MINUTES OF THE CITY OF SARASOTA FIREFIGHTERS PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF JULY 27, 2022 Present: Chair Michael Hartley, Vice Chair Shelia Roberson, Secretary/Treasurer Shayla Griggs, Trustee Charles Joseph, Trustee Scott Snow. Others: Attorney Caroline Quill, Pension Plans Administrator Debra Martin, Pension Specialist Peter Gottlieb. Absent: None. 1. CALL MEETING TO ORDER: Chair Hartley called the Sarasota Firefighters' Pension Plan (Plan) Board of Trustees regular meeting to order at 9.03 a.m. 2. PLEDGE OF ALLEGIANCE: Presenter(s): Secretary/reasurer Griggs. Trustee Joseph lead the Board and meeting attendants in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Presenter(s): Chair Hartley. Trustee Snow stated for the record, "We may disagree, but we will be respectful to one another. We will direct all comments to issues. We will avoid personal attacks." 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 Firefighters' Pension Plan Board of Trustees Regular Meeting of May 25, 2022. Presenter(s): Chair Hartley. Trustee Joseph made a motion to adopt the minutes of the May 25, 2022 meeting; Vice Chair Roberson seconded the motion. The motion carried unanimously (5-0). 11. ATTORNEY MATTERS: Book 1 Page 310 07-27-2022 9:00 a.m. Book 1 Page 311 07-27-2022 9:00 a.m. 11.1 Presentation and Discussion Re: Firefighters' Pension Plan Board of Trustees Seat 2. Presenter(s): Pedro Herrera, Sugarman & Susskind. Chair advanced item 11.1 on the agenda. Attorney Quill advised that Vice Chair Roberson, who holds Seat 2, is no longer a resident of the City of Sarasota as required by City ordinances. She could continue to serve if she and the trustee in Seat 5 switched seats, however the trustee occupying Seat 5 is also not a resident of the City of Sarasota. A second option, which is allowable under City ordinances and Florida Statutes Chapter 175 because there are less than 10 active members in the Plan, would be for the Board to solicit nominations from the membership; if none are received, the Board could appoint a trustee to Seat 2 in the same manner it appoints a trustee to Seat 5. This would require the Board to open the seat to nominations from the membership. Vice Chair Roberson and Chair Hartley noted that the candidate for Seat 2 is selected by Sarasota County and then appointed by the City Commission. To Chair Hartley's question, Secretary/Treasurer Griggs and Attorney Quill explained that Vice Chair Roberson may continue to serve on the Board through the end of her term or until a new trustee is appointed by the City Commission. Attorney Quill noted that when the City Commission appoints a replacement, the appointment would be effective immediately. Secretary/Treasurer Griggs asked Attorney Quill to provide a written account of what actions Pension Administration would need to take if the Board wishes to advertise the open seat. Vice Chair Roberson advised that the County may have identified a person who both satisfies the city residency requirement and is capable of performing the duties of a trustee on the Board. Attorney Quill noted this is the last and least complicated option. Chair Hartley agreed with Vice Chair Roberson, but stated he did not know when the County intends to submit its suggestion to the City Commission. Chair Hartley and Vice Chair Roberson asked Pension Administration to send a letter from the Board to Sarasota County, attention Jonathan Lewis, County Administrator and Kimberly Radtke in Finance, advising that the Board has discussed the matter and it will be the County's decision to determine when to submit its suggestion to the City Commission for a replacement for Seat 2. By consensus, the Board agreed. Vice Chair Roberson clarified that thel letter should explain that the County's delegate to the Board no longer satisfies the city residency requirement, and the Board therefore requests the County's suggestion for a trustee for Seat 2. To Trustee Snow's question, Secretary/Treasurer: Griggs clarified that she was appointed the Board when she was hired as the City Auditor and Clerk but not a city resident, and she therefore abstained from voting on Board motions in an abundance of respect for the residency requirement; when she secured residence within the City, she began voting and was elected as SecretarylTreasurer. Vice Chair Roberson's residency circumstance is dissimilar as she met the requirements to serve at the time she was first appointed to the Board, and therefore she may continue to serve in her fullest capacity through the earlier of the end of her term or when her replacement is appointed to the Board. Attorney Quill confirmed Vice Chair Roberson may continue to serve in her fullest capacity while she remains on the Board. Attorney Quill confirmed she would draft the correspondence to the County. 7. NOMINATION OF BOARD OFFICERS: 7.1. Appointment Re: Selection of Chair. Presenter(s): Secretary/reasurer Griggs. Trustee Joseph made a motion to nominate Michael Hartley as Chair; Vice Chair Roberson seconded the motion. The motion carried unanimously (5-0). 7.2. Appointment Re: Selection of Vice Chair. Presenter(s): Secretary/reasurer Griggs. Chair Hartley made a motion to nominate Charles Joseph as Vice Chair; Trustee Snow seconded the motion. The motion carried unanimously (5-0). 7.3. Appointment Re: Selection of Secretary/Treasurer. Presenter(s): Secretary/reasurer Griggs To Chair Hartley's question, Secretary/Treasurer Griggs and Pension Plans Administrator Martin noted that even though the City Auditor and Clerk is required to serve as a trustee on the Board by City ordinances, the position is not automatically a Board Officer, and that Florida Statutes require the Board Office of Secretary/Treasurer: to be voted on by the Board each year. Trustee Roberson made a motion to re-nominate Shayla Griggs as Secretary Treasurer; Vice Chair Joseph seconded the motion. The motion carried unanimously (5-0). The Trustees individually expressed their appreciation to Trustee Roberson for her service to the Board and membership. 8. INVESTMENT PERFORMANCE REVIEW: 8.1. Presentation and Discussion Re: Graystone Consulting; Quarterly Performance Review as of June 30, 2022. Presenter(s): Scott Owens CFA, CIMA Associate Vice President, Institutional Consultant; Andrew Mclivaine, Institutional Consultant; Graystone Consulting. Scott Owens and Andrew MclIvaine appeared before the Board and introduced themselves. Mr. Owens noted that the first half of 2022 was the worst first half for the 10-year Treasury Bill since 1788, the S&P 500 since 1962, and for 60/40 pension funds since 1932. The last time both stocks and fixed Book 1 Page 312 07-27-2022 9:00 a.m. Book 1 Page 313 07-27-2022 9:00 a.m. income simultaneously declined was 1994. He asserted that while the Federal Reserve (Fed) tries to control inflation by raising interest rates, other federal government policies are inflationary in nature, leaving the economy confused. He noted that since 1926, the S&P 500 returns 10.5% per year on average, however the annual return in any single year has been between 8% and 12% only 6 times; considering the 20% to 30% annual returns for the last 2 years, it is reasonable to expect negative retumns. He credited the Board for de-risking the portfolio while the market was trending up instead of chasing more returns and reminded the Board that downside protection will preserve assets more effectively than market gains would add assets. He provided an overview of Graystone's presentation. Mr. MclIvaine noted that the number of years with positive returns has outnumbered the years with negative returns, and the market has clearly trended upward since inception. He added that the last time stocks and bonds declined simultaneously, prior to 1994, was in 1978, indicating that it is not a common event. He read a quote from Morgan Stanley's Chief Investment Officer, who asserted that, over the last 13 years, capital market returns have been disproportionately affected by the Fed's efforts to normalize growth and inflation by repressing interest rates to incentivize investment in long-duration assets. Mr. Mclivaine stated that the current market repricing is the consequence of those efforts, which has been compounded by the COVID-19 pandemic and pandemic-associated conditions. While the Fed's mandate for inflation is in the 2% to 2.5% range, a reasonable expectation in this year may be 3% to 5%, however increasing interest rates has not brought inflation down yet. Earnings season has begun and, indicative of other large retailers, Wal-Mart announced that, for the second quarter in a row, revenues are steady however earnings are significantly down due to higher costs. A prevailing concern in the economy is whether or not it is in recession. Mr. MclIvaine stated there are 3 competing opinions: the economy is already in a recession, the economy is not in a recession yet but will be within the next year or two, and the economy will not go into recession but instead a prolonged period of stagflation, marked by positive but low economic growth. He stated that, despite political efforts to characterize the current economic circumstances as being less pessimistic, the market ultimately disfavors uncertainty, which currently abounds. Morgan Stanley anticipates more volatility to come, however over the long term, the market will likely return a rate consistent with that 10.5% average. He also posited value will continue to outperform growth due to the rising interest rate environment. Mr. Owens reminded the Board to anticipate volatility considering future earings reports predict negative amounts; ift this trend continues, the market will continue to reprice. Morgan Stanley believes unemployment will go up, use of credit will go up as savings rates go down, and that the positive trends seen recently will generally reverse. He noted contractions in gig employment, as well. These all point towards at least 2 to 3 quarters of negative growth and volatility in the market. Mr. Owens discussed the Consumer Price Index (CPI) and Producer's Price Index (PPI), noting that the PPI is higher than the CPI, which indicates earnings will decrease as retailers incorporate additional production costs into pricings to transfer those costs to consumers. Because retailers were buying inventory at higher costs during the pandemic, and now prices are going up faster than wages, demand will decline which will lead to excess inventory, then sales, which will become earnings losses. He credited the Board for de-risking the portfolio for this circumstance. Mr. Mclivaine noted that the portfolio is well positioned if the economy enters a period of recession. Turning to the Performance Summary, Mr. MclIvaine reviewed the Capital Markets Returns, noting how quickly a single negative quarter can impact the 1-, 3-, 5-, and 7-year retums, and that value outperformed growth in both the mid- and small-cap sectors. All developed international markets are down with the exception of China, which is beginning to reopen production from COVID-19 lockdowns. That notwithstanding, the war in Ukraine and global energy crisis will continue to cause volatility in foreign markets. In fixed income, the Fed's transparency in raising interest rates may have helped to price in some of the negative pressure caused by higher rates, but Morgan Stanley expects more volatility. However, as lower interest rate bonds mature and are replaced with higher rate bonds, the yield will go up. Referencing the Asset Allocation & Time Weighted Performance, Mr. Owens discussed the portfolio, noting the return is down 9.93% net, while the index was down 11.47%. He pointed out that since inception, the portfolio has performed better than the index on a gross basis, despite being defensive. If the market remains volatile for the next few quarters, he expects the 3- and 5-year returns to improve due to that defensiveness. He discussed the returns for each fund manager and reflected on how they each performed relative to their respective indexes, and how their defensiveness contributed to preserving Plan assets. He expressed some concern regarding Lazard as it is a defensive value manager which outperform in the current market, yet it significantly underperformed its index. Renaissance is similarly concerning; as a growth manager which did not perform well when growth was favored, it should outpertorm in the current market but didn't. Mr. Owens recommends monitoring both funds over the next quarter. Regarding fixed income, Mr. Owens noted that if interest rates come down, the value of bonds will increase. Considering it has performed well relative to the portfolio, Mr. Owens suggested the Board consider liquidating assets from Richmond for its operating needs. UBS has also outperformed, and it appears that the changes it instituted have had positive results. While Cohen & Steers, the Plan's global infrastructure fund, has kept pace with its benchmark, the funds initially invested were liquidated from fixed income; relative to the fixed income performance, Cohen & Steers has outperformed significantly. Turning to the Risk/Return Analysis Since Inception, Mr. Owens noted that the portfolio is slightly outperforming its passive indexes with less risk and less volatility each year. He asserted that, if the current market environment continues, the outperformance will also continue grow. He reviewed the Cash Flow Analysis. In discussing the Asset Allocation Compliance, he noted that the portfolio is slightly underweight in fixed income and overweight in equities. Within those asset classes, he noted the portfolio is overweight in value in every class, more in large cap than mid- and small-, and most overweight on a percentage basis in real estate. Each of the overweighted funds has outperformed their respective benchmarks. Despite his conçerns for Renaissance and Lazard, he only recommends monitoring them, and does not currently recommend, replacing them, or conducting a manager search. The Compliance Checklist reveals no conçerns. The Board had no questions regarding the quarterly performance review. 9. UNFINISHED BUSINESS: None. 10. NEW BUSINESS: 10.2. Presentation and Discussion Re: Graystone Consulting, Wealth Strategies Analysis. Presenter(s): Scott Owens CFA, CIMA, Associate Vice President, Institutional Consultant; Andrew Mclivaine, Institutional Consultant; Graystone Consulting. Mr. Owens explained this demonstrates the potential effects of changing the portfolio allocation to increase the weighting in alternatives and decrease the weighting in equities by various percentages. He noted that Book 1 Page 314 07-27-2022 9:00 a.m. Book 1 Page 315 07-27-2022 9:00 a.m. many of the proposed investments are illiquid and therefore the Board should consider its needs for operating cash before committing. He reviewed the Asset Allocation, noting that the Strategic Assumptions is the 7-year, and the Secular Assumptions is the 20-year, and reviewed each of the expected Annual Returns, Standard Deviations which measures risk, Sharpe Ratios which measures portfolio efficiency, and Annual Yields for each of the mixes. He focused on Mixes 3 and 4 as they are the most dramatic, and noted that Mix 3, which adds Private Equity but not Private Credit, has the greatest efficiency over both long and short runs; similarly, Mix 4 has the lowest risk. In that context, choosing one of these mixes could increase the portfolio's return or decrease the amount of risk it takes. He compared the allocations in each of the mixes and explained that he would present more information about the asset classes after the Board was comfortable changing the allocation. 10.1. Presentation and Discussion Re: Graystone Consulting: Alternative Investment Education. Presenter(s): Scott Owens CFA, CIMA, Associate Vice President, Institutional Consultant; Andrew MclIvaine, Institutional Consultant; Graystone Consulting. Mr. Owens discussed attributes of the proposed investments. He stated that Private Equity is the same as public equity, however the equity belongs to companies which are not publicly traded. He explained that investment earnings are not based on buying and selling stocks, but after the company's management develops value and sells the entire company. Private credit is the same as fixed income, except the bond issuers are not public companies. He noted that 70% of the companies in the United States are privately held, and therefore there is more opportunity in the private credit market than the public credit market. Turning to the page titled Alternative Investments Differ from Traditional Investments, Mr. Owens compared and contrasted traditional and alternative investments. On The Importance of Manager Selection Across Asset Classes, he noted the disparity between top and bottom quartiles for Private Equity, as well as other alternative investments; this indicates that the investment manager will make the difference between gains and losses in alternatives. Alternative Investments Offer Diversification in Challenging Market Environments shows that, on average, alternatives tend to rise faster in rising markets and typically decline less in declining markets than equities. Adding Alternatives Exposure to a Portfolio May Reduce Volatility and Potentially Increase Returns shows that adding alternatives improves efficiency. Mr. Owens commented on how Morgan Stanley's Global Investment Committee recommends up to 34% allocations in alternative investments for portfolios over $25 million; he does not recommend this for the Plan but stated the data Morgan Stanley compiled supports the position. He reminded the Board it currently has 10% to 12% in alternatives and the Board is considering moving up to 17.5%. A discussion ensued. Chair Hartley stated he is interested in reducing exposure in equities to 55% of the portfolio balance and supports investment in private equity but requires more information about private credit. Mr. Owens noted that it is very similar to a bond fund which pays a yield, although private companies typically offer shorter maturity dates and higher interest rates than those in publicly traded bonds. Companies utilize private equity for a variety of reasons; they may need to generate cash but do not have the time to abide by Securities and Exchange Commission rules, or they require short-term financing. To Chair Hartley's question, Mr. Owens explained that the fee structures in private equity managers are more rigid, and tend to be higher than for traditional managers, however as a whole, different private equity managers charge different rates. There are typically no reductions in prices for greater amounts invested. Chair Hartley expressed interest in reducing exposures in both growth and value equities. Trustee Roberson asked if other pension boards have invested in alternatives. Mr. Owens stated that all of his pension board clients which have more than $100 million in assets have private equity and private credit in varying amounts; he noted the Plan is already invested in alternatives and is only contemplating increasing its allocation to that asset class. To Chair Hartley's question, Mr. Owens stated he prefers Mix 3 as it has the same efficiency, but slightly more return than the other mixes; the difference in risk between Mixes 3 and 4 is minimal. To Chair Hartley's questions, Mr. Owens stated that, if the Board wished to continue, he would bring in 3 to 4 investment managers to present to the Board which perform well for different reasons. He listed the names of some of the private equity and private credit investment firms which other pension plans in Florida have used. Mr. Mclivaine noted that the standard deviation for alternatives is closer to fixed income than equities. Mr. Owens explained the Board had invested in Master Limited Partnerships (MLPs) because they do not correlate to stock performance. As stocks increased, MLPS dropped precipitously; as stocks declined, MLPs are now up approximately 50% for the first and second quarter of 2022. Trustee Snow asked if investing in additional alternatives would require additional rebalancing because real estate is outperforming to the extent it exceeds its maximum allocation. Mr. Owens explained that if the allocation appreciates beyond its range, the Board could direct a liquidation or rebalancing to reduce the allocation and be compliant. While the redemption of assets would take time to complete due to its illiquidity, the Plan would remain in compliance because the rebalancing process had been initiated. Chair Hartley asked if private equity distributions could be set up to be automatically redeemed to use as operating income. Mr. Owens described the redemption process and noted that redemptions are not automatically re-invested and could therefore be used as needed or reinvested. Trustee Snow noted the Plan uses approximately $1.06 million each month for retiree payroll. Trustee Roberson left the meeting at 10:23 a.m. and returned at 10:26 a.m. Chair Hartley expressed interest in hearing from investment managers. Mr. Owens advised the Board would first need to approve changing the Investment Policy Statement (IPS) and then execute the revised IPS. The Board would then be required to wait 30 days after the Chair executed the revised IPS before it could make new investments allowed by the revised IPS. During that time, Graystone could prepare a manager search to present to the Board; he stated he could be available to present before Graystone's next quarterly appearance if desired. The Board could then hear from prospective investment managers; upon selecting a manager, the manager and Board would enter into an investment agreement which would need to be reviewed and approved by the Plan's attorney. Upon approval, the investment manager would then notify the Plan when it was raising monies for new investments and the Plan could then invest. Trustee Snow expressed interest in de-risking the portfolio further. Vice Chair Joseph expressed support for reducing risk in the portfolio but noted the illiquidity of real estate; he asked ifr moving additional assets to illiquid investments would be problematic for Pension Administration. Mr. Owens advised that under Mixes 3 and 4, the Plan would be 15% illiquid. To Chair Hartley's question, Pension Plans Administrator Martin stated that the Plan receives money from UBS on a quarterly basis. Mr. Owens suggested that instead of moving more assets into alternatives, the Board may consider hiring a second fixed income manager which complements Richmond Capital, such as one which offers a shorter duration. This would be advantageous as it would aid with liquidity, not require a change to the IPS, and the yield curve is currently inverted such that the 2-year treasury bond offers a higher yield than the 10-year. If interest rates come down, it only lowers short-term rates, which would be beneficial to a short-term manager. Chair Hartley stated he would entertain a motion to reduce the investment allocation in equities by 5%, and increase the allocation in alternatives to 17.5%, as well as to direct Mr. Owens to conduct a private equity manager search. Vice Chair Joseph stated that he agreed the Board should consider reducing its exposure in equities, and that it should also consider liquidity; he made a motion to reduce the investment allocation in equities by 5%, and increase the allocation in altematives to 17.5%, as well as to direct Mr. Owens to conduct a private Book 1 Page 316 07-27-2022 9:00 a.m. Book 1 Page 317 07-27-2022 9:00 a.m. equity manager search. Trustee Snow seconded the motion. The motion carried unanimously (5-0). Mr. Owens stated he would draft a revised IPS and forward it to Pension Plans Administrator Martin. Chair Hartley asked if Waycross offered private equity, and if so, asked they be included in the manager search. He also asked if changing the IPS would affect the investments in real estate; Mr. Owens stated it would not. The change reduces equity by 5% and adds 5% to alternatives, but it does not limit where the additional 5% could be invested within the alternative space. If the Board desired, it could choose to invest the 5% with multiple private equity firms. 10.3. Presentation and Discussion Re: Sarasota County, GASB Statements Nos. 68 and 71 Engagement. Presenter(s): Kimberli Radtke, Director, Office of Financial Management; Sarasota County. Nicole Jovanovski, Director of Finance for the Clerk and Comptroller's Office for Sarasota County appeared before the Board and introduced herself. She noted Ms. Radtke was in transit to the meeting. Ms. Jovanovski explained this request is made each year as the Plan is multi-employer; she seeks the authorization for the Plan's actuary to prepare a schedule of the collective pension amounts, including total deferred inflows and outflows, net pension liability, and any pension expense, and ask the Plan's auditor toaudit and opine on the schedules.. This will allow Sarasota County and City to meet their respective GASB 68 and 71 requirements; the County will bear the cost. Chair Hartley noted the County has made this request for several years. Ms. Jovanovski stated that, although Ms. Radtke is required to make the request on behalf of the County, Ms. Radtke had consented to the request in an e-mail to Ms. Jovanovski. Chair Hartley noted that Ms. Radtke's letter is included in the presentation materials. At Chair Hartley's request, Pension Plans Administrator Martin confirmed this was consistent with past practice. Vice Chair Joseph made a motion to approve the County's request for GASB 68 and 71 engagement, Trustee Snow seconded the motion. The motion carried unanimously (5-0). Pension Plans Administrator Martin advised she would work with the Plan's auditor, Mauldin & Jenkins, to deliver the engagement letter to the County. Ms. Jovanovski stated this is typically done towards the end of the calendar year, which seems to work best for both parties. She thanked the Board for its consideration. 11. ATTORNEY MATTERS: Attorey Quill stated that Financial Forms were due July 1, however fines for non-compliance would not be assessed until August 1. She stated the FPPTA will offer its fall school from October 2 through October 5 in Orlando. The Department of Retirement (DOR) will also offer a school in Orlando which will be aimed at police officers and firefighters pension plans; while this is typically at the end of October, the DOR has not announced a date as of yet. Chair Hartley asked if the DOR school would be more beneficial for new trustees than for seasoned; Vice Chair Joseph stated he attended that school twice, and that while the first day is geared towards new trustees, the subsequent days covered more detailed topics. Chair Hartley asked if Sarasota County had remitted the account receivable; Pension Plans Administrator Martin noted it has and she has updated the DOR's portal; the Plan's report pending approval to trigger the distribution of Chapter 175 monies. She stated she would advise the Chair when its report is approved. Book 1 Page 318 07-27-2022 9:00 a.m. Martin noted it has and she has updated the DOR's portal; the Plan's report pending approval to trigger the distribution of Chapter 175 monies. She stated she would advise the Chair when its report is approved. Trustee Snow asked if there were any issues related to correspondence received from the State of Florida regarding reducing its expected rate of investment return. Pension Plans Administrator Martin clarified that the State was only suggesting the Plan reduce its expected rate of investment return. Attorney Quill advised this is a standard form letter the State sends to many public pension plans, and it is only a suggestion. Chair Hartley noted that at his last FPPTA conference, he informally surveyed other public plans and the majority had expected rates of investment return between 7% and 7.5%. Trustee Snow noted the Plan's is expected rate of return is currently 6.35% net/6.85% gross. 12. OTHER MATTERS: Trustee Roberson read a prepared statement in which she thanked the Board and Membership for the opportunity to serve as a trustee. The trustees individually thanked Trustee Roberson for her service to the Plan. 13. ADJOURN. Chair Hartley adjourned the meeting at 10:50 a.m. &6 Op Chyair Michael Hartley! Secretghy/Treasurer Shayl'Griggs