MINUTES OF THE CITY OF SARASOTA GENERAL EMPLOYEES' PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF JANUARY 27, 2023 Present: Chair Ryan Chapdelain, Vice Chair Mark Nicholas, Treasurer Kelly Strickland, Secretary Shayla Griggs, Trustee Robert Reardon, Trustee Barry Keeler, and Trustee Jan Thornburg. Others: Attorney Scott Christiansen, Pension Plans Administrator Debra Martin, and Pension Specialist Peter Gottlieb. Absent: None. 1. CALL MEETING TO ORDER: Chair Chapdelain called the General Employees Pension Plan (Plan) Board of Trustees Regular meeting to order at 10:00 a.m. 2. PLEDGE OF ALLEGIANCE: Presenter(s): Secretary Griggs. Chair Chapdelain led the Board and meeting attendees in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Chair Chapdelain stated for the record, "We may disagree, but we will always be respectful to one another. We will direct all comments to issues, and we will avoid personal attacks.' 4. ROLL CALL: 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 General Employees' Pension Plan Board of Trustees Regular Meeting of December 19, 2022. Presenter(s): Chair Chapdelain. Trustee Keeler made a motion to accept the minutes of the Regular Meeting of December 19, 2022; Secretary Griggs seconded the motion. The motion carried unanimously (7-0). 7. APPROVAL OF RETIREMENT REQUEST(S): None. 8. INVESTMENT PERFORMANCE REVIEW: 8.1. Presentation and Discussion Re: Graystone Consulting Quarterly Performance Summary and Quarterly Performance Report as of December 31, 2022. Book 1 Page 360 01-27-2023 10:00 a.m. Book 1 Page 361 01-27-2023 10:00 a.m. Presenter(s): Scott Owens, CFA, CIMA, Associate Vice President, Institutional Consultant; Theodore Lowe, CFA, Vice President, Institutional Consultant Analyst; Graystone Consulting. Scott Owens and Theodore Lowe of Graystone Consultants appeared before the Board and introduced themselves and their presentation. Mr. Lowe provided a market summary, noting positive returns for the first quarter of Fiscal Year 2023. Investors' concerns regarding uncontrolled inflation are beginning to ease and markets have rallied accordingly. The Federal Reserve's (Fed's) short-term interest rate increases during 2022 from 0% to above 4% have brought inflation down from over 9% to approximately 6.5%; some investors anticipate an economic soft landing, if not a shallow recession, instead of more extreme outcomes. Treasurer Strickland left the meeting at 10:04 a.m. and returned at 10:13 a.m. Mr. Lowe noted that investor confidence in the economy is mixed, and the Fed has indicated inflation is still not fully controlled, and therefore a recession may still occur in the second half of calendar year 2023. He discussed the 3 periods, or "waves" of inflation from late 2021 through 2022. The first period was marked by large supplies of cash and supply chain issues, while the Fed characterized inflation as being transitory. The second period, during the summer of 2022, saw inflation rates over 9% and commodity price spikes. As oil prices came down and supply chain issues resolved, the Fed looked for the third inflation wave to affect the economy, which is wage inflation. Currently, there are 2 open jobs for every person seeking employment, primarily seen in the service sector, suggesting employees are job-hopping for better wages. Analysts assert employers will be forced to pay higher wages, which will cause service sector employers to charge higher prices, which will increase inflation; the Fed has advised it will do everything within its power to bring inflation down to its target of 2%. Trustee Reardon noted the Fed's focus on breaking wage inflation in the service sector, but not the finance or technology sectors. Mr. Lowe noted the recent technology sector layoffs and corresponding stock selloffs and stated that the finance sector is beginning to feel some effects as well, but acknowiedged that, historically, the Fed has not focused on these two sectors. Mr. Owens added that, during the COVID-19 lockdowns, consumers stocked up on commodities, which drove those prices up; at the same time, consumers were prevented from using the service industry, which drove service prices down. Now that lockdowns have largely ended, consumers have commodity surpluses which drives those prices down. As consumers use the service market, service prices will rise. To further compound inflation issues, Mr. Owens asserted that continued unemployment benefits have discouraged workers from fully returning to the job markets, noting 5 cities in the country are paying families of 4 over $120,000 per year in unemployment benefits, and 10 million more workers retired during the COVID-19 pandemic than had been forecasted to retire. These factors have contributed to the volatile nature of the recent market. Mr. Lowe discussed the Capital Market Returns, noting the difference between the Year to Date and Quarter to Date, and that the S&P's Year to Date performance is the worst since the 2008 financial crisis when it was down 30%. He reviewed the Developed and Emerging Markets, noting how changes in the exchange rates over the last year have affected retums, as well as the potential for investment growth in both areas. For Fixed Income, Mr. Lowe noted the Barclays Aggregate Year to Date as of December 31, 2022, was down 13%; previously, it had never been down more than 10% for the prior 12 months. He noted that balanced portfolios which include stocks, bonds, and altematives, had the 4th worst year in Graystone's history. Going forward, Graystone expects the Fed to continue raising interest rates until they are above 5%, although the Fed has reduced the amount of its rate increases from .75% to .5%; Graystone also expects the Fed to reduce rates if the economy tips into recession. Mr. Owens added that there will be a federal election in 2024, sO there will be political pressure to maintain a smooth economy. He discussed how the economy avoided inflation since the 2008 recession, as well as how deglobalization and green energy have added to inflationary pressures. Turning to the Total Fund Executive Summary, Mr. Owens noted the total portfolio retumns for the quarter exceeded the expected rate of investment retumn of 6.2%, but slightly trailed the index. He explained that, since inception, the portfolio outperformed its index by approximately .5% with less risk as noted on the Total Fund Risk/Return Analysis. He reviewed the Asset Allocation Compliance, noting that value stocks are dramatically outperforming growth stocks, which is reflected in the portfolio allocation. While there may be isolated quarters where growth outperforms value, Graystone expects the general trend of value outperformance to continue. Mr. Owens pointed out that the Fixed Income asset class is the farthest from its target while UBS and AEW are overweighted; the Plan had submitted redemption requests to those managers to bring their allocations down to 5% each, however the Plan has not received any redemptions to date. Those notwithstanding, the portfolios asset classes and fund managers are within compliance. Mr. Owens reviewed each of the fund managers. He noted HGK's outperformance as a value fund, but also noted outperformances by growth managers Clearbridge by 4.64% as of December 31, 2022, and Polen by 3% in the current quarter to date. Mr. Owens added that, if the Plan onlyl had 2 large capt funds, he would have recommended replacing Polen due to its performance, however as the Plan has 3 large cap funds, it provides protection when the other 2 underperform. ToVice Chair Nicholas's question, Mr. Owens clarified that the Down Capture is based on a 10-year average and will not necessarily agree with the 1-year annualized performance. He noted their recent underperformance was due to being overweighted in the technology sector which declined substantially, and a single year of significant poor performance can bring down its 3- or 5-year returns even if it had positive returns for several of those years. To Chair Chapdelain's question, Mr. Owens explained that the Plan invested in Clearbridge as a counterbalance to Polen which has a defensive style that had not been favored by the market. Clearbridge takes overweighted positions between core, defensive, or momentum stocks based on market conditions, however, this style will underperform when the market capitulates, which the market has since the Plan invested in it. The market has begun to right itself and Clearbridge has begun to perform more positively. Mr. Owens stated that NFJ has performed predictably and consistent toi its style,and has begun to outperform now that value is favored by the market. Geneva is a new manager and only has 2 months of data to date. Templeton is an international value manager; when value was out of favor, it underperformed, and now that value is back in favor, it has outperformed. Renaissance, which is international growth, underperformed as it takes 2% positions in 50 companies while the international benchmark was driven by more concentrated holdings. Mr. Owens noted that the Plan has moved into Segall Bryant & Hamill, but neither Invesco nor Geneva were able to reduce their fees. He reviewed Invesco's performance, noting that although a negative 1 basis point of alpha can be overlooked when it generates positive returns. To Chair Chapdelain's question, Mr. Owens stated he did not have Segall Bryant & Hamill's performance, but believed they beat their benchmark over the last quarter. Regarding real estate, Mr. Owens noted that as of December 31, 2022, UBS was down 5.2%, and AEW was down by 5.6%; he added that Graystone did not have the benchmark's performance data when the quarterly report was printed. At Chair Chapdelain's request, Mr. Owens explained the Plan had requested redemptions from the real estate funds to rebalance the allocations back to their targets, however, because it is illiquid, the redemptions have not been issued to date. Pension Plans Administrator Martin added that a redemption was submitted to UBS in August 2022, however the document in Item 12.1. advises that no redemptions were issued in the first quarter of Fiscal Year 2023. Attorney Christiansen advised that none of his clients which have requested real estate redemptions have received any monies. Mr. Owens further clarified that because the real estate market did not decline proportionately to the equity and fixed income markets, the relative allocations in real estate increased which triggered institutional investors to submit redemptions requests to rebalance and stay within their respective compliance limits; however, the volume of redemption requests would require real estate funds to liquidate assets to raise sufficient cash to satisfy the redemption requests, and therefore they will pay out redemptions over longer periods oft time using income generated by real estate ownership. He suspects the market will recover which will naturally rebalance portfolios to be within compliance without the need to proceed with redemptions, which can then be cancelled if not already satisfied. Mr. Christiansen noted the real estate market currently has negative returns, which also reduces their respective allocation. Mr. Owens and Pension Plans Administrator Martin stated that both UBS and AEW have indicated they expect to resume redemptions in the second quarter of Fiscal Year 2023, and in March or April 2023, the Plan may begin to receive partial redemptions Book 1 Page 362 01-27-2023 10:00 a.m. Book 1 Page 363 01-27-2023 10:00 a.m. on a pro-rata basis. Mr. Owens discussed Lazard Global infrastructure and noted it has historically outperformed its benchmark on a nominal basis, although in the last quarter, it outperformed by 9%. The compliance checklist has no items of concerns, and Graystone currently has no recommendations . He suggested that if technology continues to underperform, he wouldrecommend maintaining that underweight. Mr. Owens asked the Board if it would prefer any changes to Graystone's presentations, such as reviewing only managers which are underperforming. Trustee Reardon asked for a macro-outlook to be added to the executive summary. Trustee Keeler expressed preference, considering the recent downward market trend, to include as much positive news as possible. Chair Chapdelain agreed and added that it will be helpful to include more information on newly added managers. The Board thanked Mr. Owens and Mr. Lowe for their presentation. 9. UNFINISHED BUSINESS: 10. NEW BUSINESS: 10.1. Presentation and Discussion Re: Actuarial Valuation as of September 30, 2022. Presenter(s): Pete Strong, Consultant and Senior. Actuary, Gabriel Roeder Smith, and Company. Pete Strong of Gabriel, Roeder, Smith, and Company appeared before the Board and introduced himself. Looking at the Reconciliation of Plan Assets page of the materials, Mr. Strong noted little but predictable differences between 2021 and 2022 in Revenues and Expenditures, Benefits and Refunds, and Administrative Expenses, however a significant, $59 million decline in Investment Income; he advised the Plan experienced significantly positive investment income in 2018, 2020, and 2021, and investment gains and losses are actuarially smoothed into the valuation over 5 years. On the Development of Funding Value of Pension Fund Assets, Mr. Strong noted the Actuarial Value of Assets at the Beginning of the Year 2022 of $167 million, exceeded the Market Value End of Year 2021 by approximately $14.5 million, which provided an additional cushion. He explained how the Amount Subject to Phase-In, or the experience loss, is calculated, and noted that 20% of that amount is recognized in this year, and again each year through fiscal year 2026. However, because of other years with positive experiences, the net phase-in amount for 2022 is $4.023 million, and earns an actuarial rate of return of 3.7%, net of investment expenses. On the pages titled Actuarial Valuation Process, Observed Experience section, Mr. Strong discussed how each experience caused gains or losses, which, in total, increased the City's required contributions in Fiscal Years ending in 2023 and 2024. He noted the temporary Change in Actuarial Assumption regarding inflation for 2023. Mr. Strong discussed how the valuation would have changed using Market Values of assets and liabilities as explained in Relationship to Market Value; he noted that the Funded Ratio based on actuarial value basis is 75.7%, down from 76.7% in 2021. Because the losses in 2022 will be smoothed in over the next 5 years, Mr. Strong expects the Contribution to remain between $7.3 and $8 million each year, absent a reversal in the market value of assets which would offset those losses. He reviewed the Unfunded Actuarial Accrued Liability and components of the Total Contribution Requirement. Mr. Strong discussed the Contributions to Finance Benefits of the Pension Fund. He explained that the Total Normal Costs is the cost of! benefits being earned by active members, and itr remains consistent at approximately 20.5% of pay; as participants transition out of employment, the dollar amount will trend down. Mr. Strong Reviewed the Unfunded Actuarial Accrued Liability, noting the present value off future benefits remains similar to previous years and explained how the funded ratio is determined. To Chair Chapdelain's question, Mr. Strong explained that the actuarial present value of future normal costs is determined by discounting the future normal costs at 6.2% per year. He expects the normal cost to trend down each year by approximately $100,000 each year; the present-day value of that is $10.7 million. Mr. Strong discussed the History of Investment Return Rates, and noted the Plan's investment return on a market basis has averaged at 6.4% over the last 10 years, and 5.4% since 2007. Mr. Strong considers this to be good as it is close to the return assumption. When actuarially smoothed, the average over all years shown is 6.5%. He also noted that there is a receivable in the amount of $1.8 million in remaining contributions owed by the City for 2022. At Chair Chapdelain's request, Mr. Strong discussed the Ratio of Market Value of Assets to Payroll. He advised the Plan's ratio is significantly higher than most other plans because it is closed, and as participants transition from employee to retiree, the burden of contributions will shift to the City. GRS includes this risk measure in all its reports in accordance with Actuarial Standard of Practice 51, however it is not particularly relevant to a closed plan with a decreasing payroll. Turning to the Sources and Financing of Unfunded Actuarial Accrued Liability, Mr. Strong noted the Plan has reduced its amortization period by 1 year each year, and it is currently 15 years. He advised the Board may wish to consider, at some point, ceasing reductions in the amortization period as a significant experience loss with a 5- to 7-year amortization period can cause extraordinary volatility in the contribution amount. He asserted a 10- year period is a reasonable minimum amortization period for the Plan. Mr. Owens of Graystone Consulting returned before the Board and asked what the average amortization period is; Mr. Strong stated that for his clients with closed plans, a 15-year amortization period is very common. To Chair Chapdelain's question, Mr. Strong explained that when the amortization period reaches 10 years, each experience creates a new 10-year base period, and the majority of his clients with closed plans and no active members have unfunded liabilities. Treasurer Strickland expressed support for a minimum amortization period of 10 years and stated that a longer period allows for more stability in contribution amounts. She noted this does not cause any adverse circumstances for participants because, even if the Plan were 100% funded, the assets are still paid out over time and not on a single date. Mr. Owens added that, because the Plan uses 5-year smoothing of gains and losses, the 23% returns in 2021 will be fully realized by 2025, however the losses from 2022 will continue to be smoothed into the valuation through 2026. He expressed caution in expecting a year or several years of outstanding investment gains during the next 5 years, and therefore adopting a longer amortization period to provide a cushion against volatility. Mr. Strong noted that normal costs will trend down, and absent significant investment losses, the contributions should remain consistently near $7.3 to 8 million range for the next several years. Attorney Christiansen, Mr. Owens, and Mr. Strong discussed the merits of declaring a minimum amortization period. Mr. Strong stated that setting a minimum amortization period would not obligate the Board to use that minimum amount, and while the Board could not change the amortization period of an existing base, it could for new bases. Further, the Board could decide to leave the amortization base at 15 years instead of reducing it each year by 1 year. To Chair Chapdelain's question, Mr. Strong explained that a 15-year amortization period would provide less volatility than a 10-year period but would take longer to pay off that base. Treasurer Strickland stated that there could be a perception issue if the Board were to minimize an unfunded liability by continually prolonging payments, however there should be no issues for the Board to make a decision today. She expressed support for a 10-year amortization term. Chair Chapdelain asked if making the investment portfolio more conservative would increase volatility with a 10- year amortization period compared to a 15-year period. Mr. Strong asserted reduced asset volatility combined with 5-year smoothing would reduce the annual gain/loss experience, and that gains and losses create more volatility than the difference between a 10- or 15-year amortization period. To Treasurer Strickland's question, Mr. Strong explained that the speed at which a plan finances its unfunded liability is independent of its return assumption, and the lower the return assumption is, the more conservative Book 1 Page 364 01-27-2023 10:00 a.m. Book 1 Page 365 01-27-2023 10:00 a.m. that plan is, as there is less probability of an investment loss. On the other hand, amortizing gains and losses amortized over a shorter period is less conservative because the contribution goes down due to the shorter period. Mr. Strong recommended the Board, by the time the Plan has no active employees, which is at least 15 years away, it will have reduced the expected rate of investment return to less than 6%; the Plan should also have approximately half its assets in fixed income to match cash-flows to retirees. Mr. Owens cautioned the investment portfolio should allow for increasing payments due to Cost-of-Living Adjustments, although those are predictable. Treasurer Strickland made a motion to continue reducing the amortization period by 1 year in each year until the period is 10 years, and then leaving the amortization period at 10years, based on Mr. Strong's recommendation. Secretary Griggs seconded the motion. To Chair Chapdelain's question, Mr. Strong explained that gains or losses experienced within 5 years of the last employee transitioning to retirement would still be amortized over 10 years but would be offset by investment gains and losses at that time, with a target of 100% funding. Mr. Strong explained that GRS advises all clients which only have retiree participants to maintain at least a 10-year amortization policy. The motion carried unanimously (7-0). 10.2. Presentation and Discussion Re: GASB No. 67 Plan Reporting and Accounting Schedules for Fiscal Year Ended September 30, 2022. Presenter(s): Pete Strong, FSA, EA, MAAA, FCA, Senior Consultant and Actuary, Gabriel, Roeder, Smith & Company. Mr. Strong explained that the GASB No. 67 report is a financial disclosure which presents all liabilities on their market values, and briefly reviewed the Schedule of Changes In The Employers' Net Pension Liability and Related Ratio as well as the Schedule Of The Employers' Net Pension Liabilities. He noted that in 2015, the second lowest Fiduciary Net Position as a % of Total Pension Liability, the Plan had a 7% return assumption. When adjusting for the return assumption, the Plan is better off in 2022 than it was in 2015. To Chair Chapdelain's question, Mr. Strong stated that the 5-year smoothing policy has been in place since prior to the Great Recession in 2008. Treasurer Strickland made a motion to accept the Actuarial Valuation and GASB No. 67 report as of September 30, 2022; Trustee Keeler seconded the motion. The motion carried unanimously (7-0). Attorney Christiansen reminded the Board that, upon accepting an actuarial valuation, the Board is required to declare an expected rate of investment return for the next year, several years, and long-term thereafter. Mr. Owens advised that a 6.2% rate of investment return is a reasonable expectation over those timeframes. Trustee Keeler made a motion to declare an expected rate ofi investment return of 6.2% for the next year, several years, and long-term thereafter, based on the advice of the investment consultant; Treasurer Strickland seconded the motion. The motion carried unanimously (7-0). 11. ATTORNEY MATTERS: Attorney Christiansen advised that the Plan is required to, every 2 years, update its Summary Plan Description and distribute it to all active members; he noted he last updated it in February of 2021. He requested the Board's approval to update the document. Secretary Griggs made a motion to authorize Attorney Christiansen to update the Summary Plan Description. Trustee Thornburg seconded the motion. The motion carried unanimously (7-0). To Chair Chapdelain's question, Attorney Christiansen advised he has seen no potential legislation that could affect the Plan. 12. OTHER MATTERS: 12.1. Presentation and Discussion Re: UBS Redemption Notification Dated December 22, 2022. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin advised this document had been discussed during item 8.1. To Trustee Thornburg's question, Attorney Christiansen explained that the contracts with real estate fund managers do not specify a timeframe by which redemptions must be paid out, however that can serve to protect the value of investments by relieving the need to prematurely liquidate properties below fair market values. 13. ADJOURN. Chair Chapdelain adjourned the meeting at 11:20 a.m. &h Zv Chair RyanChapdelain Secretar Shayla Griggs Book 1 Page 366 01-27-2023 10:00 a.m.