Book 1 Page 331 02-24-2023 8:15 a.m. MINUTES OF THE CITY OF SARASOTA POLICE OFFICERS' PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF FEBRUARY 24, 2023 Present: Chair Demetri Konstantopoulos, Vice Chair Johnathan Todd, Secretary/Treasurer Shayla Griggs, Trustee Ronnie K. Baty, and Trustee Joseph Jody" Hudgins Others: Attorney Scott Christiansen, Pension Plans Administrator Debra Martin, and Pension Specialist Peter Gottlieb. Absent: None. 1. CALL MEETING TO ORDER: Presenter(s): Chair Konstantopoulos. Chair Konstantopoulos called the 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): Chair Konstantopoulos. Chair Konstantopoulos led the Board and those in attendance in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Presenter(s): Chair Konstantopoulos. Chair Konstantopoulos 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." 4. ROLL CALL: Presenter: Pension Plans Administrator Martin. 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 27, 2023. Presenter(s): Chair Konstantopoulos. Trustee Baty made a motion to approve the minutes of the Regular Meeting of January 27, 2023; Vice Chair Todd seconded the motion. The motion carried unanimously (5-0). Trustee Hudgins made a motion to hear items 8.1. and 8.2. last as Mr. Cole had not arrived at the meeting; Vice Chair Todd seconded the motion. The motion carried unanimously (5-0). 7. RETIREMENT REQUESTS: None. 9. UNFINISHED BUSINESS: None. 10. NEW BUSINESS: 10.1. Presentation and Discussion Re: Presentation and Discussion Re: Mauldin & Jenkins, Financial Statements for the Fiscal Years ending September 30, 2022 and 2021. Presenter(s): Alison Wester, CPA, Partner, Mauldin & Jenkins. SecretarylTreasurer Griggs advised, before discussion of item 10.1. began, that Trustee Baty was confirmed by the City Commission for an additional 4-year term to the Board. Alison Wester and Jennifer Trotter, Manager, of Mauldin & Jenkins appeared before the Board and introduced themselves. Ms. Wester thanked Pension Administration for a smooth audit process. Noting the opinion is clean, Ms. Wester explained that changes in auditing and accounting standards required the report to be reorganized and expanded. She stated that the Independent Auditor's Report now appears first and includes more commentary. Management's Discussion and Analysis is unaudited but compared to information within the Financial Statements for consistency. The Statement of Fiduciary Net Position reflects the impact of the investment portfolio. To Trustee Hudgins' question, Ms. Wester and Pension Plans Administrator Martin clarified that the Plan has no leases; the facilities and equipment used by Pension Administration are provided by the Office of the City Auditor and Clerk. Ms. Wester noted the Statements of Changes in Fiduciary Net Position shows the depreciated fair value of investments as the Governmental Accounting Standards Board (GASB) requires all realized and unrealized gains and losses to be recognized in the year in which they occur. Turning to the Notes to Financial Statements, Ms. Wester advised Notes 1 through 3 are largely unchanged from previous years. In Note 4, Investments, Concentration, the portfolio contains 1 equity mutual fund which has a fair market value that exceeded 5% of the total portfolio value. She reviewed Credit Risk and noted, under Fair Value Measurements, that Level 1 investments are those which are in active markets with identical securities; Level 2 investments are those which are in in active markets for similar securities; and Level 3 investments are any other type of pricing model. She added that some real estate investments are valued at net asset value, however the Plan does not have any of those investments. Regarding Note 5, Net Pension (Asset) Liability, Ms. Wester reminded the Board that auditing and accounting standards require gains and losses to be recognized in the year they were experienced, while actuarial valuations may smooth experiences over periods of time. While discussing Note 5, Net Pension (Asset) Liability, Ms. Wester explained the Sensitivity of the Net Pension (Asset) Liability to Changes in the Discount Rate demonstrates how the liability changes if the discount rate is increased or decreased by 1%. Trustee Hudgins, Attorney Christiansen, and Ms. Wester discussed the Sensitivity of the Net Pension (Asset) Liability to Changes in the Discount Rate chart. Decreasing the discount rate increases the net pension liability, which increases the employer contribution requirements; this creates more certainty in the Plan's income compared to investment income, which fluctuates according to the market. Some state pension funds have jeopardized their financial health by declaring unrealistically high expected rates of investment returns which decreased required employer contributions; when some of those plans failed to achieve investment returns comparable to their expected rates of returns, their respective funded ratios Book 1 Page 332 02-24-2023 8:15 a.m. Book 1 Page 333 02-24-2023 8:15 a.m. accordingly decreased, and those plans were less financially healthy. Further, some states have been unable to afford to contribute monies to municipal pension plans to reduce their unfunded liabilities which compounds the deficiencies. While the Sensitivity of the Net Pension (Asset) Liability to Changes in the Discount Rate section is a required disclosure, and readers may benefit from a more detailed discussion of the consequences of changing the discount rate; Ms. Wester advised that discussion may be more appropriate for the Assumptions section of the report, and the discount rate is also reviewed by the State of Florida, Department of Retirement. Trustee Hudgins expressed interest in having more information in the report on other plans for comparison, such as the State of Florida's expected rate of return. Ms. Wester noted the Required Supplemental Information (RSI) section of the Financial Statements includes a 10-year history of the rates of investment returns. Ms. Wester reviewed the remaining notes and advised there were no subsequent events which required disclosure. In the Required Supplementary Information, Ms. Wester reviewed the components of the Schedule of Changes in the City's Net Pension Liability. On the Schedule of Contributions, Ms. Wester explained the actual contribution is expressed as a percentage of covered payroll which is trued up at the end of the year when the covered payroll amount is determined; she added that this schedule was prepared based on the valuation as of September 30, 2020. In the Other Auditor's Report Section, Ms. Wester explained that the Independent Auditor's Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed In Accordance with Government Auditing Standards is not an opinion on internal controls but would address any identified deficiencies or material weaknesses. Ms. Wester reviewed the Auditor's Discussion and Analysis. She reviewed updates to the independent auditor's report; she explained some of the changes in the audit reporting standards which reorganized financial statements and expanded auditors' disclosure responsibilities. She reviewed the sections titled Additional Information, Independent Auditor's Report, Compliance Report, Required Communications and each subsection, and Complementary Continuing Education And Newsletters for Governmental Clients. The Board thanked Ms. Wester and Ms. Trotter for their presentation. Trustee Hudgins made a motion to approve the Financial Statements for Fiscal Years ending September 30, 2022 and September 30, 2021; Trustee Baty seconded the motion. The motion carried unanimously (5-0). 8. INVESTMENT PERFORMANCE REVIEW: 8.1. Presentation and Discussion Re: Burgess Chambers & Associates, Investment Performance Summary for Period Ending December 31, 2022. Presenter(s): Larry Cole, Burgess Chambers & Associates. Larry Cole appeared before the Board and introduced himself. Mr. Cole explained that while his materials only cover performance as of December 31, 2022, fiscal year- to-date, the portfolio is up approximately 11%; that notwithstanding, the market is anticipating release of the Personal Consumption Expenditures Price Index (PCE), which the Federal Reserve (Fed) will consider when determining by how much to increase short-term interest rates. The PCE is similar to the Consumer Price Index (CPI). He noted that the expectations stated in the BCA Market Perspective have been fairly accurate, adding that he also expects the Fed to continue to raise interest rates. To Trustee Hudgins' questions, Mr. Cole advised the 10-year Treasury Bond is approaching 4%, and it is driven more by the market than the Fed, and, as the yield curve is still inverted, Mr. Cole anticipates it may go as high as 5% by the end of the calendar year, and short-term rates may reach 6%. He will present reallocation recommendations to take advantage of the increased rates and other market events. Referencing the Quarterly Market Summary, the quarter ending December 31, 2022, was largely positive across all indexes and sectors, but negative for the whole year with the exception of Energy; the Fixed Income market also had a positive quarter but negative year. He compared the Fed's interest rate hikes in 2022 to those in the late 1970s, noting that on a relative basis, the Fed raised interest rates approximately 50% in the 1970s, but approximately 2,300% in 2022; in this context, the Fed has been the most aggressive in 2022 than it had ever been previously. International markets performed well as a result of the US Dollar losing value relative to foreign currencies. There were no compliance issues to discuss. Turning to the Actual VS. Target Asset Allocation, Mr. Cole noted overweighted balances in domestic equities and underweights in fixed income; more specifically, the domestic equities are overweighted in large cap value, with an approximate allocation of 22%, compared to 14% in large cap growth. Mr. Cole recommends liquidating $3 million from Newton (FKA Mellon), which is large cap growth, and putting $1 million in each of the portfolio's 3 bond managers. While fixed income will not fare well if interest rates continue to go up dramatically, Mr. Cole asserted equities will decline more. Considering 2022 was the worst year for bonds in modern history, he asserted iti is likely to perform well. Further, the Plan will receive the coupon yield to use for its monthly expenses, and coupon rates close to 5% is closer to the Plan's expected rate of investment return of 6.5% than the coupon rates 12 months ago. To Chair Konstantopoulos and Trustee Hudgins' questions, Mr. Cole explained his recommendation would reduce the allocation in equities by approximately 1% and increase the allocation in bonds by approximately 1%. While he expects short-term interest rates to go up during the next year, the direction for long-term rates is less certain. Never-the-less, the portfolio will still benefit by reducing the equities allocation and increasing the fixed income allocation as new bond purchases would have higher coupon rates than current holdings and the portfolio's exposure in equities, which are anticipated to decline, would be reduced. He clarified that he was not confident if the market will favor growth or value equities going forward, but as a whole, he expects domestic equity prices to fall. Mr. Cole recommends selling from Newton, which had positive performance for the last quarter and year, but holding growth equities as they were down more than 30% for the year and selling now would monetize those losses. Regarding real estate, Mr. Cole recommends submitting a redemption request to JP Morgan for approximately $5 Million, noting the request would not be immediately fulfilled, and instead, would likely be paid out over 12 to 18 months. The current allocation is approximately 9.44%; BCA's internal investment committee recommends reducing real estate balances due to declining valuations in the office space sector. In metropolitan areas, office space occupancy rates appear to be solidifying at 80% to 85% as workforces return from working remotely; this reduction is beginning to be reflected on property appraisals. Mr. Cole reiterated that, because redemptions are fulfilled over time, if the market were to improve before the redemption is fully paid, the unpaid portion of the redemption may be cancelled and left invested in the fund. He recalled a similar circumstance in 2008 and 2009 when the real estate market had fallen significantly, and the Plan requested a $10 million redemption; by the time the Plan's request reached the front of the redemption queue, the real estate market was expected to improve significantly, the Plan cancelled its redemption request, and the real estate market had strong performance for the next several years. Mr. Cole added that, currently, JP Morgan has many leases that are rolling over, which provides more current information on market values. That nolwithstanding, there appears to be significant pressure in the corporate world on workers to return to the office, which may change that occupancy rate. Chair Konstantopoulos, Trustee Hudgins, and Mr. Cole discussed the redemption queue process; it is on a pro rata basis, and a request submitted now could take between 12 and 24 months to be fulfilled. The Plan would receive 30 to 45 days' notice before a redemption payment is issued which would allow the Board to decide if it wished to proceed with future payments of the redemption. There may be some quarters in which no redemption payments are made. Mr. Cole reviewed the Asset Allocation & Performance Gross. He noted the impact of a single year on the 3-, 4-, and 5-year returns; 1 year ago, the 3 Year Return was 17.8% which was ranked in the top 6% among peers, the 4 Year Return was 12.1% ranked in the top 3%, and the 5 Year return was 13%. Over 10 years, Mr. Cole estimates the 10-year average return has been approximately 7.6%. Book 1 Page 334 02-24-2023 8:15 a.m. Book 1 Page 335 02-24-2023 8:15 a.m. Mr. Cole expressed concern regarding Allspring, formerly known as Wells, which had previously ranked well in its peer group, however it has not performed well in the last 2 years. He advised he will monitor its performance and anticipates its presentation at the Board's September 22, 2023, meeting. Mr. Cole briefly touched on the Fiscal Year Rates of Return and explained he used this chart to estimate the 10-year average return. On the Total Fund page, the 5 Years Rolling Percentile Ranking = 5 years shows the portfolio ranks in the top quartile about 95% of the time. He noted that as of March 2020, the Plan was in the 26th percentile, but BCA's March 2020 quarterly performance report stated the portfolio was in the top 21st percentile as of publication. This indicates peer ranking data hadn't been fully compiled at the time he presented the March 2020 report. At Mr. Cole's recommendation, Trustee Hudgins made a motion to liquidate $3 million from Newton and separately invest $1 million into Sawgrass, NIS, and Garcia Hamilton; Trustee Baty seconded the motion. The motion carried unanimously (5-0). At Mr. Cole's recommendation, Trustee Hudgins made a motion to submit a $5 million redemption request to JP Morgan; Trustee Baty seconded the motion. The motion carried unanimously (5-0). 8.2. Presentation and Discussion Re: Presentation and Discussion Re: Declaration of Assumed Rate of Investment Return. Presenter(s): Chair Konstantopoulos. Attorney Christiansen explained the Board is required to declare an expected rate of investment return when it approves an actuarial valuation, whichi it did at its January 27, 2023, meeting, with input from its investment consultant. Mr. Cole advised that 6.5% is a reasonable expected rate of investment return. On advice from its investment consultant, Trustee Baty made a motion to declare an expected rate of investment return of 6.5% for the next year, several years, and long-term thereafter; Vice Chair Todd seconded the motion. The motion carried 4-1, with Trustee Hudgins voting against the motion. Pension Plans Administrator Martin advised she would notify the Florida Division of Retirement. Mr. Cole added that he has seen pressure on public pension boards to lower their expected rates of investment returns, and he would be available to discuss it at the Board's request. The Board thanked Mr. Cole for his presentation. 9. ATTORNEY MATTERS: 9.1. Presentation and Discussion Re: Purchase of Prior Military or Prior Government Service - Payroll Deduction Option (E-Z Payment Option). Presenter(s): Scott Christiansen, Christiansen & Dehner, P.A. Attorney Christiansen advised that participants are able to claim and purchase credited service time in the Plan using Military Service or Police Service with another agency; participants are currently required to pay the indebtedness associated with each service claim in a single lump sum. He explained that some of his clients allow participants to pay for claimed service using payroll deductions over a period of time and he is now advising all of his clients of the availability of this option. He explained that when using payroll deduction to pay for a service claim, the actuary calculates a fixed payment amount over a specified period of time, typically between 3 and 5 years, and includes amortized interest at a rate equal to the expected rate of investment return so there is no cost to the Plan to allow participants to use this option. Attorney Christiansen advised that, if a vested participant using payroll deduction separates from employment before a service claim indebtedness is fully paid, the actuary can calculate the amount of claimed service time which had been paid, which is then added to that participant's credited service total. If the participant is not vested at the time of separation, the participant's employee contributions and claim indebtedness payments and interest payments can be refunded. He noted he is only offering this to the Board as an option, but the Plan is not obligated to adopt this option. To Vice Chair Todd's question, Attorney Christiansen stated most of his clients allow participants to purchase service; of those, approximately half allow payments through payroll deduction. A participant who elects to pay for a service claim with payroll deductions enters into an agreement to pay and would not be eligible to terminate payments until the balance is fully paid or the participant separated from service. To Trustee Hudgins' questions, Pension Plans Administrator Martin addressed potential burdens to implementing a payroll deduction payment option. She discussed tracking pre- and post-tax contributions, sO that upon retirement, the pre- and post-tax portions of a participant's benefit are appropriately reported. Further, the City of Sarasota is implementing an Enterprise Resource Planning system (ERP), which will impact employee payroll, and will go live within the coming weeks. If the Plan adopted a payroll deduction option, the implementation would need to be delayed until ERP implementation issues are resolved. Pension Administration receives many service claim requests, typically from newly hired participants, but not all participants follow through with the claim process; iti is also not uncommon for participants to separate from service, sometimes within a year of being hired, which requires a refund of the participant's employee contributions and any payments made for service claim(s). Pension Plans Administrator Martin explained that, administratively, it is less complicated when participants make payments for claimed service using pre-tax monies. If a participant wishes to claim service but does not have a balance in a tax-deferred account, Pension Administration encourages the participant to enroll in the City's 457(b) Deferred Compensation Plan. This allows the participant to control their contribution rate, how much service they purchase, and when they purchase service. She noted that a service claim becomes more expensive the longer the associated indebtedness remains unpaid. Vice Chair Todd expressed support for the option. To Chair Konstantopoulos questions, Attorney Christiansen explained that a payroll agreement would typically be a fixed dollar amount, determined by the actuary and salary increases would not affect the payroll deduction amount. Trustee Hudgins noted that, if a participant found a loan with an interest rate less than the expected rate of return, then an outside loan would advantage the participant. He asserted that claiming service benefits participants, and therefore the Board should make efforts to facilitate the process; this further benefits the Police Department because increasing participants benefits increases the likelihood of employee retention. Attorney Christiansen noted that approving the payroll deduction option would require amending the Plan. While the Board informally agreed a payroll deduction payment option would be beneficial, the Board was sensitive to the timing of implementing the process considering the ERP. Pension Plans Administrator Martin stated that she will advise the Board when it is appropriate to take up the issue again. 9.2. Presentation and Discussion Re: Avoidance of Benefit Overpayments. Presenter(s): Scott Christiansen, Christiansen & Dehner, P.A. Attorney Christiansen explained he periodically advises his clients to be aware of overpayments to benefit recipients, which can be caused by a number of issues. He explained they can occur with a 10-year certain benefits in which the retiree's benefit is guaranteed for 10 years and requires a "stop date" in the event of the participant's death before the 10-year period ends, and the Social Security option of benefit, in which a higher benefit is paid prior to the participant reaching age 65 and a reduced benefit after age 65, which requires a "change date." " He recommended the Plan require its custodian to confirm they have the correct Book 1 Page 336 02-24-2023 8:15 a.m. Book 1 Page 337 02-24-2023 8:15 a.m. stop and change dates; if the custodian confirms but also overpays a benefit recipient due to an incorrect or missed stop or change date and is unable to recover the monies from the recipient, the custodian could be liable for the overpayment. Pension Plans Administrator Martin advised that no current retired participant selected the 10-year certain option, and the Plan does not offer a Social Security option. Further, the actuary is provided with the retirement option selected by each retiree and reviews benefit payments, and therefore would alert Pension Administration if there was an error or inconsistency. Additionally, Pension Administration subscribes to a service which reviews Social Security and other publicly available records and provides weekly reports to Pension Administration to advise of any recipient's death. Attorney Christiansen advised the updated contract with Allspring has been finalized and is now signed. The updated contract with Newton is still under review by Newton's attorneys. 10. OTHER MATTERS: 10.1. Presentation and Discussion Re: Administrative Expense Budget October 1, 2022 through December 31, 2022. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Administrative Expense Budget Analysis. To Trustee Hudgins' question, she explained that only the insurance cost is annualized, and the remaining budget lines accrue on a cash basis. Trustee Hudgins asked Pension Plans Administrator Martin to compare the efficiency of Pension Administration to other pension plans. He noted that, by expressing the annual Administrative Budget amount of $263,000 as a percentage of annual benefit payments or of manageable revenue, the Board may compare the efficiency of Pension Administration to other Plans, irrespective of their size. Pension Plans Administrator Martin advised she would present additional information on the next Administrative Budget Expense Analysis. 10.2. Presentation and Discussion Re: Check Register for October 1, 2022 through December 31, 2022. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Check Register. To Attorney Christiansen's question, Pension Plans Administrator Martin explained that the payment to the General Employees' Pension Plan is reimbursement of costs of shared supplies. 11. ADJOURN. Chair Konstantopoulos adjourned the meeting at 9:43 a.m. K Chair Demetri Konstantopoulos byy Secretary/iéasurer Shayla Gtggy