Book 1 Page 379 9-27-2023 9:00 a.m. MINUTES OF THE CITY OF SARASOTA FIREFIGHTERS PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF SEPTEMBER 27, 2023 Present: Chair Michael Hartley, Vice Chair Charles Joseph, Secretary/Treasurer: Shayla Griggs, Trustee Scott Snow, and Trustee Heather Mushrush. Others: Attorney Pedro Herrera, Pension Plans Administrator Debra Martin, 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 ALLEGIANCE: Presenter(s): Secretary/reasurer Griggs. Trustee Snow led the Board and meeting attendees in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Presenter(s): Chair Hartley. Trustee Mushrush 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: Pension Plans Administrator Martin called roll. Vice Chair Joseph was not present. 5. PUBLIC INPUT: None. 6. APPROVAL OF MINUTES: 6.1. Approval Re: Minutes of the Firefighters' Pension Plan Board of Trustees Regular Meeting of July 26, 2023. Presenter(s): Chair Hartley. Trustee Snow made a motion to approve the minutes of the July 26, 2023 regular meeting; Trustee Mushrush seconded the motion. The motion passed unanimously (4-0). 7. INVESTMENT PERFORMANCE REVIEW: 9. NEW BUSINESS: 9.1. Presentation and Discussion Re: Graystone Consulting, Proposed Amendment to the Investment Policy Statement. Presenter(s): Scott Owens, CFA, CIMA, Managing Director - Wealth Management, Institutional Consulting Director, Corporate Retirement Director, Impact Investing Director, Alternative Investment Director; Theodore J. Loew, Vice President, Institutional Consultant; Graystone Consulting. Scott Owens and Theodore Loew of Graystone Consulting appeared before the Board and introduced themselves. Mr. Owens explained that the purpose of the proposed amendment to the Investment Policy Statement (IPS) was to address the recently enacted HB 3, which requires public entity investors to only consider pecuniary factors when making investment decisions, which the Board already does. He noted that public entity investors may still invest in funds which consider themselves to have environmental, social, and/or governance (ESG) investment criteria, however the public entity investors must only consider the pecuniary factors of those funds. Graystone will also require fund managers to affirm their adherence to HB 3 before Graystone will present that manager to clients as an investment option. The law also requires plans to file a comprehensive report with the State of Florida by December 15, 2023, however the State has not released guidance or clarification for the report requirements to date; Graystone advised it will assist the Plan in any way possible. To Chair Hartley's question, Mr. Owens clarified that HB 3 applies to the entirety of the Plan's investment portfolio. A plan could invest in an ESG manager, provided that manager performed appropriately, and the plan made its decisions based on the fund's performance and risk factors. Vice Chair Joseph entered the meeting at 9:09 a.m. Mr. Owens noted that one of the Board's primary investment strategy criteria has been to reduce risk, which is a pecuniary factor. He noted that Sugarman & Susskind, as well as other law firms, have reviewed and approved the proposed IPS language. Attorney Herrera entered the meeting at 9:10 a.m. Attorney Herrera reiterated that the proposed amendment is to address the requirements of HB 3, as well as demonstrate to the State that the Plan is complying with HB 3. To' Vice Chair Joseph's question, Attorney Herrera confirmed he has reviewed the proposed amendment to the IPS. Vice Chair Joseph made a motion to adopt the proposed Amendment to the Investment Policy Statement; Secretary/Treasurer Griggs seconded the motion. The motion passed unanimously (5-0). 7.1. Presentation and Discussion Re: Graystone Consulting; Quarterly Performance Review as of June 30, 2023. Presenter(s): Scott Owens, CFA, CIMA, Managing Director Wealth Management, Institutional Consulting Director, Corporate Retirement Director, Impact Investing Director, Alternative Investment Director; Theodore J. Loew, Vice President, Institutional Consultant; Graystone Consulting. Mr. Loew provided a market review, noting that the gains in the first half of calendar year 2023 were driven by 7 stocks, Nvidia, Meta Platforms (formerly Facebook), Amazon, Microsoft, Apple, Alphabet (formerly Google), and Tesla; these are commonly referred to as, "the magnificent 7," and they underperformed in 2022. In 2020 and 2021, the market was driven by 5 of the magnificent 7 stocks; they sold off in 2022 and rebounded in 2023. Also in 2023, the market has been focused on the Federal Reserve (Fed), which has, by raising short term interest rates, brought inflation down from its 9% high in 2022 to approximately 4%. Although the market optimistically anticipated a point when the Fed will begin to reduce interest rates, as that would be a boon for stock prices, that optimism waned in later half of 2023 as the Fed reiterated its goal of reducing inflation to 2%. Wages continue to push inflation up as demand for workers outweighs the supply, which results in higher costs being passed onto consumers. Notwithstanding, the Purchasing Managers Book 1 Page 380 9-27-2023 9:00 a.m. Book 1 Page 381 9-27-2023 9:00 a.m. Index (PMI), which measures manufacturing productivity, indicates a contraction in that sector. Considering the service sector is growing, Graystone forecasts rolling recessions amongst varying sectors. Mr. Loew noted that credit card debt is at record highs amounts at record high rates, unemployment rates in the industrial sector rises, and mortgage interest rates exceed 7% which all bode poorly for the market; new housing sales and existing housing sales have begun to taper off, suggesting consumer fatigue. Mr. Loew discussed the Capital Market Returns in the presentation materials, reiterating the theme of 2023 was that of reversal as the leading S&P sectors in 2022 trailed in 2023 and growth has significantly outperformed value over the shorter term. He noted that, because the portfolio is positioned more defensively and towards higher quality, the Board should expect more relative underperformance, but that over the 3- year time frame, growth and value are more evenly matched. Graystone expects value to continue to outperform as long as the Fed keeps interest rates high. Mr. Owens discussed how rising interest rates typically hurt growth stocks, as was seen during 2022. Investors mistook rapidly declining inflation during the first half of 2023 as an indication that the Fed would lower interest rates, and investors moved into growth equities only to be disappointed in the latter half of the year. He noted that discussions of how artificial intelligence (AI) will impact society have significantly benefitted the magnificent 7, however, as the Fed holds to its commitment to reduce inflation, the market has declined somewhat in the current quarter. Graystone asserts that, as long as interest rates remain level or rise, value stocks and a defensive position will outperform. Mr. Loew added that the market has had 3 consecutive quarters of negative earnings growth, yet the market is still up 20%, demonstrating that the fundamentals have not kept up with performance. He reviewed the Emerging Markets % Equity, noting China had negative 16% growth despite anticipation for a positive post- COVID economic reopening. To Chair Hartley's questions, Mr. Owens discussed the correlation between the tech sector's performance and Ireland, due to the corporate-friendly policies and low tax rates in that country. He added that Ireland did not perform as well while the market favored value equities. Mr. Loew reviewed the Fixed Income % Returns indexes, noting their decline is a result of rising interest rates. Considering the sector's lackluster performance now spans into the 3-year range, moving into alternative investments was a smart allocation decision, Graystone has had internal discussions regarding this allocation as cash is eamning 5% and corporate bonds are returning 6%. To Chair Hartley's comments regarding Ronald Lanier's departure from UBS, Mr. Owens explained how UBS is analogous to a bond fund, in that UBS pays investment income based on revenues generated by its real estate holdings. Although the value of those real estate holdings will fluctuate over time based on market conditions, the real estate income, and subsequently the amounts paid back to investors, stays relatively stable. He noted that UBS had restructured its portfolio several years ago because it was heavily invested in traditional shopping malls which then became less popular than outdoor strip malls. UBS is now heavily positioned in the industrial space which is doing well; its portfolio's performance is being dragged by corporate and commercial properties as companies struggle to determine how much property to lease as they return to in-person work. Mr. Owens explained how real estate investments are illiquid. He opined that, considering rising interest rates are slowing the demand for properties, and interest rates will eventually decline, it may be an opportune time to consider investing more in real estate while values are depressed. He reassured the Board that a prudent choice would be to monitor this asset class. Vice Chair Joseph asked if the office space subsector will perform comparably to traditional shopping malls. Mr. Owens and Mr. Loew discussed the challenges in that subsector and asserted that companies are renewing leases, but at lower square footage than they had required prior to the COVID-19 pandemic; approximately 15% to 25% of office spaces are vacant. Combined with the Fed's efforts to slow economic growth, Mr. Owens asserted those vacancies will not be filled quickly, but will return to fuller occupancy levels when the currently inverted yield curve normalizes. Mr. Owens reviewed the Asset Allocation & Time Weighted Performance pages of the materials, noting that, although the portfolio has come down somewhat in the last quarter of the fiscal year and underperformed the index, it has still performed as intended. He discussed the defensive nature of the portfolio and noted that while the portfolio has benefitted from less risk, it has underperformed the market which has been driven by lower quality, higher valuation growth stocks. Turning to the individual managers, Mr. Owens noted that Wedge and HGK complement each other as large cap value managers, with one outperforming and the other underperforming their common benchmark. Similarly, Brown Advisory and Sawgrass complement each other in the large cap value space; although Brown is less defensive than Sawgrass, and Brown underperformed in 2022 due to its technology holdings, Mr. Owens expressed confidence in their long-term performance. DePrince, Race, & Zollo continues to relatively outperform across all timeframes except for the current quarter. Oak Ridge continues to trail its benchmark, but as a high-quality growth manager, that performance is expected; he noted Oak Ridge is a "growth at a reasonable price" manager, and does not venture into lower quality, high price-to-earnings multiple stocks which have driven the market. Mr. Owens noted that the Board has a history of shifting the portfolio from favoring either growth or value, depending on the market cycle. Currently, the portfolio is equally weighted, but he believes there will come a point at which the Board may consider the portfolio favoring value again. Lazard and Renaissance currently outperform their benchmarks. Mr. Owens commended the Board on its conviction in Renaissance, as it has had periods of underperformance due to its strategy of holding 2% positions in 50 companies, which differs from the index's weighting. Regarding Richmond, as a fixed income manager, Mr. Owens asserted it will never outperform the benchmark while interest rates rise; never-the- less, the portfolio derives value from fixed income investments based on the returns paid out to the Plan. The portfolio similarly derives value from real estate through the income generated by the properties in the real estate portfolio, and not the share price of the investment. He advised that, due to the difficulties in the real estate market and the illiquid nature of the fund, UBS is not making redemption payments for at least 2 quarters. Mr. Owens asserted the asset class may begin to outperform before the full redemption is satisfied. Cohen & Steers has performed well to date, although it is only slightly outpertorming the benchmark as of June 30, 2023. The Total Fund - Risk/Return Analysis shows the portfolio is generating a comparable return since 2006 as the index with lower risk, giving a positive alpha of .25. Mr. Owens briefly reviewed the Cash Flow Analysis, noting the income derived from real estate is similar to that of Sawgrass Large Cap Growth, but with 60% of the assets invested. The Asset Allocation Compliance shows the portfolio is deliberately very close to its targets, except for real estate, because of the current market conditions. To Chair Hartley's question, Mr. Owens explained that HGK is changing its name to Hudson Edge Investment Partners; Morgan Stanley's research group has vetted the action and advised it will not affect performance. Graystone will continue to monitor the manager but does not recommend any changes. Attorney Herrera confirmed there is no legal issue, and the contract terms remain the same. To Chair Hartley's question, Mr. Owens advised he anticipates more headwinds and volatility in the market due to the Fed's efforts to slow the economy. In the last decade, most Fed actions have been quickly reversed when the market or economy reacted. In the current environment, the Fed has been steadfast in raising interest rates to control inflation. Despite its efforts, unemployment remains low, and employers are having difficulty filling vacant positions which provides more upward pressure on inflation. He provided a brief history of the labor market since the beginning of the COVID-19 pandemic, noting a loss of 10 million more jobs than forecasted. Now that federal economic stimulus has ended, interest rates are rising, and student loan and rent moratoriums have ended, many of those excess 10 million workers who left the job market have begun to re-enter the work force which is saturating the market. Further, credit card debt is at a record high level while interest rates are at record highs, defaults are up, and savings are down. These all paint a grim image for the market. Mr. Owens explained how wage inflation filters through new employees, to existing employees, to overhead costs, and is ultimately passed on to consumers; he asserted that, as long as unemployment remains very low, the market faces headwinds. If unemployment rises, the Fed will lower rates to stimulate the economy and inspire better market performance. Chair Hartley asserted that consumers' demands in the holiday season may exacerbate the current economic issues; Mr. Owens noted that 2024 is an election year, and that may offset the current trend. Mr. Owens posited that influence on the market must be organic to be sustainable, and if the election cycle boosts the market in 2024, the market will return to its trend when the election concludes. Mr. Owens noted that recessions frequently follow Book 1 Page 382 9-27-2023 9:00 a.m. Book 1 Page 383 9-27-2023 9:00 a.m. inverted yield curves; the current yield curve has been inverted for 12 months and does not appear to be returning to its normal shape, which complicates the Fed's efforts for an economic "soft landing." To the Chair's questions, Mr. Owens advised that the portfolio would need to reallocate more assets into cash if the Board wished to be more defensive. However, considering the assumed rate of investment return is 6.35%, and cash is earning 5%, there would be less pressure on investments to meet thel Plan's needs. He reiterated that the consequence of a defensive portfolio is underperformance in a rising market, but that a defensive portfolio will also protect Plan assets when the market declines. The Board thanked Graystone for its presentation. 8. UNFINISHED BUSINESS: None. 10. ATTORNEY MATTERS: Attorney Herrera discussed the impact of Florida HB 3, which is now Chapter 2023-28, which requires the Plan to file a compliance report with the Division of Retirement (DOR) in the December of every odd year; the DOR will, in turn, file a report with the Governor confirming compliance. The DOR has not released requirements for the compliance report. He explained that the law stemmed from a dispute between the State Board of Administration (SBA), which oversees the DOR, and the investment firm BlackRock, which had purchased stocks in companies which ncorporated environmental, govemance, and social factors (ESG)in stock selection, portfolio construction, and in how it voted in proxies for the assets it managed. The SBA passed an administrative policy, which then was codified into law, that now requires public entity investors to only consider pecuniary factors and exclude ESG factors when making investment decisions. Soon after passage of HB 3, the SBA made a significant commitment to a BlackRock ESG fund; the Governor's office clarified that the purchase was permissible under the law because the fund had excellent performance, reasonable fees, and risk metrics which satisfied the SBA's longstanding tolerance and thresholds. While this is not official guidance or direction, it indicates that a public entity may invest in any fund it desires provided that the public entity only considers pecuniary factors when considering the investment. While Chapter 2023-28 presents an additional administrative burden, there should be minimal impact on the Board's practices. Mr. Owens appeared before the Board and asked, if the Board were to select an ESG fund based on pecuniary factors and the fund subsequently underperformed, would the Plan be compelled by Chapter 2023-28 to divest from that fund because it was an ESG fund. Attorney Herrera opined that, if the decision to sell a fund is based on the fund's performance, then the decision is based on a pecuniary factor and therefore the Plan would not be compelled to divest. Attorney Herrera advised the Board that Sugarman & Susskind would assist in any way possible to provide ac compliant report to the State. 11. OTHER MATTERS: 11.1. Presentation and Discussion Re: 2024 Proposed Meeting Schedule. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the 2024 Proposed Meeting Schedule and noted that Attorney Herrera would be available to attend the February, July, September, and possibly the March 2024 meetings in person; the rest he would need to attend virtually. The Board had no questions or objections. 11.2. Presentation and Discussion Re: Administrative Budget Expense Report, As of June 30, 2023. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Administrative Budget Expense Report. The Board had no questions. 11.3. Presentation and Discussion Re: Check Register, April 1, 2023 to June 30, 2023. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Check Register as payments are made by ACH. To Chair Hartley's question, Pension Plans Administrator Martin clarified that Chubb provides insurance to the Board. The Board noted that Chair Hartley and Vice Chair Joseph will be attending the FPPTA event. To Trustee Snow's question, Pension Plans Administrator Martin advised that she does not anticipate needing a budget adjustment for the final quarter of the fiscal year, however she would request one if necessary. To Attorney Herrera's question, Pension Plans Administrator Martin confirmed the Board approves its annual budget at the membership meeting in March preceding the start of the fiscal year. To Trustee Snow's question, Pension Plans Administrator Martin confirmed that the Plan's actuary will value the Plan after the conclusion of the fiscal year. The Board discussed its amortization policy, noting it is a rolling 10 years which is reduced every year by 1 year. 12. ADJOURN. Chair Hartley adjourned the meeting at 10:10 a.m. - Dg Chair Michael Hartley Secrelarypyeasurer Shayla Grigos Book 1 Page 384 9-27-2023 9:00 a.m.