Date: February 27, 2008

To: Mayor Edward “Bud” Caulfield

And

Members of the Lowell City Council

CC: Bernard F. Lynch, City Manager

From: Tom Moses, CFO

Re: CC Motion of 02.26.08 by Council Milinazzo “Request a Report from the Retirement Board re: Investments of Retirement Funds”

Councilor Milinazzo raised several questions at the February 26, 2008 City Council meeting. This memo will address those questions.

Retirement Member Annual Statements

The Lowell Retirement System (the “System”) is required to send an annual statement to each of its active members. The statutory reference is MGL Chapter 32 Section 20(5)(i), and states (emphasis added):

Each board shall prepare annually a report which shows the financial condition of the system as of December thirty-first of the previous year in a manner which can be easily understood by the members of said system. Such report shall contain information showing the financial transactions of the previous year, statistical information with reference to the membership of the system, a summary of the findings of any timely audit reports, a summary of the board's investment policy, a summary of the system's investment portfolio as of December thirty-first of the previous year, and information with regard to the system's most recent actuarial valuation including the unfunded actuarial liability as of the valuation date. Each board shall file a copy of its report with the governmental unit in which the system is established. A copy of the report or a summary thereof shall be made available upon request to each member of the system and to other interested persons. Each board shall annually, on or before July first, furnish to each member of the system an annual statement for the previous calendar year relative to the status of the member's account. Such statement shall show either the total contribution since the member entered the retirement system, the total amount of interest which has accrued, and the combined total in the account as of the end of the previous calendar year, or the regular deductions for the previous calendar year, additional deductions, if any, for the previous calendar year, regular interest credited for the previous calendar year, and accumulated total deductions as of the close of the previous calendar year. The state retirement board shall file a copy of its report with the governor, and with the state treasurer for publication in his annual report. The teachers' retirement board shall file a copy of its report with the governor and with the state treasurer, and with the commissioner of education for publication in the annual report of the department of education. The retirement board of each county, city or town system shall file a copy of its report with the county commissioners, the mayor or the board of selectmen, for publication in the annual report of the county, city or town, as the case may be. The retirement board of the Massachusetts Turnpike Authority employees' retirement system shall file a copy of its report with the authority for publication in the authority's annual report to the governor and to the general court. The retirement board of the Massachusetts Bay Transportation Authority police retirement system shall file a copy of its report with the authority for publication in the authority's annual report to the governor and to the general court. The retirement board of the Massachusetts Housing Finance Agency employees' retirement system shall file a copy of its report with the agency for publication in the agency's annual report to the governor, to the general court and to the comptroller. The retirement board of the Massachusetts Port Authority employees' retirement system shall file a copy of its report with the Authority for publication in the Authority's annual report to the governor and to the general court. The retirement board of the Greater Lawrence Sanitary District employees' retirement system shall file a copy of its report with the district commission for publication in the district's annual report. The retirement board of the Blue Hills Regional Vocational school system shall file a copy of its report with the school system for publication in the authority's annual report to the governor and to the general court. The retirement board of the Minuteman Regional Vocational Technical School District shall file a copy of its report with the district for publication in the district's annual report. Copies of the reports of the retirement board shall be furnished upon request to members of the system and to other interested persons. Each board shall annually, on or before July first, furnish to each member of the system an annual statement for the previous calendar year relative to the status of the member's account. Such statement shall show either the total contribution since the member entered the retirement system, the total amount of interest which has accrued, and the combined total in the account as of the end of the previous calendar year, or the regular deductions for the previous calendar year, additional deductions, if any, for the previous calendar year, regular interest credited for the previous calendar year, and accumulated total deductions as of the close of the previous calendar year.

Interest Rate

The Councilor wanted further clarification of the interest rate contained on the annual statements. There was broad misunderstanding that this interest rate represented the annual return for the System. This is not the case. This interest rate is the amount credited to reach individual member's accumulations, and is defined by MGL Chapter 32, section 22(6)(v)(b), and may be paid out if a member withdraws funds prior to receiving a pensions. That subsection of the law reads (emphasis added):

The phrase "regular interest'' as used in sections one to twenty-eight, inclusive, shall mean the interest credited to any member's account in the Annuity Savings Fund of any system during the period of his membership therein or to his account in the special fund for military service credit during such period. As applied to such interest for any period prior to January first, nineteen hundred and forty-six, "regular interest'' shall mean interest at the rate in effect and allowed in such system from time to time during such period. As applied to such interest on balances outstanding in any such accounts as of the commencement of business on January first, nineteen hundred and forty-six, or as applied to such interest credited on regular deductions made on or after such date in the nature of make-up payments, or otherwise, on account of service rendered by any member prior to such date, "regular interest'' shall mean interest credited at the rate of three per cent per annum. As applied to such interest credited on all other regular deductions and on all additional deductions made on or after January first, nineteen hundred and forty-six, and on all amounts thereafter transferred from any member's account in the Annuity Savings Fund or from his account in the special fund for military service credit in any contributory retirement system established under the provisions of a special law to his account in the corresponding fund of a system maintained under the provisions of sections one to twenty-eight, inclusive, "regular interest'' for the calendar years nineteen hundred and forty-six and nineteen hundred and forty-seven shall mean interest credited at the rate of three per cent per annum. For any calendar year subsequent to nineteen hundred and forty-seven and prior to nineteen hundred and eighty-four, "regular interest'' shall mean interest credited at the average earned rate which shall be determined by the actuary from the investment earnings of all systems maintained under the provisions of said sections and which shall be calculated on the basis of data contained in the annual statements of such latter systems filed in the office of the commissioner of insurance for the second calendar year preceding that for which such rate is to be applied. Such average earned rate shall be taken to the nearest tenth of one per cent and shall be obtained from the ratio which the total income derived from the interest and dividends earned on the invested funds of all such systems during the calendar year covered by such annual statements bears to the mean of the total ledger assets of all such systems at the beginning and end of such year. For any calendar year beginning subsequent to December thirty-first, nineteen hundred and eighty-three, "regular interest'' shall mean interest credited at a rate established by the commission, in consultation with the commissioner of banks. The rate established by the commission shall be taken to the nearest tenth of one per cent and shall be obtained from the average rates paid on individual savings accounts by a representative sample of financial institutions; provided, that said commission shall sample no less than ten such financial institutions.

That interest rate by no means reflects the total returns of the System. The System's return in calendar year 2006 was 16.91%, fourth best out of the commonwealth's 106 systems. Our ten-year annualized return is 10.93%. 2007 results will be available in a few months.

Type of Investments

Lastly, the Councilor asked how the System invests it money. As of 12/31/06, the System had 96% of our assets in the Commonwealth's Pension Reserves Investment Trust (“PRIT”) Core Fund, 2% was in alternative investments, 1% in real estate and 1% in cash. PRIT is a $50 billion pooled investment trust run by the state. It has approximately 40 professional money managers that handle portions of the portfolio. Most of these managers are internationally known, and include Goldman Sachs, Wellington Management, Blackrock, Fidelity, and Putnam.

PRIT's asset allocation as of 12/31/2006 was domestic equity 25.2%, international equity 20.4%, real estate 10.1%, U.S. bonds 10.1%, alternative investments 6.5%, emerging markets equity 6.4%, hedge funds 5.1%, high yield bonds 4.8%, TIPS and commodities 4.7%, portable alpha (hedge funds) 3.5%, and timber 3.1%

Finally, if any employee has questions about their annual statements or the System's benefits and investments, the Retirement Board's professional staff is fully capable of handling their queries. Feel free to refer any questions to the staff. They can be reached at (978)-970-4094.