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MARCO ISLAND — The Niles Conference Room on the first floor of City Hall doesn’t have blackjack tables, slot machines or flashing lights. But when the city’s Police and Fire Pension Boards met there for their regular quarterly meeting on Thursday, the room essentially became a casino, with the retirement funds of the city’s uniformed first responders being at stake.
Of course, the Pension Board members are doing what any investor, whether a private individual or a government entity, does with its funds try to obtain maximum return while minimizing risk. For these funds, the casino of choice is the financial markets. The funds, which are separate but tend to invest in tandem, and hold joint meetings with their legal and investment advisors, put their dollars into equities that is, stocks, bonds, or cash equivalents such as CDs. Or they take a risk on options, which was the recommendation from consultant Scott Owens of Graystone Consulting on Thursday.
The Police Pension Board cashed out of the game early. With only one member, MIPD Officer Mark Haueter, present, apart from City Clerk Laura Litzan, who sits on both boards, the police board did not have a quorum, and so could not conduct business.
“You can talk, you just can’t vote,” said Pedro Herrera of Sugarman & Susskind, P.A., the city’s east coast pension fund attorney. The Fire Pension Board is longer-established, and has more funds, and they continued on alone. The Firefighters’ Pension Fund, as of June 30, had a total portfolio of $8,295,529, with the largest investments in large cap value and growth stock funds.
The past few years have been challenging for investors, and the uncertainty the one certain thing in investing will continue, Owens told the group. All in all, though, he and his firm believe that the run-up in stocks has limited their further upside potential, while conditions are ripe for a “correction,” and bonds are not attractive.
“We feel the fixed income market is going to hurt for the next couple of years. With the stock market at all-time highs, you want alternatives other than equities. Where are you gonna put it?” he asked. The answer, he said, is options cover call strategies.
“This will protect you on the downside,” said Owens. “It’s all options on large cap equities nothing crazy.”
“It’s not corn?” interjected Litzan.
“We’re scared to death waiting for the other shoe to drop,” said Owens. “Fear is good. It keeps the market from going straight up with ‘irrational exuberance.’ ”
The underlying financial problem, he said, is “a wider and wider disconnect between the economy and the market. The markets are up, the economy is not. Something’s gotta give.” He called it the Great Disparity 25 percent growth in the stock market since 2009 versus two percent in the broader economy.
The point of the options he is recommending, he told the board, is to “try to immunize your portfolio” from potential losses. “You get protection on the downside, but you only get 85 percent of the potential upside. Instead of earning 12 percent, you get 10 percent” if the fund’s assets continue to climb. “It’s great in a sideways market.”
Litzan asked whether Owens would recommend the same strategy for the police fund, with its smaller holdings, $5,671,474 as of July 30. “Absolutely. One hundred percent,” he answered.
All of the pension board members have jobs that do not consist of following and playing the financial markets. Litzan and member Tom Kirstein, a CPA, are certainly used to dealing with numbers. But the ghosts of Enron and the financial meltdown of 2008 hung over the room, and as anyone who has puzzled over how to allocate their retirement funds can appreciate, it is difficult to know what to do other than choose an advisor, understand to the best of your ability, and trust they are working in your best interests.
In the end, the Fire Pension Board opted to wait and see. They passed unanimously a resolution that would allow them to invest in options per Graystone’s recommendation, but did not pull the trigger to put their chips on the table. Both police and fire pension boards are set to meet again on Nov. 7.