ANNUAL REPORT 1992 (July 1,1991 to June 30,1992) CITY OF LOS ANGELES DEPARTMENT OF PENSIONS FIRE AND POLICE PENSION SYSTEMS Department of Pensions _ 360 East Second Street • Suite 600 • Los Angeles, California 90012 Annual Report 1992 July 1,1991 to June 30,1992 Gary ¥,attingly General Manager James J. Mcfluigan Allan Moore Assistant Manager Assistant Manager Eudon Ferrell Dennis R. Sugino Assistant City Attorney Chief Investment Officer Table of Contents General Manager's Letter. ... .... .. 3 System Investments ................ 5 Membership Active Membership 10 Retired Membership 12 Pension Statistics: Last Ten Years 14 Actuarial Report Summary 19 Department Budget 23 Auditor's Report 25 Legal Summary 33 Description of Pension Benefits 37 Milestones 41 Dept. of Pens ions 1992 Annual Report -1- Fire and Police Pension Systems MAYOR Tom Bradley City Attorney Controller James Kenneth Hahn Rick Tuttle CITY COUNCIL John Ferraro, President Marvin Braude, President Pro Tempore Mike Hernandez Joel Wachs Joy Picus First District Second District Third District John Ferraro Zev Yaroslavsky Ruth Galanter Fourth District Fifth District Sixth District Ernani Bernardi Mark Ridley-Thomas Rita Walters Seventh District Eighth District Ninth District Nate Holden Marvin Braude Hal Bernson Tenth District Eleventh District Twelfth District Michael Woo Richard Alatorre Joan Milke Flores Thirteenth District Fourteenth District Fifteenth District BOARD OF PENSION COMMISSIONERS Sam Diannitto, President Susan Steinhauser Louis Moret Vice President Commissioner Tong Soo Chung Ana Segura Commissioner Commissioner Paul Hudson Kenneth E. Staggs Commissioner Commissioner Dept. ofPensions 1992 Annual Report -2- Fire and Police Pension Systems CITY OF Los ANGELES CALIFORNIA DEPARTMENT OF ALLAN E. MOORE ASSISTANT GENERAL MANAGER-FISCAL PENSIONS 360 EAST SECOND STREET JAMES J. McGUIGAN SUITE 600 ASSISTANT GENERAL MANAGER-BENEFITS LOS ANGELES. CA 90012-4203 DENNIS R. SUGINO 485-2833 CHIEF INVESTMENT OFFICER GARY MATTINGLY GENERAL MANAGER TOM BRADLEY MAYOR June 30, 1992 The Honorable Tom Bradley, Mayor and Honorable Members of the City Council: In accordance with the Charter, I am submitting the Annual Report on the affairs and operations of the Department of Pensions for the fiscal year ended June 30, 1992. We earned $560 million during the year, increasing assets to $4.6 billion. We added a long duration fixed income and replaced a fixed income and an equity manager. We also hired two emerging equity and two emerging fixed income advisors pursuant to the Emerging Manager Policy adopted by the Board in 1991. This policy was adopted to pro- vide new or "emerging" investment advisor firms opportunities to contract with Pen- sions. It also gives us the opportunity to contract with firms we have been prevented from hiring in the past due to size requirements. The Board also hired a consultant to perform an assetlliability study. The consultant will review our asset allocation mix and recommend changes to maximize the Fund's rate of return at an acceptable level of risk. Also included in this annual report are financial statements prepared by our au- ditors, Miller, Kaplan, Arase & Co., and a summary report of our actuary, The Wyatt Company. Respectfully submitted, ~rh-t Gary Mattingly (JQ AN EQUAL EMPLOYMENT OPPORTUNITY - AFFIRMATIVE ACTION EMPLOYER Recyc!able and made 1,0m Iec"{ded ,W'.,sle, "C6tE) Investments Dept. of Pensions 1992 Annual Report -5- Fire and Police Pension Systems Summary of Investment Activities Introduction ranging between the 44th and 70th percentile. For this past year, the System returned 14.0 percent (41st We earned $560 million during the past year. Dur- percentile) versus the public fund median of 13.4 per- ing the past five years, the System's assets have cent. grown from $2.7 billion to $4.6 billion. Asset Allocation Decisions MARKET VALUE GROWTHOF SYSTEM ASSETS In Billions of Dollars - Fiscal Year Ending June 30, 1992 Our asset allocation plan establishes the blueprint for investing the System's assets in stocks, bonds, real estate and cash equivalents over a three to five year period. This plan is the single most important factor in managing risk and achieving superior invest- ment performance in the long term. The asset class targets for this period were as follows: us. Large Capitalization Stocks 47% US. Small Capitalization Stocks 5% Non·US, Stocks : 6% US. Investment Grade Bonds 27% High Yield Bonds 5% Real Estate 10% The actual asset class percentages of the System will vary from target allocations due to inflows (such as City and member contributions), outflows (such 82·83~84 84-85 85-8686-8787-88 88-8989-90 ~91 91-92 as pension payments) and the movements of the sec- urities markets. Assets are periodically rebalanced to Investment Environment adjust for these movements. As of June 30,1992, the asset values were as follows': The bond market (Salomon Bros. Broad Invest- MARKET VALUE ment Grade Index) was up 14.2 percent. Large (In millions) capitalization stocks (S & P 500) achieved a 13.5 per- ASSET CLASS As of 6/30/92 cent return. Small stocks (NASDAQ Composite) re- U,S. Large Capitalization Stocks $2,230.4 turned 19.9 percent. International stocks (Morgan U,S. Small Capitalization Stocks 240.6 Stanley EAFE) had a negative 0.6 percent return.' Non·U.S. stocks 239.3 U,S. Investment Grade Bonds 1,338.8 Real Estate, as measured by the National Council of High Yield Bonds 259.5 Real Estate Investment Fiduciaries Index trailed all Real Estate 188.5 asset classes with a negative 6.7 percent return. Cash Equivalents 143.3 Total .$4,640.4 Investment Performance The investment objectives of the System, over a Domestic and foreign securities lending contrib- full market cycle (usually 3 to 5 years), are a return uted $653,887 towards investment performance for of at least two percent above the consumer price the year. The options overwriting program is designed index per year and above median investment perfor- over the long run to add incremental return and reduce mance for public funds. portfolio volatility. For the year, the program reduced During the past five years, the System's annualized investment return by $13.6 million. return of 8.9 percent was more than double the infla- tion measure increase of 4.3 percent. During the one- Investment Activity year period, the System's overall investment perfor- For the past four years, we have worked diligently mance was up 14.0 percent and outpaced the con- toward fully implementing our asset allocation. All sumer price index of 3.1 percent. major components of this plan are now in place. The The System's performance was competitive with major portfolio activities of the year included the other public funds (Trust Universe Comparison addition of a long duration fixed income manager, Service [TUCS]) over the past three to five years, the replacement of a bond and an equity manager, a Dept. of Pensions 1992 Annual Report -6- Fire and Police Pension Systems Investment Activity Cont'd mainstream relatively small money management firms who can make a significant contribution to the search for new real estate advisors, the hiring of an overall financial goals of the Pension Fund. This year asset/liability consultant, the rehiring of our custo- the Board commenced its first emerging manager dian bank, and the hiring of emerging core equity searches and hired two growth style equity advisors, and fixed income managers. A search was com- Galleon Capital Management Co. and Brown Capital menced for a real estate consultant. No real estate Management, Inc., and two fixed income core mana- properties were added to the portfolio during the fis- gers, HCM Capital Management, and Smith Graham cal year. & Company. Loomis Sayles was hired in October 1991 to man- age a fixed income long duration bond style. This hir- Other Activity ing completed the asset allocation plan adopted by the Board. The System votes all domestic and available inter- The Board exercised its termination option for Se- national proxy solicitations. There were 675 corpo- curity Pacific Investment Managers for equities in rate proxies voted in 1991-92. The System votes affir- September 1991 and for bonds in March 1992. Key matively on preemptive rights, cumulative voting, management personnel left Security Pacific as adoption of the Sullivan Principles, and confidential rumors of the Bank's merger with Bank of America voting. The System opposes anti-takeover measures became reality. and generally abstains on issues of a SOCial,political, Delta Asset Management replaced Security Pacific or environmental nature that have no expected Investment Managers soon after our portfolio mana- economic impact on the System's assets. gers left the bank subsidiary to form their own man- The System's six-phase South Africa Divestiture agement company. Delta was hired to manage the Program was adopted in 1985 after a legal and finan- Fund's assets in the same growth/sector-rotation style cial study concluded that the Program was not incon- that had been used by their senior management team sistent with the fiduciary responsibilities owed to the at Security Pacific. System's members. The final Phase VI was imple- Lincoln Capital was hired to replace Security mented in 1991 and requires the divestiture of secur- Pacific Investment Managers when the loss of person- ities of all companies doing business in South Africa, nel threatened the active management style of our unless the Board determines that a company is engag- bond portfolio. Lincoln was hired on an interim basis ing in political, SOCial,and economic activities that for the remaining term of the Security Pacific bond substantially assist efforts to end apartheid. A com- contract. pany may also be exempted if the System's perfor- The Board's investment with the FS Weingarten mance could conceivably be economically harmed Fund to purchase shopping centers in the Mid-West by a restriction against purchase.