per month, at the next scheduled City Council meeting, and to order an actuarial study based on this amount for Council’s consideration, seconded by Mr. Blakeman. In response to Mr. Koenig, although Mrs. Hettinger felt that the Board’s recommendation should be forwarded to the Legislative, Finance, and Administration Committee for their review and recommendation to City Council, Mr. Bonar and Mr. Blakeman indicated that the Board’s recommendation would be forwarded directly to City Council. Responding to Mr. Koenig, Mr. Lynn stated that if the actuarial study were not completed by the time the Board’s recommendation was presented to City Council, which would occur during their Regular Meeting of August 27, 2012, City Council could table action until the actuarial study was completed. The motion to adopt Option #1 (as outlined in the information provided by Mr. Les Blakeman in reference to the Discussion - Adjustments to the Minimum Payment for Pension), increasing the minimum payment for pension to $500 per month, at the next scheduled City Council meeting, and to order an actuarial study based on $500 per month, was carried, with Mr. Koenig, Mrs. Mitchell, and Mr. Bonar voting no.

CIVILIAN PENSION BOARD MEETING OF AUGUST 15, 2012 PAGE 5 SCHEDULING OF FUTURE MEETING DATES Mr. Bonar advised members that the City Clerk’s Office would be setting future meeting dates. In response to Mr. Blakeman’s request, Mr. Koenig stated that staff would provide members with an update of current retirees from January 2012 through June 30, 2012. (Clerk’s Office Note: This information was subsequently provided to members by the Clerk’s Office.) Mr. Blakeman moved for adjournment, seconded by Mrs. Hettinger and unanimously carried. Meeting Adjourned at 4:45 P.M. David L. Bonar Chairman DLB/JS/jg/dd/tm S:\AGENDAS-MINUTES-PACKETS\Misc-Minutes\PENSION\2012\08-15-2012 Civilian Pension.wpd Attachments Attachment #1 - Page 4, Portfolio Options - City of Dover, DE General Employees Asset Liability Study dated July 31, 2012 Attachment #2 - Information Provided by Mr. Blakeman in Reference to the Discussion - Adjustments to the Minimum Payment for Pension

ATTACHMENT #1 Civilian Pension Board Meeting of 08/15/2012 Quarterly Investment Monitor - June 2012 Asset Allocation Study Portfolio Options Gen Option Option Option EE & OPEB 1 2 3 Police Pension Cash 5.000 5.000 5.000 2.000 1.000 ML U.S. Treasuries, Inflation-Linked 7.000 7.000 7.000 0.000 0.000 Barclays Capital Interm U.S.Govt/Credit 10.000 10.000 10.000 34.000 31.000 Barclays Capital Long Gov/Credit Index 20.000 17.268 12.287 0.000 0.000 Russell 1000 Value Index 12.117 10.000 11.344 14.000 10.000 Russell 1000 Growth Index 10.000 10.738 14.369 14.000 15.000 Russell Midcap Index 5.000 5.000 5.000 8.000 11.000 Russell 2000 Index 5.000 5.000 5.000 5.000 7.000 FTSE NAREIT REIT: Equity 5.000 4.994 5.000 0.000 0.000 MSCI EAFE (Net) Index 10.000 10.000 10.000 23.000 25.000 MSCI EM (Emerging Markets) Index 10.883 15.000 15.000 0.000 0.000 Fixed Income 42.00% 39.27% 34.29% 36.00% 32.00% Equity 58.00% 60.73% 65.71% 64.00% 68.00% Option 1 Option 2 Option 3 Gen EE & Police Pension OPEB Expected Return 6.75% 7.00% 7.25% 6.70% 7.00% Expected Standard Deviation 11.3045 12.1307 13.0225 12.1951 13.1609 Expected Sharpe Ratio 0.3760 0.3710 0.3648 0.3444 0.3422 Option 1 Option 3 OPEB Option 2 Gen EE & Police Pension Expected Return Expected Risk 8 14 Expected Sharpe Ratio 13.02 13.16 0.50 7.25 7.00 7.00 12.13 12.20 6.75 6.70 12 11.30 6 0.38 0.37 0.36 Expected Sharpe Ratio 10 0.34 0.34 Expected Return Expected Risk 8 4 0.25 6 4 2 2 0 0 0.00 4

ATTACHMENT #2 Civilian Pension Board Meeting of 08/15/2012 NOTICE The following information relates to Agenda Item #6, Discussion - Adjustment to the Minimum Payment for Pension, and was provided to the Clerk’s Office by Mr. Les Blakeman on August 7, 2012. - City Clerk’s Office