MINUTES OF THE CITY OF SARASOTA GENERAL EMPLOYEES' PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF JANUARY 21, 2022 Present: Chair Ryan Chapdelain, Vice Chair Mark Nicholas, Treasurer Kelly Strickland, Secretary Shayla Griggs, Trustee Robert Reardon, and Trustee Barry Keeler. Others: Attorney Scott Christiansen, Pension Plans Administrator Debra Martin, Senior Pension Analyst Anthony Ferrer, 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. Secretary 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 not engage in personal attacks.' " 4. ROLL CALL: Pension Plans Administrator Debra 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 10, 2021. Presenter(s): Chair Chapdelain. Secretary Griggs made a motion to approve the minutes of thel Regular meeting of December 10, 2021; Vice Chair Nicholas seconded the motion. The motion carried unanimously (5-0). 7. BOARD ELECTIONS: 7.1. Presentation and Discussion Re: Nomination to General Employees' Pension Plan Board of Trustees Seat GP1. Presenter(s): Secretary Griggs. Senior Pension Analyst Ferrer appeared before the Board and, with Attorney Christiansen, unsealed the ballots from the election of Seat GP1. Secretary Griggs read the ballots for the record; Pension Plans Administrator Book 1 Page 288 01-21-2022 10:00 a.m. Book 1 Page 289 01-21-2022 10:00 a.m. Martin and Pension Specialist Gottlieb recorded the ballots. Secretary Griggs noted 3 ballots were ineligible. Pension Plans Administrator Martin announced she and Pension Specialist Gottlieb concurred in their vote counts. April Bryan received 53 votes and Barry Keeler received 134 votes. Treasurer Strikland made a motion to accept the results of the election of Seat 1 electing Barry Keeler as Trustee; Vice Chair Nicholas seconded the motion. The motion carried unanimously (5-0). Secretary Griggs administered the oath of office to Trustee Keeler, and hej joined the Board on the dais. 8. APPROVAL OF RETIREMENT REQUEST(S): 8.1. Presentation and Discussion: DROP Retirement Request of Teresa Witkowski. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin stated that Ms. Witkowski requests to enter the DROP effective December 1, 2021, with 30.06 years of service at age 52; she selected the lifetime only option. Treasurer Strickland made a motion to approve Ms. Witkowski's request for retirement; Vice Chair Nicholas seconded the motion. The motion carried unanimously (6-0). 8.2. Presentation and Discussion: DROP Retirement Request of Lithroy Skinner. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin stated that Mr. Skinner requests to enter the DROP effective December 1, 2021, with 22.91 years of service at age 65; he selected the 50% to joint annuitant option. Treasurer Strickland made a motion to approve Mr. Skinner's request for retirement; Vice Chair Nicholas seconded the motion. The motion carried unanimously (6-0). 9. INVESTMENT PERFORMANCE REVIEW: 9.1. Presentation and Discussion Re: Graystone Consulting Quarterly Performance Summary and Quarterly Performance Report as of December 31, 2021. Presenter(s): Scott Owens, CFA, CIMA, Associate Vice President, Institutional Consultant, Andy Mcllvaine, Institutional Consultant, Graystone Consulting. Scott Owens and Andy MclIvaine of Graystone Consulting appeared before the Board and introduced themselves. Mr. Owens introduced their presentation. Mr. MclIvaine provided an overview of the stock market for the quarter ending December 31, 2021. The market continued to grow for the last 6 quarters which has fueled economic growth, unemployment continues to trend downward, and GDP, manufacturing and servicing indexes are all trending positively. Those notwithstanding, inflation is at a 40-year high near 7% which has been related to supply chain issues and excessive demand due to fiscal liquidity. Although the Federal Reserve is working to reduce liquidity, Graystone asserts inflation is no longer transitory as it will require time to correct. Mr. Mclivaine noted that despite the market finishing one of the strongest years in decades, consumer confidence is low. While the Federal Reserve indicates it is raising interest rates in attempts to control inflation, the Build Back Better program promises more employment opportunities which should increase liquidity and therefore increase inflationary pressures. While this confusion tends to drive investors to more conservative vehicles, Graystone still recommends stocks over bonds, as bond values typically decline when interest rates rise, as well as value stocks to growth stocks, and active management over passive management. He noted the 30% difference in values between the top 5 and bottom 495 stocks in the S&P 500; this will create investment opportunities where fundamentals will become more important than they had over the last 18 to 24 months. Turing to the Quarterly Performance Summary, Mr. MclIvaine reviewed the Capital Market Returns, and noted that although growth outperformed value in the large cap sector for the quarter ending December 31, 2021, value outperformed growth in January 2022. Regarding the Sector Returns, Mr. MclIvaine stated that Graystone expects to see lower and more varied returns going forward. He reviewed Developed and Emerging Markets Equity Returns, as well as Fixed Income, noting that despite its poor performance and losses when factoring in inflation, fixed income investments are critical components of a diversified and balanced portfolio. Mr. Owens reviewed the Total Fund = Executive Summary and Total Fund - Risk/Returns: Since Inception. Regarding the Asset Allocation Compliance, Mr. Owens recommended rebalancing from HGK into equities; he stated that it was difficult to provide exact dollar amounts or percentages as the market has moved dramatically since December 31, 2021, however the goal would be to get each of the managers at their respective targets with a slight overweight in equities, sO that the portfolio was not aggressive in any single sector. Chair Chapdelain asked if Graystone's outlook would support reducing the fixed income to its floor and reinvesting the proceeds into small cap value to bring that class to its ceiling. Mr. Owens advised that having any asset class at its maximum or minimum would mean respective gains or losses in that class would put that class out of compliance, and that he prefers to have holdings at their targets to allow for movement without exceeding compliance limits. Chair Chapdelain asked Mr. Owens how he proposes to invest any proceeds taken from HGK. Mr. Owens stated he would apply some to Polen, Clearbridge, Renaissance, NFJ, and Allianz sO that they were just under their respective targets; he noted that HGK is overweight by less than 1% as the cap is 17.5%, and it was at 18.2% as of December 31, 2021, but that he would recommend reducing HGK to 17%. Chair Chapdelain and Mr. Owens discussed the value of reducing fixed income by a fraction of a percentage considering its performance relative to the rest of the portfolio. Mr. Owens then advised he could provide materials to the Board on "liquid alts, which are alternative investments which have similar absolute risk profiles as fixed income yet are significantly more liquid. He stated that in a normal interest rate environment, liquid alts and bonds have similar returns, however when interest rates have risen, bonds have lost value while liquid alts have provided more positive returns. He offered to provide an asset allocation study and suggested the Board could reduce the range of fixed income without changing the long-term target by adding an asset class for hedge funds and liquid alts; this would give more investment options without changing the risk profile of the portfolio. He noted that liquid alts are expensive, charging at least 1%, but functional for some portfolios. Mr. Owens proposed a range from 0 to 5% sO that the Plan is not required to always have funds in that class, but that class is available when the market environment favors it. Chair Chapdelain asked if liquid alts are allowed under the Investment Policy; Attorney Christiansen advised he would need to review the Investment Policy. Trustee Reardon noted that this seems like a significant amount of effort for a small percentage of the portfolio. Chair Chapdelain pointed out that the predictability oft the fixed income asset class is a known quantity. Mr. Owens explained that this is a common conversation amongst other plans, and considering the current inflation rate, which does not appear transitory, cash is not a reasonable investment; further, considering the Plan has been reducing its investment retum assumption rate, discussions of the long- term strategy should include lower risk investment options. To Chair Chapdelain's question, Mr. Owens stated that the volatility standard deviation of fixed income is between 2 and 4, and liquid alts is between 3 and 5; additionally, liquid alts do not correlate to stocks or bonds, sO it further diversifies a portfolio. Trustee Reardon asked what type of leverage liquid alts apply, and if they are prone to blow-ups; Mr. Owens stated they have not seen that to date, and they use a small amount of leverage. He described two liquid alts he has in mind. One is a hedge fund comprised of other hedge funds across multiple sectors, which means it is a complicated investment. The second is a credit long/short strategy, which buys credit and shorts other credits to neutralize the duration of the interest rate exposure; he noted that right now, this strategy has a negative duration, Book 1 Page 290 01-21-2022 10:00 a.m. Book 1 Page 291 01-21-2022 10:00 a.m. meaning if interest rates go up, this strategy will have a positive retum. The credit strategy is less complicated than the hedge fund strategy. Mr. Owens noted these have been vetted and researched, but have only been operational for about 10 years, sO they do not have an established record over a wide variety of market environments. While Mr. Owens asserted Morgan Stanley's research is amongst the toughest in the industry, there are unknown quantities in investing in liquid alts. He stated the two managers are BlackRock and BlackStone, which are amongst the largest and respected managers on Wall Street. With the Board's informal consent, Chair Chapdelain asked Mr. Owens to proceed with the asset allocation for at least the purpose of discussion. Mr. Owens asked the Board if it would approve by consensus his request for rebalancing. Attorney Christiansen advised that if money is being liquidated from one manager and invested in another, the Board would need to approve by a motion, and asked Mr. Owens to make a recommendation with specific amounts or percentages for the Board to consider. Mr. Owens recommended the Board authorize reducing HGK to 17% and NFJ to 11% of the portfolio and reinvest the proceeds to increase: Polen to 8%, Allianz to 10%, Templeton to 7.5%, and Renaissance to 7.5%. He assured the Board that the amounts of reductions will equal the increases. Treasurer Strickland made a motion to approve Mr. Owens' recommendation to rebalance the portfolio as stated; Trustee Reardon seconded the motion. The motion carried unanimously (6-0). Attorney Christiansen advised that the Plan is prohibited from investing in private placements or other restricted securities which are not clearly marketable, and asked Mr. Owens if liquid alts are either of those. Mr. Owens stated they are mutual funds which are traded daily. Mr. Owens discussed each of the investment managers. He noted HGK has started to significantly outperform now that the market favors value, as opposed to ClearBridge and Polen, which are growth funds, noti in favor, and are underperforming. He cautioned against divesting from growth as it will eventually come back into favor, just as he cautioned against divesting from value managers when that was not in favor. He commented on NFJ and Allianz; regarding Templeton, he noted that while they have produced long term returns with positive alpha, it is not performing currently as well as other value managers because it has not ventured into growth stocks. Renaissance is similar to Templeton, but for different reasons; because it has 50 different holdings and the stock market has been driven by a select few stocks, Renaissance has underperformed. Mr. Owens stated he expects Renaissance to begin to perform when the market reaches more traditional conditions. He noted Invesco is performing consistently with its class, but that the class will not perform as well as stocks, however the risk associated with stocks is significantly higher than that of bonds. Mr. Owens explained that real estate has a positive correlation with inflation, and AEW has outperformed on a relative and absolute basis with risk levels comparable to fixed income; UBS is similarly performing well. He noted that Lazard is performing as predicted, although it has not been part of the portfolio for enough time to evaluate. Chair Chapdelain noted he did not have a risk/return analysis for the real estate funds. Mr. Owens stated that it takes a while to receive data from that sector and it was not available when the reports were sent out; typically, it is issued around the 15th or 20th of the month, however Mr. MclIvaine stated he had not seen it as of Thursday, January 20. Trustee Reardon asked if Graystone has any clients with exposure to Treasury Inflation Protected Securities (TIPS). Mr. Owens stated that Graystone has done significant research on these, and in a normal environment, they are unexciting investments; however, when there is unexpected inflation, TIPS perform very well. He has some clients which hold TIPS and they've done well recently, however the questions to ask are first, whether inflation is expected or unexpected, because TIPS perform well with unexpected inflation, and second, whether inflation will continue, because declining interest rates will cause TIPS values to also decline. He explained that TIPS are core investments in the Investment Policy Statement, and nothing prevents the current managers from holding TIPS if they fit their respective strategy. Mr. MclIvaine clarified that their clients which have TIPS have relatively small holdings. Attorney Christiansen asked if any of the fund managers in the portfolio have TIPS; Mr. Owens said he would need to confirm with the fund managers currently hold, or have previously held TIPS, and would report back to the Board through Pension Administration. Mr. Owens stated that aside from the asset allocation which has been addressed, there are no compliance issues to address. He stated they will bring an asset allocation with liquid alts and TIPS to their next appearance. Attorney Christiansen asked if Graystone could recommend an assumed rate of investment return for the coming year, several years, and long term thereafter, as the Board will be required to declare an expected rate after approving the actuarial valuation to be presented at this meeting. Mr. Owens stated 6.2% is a reasonable expected return for the short, medium, and long term. Chair Chapdelain asked Mr. Owens when he intends to present the asset allocation. Mr. Owens stated he would confer with his analysts and coordinate an appearance with Pension Administration. Chair Chapdelain asked for the status of combining Graystone's presentation materials into a single packet. Mr. Owens stated that Graystone has not made any progress, however, there are only a few pages in the Quarterly Report which are not in the Summary Report, and he rarely presents the Quarterly Report. While he brings a copy of the Quarterly Book to each meeting in the event there are questions, he would be happy to only send it digitally and present just the Summary unless additional questions are posed. The Board agreed by consensus. The Board thanked Mr. Christiansen and Mr. MclIvaine for their presentation. 10. UNFINISHED BUSINESS: None. 11. NEW BUSINESS: 11.1. Presentation and Discussion Re: Actuarial Valuation for Fiscal Year Ended September 30, 2021. Presenter(s): Pete Strong, Consultant and Senior Actuary, Gabriel Roeder Smith & Company. Pete Strong of Gabriel, Roeder, Smith & Company appeared before the Board and introduced himself. Mr. Strong noted that at its December 10, 2021 meeting, the Board requested Mr. Strong prepare the actuarial valuation using the lowest possible assumed rate of investment return which could be afforded by the actual investment gains for the year. He stated that the exact break-even rate was approximately 6.17%, and he rounded it to 6.2% to have a small reduction in the required contributions. Turning to the valuation report, Mr. Strong discussed the Observed Experience, noting that payroll was less than predicted due to the number of exiting employees. The funded ratio is now 75.1%; it would have been 79.3% had the assumptions remained unchanged. He reminded the Board that in an actuarial value, investment gains and losses are "smoothed" over 5 years. He reviewed the key elements of the experience, noting the differences between the expected and actual elements and how each impacted the valuation. He discussed the Change in Actuarial Assumption and explained how the change increased the City's contribution relative to before the assumption change but lowered the City's contribution relative to the prior year's valuation, as well as the Relationship to Market Value. Mr. Strong discussed Contributions to Finance Benefits of the Pension Fund and explained how the City portion of the total contributions are determined, as well as how it changed due to changes in the assumption. He stated that the change from 2022 to Before Assumption Changes 2023 was a result of decreases in covered payroll due to the Great Resignation during 2021. He anticipates this trend will continue as more members leave employment and enter retirement. He explained the Unfunded Actuarial Accrued Liability, which incorporates all assumptions as being fully realized, which determines the funded ratio, Sources and Financing of Unfunded Actuarial Accrued Liability, which shows how the unfunded liability is amortized. He explained the reason the Remaining Financing Period is 16 years is sO that the unfunded liability is paid to $0 by the time the last employee is projected to exit the plan and enter retirement. Regarding the Development of Funding Value of Pension Fund Assets, Mr. Strong explained how the actual value Book 1 Page 292 01-21-2022 10:00 a.m. Book 1 Page 293 01-21-2022 10:00 a.m. of investment returns on line E1, less the assumed amount of investment retumn on line E3, equals the investment gains which are then smoothed into this year's valuation and the next 4 annual valuations. Pointing to line H, he stated that in 2020, the actuarial value, which smooths gains and losses, was higher than the market value creating a loss; the significant investment gains in 2021 become a cushion to offset potential investment losses. He reviewed the History of Investment Return Rates. 11.2. Presentation and Discussion Re: GASB No. 67 Plan Reporting and Accounting Schedules for Fiscal Year Ended September 30, 2021. Presenter(s): Pete Strong, FSA, EA, MAAA, FCA, Senior Consultant and Actuary, Gabriel, Roeder, Smith & Company. Turning to page E-1 of the valuation report, Mr. Strong advised that the GASB statement is presented on a market basis with no actuarial smoothing. He focused on the 2021 column and stated that was calculated before the reduction in the assumed rate of investment return. He commended the Plan on reducing the Net Pension Liability from $57 million in 2020 to $31 million in 2021. Chair Chapdelain asked Mr. Strong how many members are projected to retire in 2022 and did he believe that estimate was reasonable considering the COVID-19 pandemic. Mr. Strong stated that 11 members are expected retirements. This was based on a 2018 experience study which has guided GRS's projections. Considering the current value oft future benefits and actuarial liability are relatively close, and the Plan only has 109 active members remaining, differences between the projected number of members transitioning from employment to retirement and the actual numbers due to members either retiring early or delaying retirement would change a valuation by a fraction of a percentage, but not by millions of dollars. Chair Chapdelain pointed out that the experience study was performed before COVID-19; Mr. Strong explained that while early resignations and retirements would create an experience loss, those events also reduce the Normal Cost due to less payroll expenses. Chair Chapdelain asked Mr. Strong if he continued to recommend reducing the expected rate of investment return with the goal of 6%, if not less. Mr. Strong recommended the Board not make significant changes for the time being as dramatic changes in inflation and/or interest rates over the next 3 to 5 years will affect de-risking the Plan's portfolio, all of which will factor into determining the expected rate of return. Secretary Griggs made a motion to accept the Plan valuation prepared by Gabriel, Roeder, Smith and Company for the fiscal year ending September 30, 2021; Treasurer Strickland seconded the motion. The motion carried unanimously (6-0). Attorey Christiansen noted that when the Board accepts an actuarial valuation, it must also declare an expected rate of investment return. Trustee Keeler motioned for the Board to declare, based on advice from the investment consultant, an expected rate of investment return of 6.2% for the next year, several years, and long-term thereafter; Vice Chair Nicholas seconded the motion. The motion carried unanimously (6-0). The Board thanked Mr. Strong for his presentation and service to the Board. 12. ATTORNEY MATTERS: Attorney Christiansen noted that Trustee Keeler must complete and submit his financial disclosures, and former Trustees McVaugh and Vincent must complete form F1 for a former trustee. Further, an additional election is coming up for former Trustee McVaugh's seat which is member-only. Trustee Keeler asked if there were any departmental restrictions on who could run for a member-only seat. Attorney Christiansen confirmed all active members are eligible to run for member-only seats. Pension Plans Administrator Martin confirmed there was sufficient time to distribute and collect ballots. Pension Plans Administrator Martin also confirmed the February 18, 2022 meeting will be held in Chambers. 13. OTHER MATTERS: Referencing the 2022 Board meeting schedule, Chair Chapdelain asked Pension Administration if HGK, which is scheduled to present to the Board at the May 9, 2022 meeting, could present instead at the March 22, 2022 membership meeting with Invesco, and ClearBridge, which is scheduled at the March 22, 2022 membership meeting, could present with Polen Capital at the May 9, 2022 meeting, sO that managers in the same asset classes could present at the same meetings. Pension Administration advised it would contact HGK and ClearBridge to confirm their ability to accommodate the change. 14. ADJOURN. Chair Chapdelain adjourned the General Employees Pension Plan Board of Trustees regular meeting at 11:37 a.m. - - Chair Ryan Chapdelain Secretaryl (ShaylaGriggs Book 1 Page 294 01-21-2022 10:00 a.m.