Book 1 Page 443 02-20-2025 8:15 a.m. MINUTES OF THE CITY OF SARASOTA POLICE OFFICERS' PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF FEBRUARY 20, 2025 Present: Chair Johnathan Todd, Vice Chair Ronnie K. Baty, Secretary/Treasurer Shayla Griggs, Trustee Joseph Jody" Hudgins, and Trustee Tyler Rossnagle. Others: Attorney Stuart Kaufman, Pension Plans Administrator Debra Martin, and Pension Specialist Peter Gottlieb. Absent: None. 1. CALL MEETING TO ORDER: Presenter(s): Chair Todd. Chair Todd called the February 20, 2025, regular meeting of the Police Officers' Pension Plan (Plan) Board of Trustees to order at 8:15 a.m. 2. PLEDGE OF ALLEGIANCE: Presenter(s): Secretary/reasurer Griggs. Secretary/Treasurer Griggs led the Board and meeting attendees in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Presenter(s): Chair Todd. Chair Todd stated for the record, "We may disagree, but we will be respectful of one another. We will direct all comments to issues. We will not engage in personal attacks.' I 4. ROLL CALL: Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin called roll; all trustees were present. 5. PUBLIC INPUT: None. 6. APPROVAL OF MINUTES: 6.1. Approval Re: Minutes of the Police Officers' Pension Plan Board of Trustees Regular Meeting of January 23, 2025. Presenter(s): Chair Todd. Vice Chair Baty made a motion to approve the minutes of the Board's Regular Meeting'of January 23, 2025; Trustee Hudgins seconded the motion. The motion passed unanimously (5-0). 7. RETIREMENT REQUESTS: None. 8. INVESTMENT PERFORMANCE REVIEW: 8.1. Presentation and Discussion Re: Burgess, Chambers & Associates, Quarterly Performance Report for Period December 31, 2024. Presenter(s): Larry M. Cole, Executive Vice President, Burgess Chambers & Associates. Larry Cole of Burgess, Chambers & Associates (BCA) appeared before the Board and introduced himself. Mr. Cole began his presentation by noting the portfolio's strong rolling 1-year return as of October 1, 2024. Despite the Federal Reserve (Fed) having lowered short-term interest rates in September, November, and December 2024, intermediate- and long-term interest rates rose in Q4 2024 resulting in a -3% return in the fixed income sector. The interest rate yield curve is fairly flat; Mr. Cole predicted that, despite political pressures to reduce short-term rates, the Fed will maintain rates for the time being because reductions would be inflationary, and the market is already concerned about tariffs. Mr. Cole advised the Board that, when making investment decisions, it could disregard the president's statements regarding tariffs because there is little insight into his motivations or goals for announcing them, nor is there any indication of which tariffs would be enacted. Mr. Cole asserted that the president's threats to impose tariffs are attempts to balance trade conditions between the US and its partners; while this would ultimately be beneficial for the domestic economy in the long-term, it may also cause short-term inflationary pressures, which is a further season for the Fed to maintain the current short-term interest rate. For the last 18 months, the portfolio's fixed income managers have been able to purchase investment-grade bonds, which are now at and above 5%. Mr. Cole noted that purchasing fixed income securities as yields rise is beneficial to the portfolio, however rising rates also cause the portfolio's currently held bonds' prices to decline. In the broader picture, the investment assumption that a 60% allocation to equities and 40% to fixed income should produce an 8% return had not been achievable over the last 15 years because of low interest rates, and investors sought alternatives to fixed income to make up the difference; now, as interest rates are rising, that assumption becomes more attainable. Mr. Cole reviewed the 1 Quarter Performance chart on the Quarterly Market Summary page of the materials. The S&P's 2.4% return is misleading because the market rotated in December 2024 back to favoring the "magnificent 7" mega-cap tech stocks which dominated returns in recent years; without the magnificent 7, the S&P was flati for the quarter, and the portfolio is underweight to those stocks. The market is more concentrated now than in recent history, as therefore the S&P 500 index is currently not a core index and instead is behaving like a large-cap growth stock. While international stocks declined in Q4 2024, they, and domestic stocks, rebounded in Q1 2025; Mr. Cole estimated that the portfolio is up 3% to 5% on a fiscal year-to-date basis as the market broadened away from the magnificent 7. He predicted that if artificial intelligence continues to positively impact the world, the remaining 493 stocks in the S&P 500 will be rewarded, and the portfolio will outperform; on the other hand, ift the market stays concentrated, the portfolio will underperform its benchmarks. Trustee Hudgins asked Mr. Cole if BCA could include the portfolio's allocation to each of the listed sectors; Mr. Cole agreed and advised that information would likely be shown separately as the Quarterly Market Summary pages refer to the broader indexes, and not specifically to the portfolio. Mr. Cole concluded his market summary, noting that the Fixed Income Market Sector Performance chart shows that fixed income investments lagged in Q4 2024, while the trailing 1-year shows equities remained positive. There were no compliance issues. Mr. Cole reviewed the Actual VS. Target Asset Allocation page; the portfolio is overweight to domestic equities and underweight to international, which is appropriate because there is significant uncertainty in the international equity markets. He reminded the Board that Global Infrastructure is comprised of stocks in companies which focus on infrastructure projects like airports, toll roads, utilities, bridges, and will benefit from government investments in those items. While infrastructure tends to be a defensive investment, the sector was up 30% for the trailing 12 months as of September 30, 2024. To Trustee Hudgins' question, Mr. Cole asserted there are numerous companies poised to begin rebuilding Ukraine when the conflict there is resolved; both Lazard and Cohen & Stears hold European companies which would be involved in such efforts. He was less confident about investment benefits in the Gaza Strip Book 1 Page 444 02-20-2025 8:15 a.m. Book 1 Page 445 02-20-2025 8:15 a.m. considering its geographic size. He noted that the current investment environment is frenetic considering the volume of events and news emerging on a daily basis. Mr. Cole continued his discussion oft the portfolio. The Private Real Estate sector is underweighted to its target, and the allocation reflects a $10 million redemption request to JP Morgan, of which approximately $3 million has been satisfied; real estate transactions need to increase before more of the redemption is satisfied. Mr. Cole noted that the sector had a modest but positive return for the quarter. To Trustee Hudgins' question, Pension Plans Administrator Martin noted the portfolio's book value allocation to JP Morgan is $15.8 million. Mr. Cole reminded the Board that in 2008 and 2009, when real estate values and transactions were significantly depressed, the Plan had an unsatisfied real estate redemption request that, by the time JP Morgan was able to satisfy the request, the Board cancelled the redemption and was rewarded with healthy returns over the ensuing decade; now may be a similar circumstance and the Board may similaily decide to cancel its outstanding redemption request. BCA has had numerous internal conversations regarding the bottom of the real estate market. JP Morgan has been successful at repurposing many of its properties to be more marketable in the current environment, businesses appear to have growing needs for oflice space as they call workers back into the office from remote work, and the current administration is pro-growth, suggesting a positive outlook for the sector; that notwithstanding, Mr. Cole is comfortable leaving the redemption request in place because there haven't been enough transactions to provide sufficient comparable properties and impact valuations. Mr. Cole speaks frequently with JP Morgan and monitors transaction activity levels; he will advise the Board if a change to the redemption request is appropriate. Mr. Cole briefly reviewed the Asset Allocation; on the Historical Asset Allocation page, he noted that from December 31, 2022, to December 31, 2024, the fixed income allocation grew by approximately 7% which took advantage of rising interest rates and has derisked the portfolio. The Asset Allocation & Performance - Gross page shows a -1% absolute return for the quarter while the benchmark return was -.9%. Growth managers made the largest positive contributions, although Newton Large Cap Value has been a consistent performer since inception. He reminded the Board that Franklin Templeton does not track closely to its benchmark and has had erratic short-term performance but more consistent long-term returns. American Funds EuroPacific Growth fund was down 6.9% as of calendar year-end but is having a strong current quarter. Global Infrastructure's negative performance may rebound. Convertibles had good performance for the year, however relative to equities, they dragged the portfolio's 1-year return down. The portfolio's Real Estate had a positive quarter which moved the 4-year and 5-year returns into positive territory. Returning to Convertibles, Mr. Cole advised that the 3-year return is still negative as it includes 2022; the percentile ranking in the 3-year and 4- year are slightly below average when compared to approximately 1200 public pension plans in the United States. He reminded the Board that the portfolio will struggle on a relative basis if the market remains highly concentrated and, as such, he was not as concerned with relative performance. Apple and Tesla are currently the least influential of the magnificent 7, although all 7 are currently, "priced to perfection, and can individually react dramatically to negative news. On the other hand, each of the magnificent 7 companies have respectively strong fundamentals and good earnings, which differentiates them from dot-com era stocks in the late 1990s. Mr. Cole reviewed the Growth of Investments page, noting that the total fund market value (blue line) and net cash flow (green line), which are contributions, shows the portfolio is paying out more than it is taking in; the difference between the blue and green lines is earnings. On the Fiscal Year Rates of Return, Mr. Cole amended his estimate of the current return to 2% to 3% on a fiscal year-to-date basis The average annual return over the range shown was 8.4%; while he believes actuaries are overly focused on current, short-term returns, Mr. Cole asserted the portfolio is well-positioned to meet and exceed the expected rate of investment return. He briefly reviewed the Total Fund page; and has no investment recommendaticns at this time. Mr. Cole reminded the Board that he had previously discussed investing in private credit. He found that private credit managers take longer to issue performance reports than most managers; if the Board were to invest in private credit, BCA's quarterly performance report would likely only show preliminary results with a final report to be issued later. This will cause issues when disbursing DROP funds as the Plan would need to issue a preliminary check, and then a final check, creating an additional administrative burden. As such, Mr. Cole has refrained from further recommending private credit to the Board. Trustee Hudgins noted that investors have moved significant amounts of money into private credit which has weakened the overall quality; Mr. Cole asserted that some private credit firms are better than others, and that BCA had positively viewed Nuveen/Churchills product due to its longer track record, selectivity in issuing credit, and all of its products are floating rate bonds tied to the Secured Overnight Financing Rate; it has a shorter lock-up period compared to its peers. If the reporting delay can be resolved, Mr. Cole advised he may bring the asset class back to the Board for consideration. Attorney Kaufman reiterated the reporting delay issue, noting Nuveen/Churchil takes at least 6 weeks after the end of the quarter to receive performance results, if not longer, which causes administrative issues for some of his clients. Mr. Cole added that, while he has recommended private credit, he has never recommended private equity to his clients. Despite impressive presentations, private equity managers have yet to produce substantive returns on investments. To Trustee Hudgins' questions, Mr. Cole explained that TIAA, which owns Nuveen/Churchil, has its own assets invested in its products. He asserted that it has a high recovery and low loss rates. Trustee Hudgins noted that Nuveen/Churchill leverages its lending to promote cash flow, and its hard assets are not real estate but buyouts as well as refinances of short-term debt and/or lines of credit, making liquidity analysis difficult. While Nuveen/Churchill rarely had low recapture rates, Trustee Hudgins suggested that, if the yield remained favorable after deducting the loss rates, and the reporting delay issue is resolved, the asset class may be attractive. That notwithstanding, he was concerned because Nuveen/Churchil would not provide its historical loss rates or information regarding troubled debt restructures (TDRs). He suggested Nuveen/Churchil may appear to have attractive loss ratios by refinancing from within their own portfolio. Mr. Cole reiterated his confidence in private credit as an asset class, but reluctance to propose it to the Board due to the administrative issues caused by the reporting delays. If the reporting issue can be resolved, he will bring the asset class to the Board's attention. The Board thanked Mr. Cole for his presentation. 9. UNFINISHED BUSINESS: None. 10. NEW BUSINESS: 10.1.Presentation and Discussion Re: Mauldin & Jenkins, Financial Statements for the Fiscal Years Ending September 30, 2024, and 2023. Presenter(s): Daniel Anderson, CPA, Partner; Jennifer Trotter, Senior Manager; Mauldin & Jenkins. Daniel Anderson and Jennifer Trotter of Mauldin & Jenkins appeared before the Board and introduced themselves and their presentation. Mr. Anderson briefly reviewed the Auditor's Discussion and Analysis, noting that the opinion is clean and unmodified, which is the highest assurance an auditor can render; the audit was performed under generally accepted auditing standards as well as Government Auditing Standards to provide a reasonable basis that the financial statements are free of material misstatements. At the end of the financial statements in the Other Auditor's Report section, is the compliance statement which discusses the auditor's tests and conçerns over internal controls with respect to laws, rules, and regulations; this section only lists negative findings and deficiencies identified in the course of the audit, which Mauldin & Jenkins found none in the 2024 audit. He briefly reviewed each of the Required Communications listed on pages 5 and 6 of the Auditor's Discussion and Analysis. Turning to the financial statements, Mr. Anderson explained that the Management's Discussion and Analysis provides comparative data from the current and prior fiscal years, as well as management's narrative of activity which resulted in the changes in statement of net position. In light of Mr. Cole's discussion of the Plan's investments, Mr. Anderson omitted the statement of net position and noted there was a $50 million increase in net position for FY 2024, which was attributed to investment income. As stated in Note 5. Net Pension Liability, the net pension liability dropped $37.8 million from Fiscal Year 2023 to Fiscal Year 2024; the Discount Book 1 Page 446 02-20-2025 8:15 a.m. Book 1 Page 447 02-20-2025 8:15 a.m. Rate section of Note 5 shows how net pension liability changes when the expected rate of investment return is increased or decreased by 1%. Mr. Anderson commented that the Plan's expected rate of investment return of 6.5% is conservative considering the Florida Retirement System (FRS) uses 6.7%, and the Plan's actual annual returns exceeded the respective expected rates of investment returns in 7 of the last 10 years. Trustee Rossnagle made a motion to accept the Financial Statements as presented by Mauldin & Jenkins; Secretary Griggs seconded the motion. The motion passed unanimously (5-0). 11. ATTORNEY MATTERS: Attorney Kaufman advised that he is still working to compile a supplemental record in the Pangallo matter and anticipates being able to present it to the Board by April 24, 2025; the matter is at the informal hearing stage. There is no new proposed legislation which would affect the Plan. Attorney Kaufman is reviewing the Summary Plan Description which is required to be updated every 2 years. He is also reviewing the Plan's Operating Rules in the context of changes in the law. 12. OTHER MATTERS: Pension Plans Administrator Martin advised that Gabriel, Roeder, Smith & Company (GRS) would charge a flat fee of $15,000 to perform for the Plan an actuarial experience study in the summer of 2025; the expense for an experience study would need to be reflected in the fiscal year's budget in which the associated payment was required. A brief discussion amongst the Trustees, Attorney Kaufman, and Pension Plans Administrator Martin ensued. GRS recommends open plans to conduct experience studies approximately every 5 years; GRS specifically recommended the Board conduct an experience study as the Plan must adopt the Florida Retirement System's updated mortality tables to be used when GRS performs the Plan's fiscal year 2025 actuarial valuation. The last experience study, for which GRS charged $12,000, was performed 5 years ago. While Trustee Hudgins asserted that the Plan's financial health and conservative expected rate of investment return may be sufficient to accommodate the updated FRS mortality tables without an experience study, he also proposed asking if GRS would allow the associated payment to be spread across 2 fiscal years. Attorney Kaufman advised that an experience study should be conducted under a formal engagement letter; if GRS had urgent concerns which would necessitate an experience study, Pete Strong of GRS would have identified those concerns when he presented the fiscal year 2024 actuarial valuation at the Board's January 23, 2025, meeting, and therefore the Board may reasonably delay requesting a new experience study for 1 year. The Board took no position at this time for or against a new experience study and instead asked Pension Plans Administrator Martin to discuss with GRS whether they would allow payments to be spread across 2 fiscal years. 10. ADJOURN. Chair Todd adjourned the meeting at 8:59 a.m. ) - SAl Chaif, Johnathan Todd Secretarreasurer ShaylaGriggs