Book 1 Page 403 02-28-2024 9:00 a.m. MINUTES OF THE CITY OF SARASOTA FIREFIGHTERS PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF FEBRUARY 28, 2024 Present: Chair Michael Hartley (Telephonic), Vice Chair Charles Joseph, Secretary/Treasurer Shayla Griggs, Trustee Scott Snow, and Trustee Heather Mushrush. Others: Attorney Pedro Herrera (Telephonic), Pension Plans Administrator Debra Martin, and Pension Specialist Peter Gottlieb. Absent: None 1. CALL MEETING TO ORDER: Presenter(s): Chair Hartley. Vice Chair Joseph called the Sarasota Firefighters Pension Plan (Plan) Board of Trustees Regular meeting to order at 9.00 a.m. 2. PLEDGE OF ALLEGIANCE: Presenter(s): Secretary/reasurer Griggs. Vice Chair Joseph led the Board and meeting attendees in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Presenter(s): Chair Hartley. Vice Chair Joseph stated for the record, "We may disagree, but we will be respectful to one another. We will direct all comments to issues. We will not engage in personal attacks." 4. ROLL CALL: Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin called roll. Chair Hartley appeared telephonically; Vice Chair Joseph, Secretary/Treasurer Griggs, and Trustees Snow and Mushrush appeared in person. 5. PUBLIC INPUT: None. 6. APPROVAL OF MINUTES: 6.1. Approval Re: Minutes of the Firefighters' Pension Plan Board of Trustees Regular Meeting of January 24, 2024. Presenter(s): Chair Hartley Trustee Snow made a motion to approve the minutes of the January 24, 2024, regular meeting; Trustee Mushrush seconded the motion. The motion passed unanimously (5-0). 7. INVESTMENT PERFORMANCE REVIEW: 7.1. Presentation and Discussion Re: Graystone Consulting; Quarterly Performance Review as of December 31, 2023. Presenter(s): Scott Owens, Managing Director Wealth Management, Institutional Consulting Director, Corporate Retirement Director, Impact Investing Director, Alternative Investment Director, Institutional Consultant; Theodore Lowe, Vice President, Institutional Consulting Analyst; Graystone Consulting. Scott Owens of Graystone Consulting (Graystone) appeared before the Board and introduced himself. Mr. Owens provided a market summary and explained how, in 2023, the market rebounded significantly from 2022. Anticipation of the Federal Reserve (Fed) either raising or lowering short-term interest rates in response to inflation caused considerable volatility throughout the year; Graystone expects that volatility to continue in 2024. While the market is performing well, the US economy's performance is suspect. He explained how the Fed must balance slowing the economy to reduce inflation while not simultaneously causing excess volatility in the market. Even though the rate of inflation has come down, prices have yet to fall, which causes a lack of clarity for market analysts and investors. Noting the Plan has traditionally been defensive in its investments, meaning the portfolio will be less volatile than its benchmarks, Mr. Owens reviewed the Capital Market Returns of the Quarterly Performance Summary. He pointed out the disparity between growth and value stocks and explained that falling interest rates tend to favor growth more than value equities. Although the portfolio had been positioned to take advantage of the market's preference for growth or value equities, depending on which was favored at the time, the portfolio has been neutrally weighted for the past year considering the lack of market clarity allocations are closer to their respective targets. He reminded the Board that the portfolio is constructed and allocated defensively and holds 3 to 4 months of expenses in cash; at the moment, the portfolio is even more defensive than typical. Despite its defensiveness and underperforming its benchmarks, the portfolio is achieving the Plan's return objectives and therefore Mr. Owens is unconcerned about the relative performance at this time. He reviewed the S&P 500 Sector % Returns and international Developed and Emerging Markets. Fixed Income saw considerable volatility with a sizable portion of the 12-month return being achieved in Q4 2023; Mr. Owens noted that interest rates went up by 1% and then back down 1%. Currently, the short- and long-term yield curves remain inverted, and the Fed is being very cautious about lowering interest rates. Market analysts believe that the yield curve will eventually right itself as long-term yields rise slightly and the short-term yields decline. Noting the inverse relationship between interest rates and fixed income security prices, Mr. Owens advised that as short-term bonds go up in value, it would be prudent to extend the duration of those securities. On the page of the materials titled Morgan Stanley Cycle Indicator for US Economy, Mr. Owens discussed how various economic indicators have misled the market and analysts into thinking the economy would fall into recession; he commended the Fed's efforts in effectuating an economic soft landing which constrained growth and inflation without tipping into a recession. Page 9 of the materials, which shows consumer credit versus savings, and page 10, which shows manufacturers' inventories versus consumer demand, show the economy is slowing which could have a negative impact on the market. Page 11 shows that historically, the market continued to rise, and the economy continued to expand for almost 4 years after the Fed first raises interest rates to slow the economy; that notwithstanding, this cycle includes an unprecedented amount of federal stimulus injected into the economy to endure the COVID-19 pandemic. However, there has never been a recession with 100% employment; currently the labor market offers approximately 1.1 to 1.2 jobs for every worker. Mr. Owens discussed the S&P 500's severe concentration in the Magnificent 7 stocks, both in weighting and contribution to its return, as shown on page 14 of the materials. While the Magnificent 7 stocks had a dramatic influence on 2023's gains, they similarly influenced the losses in 2022. Mr. Owens reiterated his comfort with the portfolio underperforming its benchmarks by avoiding concentration in the Magnificent 7. He noted that, on a percentage basis, a stock, fund, or portfolio which loses 50% of its price needs to rebound 100% from its bottom to recover that loss. Turning to the Asset Allocation & Time Weighted Performance and Total Fund - Risk/Return Analysis, Mr. Owens explained that since inception, the Plan's portfolio has the same returns as the benchmark, but with less risk. The Asset Allocation Compliance on page 21 shows the portfolio is very close to its target allocations with the exception of real estate. Mr. Owens briefly discussed each fund manager. Wedge has more risk, but considering its alpha, up Book 1 Page 404 02-28-2024 9:00 a.m. Book 1 Page 405 02-28-2024 9:00 a.m. capture, and down capture, the risk is rewarding the portfolio. Hudson Edge is providing the same return as the benchmark but with slightly more risk. While Graystone has had some concerns regarding Hudson Edge, especially considering the negative alpha, or excess return meaning the portfolio is paying for the excess risk, Hudson outperformed for the quarter. Considering Sawgrass' up and down capture rates are well below 100%, it is a defensive fund and performed as expected; when adjusting for risk, Sawgrass is outperforming its benchmark. Brown is providing a lower return with higher risk; when the portfolio added Brown, it had lower volatility and less risk; however, since inception, it has become more volatile and riskier. Mr. Owens asserted that the market environment over the last 3 years has not been conducive to evaluating managers; while Brown nominally outperformed its benchmark for the quarter, Graystone is closely monitoring its performance. DePrince, Race & Zollo (DRZ) significantly underperformed for the quarter, however its long-term performance has been strong, and it has impressive up and down capture rates. Mr. Owens advised that DRZ made some poor investments in 2023, however he has confidence in its process over the longer timeframe. Oak Ridge is similar to Sawgrass in that it is designed to mitigate risk; Mr. Owens will discuss Sawgrass later in his presentation. To Vice Chair Joseph's question, Mr. Owens asserted that Sawgrass and Oak Ridge are similarly defensive, and have performed comparably. On a risk-adjusted basis, both are outperforming their benchmarks, but trail on an absolute basis. Mr. Owens advised that a more appropriate question to ask would be whether the portfolio is too focused on risk management and not enough on return. He noted that Oak Ridge outperformed relatively over the 3-year period, which is when the market was going down. Otherwise, it has consistently trailed its benchmark over every other timeframe. Lazard had a difficult beginning when the Plan first invested with them, however it has steadily improved. Renaissance has significantly outperformed its benchmark over each time frame through 5 years. Mr. Owens explained how Renaissance earns alpha by selling stocks which gained and buying back stocks which declined, and it creates returns through rebalancing; as the market deconcentrated, Renaissance began to outperform more significantly. Richmond! has the lowest standard deviation, which is the statistical measure of market volatility and measures how widely prices are dispersed from the average price, of the equity funds in the portfolio. Mr. Owens noted that Richmond's beta, which measures risk relative to its benchmark, is slightly above 100, indicating it is riskier, however it has positive alpha and is performing well. Regarding the UBS TPF and TPI funds, Mr. Owens suggested that the decline in the real estate market may have ended, and it may be nearing the bottom ofi its cycle. Real estate managers, in conversation with Graystone, assert the transactions will begin when interest rates come down, however Graystone does not anticipate activity to resume within the next year because the real estate market is less responsive than equity and retail markets. Real estate funds continue to pay dividends; however, the share values remain low. Chair Hartley observed that real estate, as stated on the Asset Allocation & Time Weighted Performance page, is still outperforming fixed income over the 10-year period. Mr. Owens stated that on an absolute basis, private real estate remains a strong decision. Chair Hartley suggested that it may be prudent to retain real estate as it likely will only go up. Mr. Owens concurred, but noted the correction may take some time. He reminded the Board that it has a redemption request pending and it may choose to cancel the request, however no monies are being redeemed because there have been no transactions to generate funds to satisfy the redemptions. Vice Chair Joseph asked if there are better real estate funds than UBS. Mr. Owens explained that even if the Board wished to investi in a different real estate fund, it would not be able to invest without overweighting significantly to the asset class because UBS has not satisfied the redemption request. Because real estate funds take in and pay out monies on a gradual basis, reducing the allocation in real estate would require constantly rebalancing the portfolio throughout the duration of the redemption. To Chair Hartley's question, Mr. Owens explained that the since inception return stated on the Asset Allocation & Net Dollar Weighted Performance (IRR) on page 35 is used by the Plan's actuary. Mr. Owens concluded his discussion of the fund managers with Cohen & Steers, which stumbled on inception but has begun to recover as the real estate market recovers. He noted that the upside and downside capture and alpha numbers are not good, however it is defensive, which is why the Plan chose it. There are no issues on the Compliance Checklist. The Asset Allocation & Net Dollar Weighted Performance (IRR) is used by the actuary, and shows that, since inception, the portfolio returns 6.07% per year. Mr. Owens had no recommendations regarding rebalancing or allocation changes. The Board had no questions for Mr. Owens regarding the quarterly performance review. Chair Hartley advised that he wants to discuss Oak Ridge and hear from some of its competing managers to evaluate whether or not to divest or continue the allocation with Oak Ridge. Turning to the Small/Mid Cap Growth Manager Search Summary (Search), Mr. Owens explained that the Search shows Oak Ridge and 4 additional managers within the SMID Growth asset class, and therefore any changes in managers would not require a change to the Investment Policy and could be immediate. Noting that growth managers will have higher price to earnings ratios (PE), Mr. Owens pointed out that Oak Ridge and Westfield have the lowest PE forecasted versus the other 3 managers, indicating Oak Ridge and Westfield are the highest value, most stable, and least risky funds in the search; however; considering the portfolio already contains a value manager which is already less risky than growth, the Board may consider how much risk it wants to take by even being in growth. Mr. Owens discussed the number of stocks each manager holds, whether each fund allows foreign securities, and explained that each fund manager may hold some portion of their portfolio in cash if they are required by their process to sell a holding but haven't yet dentified a new investment. He reviewed each manager's fee and noted that all of the managers have less risk than the benchmark, the Russell 2500 Growth. Turning to performance, Mr. Owens pointed out that Oak Ridge clearly underperformed relatively to the remaining managers over most timeframes, however; Oak Ridge outperformed when value stocks were favored. Further, Oak Ridge has a significantly longer track record than Congress, Fiera, and Geneva. Considering there are lower cost managers with better performance, Mr. Owens agreed that the discussion was worthwhile. He reminded the Board that funds which have operated longer allow one to evaluate those funds in both up- and down-market cycles. Mr. Owens reviewed the Calendar Year Returns Analysis in the Investment Manager Search Analysis, noting that annualized returs, as stated in the Summary, could mask an outlying performance year. Generally, while Oak Ridge underperformed its peers, its worst performance has been in positive, up-cycle years when it significantly trailed the benchmark but still had positive returns; it wasn't hurt as significantly by down years, but also didn't provide great returns in up years. Mr. Owens compared Oak Ridge to Sawgrass. Considering there are managers which protect as well as Oak Ridge in down markets, capture more return in up markets, and yet are less expensive than Oak Ridge, changing managers may be prudent. Mr. Owens reviewed the page titled 5-Year Rolling Period Returns and noted that Oak Ridge tends to perform below, if not well below its benchmark; he noted that Congress and Geneva do not have sufficient histories to show averages prior to 2018. The 5-Year Rolling Period Alpha shows that Oak Ridge has the lowest excess return of the group because, as Mr. Owens asserted, it leans away from growth and towards value. In 2021, Oak Ridge matched the benchmark, however this was during a window during which value was favored. The market last began to favor growth stocks in 2014, growth stocks; prior to that turn, Oak Ridge had performed well. Mr. Owens reviewed the 3-, 5-, 7-, and 10-year Risk/Return Analyses, on pages 11 through 14 respectively. Oak Ridge performed well over the 3-year timeframe however it trailed the group over longer periods. Fiera and Westfield performed consistently over all timeframes, charting with better returns and less risk than the benchmark. To Vice Chair Joseph's questions, Mr. Owens explained that, in evaluating a manager's performance over time, the length of time a fund has been in operation is not as critical as the number of market-cycles. He noted that there hasn't been a significant down-market cycle in the last 7 years; while 2022 was al bad year, it was driven by the COVID-19 pandemic, and anomalous. While a fund which hasn't operated during a down cycle could outperform in that environment, that performance has yet to be observed; Congress is a good example of this type of history. Although Congress has lower risk, risk is measured differently in up- Book 1 Page 406 02-28-2024 9:00 a.m. Book 1 Page 407 02-28-2024 9:00 a.m. versus down-markets. While Mr. Owens would not object to investing in Congress, he would also prefer that it had al longer pertormance history. He recommended the Board consider Fiera or Westfield, adding that Fiera has slightly more risk. He reviewed Fiera's and Congress' up and down capture rates over 5 years, noting Congress is more defensive and forgoes some upside capture in exchange. Fiera has a higher up capture rate than Congress, but Congress has a lower down capture rate. Congress is more in line with the Plan's lower risk philosophy and has the lowest fees, but it has less history than Fiera. Chair Hartley advised he would like to hear from representatives from Fiera and Congress at its May 22, 2024, meeting; the Board agreed and declined to invite Oak Ridge back as it presented at the Board's January 24, 2024, meeting. Mr. Owens advised he would coordinate their presentations. The Board had no questions for Mr. Owens and thanked him for his presentation. Trustee Snow left the meeting at 10:09 a.m. 8. UNFINISHED BUSINESS: 8.1. Presentation and Discussion Re: Gabriel, Roeder, and Smith, Actuarial Valuation Report Supplement for Fiscal Year Ended September 30, 2023. Presenter(s): Brad L. Armstrong, ASA, EA, FCA, MAAA, Senior Consultant and Actuary, Gabriel, Roeder, Smith & Company. Brad Armstrong of Gabriel, Roeder, Smith & Company (GRS) appeared before the Board and introduced himself. Mr. Armstrong explained that the Board, at its January 24, 2024, meeting, had requested GRS to prepare a study showing the impact to the Plan if the Board were to decrease its expected rates of investment return (ROR); the actuarial statements provided show proposed expected RORS of 6.7%, and 6.6%, as well as the expected ROR of 6.85%. Trustee Snow rejoined the meeting at 10:11 a.m. Mr. Armstrong noted that, although there are no active or inactive members, the annual benefits for retired members has not yet crested because of the Cost-of-Living Adjustments (COLA) which will still occur, however the Plan's liabilities have crested and are trending down. Redueing the expected ROR will shift the liabilities upward slightly. Turning to the Actuarial statement, Mr. Armstrong compared the City of Sarasota's (City's) contribution for 2022 to what the contribution will be in Fiscal Year 2025 if the Board decides to maintain the current expected ROR at 6.85%, and if the Board reduces the expected ROR to 6.7% or 6.6%. Mr. Armstrong noted that the declared expected ROR is the gross figure, and therefore there is an approximate 50 basis point reduction to the net necessary return on actual holdings. In the Valuation Results section, Mr. Armstrong discussed how lowering the expected ROR decreases the funded ratio. Secretary/Treasurer Griggs left the meeting at 10:16 a.m. Although he stressed the importance of reaching the long-term objective of a 100% funded ratio, Mr. Armstrong cautioned that a funded ratio in significant excess of 100% is problematic because the excess funds would not be accessible by benefit recipients until all benefit payments were completely paid out. As of today, the average benefit recipient age is approximately 70 years, and the average life expectancy is at least 15 to 16 years, and therefore the last benefit payment may be as many as 40 years away. He characterized the Plan as being on a "glide path" to the time when the Plan's actuarial value equals the market value, which should be before the last benefit payment is made; at that time, the portfolio should be in cash and immediately available. Secretarylreasurer Griggs rejoined the meeting at 10:20 a.m. Kelly Strickland, the City of Sarasota's Director of Financial Administration, appeared before the Board and introduced herself. Ms. Strickland advised she has reviewed the presentation materials, the proposed reductions to the expected ROR, as well as the impact to the City for each scenarios. The City is preparing its FY 2025 budget, and, while she would ask for the least amount of change as possible yet she also recognizes the benefit to the Plan of lowering the expected ROR. Vice Chair Joseph noted the Board's history of its expected ROR since 2011, the State of Florida's recent guidance to public pension plans to consider lowering expected RORS, and that the Plan's last reduction was in 2018. He advised that the expected RORS for the General Employees' Pension Plan as well as the Police Officers' Pension Plan were both lower than the Plan's, and he suggested the Board consider reducing its expected ROR; he proposed the Board reduce the expected ROR for the FY 2023 valuation to 6.7%, to 6.6% for the FY 2024 valuation, and to 6.5% for the FY 2025 valuation. Ms. Strickland advised that the City will work with the Board with its decision, and that this is not a year in which she would request the Board maintain the current expected ROR. Chair Hartley made a motion to reduce the expected ROR for FY 2023 of 6.7%, to 6.6% in FY 2024, and to 6.5% in FY 2025; Trustee Mushrush seconded the motion, noting this is not a year in which the City is requesting relief. To Attomey Herrea's question, Vice Chair Joseph clarified that the reduction in the expected ROR would become effective with the Plan valuation as of September 30, 2023; Chair Hartley conçurred and thanked Ms. Strickland for her contributions to the discussion of this matter. To Trustee Snow's question, Mr. Armstrong advised that the reductions to the expected ROR would not change the layered amortization policy and added that policy benefits the City by spreading out the impact of gains and losses over several years; a 1-year amortization policy would significantly increase the impact of a lower expected ROR. The motion passed unanimously (5-0). Mr. Armstrong advised the Board that it is required by Florida statute to adopt the mortality tables used by the Florida Retirement System (FRS). The FRS mortality tables are due to be updated in 2024 or 2025, and would likely change the Plan's actuarial liability. The FRS's last update to their mortality tables lessened the actuarial liability. The Board thanked Mr. Armstrong and Ms. Strickland for their appearances. 9. NEW BUSINESS: 9.1. Presentation and Discussion Re: Declaration of Expected Rate of Investment Return. Presenter(s): Chair Hartley. Mr. Owens re-appeared before the Board and advised that an expected gross ROR of 6.7% is a reasonable rate to declare based on the current asset allocation for the short term, medium term, and long term thereafter. To Pension Plan's Administrator Martin's question, Mr. Armstrong confirmed that, even though the Board is going to reduce the expected ROR in future years, the rate to declare to the state for the short term, medium term, and long term thereafter is the rate approved for the current year. To Trustee Snow's question, Mr. Armstrong confirmed that the funded ratio, based on the now-approved expected ROR of 6.7%, is 93.7%. 10. ATTORNEY MATTERS: Attorney Herrera noted that, while there is no pending legislation which would directly impact the Plan, there Book 1 Page 408 02-28-2024 9:00 a.m. Book 1 Page 409 02-28-2024 9:00 a.m. was a bill in committee which would impact the FRS; the most consequential provision re-implements the 3% COLA for members hired on or after July 1, 2011, but who have not retired yet; the COLA for members hired before July 2011 was not changed; the provision will be retroactive. 11. OTHER MATTERS: Pension Plans Administrator Martin advised that the Plan' 's COLA for this year has been processed and will take effect with benefit checks issued for February 2024. Pension Plans Administrator Martin advised that Mauldin & Jenkins will present the financial statements at the Board's March 27, 2024, membership meeting because it requires the declared expected ROR before completing the notes to the financial statements. Trustee Snow asked when retirees were able to claim a credit on their income taxes for the purchase of certain non-City health benefits; Pension Plans Administrator Martin advised that became effective in the current year, and that a memo was distributed to retirees. Chair Hartley thanked Vice Chair Joseph for conducting the meeting. 12. ADJOURN. Vice Chair Joseph adjourned the meeting at 10:36 a.m. BR C Chair MichaellHartley Secretan/Treasurer Shayla/Griggs