MINUTES OF THE CITY OF SARASOTA FIREFIGHTERS PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF FEBRUARY 24, 2021 Present: Chair Michael Hartley, Vice Chair Shelia Roberson, Secretary/Treasurer Shayla Griggs, Trustee Charles Joseph, and Trustee Scott Snow. Others: Attorney Pedro Herrera, Pension Plans Administrator Debra Martin, Senior Pension Analyst Anthony Ferrer, and Pension Specialist Peter Gottlieb. Absent: None 1. CALL MEETING TO ORDER: Chair Hartley called the Sarasota Firefighters' Pension Plan (Plan) Board of Trustees regular meeting to order at 9.00 a.m. 2. PLEDGE OF CIVILITY: Presenter(s): Chair Hartley. Chair Hartley 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." n 3. ROLL CALL: Pension Plans Administrator Martin called roll. Chair Hartley, Secretary/Treasurer Griggs, Trustee Joseph, and Trustee Snow appeared in person. Vice Chair Roberson appeared telephonically. Attorney Herrera, Pension Plans Administrator Martin, and Senior Pension Analyst Ferrer also appeared telephonically. Pension Specialist Peter Gottlieb appeared in person. 4. PUBLIC INPUT: None. 5. APPROVAL OF MINUTES: 5.1. Approval Re: Minutes of the Firefighters' Pension Plan Board of Trustees Regular Meeting of January 27, 2021. Presenter(s): Chair Hartley. Trustee Joseph made a motion to adopt the minutes from January 27, 2021; Trustee Snow seconded the motion. The motion carried unanimously (5-0). 6. INVESTMENT PERFORMANCE REVIEW: 6.1. Presentation and Discussion Re: DePrince, Race & Zollo, Inc., Quarterly Performance Summary as of December 31, 2020. Book 1 Page 221 02-24-2021 9:00 a.m. Book 1 Page 222 02-24-2021 9:00 a.m Presenter(s): Nathan C. Rusbosin, Marketing/Client Service, Randy A. Renfrow, CFA, Partner and Co-Portfolio Manager, US Small Cap Value, DePrince Race, & Zollo, Inc. Nate Rusbosin appeared before the Board telephonically and introduced himself and Randy Renfrow. Mr. Rusbosin gave an overview of their presentation, noting the firm is a small cap value investor with $3.5 to $4 Billion under management and approximately 18 clients. He discussed anticipation for a potential market rotation to favoring value instead of growth investments which appears more eminent, remarking that since September 30, 2020, DRZ's portfolio, across its 5 strategies, is up over 40%. He gave a firm overview and discussed its investment strategy, its buy and sell decision process, and gave an overview of the Plan's portfolio performance as of December 31, 2020. Mr. Rusbosin reviewed the Russell 2000 Value Index and Growth Index performances, pointing out that the' Value Index has typically trailed the Growth Index, however that trend may be starting to reverse. He stated DRZ's small cap value strategy is up over 54%, and as of February 2021, iti is up 14.9%, and noted that this is approximately 430 basis points above the Russell 2000 Value Index. Mr. Rusbosin reviewed the Cumulative Risk Factor Attribution (2015-2020) and Market Capture. Mr. Renfrow began by discussing the SCV Active Risk Exposures as of December 31, 2020 as representative of the Plan's portfolio position. He explained that while the portfolio is driven by "bottom-up" stock picking, the external factors which influence the portfolio's performance, such as financials, industrials, materials, and energy, are aligned to favor value investing and the portfolio is overweighted in these sectors. He discussed the portfolio's top 10 holdings, highlighting 3 which are Florida-based companies: Ryder Systems, Wyndham Destinations which has recently changed its name to Travel and Leisure, and Rayonier. Chair Hartley thanked Mr. Renfrow and Mr. Rusbosin for their presentation, as well as for DRZ's service to the Plan. 7. NEW BUSINESS 7.1. 7.1. Presentation and Discussion Re: Mauldin & Jenkins, Independent Auditors Report for the Fiscal Years ending September 30, 2020 and 2019. Presenter(s): Alison Wester, CPA, Partner, Mauldin & Jenkins. Alison Wester of Mauldin & Jenkins appeared before the Board telephonically and introduced herself. Ms. Wester presented the Financial Statements for the Fiscal Years Ended September 30, 2020 and September 30, 2019. She stated the opinion is clean and unmodified and noted the required supplementary information is included. She reviewed the Management's Discussion and Analysis, the Statements of Fiduciary Net Positions, and Statements of Changes in Fiduciary Net Positions noting a positive change of $2.8 Million. Ms. Wester explained each of the Notes to Financial Statements, and pointed out regarding Note 2, Plan Description, that some modifications were made to account for the Plan being closed and all members being retired. For Note 3, Investments, Fair Value Measurements, Ms. Wester explained Level I investments are those which are identical in an active traded market, Level II investment are those which are similar in an active traded market, and Level III are any other type of investment valuation. Regarding Note 4, Contribution Information, Ms. Wester noted the unfunded actuarial accrued liability is being amortized as a level dollar amount over a closed two-year period from the fiscal year ending September 31, 2021 to the fiscal year ending September 30, 2023. Chair Hartley asked why Note 5, Net Pension Liability, for a closed plan, includes Salary Increases. Brad Armstrong of Gabriel, Roeder, Smith and Company appeared before the Board telephonically and introduced himself. He explained that the report in 2018, which was issued when the Plan had active members and had a salary scale, was used to determine the 2020 city and county contribution levels. While those assumptions exist retrospectively, the salary increases were removed from the prospective assumptions. Ms. Wester reviewed Notes 6 Share Payables, 7 Risks and Uncertainties, and 8 Subsequent Events. She discussed the Required Supplementary Information, noting the Schedule of Changes in the Net Pension Liability will eventually include 10 years of historical information, Schedule of Contributions, and Schedule of Investment Returns. The Other Supplementary Information included Schedule of Investment and Administrative Expenses broken down by line item, and lastly is the Auditor's Report on Internal Controls over Financial Reporting. Ms. Wester discussed the Auditor's Discussion and Analysis, which included a firm overview, the components of the independent Auditor's Report, and the Required Communications; she explained they encountered no significant difficulties in completing their report, no disagreements with management, no significant issues discussed with management, and no audit adjustments. Ms. Wester stated there was 1 recommendation for the Board and Pension Administration: to ensure future investment decisions and actuarial assumptions continue to align with the anticipated future benefit payments as the fund moves towards a 100% funded condition by September 30, 2023, along with the anticipated expiration of the Interlocal Agreement. Ms. Wester thanked the Board for the opportunity to serve. Chair Hartley asked Ms. Wester to discuss the recommendation in the context of the Plan being closed. Ms. Wester stated the Plan's closed status as well as expiration of the Interlocal Agreement indicate that in 2 years the City will become solely responsible for the funding of the Plan. Therefore, it is critical to monitor the actuarial assumptions and investment returns over that timeframe. She suggested working with the investment managers, and specifically its bond manager, to schedule investment maturities to coincide with the cessation of the county's contribution requirement. Ms. Wester qualified the recommendation, stating that the Board appears to be well-aware of the issue, and therefore the recommendation could be viewed more as a reminder. Vice Chair Roberson made a motion to accept the Financial Statements; Trustee Joseph seconded the motion. The motion passed unanimously (5-0). 8. UNFINISHED 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 stated that because the valuation with no changes in assumed rate of investment return at 6.85% had been presented at the Board's January 27, 2021 meeting, he would focus his comments today on the new results based on reducing the assumed rate of investment return to 6.7% and 6.6%, as requested at that meeting. Further, sample valuations were also calculated at 6.85%, 6.7%, and 6.6% using a "mark- to-market" valuation method which immediately recognizes all potential unrecognized losses instead of amortizing losses over 2 years. Mr. Armstrong called attention to an additional comment, which is titled, "Warning" to differentiate it from the preceding comments and not minimize its significance, regarding the closed 2-year amortization period. Mr. Armstrong stated the Plan's short amortization policy causes more extreme deviations from the projected amounts. Mr. Armstrong briefly addressed the Interlocal Agreement, noting it was uncommon for 2 employers with this type of agreement to share gains and losses, as in his experience, it is more common for one employer to own these. Book 1 Page 223 02-24-2021 9:00 a.m Book 1 Page 224 02-24-2021 9:00 a.m Mr. Armstrong referred 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, and noted the amounts are based on balances as of September 30, 2020, and do not reflect any investment performance after that date. Regarding the Total Adjusted Contribution Requirement, County/City portion, Mr. Armstrong stated that last year, that amount was $9,358,000. He discussed how the valuations change when the expected rate of return and calculation methodologies are adjusted. Secretary Griggs left the meeting at 9:58 am. Mr. Armstrong advised the funded ratio would change using different assumed rates of investment return and the Mark-to-Market methodology. He noted that in 2019 funded ratio was 84.3%; under the Current Asset Valuation, if there is no change in the assumed rate of return, the funded rate would be 91.6%, under Alternate 1 would be 90.2%, and under Alternate 2 it would be 89.2%. Using the Mark-to-Market methodology, the funded ratio would be 88.7% with no change in the expected rate of return, 87.4% under Alternate 1, and 86.5% under Alternate 2. Mr. Armstrong explained that as the expected rates of investment return is reduced, benefit security increases. Mr. Armstrong reviewed the Required Contributions for 2021-22 (Alternates) on the page titled Determining Dollar Contributions, noting they did not show the bi-weekly amounts to avoid confusion, and they restate the amounts on the prior page while separating out the City and County contribution requirements. At the request of Chair Hartley, Mr. Armstrong stated the current contribution rate is $9,358,622. At the request of retiree Emest Cave, Mr. Armstrong explained the difference between the Current Asset Valuation Method and the Mark-to-Market valuation methods. The current asset valuation method smooths investment returns above and below expectations over 3 years, whereas the Mark-to-Market valuation method immediately realizes losses. Mr. Armstrong stated that the current valuation method which uses a relatively short amortization period is intended to decrease the amount of change from one year to the next, however, as the contributions are expected to dramatically drop this year and then increase again next year, the method under the circumstances is not performing to its intended purpose. Michael Regnier, Fire Chief of the Sarasota County Fire Department and retired member of the Plan, and Kimberli Radtke, Director of the Office of Financial Management, Sarasota County, appeared before the Board and introduced themselves. Chief Regnier asked the Board to engage with the City and County sooner to make decisions regarding topics such as using the Mark-to-Market methodology, or if such a decision could be made over the next year. Further, Chief Regnier also pointed out that although the Mark-to-Market methodology smooths out dramatic fluctuations, as the stated expected rate of return is lowered, the employer contributions increase. Chief Regnier and Ms. Radtke expressed support for leaving the current expected rate of return at 6.85% unchanged because the County has based its budget on that rate and the savings are reflective; further, they expressed concern for the increases to future employer contributions associated with an increased expected rate of return, and they had believed the rate would not be changed during the remaining 2 years of the Interlocal Agreement. Chief Regnier requested the Board contact the County and City representatives to begin engagement on topics such as the declared rates of return and Mark-to-Market methodology as early as possible. He noted that the County has been working under the assumption that if the Interlocal Agreement were extended and the Plan remained solvent, the County's future obligation would be an approximate $1 million impact, which is the amount included in their budget, however GRS has determined significantly higher amounts. Chief Regnier expressed support as a County representative and a retiree for their partnership with the Plan and he is open to discussing the reduction of the expected rate of retum and Mark-to-Market methodology, but that he believed those would be best addressed during the last year of the Interlocal Agreement. Chair Hartley noted the Employer Contributions stated on the Cash Flow Projection Based on Current Assumptions includes not just administrative fees, but also payments to investment managers which would remain irrespective of changes in the portfolio. Chief Regnier reiterated that he is comfortable with the declared rate of investment return at 6.85%, as well as the reduction in employer contributions in 2021/22 and then a significant increase in 2022/2023. Chair Hartley reviewed the amounts stated on the Determining Dollar Contributions page of the materials and asked if the City or County have had any discussions of the Interlocal Agreement. Chief Regnier stated there has been discussions at the County, but neither he nor Ms. Radtke are aware of any engagement with the City. He explained he believes the Interlocal Agreement, if nothing is done, would continue for another 10 or 20 years with the same obligation of liability. Mr. Armstrong stated, at Chair Hartley's request, that amortizing liabilities over 10 years would minimize fluctuations in contribution amounts from year to year; he directed the Board's attention to the Employer Contribution Projection Based on Alternate Assumptions and Methods and estimated the 2021/22 amount would be less, 2022/23 would be less than $5 Million, and 2023/24 and after would probably be higher by $3 Million to $4 Million, which would moderate the projected contributions considerably and reduce the peak seen on the chart on that page of the presentation materials. Chief Regnier stated he does not currently have enough information to adequately process a recommendation and asked for more specific amounts or a separate meeting of all parties for further future discussion as the County's budget does not contemplate the alternates proposed in the valuation unless no changes are made. Chair Hartley reviewed the Other Observations page of Gabriel, Roeder, & Smith's materials, noting the Board's history of reducing its investment return assumptions and amortization period since 2006. Chief Regnier asked if there are other similar pension boards and what their investment return assumption is; Chair Hartley explained that a closed plan of comparable size is uncommon. Mr. Armstrong added that for a comparison to be meaningful, one would need to compare plans which closed around the same time SO that they have the approximately same duration; the Plan, which closed in 1996 and has only retirees, will have different investment needs from one which closed more recently and has active employees. Mr. Armstrong stated that the National Association of State Retirement Systems recent annual survey stated that the median return assumption rate amongst the nation's largest 130 pension plans is 7.25%, and that rate has been going down every year; he expects the median to be 7% next year. Mr. Armstrong qualified most of the 130 plans are still open. Attorney Pedro Herrera appeared before the Board telephonically and introduced himself. Attorney Herrera stated that his firm, Sugarman & Susskind, represents approximately 140 pension plans in the state of Florida; all have been reducing their return assumptions, and most are around 7%. He reiterated the complexities of trying to compare aspects of different plans. Vice Chair Roberson asked if a representative from the City's Finance Department was invited to the meeting; Pension Plans Administrator Martin stated that representatives from the City had been invited, however the City's Finance Director had a personal emergency which precluded her attendance. Chair Hartley, Attorney Herrera, Mr. Armstrong, and Chief Regnier discussed the potential effect oft the Board delaying a change in the valuation methodology to Mark-to-Market and reducing the investment return assumption rate for 1 year. Mr. Armstrong stated that each of the presented options, including making no changes to the valuation method or assumptions, are reasonable from an actuarial standpoint. Ms. Radtke stated that without more information about changing the amortization policy, she recommends leaving the expected rate of retumn at 6.85% for an additional year as the Mark-to-Market methodology is more costly over 2 years than the current method. Chair Hartley stated that the Plan's most recent quarterly investment portfolio report stated the investment Book 1 Page 225 02-24-2021 9:00 a.m Book 1 Page 226 02-24-2021 9:00 a.m return rate from 2006 through December 31, 2020 is 6.33%, and the Board has worked diligently to reduce the expected rate of return from 8%1 to be closer to the actual return rate. He stated that the expected rate of return of 6.85% includes expenses and approximately 6.35% without; the current funded ratio is 91.6%. Trustee Snow and Chief Regnier discussed the terms of the Interlocal Agreement. Trustee Snow noted that the last employee to retire was in 2019 and the Interlocal Agreement required the County to maintain employee contributions for 10 years from that date. Chief Regnier and Trustee Snow agreed they were not speaking to specifics in the Interlocal Agreement and that the terms should be reviewed and discussed. Secretary Griggs returned to the meeting at 10:57am Trustee Snow related the importance of reducing the assumed rate of investment return and de-risking the portfolio considering the Plan's closed status. He further stated that ift the County were to return to the Board in a year and ask the assumed rate of investment return remain unchanged, he would be unable to agree with the request. Chief Regnier stated that he respects the Board's fiduciary responsibility to the Plan, and he could not comment if he would support or oppose reducing the expected rate of return or changing the valuation method next year as it would be based on the events of the coming year. He asked if the Board has a desired expected rate of return or if it changes over time. Ms. Radtke similarly reiterated her support for leaving the expected rate of return at 6.85% because it results in less employer contributions over the next 2 years than the Mark-to-Market method, and the County is not prepared, from a budgetary perspective, for the additional costs. The Board analogized the expected rate of return as a line in the sand which keeps moving because of fluctuations in the market. Ms. Radtke stated the County is not opposed to changing the amortization policy but would like to have a better understanding of it as well as the Interlocal Agreement. Chair Hartley stated the Board must abide by the controlling ordinances and policies in the context of potential dramatic changes in investments in the future, and therefore the Board's first goal is to become fully funded as quickly and prudently as possible. Retiree Ernest Cave appeared before the Board and introduced himself. Mr. Cave stated his understanding is that the Board's goal is to have the Plan 100% funded by the end of the Interlocal Agreement and the 2003 Agreement Addendum specifically states the County has no obligation to contribute to the fund after September 30, 2023. Mr. Cave asserted the agreement should automatically extend if neither party took action to discontinue it, and if it were to continue, the contributions to pension would as well, however he has anecdotally heard that the County's employer contributions would end September 30, 2023. He asked if the asset smoothing policy were to be extended beyond the expiration of the Interlocal Agreement, would that need to be addressed separately. Mr. Cave suggested the Plan reach 100% funded status before the County ceased employer contributions. Attorney Herrera advised asset smoothing is controlled by the Board exclusively and neither the City nor County could contractually obligate the Board of Trustees to change its policy on the matter. Attorey Herrera stated that from the Plan's perspective, the Plan is guaranteed payment from either the City as the original Plan Sponsor, or the County and the City. If the City and County were to discontinue all forms partnership regarding employer contributions to the Plan, employer contributions are guaranteed by the City of Sarasota, pursuant to state statutes. Chair Hartley explained the Board could provide financial impact statements to address change to an interlocal agreement upon request to the Board, but that the agreement to provide employer contributions were between the City and County. The Board discussed the current and forecasted employer contribution amounts with no changes to the assumptions or methodology. Kelly Strickland, Director of Finance for the City of Sarasota, appeared before the Board telephonically and introduced herself. Ms. Strickland asserted her support for maintaining the expected rate of investment return at 6.85% as the Cityi is working on its budget, and the current projected contributions are plausible from the City's perspective. Ms. Strickland was unaware of any changes or discussions regarding the Interlocal Agreement. Attorney Herrera asked the City and County to discuss what each are doing with federal funds for local governments. Ms. Radtke stated that federal funds are not allowed to be used for pension funding. The County has spent the $75 million ithas received on the community and minimal distributions to municipalities. There may be additional funding in the future, but she cautioned it would likely be restricted from use for pension funding and Ms. Strickland concurred with these comments. Attorney Herrera clarified that while federal funds could not be used to directly pay pension benefits, they could free up other assets which could then be used for employer contributions to pension plans. Chair Hartley thanked Chief Regnier and Ms. Radtke for their appearances and participation in the meeting. Mr. Armstrong stated he would work with Pension Administration to prepare a copy of the valuation report finalized in January 2021 that is compliant with the Americans with Disabilities Act to be published on the City's website. 9. NEW BUSINESS: 9.1. Presentation and Discussion Re: Declaration of Rate of Return Presenter(s): Chair Hartley. The Board discussed the uncertainty oft the market and need to reduce risk versus accommodating the Plan's partners' requests to maintain the current rate of return sO that they have adequate time to prepare for changes in contribution amounts as well as review the Interlocal Agreement, noting the Board last reduced the declared rate of return in September 2018, and ifl left unchanged for the next year, the rate of return will have been in place for 3 years. The Board expressed concern for the burden that would be placed on the City and County should it reduce the expected rate of return, but with the aim to reach a fully funded status and reduce risk over time and anticipate the need to reduce the rate of return next year. Trustee Joseph made a motion, seconded by Vice Chair Roberson, to adopt the actuarial valuation as of October 1, 2020, as stated in Gabriel, Roeder, Smith, and Company's report dated January 12, 2021 which used an assumed rate of investment retum of 6.85%, and was presented at the January 27, 2021 meeting. The motion carried unanimously (5-0) Chief Regnier asked how the funding status would affect state monies which were contingent upon the Plan not being fully funded. Attorney Herrera stated that Florida Statute 175 for Firefighters and 185 for Police Officers provides state premium tax monies to plans which are not fully funded, however the definition of, "fully funded," as used in the statutes is different from the definition in an actuarial context. Attorney Herrera suggested that, as the Plan reaches fully funded status, it could re-state its actuarial assumptions to maintain a near-100% funded status. Mr. Armstrong added that the cessation of Chapter 175 contributions from the State to plans which are fully funded are only ceased while a plan is fully funded, and that a change in assumption or experience which lowered the funding status to below 100% would restart payment of state monies. In that regard, aiming for a 99.5% funding status would be optimal, although difficult to predict. 10. ATTORNEY MATTERS: Book 1 Page 227 02-24-2021 9:00 a.m Book 1 Page 228 02-24-2021 9:00 a.m Attorney Herrera thanked the Board for accommodating his absence at the last meeting as well as allowing Attorney Robert Sugarman to appear in his absence. Attorney Herrera advised there is proposed legislation which would effectively close the defined benefit arm of the Florida Retirement System leaving new hires only the defined contribution plan. There have been previous unsuccessful attempts to close the defined benefit plan as there is significant opposition. A second bill, which has some broad support, increases criminal penalties for public protest, and seeks to curb the ability for local legislative bodies to divert monies from police departments. While these do not directly affect the Plan, Attorney Herrera would continue to monitor them for any potential impact to the Plan and should have a fuller report by the Board's May meeting. Attorney Herrera stated there will be an FPPTA virtual session with the intent to have its annual conference in June held as a live event, however the final decision may not have been made yet. 10. OTHER MATTERS: None. 11. ADJOURN. Chair Hartley adjourned the meeting at 11:46 a.m. Rala Chair Michael Hartley/ retép/Treasurer Shaya friggs