MINUTES OF THE CITY OF SARASOTA FIREFIGHTERS PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF JANUARY 27, 2021 Present: Chair Michael Hartley, Vice Chair Shelia Roberson, Secretary/Treasurer Shayla Griggs, Trustee Charles Joseph, Trustee Scott Snow. Others: Attorney Robert Sugarman, Pension Plans Administrator Debra Martin, Senior Pension Analyst Anthony Ferrer, Pension Specialist Peter Gottlieb. Absent: None 1. CALL MEETING TO ORDER: Chair Hartley called the Sarasota Firefighters' Pension Plan Board of Trustees regular meeting to order at 9.01 a.m. 2. 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." 3. ROLL CALL: Chair Hartley stated that all trustees were present in Chambers, and there was no need for a roll call. Attorney Robert Sugarman, Pension Plans Administrator Martin, and Senior Pension Analyst Ferrer appeared telephonically. 4. PUBLIC INPUT: None. 5. APPROVAL OF MINUTES: 5.1. Approval Re: Minutes of the Firefighters' Pension Plan Board of Trustees Regular Meeting of December 2, 2020. Presenter(s): Chair Hartley. Trustee Snow made a motion to adopt the minutes; Trustee Joseph seconded the motion. The motion carried unanimously (5-0). Vice Chair Roberson requested the draft minutes contain a less opaque watermark. 6. INVESTMENT PERFORMANCE REVIEW: Book 1 Page 213 01-27-2021 9:00 a.m. Book 1 Page 214 1-27-2021 9:00 a.m. SecretarylTreasurer Griggs asked telephonic attendees to mute their phones unless they are speaking. Al brief discussion of the agenda order ensued. 6.1. Presentation and Discussion Re: HGK Asset Management, Quarterly Performance Summary as of December 31, 2020. Presenter(s): Matthew Witschel, Vice President, Director National Accounts, Michael Pendergast, CFA, Managing Partner, CEO, CIO, HGK Asset Management. Matthew Witschel of HGK Asset Management appeared before the Board telephonically and introduced himself, Mr. Pendergast, and their presentation. Mr. Witschel discussed HGK's investment philosophy, the assets under management, the Statement of Changes in calendar year 2020, Statement of Changes since Inception in May 2015 through December 2020, the Long-Term Performance in Calendar Year 2020, and Performance by fiscal year. Mr. Witschel described HGK as a conservative large cap value manger, focusing on high quality companies with strong fundamentals, and while growth dominated value in 2020, in fourth quarter of 2020, value outperformed growth by 16% to 11%, suggesting the early stages of a sustained rotation to value. Mr. Pendergast appeared before the Board telephonically and introduced himself. Mr. Pendergast thanked the Board for the opportunity to discuss HGK's strategy and share why he believed its portfolio is well positioned to capitalize on events in 2021. Mr. Pendergast discussed the Portfolio Characteristics, noting and elaborating on their focus on value, quality, and the defensive nature of how the portfolio is constructed. He gave a portfolio commentary on the 4th quarter 2020, asserting development of a COVID-19 vaccine and 2020 presidential election results triggered the rotation from growth to value which suggests a strong economic recovery and a "line of sight" to a return to a normal environment for businesses and consumers are approaching. HGK believes the market is in the early stages of a value rotation as the lowest earning companies have had the greatest increase in valuation. He discussed the 2020 Large Cap Value market performance as broken down from January-October 2020, November-December: 2020, and 2020 Year to Date. Mr. Pendergast noted that a sizable number of firms which have reported losses have seen a significanti increase in their market capitalizations, suggesting optimistic expectations offuture growth; this type of excess has not been observed in the last 30 years outside of the early 2000's tech bubble and 2008-2009 great financial crisis. He recommends caution as some investment money is chasing unprofitable companies that may eventually report some profit and investment return, but the markets have built in expectations which exceed these companies' achievements, which will cause protracted underperformance for extended periods of time. He recommends owning high quality companies with reasonably discounted valuations and above average dividends. He anticipates wide-scale COVID-19 vaccine distribution will enable a return to a type of normalcy, a large fiscal stimulus package to address the COVID pandemic, and infrastructure spending will bring about a strong market and economy in 2021. Mr. Pendergast stated that during the last 46 exits from the recessions which had been caused by some types of crises, value has always significantly outperformed by 46% on average, and each subsequent recovery has brought a greater outperformance. He asserted the market is positioned for a significant rotation to value, or, at minimum, value will provide for a clear hedge should the market stumble. In response to questions, Mr. Pendergast stated there have been no changes in management or decision- makers at HGK. He also clarified that Class A and Class B, as stated on page 12 ofthe presentation materials differentiate voting rights due to family structures at each firm's inception, but they are otherwise equal in terms of claims to dividends and earnings. Trustee Joseph and Mr. Witschel discussed HGK's performance in terms of amounts invested relative to the benchmark; Mr. Witschel stated that a significant portion of HGK's performance was due to a difficult year in 2015. Scott Owens of Graystone Consulting appeared before the Board telephonically and introduced himself and asked HGK to elaborate on the difficulties in 2015. Mr. Pendergast discussed OPEC's decision to suspend its adherence to promoting market price, and instead pursue market share in response to fracking and shale operations in the United States, which had a severe negative impact on oil prices. HGK's portfolio was overweight in energy at the time, including firms such as Marathon Oil and Occidental Petroleum, which were heavily vested in shale production. Mr. Pendergast stated the portfolio has since been repositioned with less exposure to companies which had chased prices and therefore had to change production and spending levels based on price and demand fluctuations. HGK has shifted focus towards higher quality and integrated producers such as Chevron and Conoco Phillips which are run for cash-flow generation, profitability, and to cover operations, production, and dividends. This strategy has worked well as many of the companies which have adopted this model have increased dividends over the last 5 years. Mr. Owens also asked Mr. Pendergast to discuss what he expects regarding inflation. Mr. Pendergast stated iti is a difficult question to answer even for subject matter experts, but that many companies he has spoken with have stated they are experiencing some cost-inflation as input prices are rising due to upturns in the economy. He stated that he believes inflation exists in the context of stimulus money but it appears to be concentrated, sO far, in financial assets which gives HGK concern for speculative bubbles. Mr. Pendergast lastly believes the Fed, given its messaging, would like inflation to run "hotter" and longer to make up for previous periods of lower inflation. He anticipates a oredictable rise in inflation rate continuing through the later part of the year which would be less disruptive than unpredictable rates of inflation. Mr. Owens asked Mr. Pendergast to discuss the effect of a minimum wage on inflation, as well as how value stocks have performed under an inflationary environment. Mr. Pendergast stated that at the margins, an increase to the minimum wage would add to the rate of inflation, but many companies in many industries already pay at rates greater than the current minimum wage. Those industries which would require a significant increase, such as hospitality and food service, would have a disruption and would need to find other areas in which to cut back or lay off workers. To the second part of the question, Mr. Pendergast stated that value companies tend to do better in a rising inflation environment as they manage their costs and margins and are able to pass through price increases. In general, a small amount of inflation is typically good for companies and share prices. In growth companies, some companies will benefit from inflation and some will suffer. He explained that investors are paying a certain price for a claim on future dividends. When inflation increases, investors expect a higher return or they discount the future dividends or earnings at a higher rate, meaning al lower present value. Therefore, generally, rising inflation followed by a commensurate rise in interest rates would indicate a higher discounted mechanism towards future dividends, and thus al lower present-day value. This was experienced in the tech bubble and 2009 financial crisis. Value stocks tend to be more moderately priced with more predictable dividends, therefore their present-day values change less. Chair Hartley thanked Mr. Witschel and Mr. Pendergast for their presentation and update. 6.2. Presentation and Discussion Re: Graystone Consulting, Quarterly Performance Summary and Quarterly Performance Report as of December 31, 2020. Book 1 Page 215 1-27-2021 9:00 a.m. Book 1 Page 216 1-27-2021 9:00 a.m. Presenter(s): Scott Owens, CFA, CIMA, Associate Vice President, Institutional Consultant, Andy MclIvaine, Institutional Consultant, Graystone Consulting. Mr. Owens gave a brief introduction to his presentation and Mr. MclIvaine. Mr. Mclivaine advised, regarding negotiations with Brown Advisory, of an acceptable management fee, that Brown had agreed to 55 basis points on the first $10 million, and 50 basis points on the remainder and new assets. The amount to be invested is now $11.3 million. Renaissance, the Plan's current large cap growth manager, currently charges 55 basis points. Chair Hartley asked where Brown stands with its other clients. Mr. Owens stated Brown has a "most favored nations" policy, which Graystone also requires, which states that terms offered to one client must be offered to all clients. As such, Brown could not go lower than the 55 basis points on the initial $10 million, and 50 basis points thereafter without lowering its rate for all its clients to that offered to the Plan. The Board discussed Brown's fee structure. By consensus, the Board agreed to continue engagement with Brown Advisory at the stated fee structure of 55 basis points for the first $10 million, and 50 basis points on amounts thereafter. Vice Chair Roberson made a motion to approve the consensus noted by the Board. Trustee Snow seconded the motion. The motion carried unanimously (5-0). Robert Sugarman of Sugarman & Susskind appeared before the Board telephonically and introduced himself, and requested the motion include granting authority to the Chair to execute the approved contract. By consensus, the Board amended the motion to include authorization to the Chair to execute the contract upon approval by counsel. Chair Hartley and Trustee Snow asked if fund managers could send quarterly performance reports to them in advance of meetings at their respective residences. Mr. Owens gave a recap of the market and portfolio's performance in 2020, noting the market was driven by government stimulus which suggest there will be better performance in the economy, current issues with supply chain disruption are anticipated to be resolved, and valuations are high due to expectations of improved earnings. However, those companies which experience issues and have high valuations, such as tech and large cap companies, should anticipate price pull-back. Secretary Griggs exited the meeting at 9.59 a.m. and returned at 10.02 a.m. Mr. Owens noted that 35% of the S&P 500 performance is attributable to 5 stocks, and that by removing those 5, which are currently priced very high, the S&P 500 would have been negative. As Mr. Pendergast noted, those companies with over-inflated valuations drove the market up, if there is a pull-back, they will similarly drag the market down, however, due to risk mitigation, the Plan does not own those stocks. Mr. Owens discussed unemployment, corporate profits, manufacturing and servicing indexes, as indicating the economy is expanding and he anticipates continued growth. Mr. Owens discussed the 1-, 3-, and 5-year Capital Market Returns, noting the disparity between thel Russell Growth and Value indexes. He explained that most previous market cycle changes have been accompanied by changes in leadership, and large cap growth has been leading; in the most recent quarter, the leader has been value in large-, mid-, and small-cap. While it has been only 1 quarter, all indications suggest a rotation to value is in order. Mr. Owens reviewed capital returns by sector, in developed and emerging international markets, and fixed income markets. He discussed the portfolio's Asset Allocation and Time Weighted Performance and pointed out it has added an additional benchmark for the international value and growth funds because those both uses a blended benchmark with growth and value components. He reminded the Board that Renaissance takes a 2% allocation in 50 holdings, yet that market had been driven by a relative few number of firms; Renaissance's allocation provides downside protection but also potential underperforance. Mr. Owens discussed the Risk Return Analysis Since Inception, noting the alpha is a measurement of return and beta and standard deviation are forms of measuring risk, the Cash Flow Analysis, and Asset Allocation Compliance by asset type and by manager. Mr. Owens proposed rebalancing thel large cap growth and value managers to their respective targets after engaging in Brown Advisory. Chair Hartley noted the Plan had moved $1.5 million out of Sawgrass in January, and Mr. Owens stated that the market had moved dramatically since the end of the calendar year as well. Mr. Sugarman asked if the proposed balancing would be inside or outside of the investment policy guidelines; Mr. Owens stated it was inside guidelines. Mr. Sugarman stated it could be done without a 31-day waiting period. Vice Chair Roberson made a motion to, after execution of the contract with Brown Advisory and rebalancing is determined to be necessary, to rebalance the portfolio as recommended by Graystone. Trustee Joseph seconded the motion. The motion carried unanimously (5-0). Secretary Griggs exited the meeting at 10.20am Mr. Owens reviewed each of the investment managers. Regarding Renaissance, Mr. Owens stated the market environment has favored growth, however Renaissance has had negative alpha which has been detrimental to the portfolio on a relative basis; that notwithstanding, it has returned 15% per year on average since inception and is a better performer on an absolute basis. Regarding Lazard, Mr. Owens explained it does not look as well as it could considering it uses a blended growth and value benchmark; while using a different benchmark would be unethical, additional benchmarks are not reasonable. Mr. Owens predicted fixed income will have predictable but unexciting returns, however they balance alternative investments. Regarding UBS Trumbull Property Fund, Mr. Owens stated that the real estate market cycle should follow the overall market, however not as quickly; he explained that the Plan still receives income from UBS Trumbull, however capital appreciation, which is derived from the quarterly appraisal process, will improve over a longer cycle. The UBS Trumbull Property Income Fund is more mortgage based and the return stream is more indicative of why thel Plan should be in real estate. He does not recommend any changes. Mr. Owens stated that Cohen & Steers is still a recent investment; Graystone expects infrastructure spending toi increase over the near future which will benefit this fund. Mr. Owens reviewed the Compliance Checklist, noting there were no issues, which concluded his presentation. Book 1 Page 217 1-27-2021 9:00 a.m. Book 1 Page 218 1-27-2021 9:00 a.m. Chair Hartley thanked Mr. Owens and Mr. MclIvaine for their reports. 7. UNFINISHED BUSINESS: None. 8. NEW BUSINESS: 8.1. Presentation and Discussion Re: Actuarial Valuation Report for Fiscal Year Ended September 30, 2020. Presenter(s): Brad L. Armstrong, ASA, EA, FCA, MAAA, Senior Consultant and Actuary, Gabriel, Roeder, Smith & Company. Mr. Armstrong appeared before the Board telephonically and introduced himself. Mr. Armstrong discussed the Observed Experience and stated that contribution rate for the fiscal year beginning October 1, 2021 is $4.9 million, which is approximately half that from the prior year's valuation. The Funded Condition is 91.6%, which is up from last year's 84.3%; he noted these are based on the Florida Retirement System's (FRS') mortality tables which were issued before the COVID-19 pandemic. He noted key elements affecting the overall experiences and cautioned that despite Mr. Owens generally positive news regarding the last quarter of calendar year 2020, that quarter was outside this valuation which saw a less than estimated rate of return, as well as fewer pension recipients than expected had been removed. Mr. Armstrong presented the Comments on the valuation, elaborating on the reductions of liabilities and employers' required contributions, alternate results using a 10-year period to amortize the decrease in liabilities, and noted the valuation used the Funding Value of Assets and not the Market Value of Assets which resulted in a higher funded ratio and lower employer contribution requirement; he reminded the Board ity was recognizing market deviations over a 3-year period. Mr. Armstrong discussed payouts from the Share Account for pre- and post-2003 retirees. Mr. Armstrong discussed the gross investment return assumption and asked the Board to review the assumption; he directed the Board to the Other Observations, History of Investment Return Assumptions in the valuation to aid in its review, noting the opportunity to lower the expected rate of return as well as de-risking the portfolio. Turning to the Contributions to Finance Benefits of the Pension Fund for the Fiscal Year Beginning October 1, 2021 to be contributed during the Fiscal Year ending September 30, 2022, Mr. Armstrong reviewed the Main Results and 10-Year Amortization for Assumption Changes; he explained that lowering the assumed rate of return by 25% from 6.85% to 6.6% would likely increase the City Portion by approximately $2 million. Mr. Armstrong stated that a 6.85% assumed rate of return is a reasonable assumption, however a lower rate of return would also be reasonable. Chair Hartley asked about the 2022/23 employer contribution amount; Mr. Armstrong referred to the Cash Flow Projection Based on Current Assumptions and Methods September 30, 2020, noting the dramatic fluctuation from 2020/21 to 2022/23, as well as the Derivation of Funding Value of Pension Fund Assets, and explained it has yet to recognize the market return in the last 2 years which is reflected in the Total Recognized Investment Gain/Loss in 2021 due to the Plan's amortization policy being over 2 years; he suggested a extending the amortization policy to 5 or 10 years stabilize the contribution rate from year to year. The Board and Mr. Armstrong discussed aspects of lowering the assumed rate of return; Chair Hartley suggested Mr. Armstrong provide projections in which the assumed investment rate of return was lowered by. 15% and .25%, as well as invite representatives from Sarasota County, at the February Board meeting. Mr. Armstrong suggested the Board consider extending the amortization period as well; Chair Hartley stated there is an issue because of an interlocal agreement. The Board approved Chair Hartley's suggestion by consensus to invite Mr. Armstrong to present at the February meeting along with County representatives. Mr. Armstrong reviewed Determining Dollar Contributions which breaks out the City's and County's contributions. Vice Chair Roberson asked Mr. Armstrong to confirm the amortization policy currently allows for a 2-year period. Mr. Armstrong stated he would provide computations in which just the rate of return is changed, as well as computations with longer amortization periods for the Board's information. Chair Hartley left the meeting at 11.14 a.m. and returned at 11.17 a.m. Pension Plans Administrator Martin stated she would invite appropriate staff from the City and County to the February meeting. 8.2. Presentation and Discussion Re: GASB No. 67 Plan Reporting and Accounting Schedules for Fiscal Year Ended September 30, 2020. Presenter(s): Brad L. Armstrong, ASA, EA, FCA, MAAA, Senior Consultant and Actuary, Gabriel, Roeder, Smith & Company. Mr. Armstrong stated the GASB 67 report supplements the auditor's report, and that he was only prepared to speak to the Schedules of Required Supplementary Information Schedule of the Net Pension Liability Multiyear, noting the positive trend in the Plan Net Position as a Percentage of Total Pension Liability is based on the market value. Mr. Armstrong stated, in conclusion, that as of September 30, 2020, the Plan required approximately $20 million, for a valuation of $180 million in assets to be fully funded but would be closer to $195 million before the change in assumed mortality rates. Trustee Joseph made a motion to accept the GASB No. 67 Plan Reporting and Accounting Schedules for Fiscal Year Ended September 30, 2020. Vice Chair Roberson seconded the motion. The motion carried unanimously (4-0). The Board thanked Mr. Armstrong for his report. 9. ATTORNEY MATTERS: 9.1. Presentation and Discussion Re: Chapter 2020-149, Laws of Florida, E-Verify Requirements to Hire. Presenter(s): Robert Sugarman, Sugarman & Susskind, P.A. Mr. Sugarman stated that the Florida Legislature had passed a statute requiring public entities to follow the Book 1 Page 219 1-27-2021 9:00 a.m. Book 1 Page 220 1-27-2021 9:00 a.m. E-Verify procedure to confirm prospective employees' immigration status; the law expands that requirement to confirm all vendors who work directly or indirectly with public entities use E-Verify for persons hired on or after January 1, 2021. This does not require action on behalf of the Board. Mr. Sugarman also stated that he had an answer to a question regarding Income Withholding Orders (IWO), which had previously been called Income Deduction Orders. In the question, a retiree's benefit is being split between a retiree and the retiree's former spouse under an IWO; the member asked to remit a portion of the required payment directly to the former spouse rather than have Pension Administration deduct that amount from the member's monthly benefit payment. Mr. Sugarman advised that was possible if the court were to issue a revised IWO. In this circumstance, Pension Administration must abide by the court's order, and not the member's request. Chair Hartley thanked Mr. Sugarman for his presentation and for filling in for Pedro Herrera. 10. OTHER MATTERS: Pension Plans Administrator Martin advised that the Trustees' FPPTA dues had been paid in December, there will be a virtual spring trustee school from April 6 - 9, and trustees who are certified and need continuing education will have an opportunity May 4 - 5, which will also be a virtual event. Also, the Wall Street program has been cancelled for 2021. Lastly, 1099s were mailed out to retirees on January 26. Upon Chair Hartley's inquiry, Pension Plans Administrator Martin confirmed the payroll transfer completed properly. 11. ADJOURN. Chair Hartley adjourned the meeting at 12:09 p.m. 560 Chair Michaél Hartley Secretary/fr reasurer Shayla/Griggs