Book 1 Page 363 09-22-2023 8:15 a.m. MINUTES OF THE CITY OF SARASOTA POLICE OFFICERS' PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF SEPTEMBER 22, 2023 Present: Chair Demetri Konstantopoulos, Vice Chair Johnathan Todd, Secretary/Treasurer Shayla Griggs, and Trustee Ronnie K. Baty Others: Attorney Scott Christiansen, Pension Plans Administrator Debra Martin, and Pension Specialist Peter Gottlieb. Absent: Trustee Joseph Jody" Hudgins. 1. CALL MEETING TO ORDER: Presenter(s): Chair Konstantopoulos. Chair Konstantopoulos called the regular meeting of the Police Officers' Pension Plan (Plan) Board of Trustees to order at 8:15 a.m. 2. PLEDGE OF ALLEGIANCE: Presenter(s): Secrelary/lreasurer Griggs. Chair Konstantopoulos led the Board and those in attendançe in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Presenter(s): Chair Konstantopoulos. Chair Konstantopoulos stated for the record, "We may disagree, but we will be respectful of one another. We will direct all comments to issues. We will not engage in personal attacks." 4. ROLL CALL: Presenter: Pension Plans Administrator Martin. Pension Plans Administrator Martin called roll. Secretary Griggs and Trustee Hudgins were not present. 5. PUBLIC INPUT: None. 6. APPROVAL OF MINUTES: 6.1. Approval Re: Minutes oft the Police Officers' Pension Plan Board of Trustees Regular Meeting of July 28, 2023. Presenter(s): Chair Konstantopoulos. Secretary Griggs joined the meeting at 8:16 a.m. Trustee Baty made a motion to approve the minutes of the Regular Meeting of July 28, 2023; Vice Chair Todd seconded the motion. The motion passed unanimously (4-0). 7. RETIREMENT REQUESTS: None. 8. INVESTMENT PERFORMANCE REVIEW: 8.1. Presentation and Discussion Re: Allspring Global Investments, Investment Performance Summary for Period Ending June 30, 2023. Presenter(s): Bobby Chen, Senior Portfolio Specialist; Dann Smith, Director, Institutional Client Group; Allspring Global Investments. Bobby Chen and Dann Smith of Allspring Global Investments (Allspring) appeared before the Board and introduced themselves. Mr. Smith provided a firm overview, noting it had separated from Wells Fargo to become an independent asset manager, and it has moved its headquarters to Charlotte, North Carolina; while Allspring has a transitional service agreement with Wells Fargo for technologic processes, it anticipates complete disengagement from Wells Fargo by the latter half of 2024. Allspring will delay outsourcing its middle-office functions to State Street Advisors until it has fully disengaged from Wells Fargo. He assured the Board that the Plan should not perceive any changes, other than the name change from Wells Fargo to Allspring. Noting the Plan is invested in Allspring's Large Cap Growth strategy, Mr. Chen advised that the year-to- date (YTD) absolute returns through June 30, 2023 were approximately 24%, yet the portfolio trailed its benchmark. He noted the benchmark's concentration as compared to the portfolio, which is more diversified, as well as the portfolio's overweighted positions in mid-cap stocks; he added that the benchmark, the Russell 1000 Growth index, includes the Russell Mid-Cap index, and therefore the mid-cap weighting is within its strategy. Historically, Allspring's overweight to mid-cap provides for more alpha opportunity; alpha is the excess return earned on an investment above the benchmark return when adjusted for risk. Mr. Chen explained that, although the portfolio has historically outperformed the index, it has recently lagged because the index's returns have been dominated by Nvidia, Meta Platforms (formerly Facebook), Amazon, Microsoft, Apple, Alphabet (formerly Google), and Tesla, which are collectively known as "the magnificent 7." After briefly reviewing the pages of the materials titled Dynamic Growth Equity, Investment Philosophy, and Dynamic Growth Team, Mr. Chen discussed how the majority of the index's returns were driven by 7 stocks, as represented on the page titled Large cap growth returns dominated by mega caps; he advised that the market has never been this concentrated. In noting the degree to which Apple's and Microsoft's stocks dominate market, Mr. Chen noted the portfolio is underweighted in Apple because Apple's lack of revenue growth in the past few years, and Allspring is committed to investing in only top quartile growth. Despite not growing on a fundamental level, Apple's stock is up 35% YTD in 2023. Mr. Chen discussed why Allspring believes the market favors mega-cap stocks. Higher interest rates have given rise to economic uncertainty, which creates an environment that favors the market's largest stocks. While very few companies have directly profited to date from artificial intelligence (AI), discussions of how Al will impact commerce in general, combined with mega-cap companies' investments in this field, have helped to frame mega-cap companies as early-stage beneficiaries. Additionally, as a collective group, and notwithstanding Apple's lack of revenue growth, mega-caps' earnings revisions have held up better than those of down-cap companies. Mr. Chen noted that, as demonstrated on the page of the materials titled, Market returns, 2021 column for R 1000G Minus R20006, mega-caps outperforming small-caps is a recurring trend, although it is unusual for this to have repeat years SO close together. He asserted that, for the stated reasons, Allspring has had soft performance recently, and that it had outperformed during the 4 years prior to 2021. Turning to the page titled Earnings beats: portfolio VS. benchmark, Mr. Chen explained why Allspring has confidence in the strategy, and is reluctant to weight the portfolio closer to the benchmark. The graph shows the percentage of companies which beat their earnings estimates; the companies in the portfolio surpassed their earnings estimates far more often than those in the benchmark. In this context, the portfolio holdings have not underperformed as much as the market is intensely focused on a very small group of companies, and the solid fundamentals of the companies in the portfolio have not translated into the expected returns in this environment. Mr. Smith added that the combined weighted average market cap rates of Apple and Microsoft are greater than the entire mid-cap index. The page titled Dynamic Premier Growth: Track record consistency shows the portfolio has outperformed the index on a rolling 5-year basis 73% of the time, Book 1 Page 364 09-22-2023 8:15 a.m. Book 1 Page 365 09-22-2023 8:15 a.m. although Mr. Chen acknowledged the portfolio is currently lagging. The page titled Valuations attractive down market cap, shows the percentile ranking each index's current valuation relative to that index's valuation since 1998. He noted that the large cap indexes are all trading at valuations near their highest historical levels while the midcap indexes are currently lower than their averages, suggesting opportunities for better values can be found in the mid-cap range. At Mr. Smith's suggestion, Mr. Chen reviewed the Portfolio positioning page of the materials, noting the long-term growth forecast of 19.3% is higher than the benchmark. On the Portfolio Attribution page of the materials, Mr. Chen explained that while the largest contributors to the portfolio are not mega-caps, they are market leaders in their sectors. He noted that some of the largest detractors to performance are due to underweighted positions, such as in Apple. Mr. Smith reiterated that Allspring intends to stay faithful to its strategy because of its conviction and will not venture into other asset classes solely because the market is currently trending differently. Larry Cole, of Burgess Chambers & Associates, appeared before the Board. To Mr. Cole's question, Mr. Chen stated that, although the current quarter started positively, performance quickly reversed, and the portfolio currently trails the benchmark somewhat, mostly due to investor focus on mega-caps. He reiterated his confidence in the strategy over the long-term, despite its current performance. The Board thanked Mr. Chen and Mr. Smith for their presentation. 8.2. Presentation and Discussion Re: National Investment Services, Investment Performance Summary for Period Ending June 30, 2023. Presenter(s): Mark Anderson, CFA, Chief Strategy Officer; Ray Caprio, Director, Institutional Sales; National Investment Services. Mark Anderson and Ray Caprio of National Investment Services (NIS) appeared before the Board and introduced themselves. Mr. Caprio reviewed the Company Overview page of the materials and explained that NIS's parent company, Resolute Investment Managers (Resolute), changed ownership, however NIS will remain a wholly autonomous subsidiary. Resolute invested cash into NIS which allowed NIS to establish a succession plan and develop a capital structure to allow for more growth in new markets; he noted that NIS entered the retail market by offering its first mutual fund in 2020. Mr. Caprio advised that Kelso Investments, one of Resolute's investors, divested its holdings in Resolute which required NIS's clients to provide consent, but the divestment creates no meaningful changes for NIS's clients, and that NIS would only experience a minor organizational change at Resolute. He also noted that the firm has invested heavily into cybersecurity and compliance, as well as added analysts and more back-office support. Referencing the Performance Overview in the materials, Mr. Anderson explained that the portfolio has generally matched the benchmark, although it has had periods of slight under- and out-performance; quarter-to-date, the portfolio is 10 basis points ahead of the benchmark, and he anticipates continued outperformance as interest rates continue to drift upward. Corporate bonds contributed to the outperformance; because the Plan requires corporate bonds to be A-rated or better, the Board should anticipate less yield in exchange for the higher credit rating. While the portfolio generally outperformed during the March and April 2020 meltdown relative to other portfolios, currently, A-rated corporate bonds are yielding less than lower rated corporates; the portfolio is up approximately 3% relative to the benchmark as of June 30, 2023. The portfolio's municipal bonds were up 5% as of June 30, 2023, but have a lower weighting in the portfolio. NIS has reduced its weighting in municipal bonds from 8% at the beginning of 2023 to approximately 4% now due to valuation concerns. Treasury bonds in the portfolio were also ahead oft the benchmark, mostly due to thei interest rate yield curve inversion; NIS has been reweighting its treasury bond allocation to emphasize the 3- to 5-year duration. To Mr. Cole's question, Mr. Anderson explained that, if given the opportunity, he would suggest amending the investment policy guidelines to allow a percentage of the corporate bonds in the portfolio to be less than A-rated; he suggested an allocation of 10% to 15% of BBB rated corporate bonds. This would allow the portfolio to outperform the index more efficiently; the portfolio is currently underweight in corporate bonds due to lack of available A or better corporate bonds to populate the portfolio. Mr. Cole explained that there are only 7 corporate bonds which are AA or better, and only 1 or 2 which are AAA rated; the A or better requirement has been in the Plan's investment policy for a significant period of time and is not bound by local ordinances. Attorney Christiansen added that the Plan is more restrictive regarding corporate credit ratings than many of his other clients. Mr. Cole explained that the Plan may be missing out on some yield due to an antiquated requirement, and advised he would research the issue and report back to the Board. To Mr. Cole's question, Mr. Anderson advised that NIS is buying agency mortgages as there has been a disconnect in the market as banks and the Federal Reserve (Fed) have tried to reduce their balance sheets. NIS has also invested in certain industrials, which lead the Treasury market yield by 50 to 70 basis points. He noted that the portfolio currently yields approximately 5%; while the Plan could simply purchase a Treasury bill with a 5% yield, if rates were to decline, the current portfolio would outperform while a 5% Treasury bill would not change its payment stream. Referencing the CPI graph on page 5 of the materials, Mr. Anderson explained that the Services component of the Consumer Price Index (CPI) remained steady at 2% until the COVID-19 pandemic; then, it rose to 4%, and it has not declined significantly since. He asserted the Fed will remain uncomfortable with the rate of inflation until the Services component of inflation returns closer to its traditional level, which will then shift investors' focus to the "higher for longer" camp. NIS is, accordingly, adjusting the portfolio duration down by 1/3 of a year. While NIS is not a duration manager, it believes rates will go up in the future, and a lower duration would then benefit the portfolio. He noted that energy inflation had benefitted the portfolio, but as energy inflation declines, it will detract. Mr. Cole added that rising wages continue to exert pressure on inflation; Mr. Anderson concurred. The Board thanked Mr. Caprio and Mr. Anderson for their presentation. 8.3. Presentation and Discussion Re: Burgess Chambers & Associates, Quarterly Investment Performance Review for Period Ending June 30, 2023. Presenter(s): Larry M. Cole, Executive Vice President, Burgess Chambers & Associates. Mr. Cole advised he will request a small reallocation, which prompted his question to NIS regarding new investments. Mr. Cole explained that fiscal year through June 30, 2023, the portfolio was up 14%, but that the portfolio lost approximately 3% during the current quarter; the primary reason for the decline is likely due to rising interest rates which caused a sell-off in the market-leading tech stocks, uncertainty caused by the government's budget issues and potential shut-down, and the election in 2024. To Chair Konstantopoulos's question, Mr. Cole explained that he suspects the reason there are fewer A- rated corporate bonds may be due to the rating agencies not changing with the times, and that during low- interest rate periods, there was more borrowing and higher debt ratios. Mr. Anderson appeared again before the Board and agreed, adding that an optimal capital plan includes some debt to maximize leverage. Mr. Cole noted that the BCA Market Perspective in his report, which focuses on the housing affordability crisis, is not directly applicable to the Plan, however he suspects it may become an issue in the 2024 election as it is directly relevant to the economy. He noted that the Florida housing market is currently supply driven, as there is more than ample demand. Mr. Cole reviewed the Quarterly Market Summary, noting it is the general market performance, and not the portfolio's performance. He noted the dismal performance in 2022 when the bond market failed to provide any support as stocks declined. While investors who held individual bonds were not directly affected by rising interest rates, as their returns were paid out as scheduled, investors who are required to mark-to- market suffered losses as rates rose. Mr. Cole asserted that, although raising interest rates has brought inflation down dramatically, the Fed will have the most difficulty in finally reaching its target inflation rate due to pressures from the energy sector, wages, and labor issues; he added that he does not believe the Fed will consider lowering rates until at least the latter half of 2024. Mr. Cole noted that 18 months ago, managers were buying bonds in the 2.5% to 3% range while now, they are looking at bonds yielding 5%; he opined that, if the Board were to reduce its credit rating requirement, it may find yields closer to 6%. He noted that, if an investor can buy a bond at 5.5% and has an assumed rate of investment return of 6.5%, more funds can be allocated into fixed income to reduce risk. Book 1 Page 366 09-22-2023 8:15 a.m. Book 1 Page 367 09-22-2023 8:15 a.m. Mr. Cole advised there were no compliance issues as of the reporting period. Turning to the Actual VS. Target Asset Allocation, Mr. Cole explained the portfolio is similarly allocated as of September 21, 2023. He recommends the Board reduce the allocation in large-cap equities and increase the fixed income allocation, and he will discuss his recommendation later in his presentation. The Fixed Income balance is not reflective of a $10 million redemption request which is currently unsatisfied. Mr. Cole suspects the real estate market may recover before the full redemption request is paid out, and the Board may choose to cancel the unpaid portion of the redemption request; only $500,000 has been received to date due to a lack of transactions in the real estate market. The page titled Asset Allocation & Performance - Gross shows the Quarter-to-Date return as of June 30, 2023 was 3.3%, which puts the portfolio in the top 39th percentile amongst its peers; the Fiscal YTD return was 14.9%, which he estimates is currently closer to 12%. Mr. Cole discussed the Domestic Equity class, adding that Granite Large Cap would likely tell a similar story to Allspring's. While the Russell 1000 Growth Index is heavily concentrated, most managers are unwilling to match the index's weighting due to concentration risk. Although he has contemplated recommending moving assets into an S&P 500 index fund to increase the upside capture rate, that would essentially be an expensive growth fund, and would come with significantly higher risk. He asserted the market is broadening, and he does not recommend any manager changes now, and allowing Granite and Allspring to catch up. Mr. Cole believes, after a lengthy conversation with JP Morgan, that the real estate market is reaching a bottom; he asserted that valuations were based on empty office spaces over an indetermined amount of time which likely won't be the case. While a return to 100% occupancy is not a reasonable expectation, neither is the 40% to 50% occupancy as priced into current valuations. He recommends monitoring this sector. The bond sector is down in this quarter due to rising interest rates, however YTD they remain positive, and therefore it may be time to start putting more assets into this class. Mr. Cole reviewed the Fiscal Yar Rates of Return and Total Fund pages of the materials. Returning to his recommendation, Mr. Cole suggested the Board liquidate $1 million from Newton, $500,000 from Granite Large Cap, and $500,000 from Allspring Large Cap, and invest $1 million in Sawgrass and $1 million in NIS. Garcia Hamilton is already the largest bond manager in the portfolio, and this distribution would reduce that relative imbalance. Trustee Baty made a motion, as recommended by Mr. Cole, to liquidate $1 million from Newton, $500,000 from Granite Large Cap, and $500,000 from Allspring Large Cap, and invest $1 million in Sawgrass and $1 million in NIS; Vice Chair Todd seconded the motion. The motion carried unanimously (4-0). Mr. Cole advised he may come back to the Board next quarter with a similar request, however, in 2 to 3 years, this will likely be a prudent move. 9. UNFINISHED BUSINESS: None. 10. NEW BUSINESS: 10.1. Presentation and Discussion Re: Burgess Chambers & Associates, Proposed Amendment to the Investment Policy Statement. Presenter(s): Larry M. Cole, Executive Vice President, Burgess Chambers & Associates. Attorney Christiansen reminded the Board that, at the July 28, 2023 meeting, he presented his memo to clients addressing how to address the recently passed Florida HB3 which restricts public entity boards from making investing decisions based on non-pecuniary factors. One of his recommendations was to direct the investment consultant to draft an amendment to the Investment Policy Statement (IPS) requiring the consideration only of pecuniary factors when making investment decisions. Mr. Cole noted that he had also updated some information, such as index names which have changes, although the substantive changes to the IPS are related to HB3. Mr. Cole reiterated that the State of Florida has not released details regarding the reporting processes required by HB3, sO this will be a developing process. Attorney Christiansen added that, if the State of Florida asks each plan what it has done to comply with HB3, the Board can confirm it has updated its IPS to reflect the required changes. Trustee Baty made a motion to approve the proposed Amendment to the IPS as presented to comply with HB3; Vice Chair Todd seconded the motion. The motion carried unanimously (4-0). Mr. Cole added that he and Attorney Christiansen have reviewed the ownership change at NIS, which also affects SSI, and believe it will not impact either fund managers' personnel, policies, or practices. Nevertheless, Mr. Cole will continue to monitor each manager. The Board thanked Mr. Cole for his presentation. 10.2. Presentation and Discussion Re: Proposal to Provide Audit Services for Fiscal Year Ending September 30, 2023. Presenter(s): Alison Wester, Mauldin & Jenkins. Alison Wester of Mauldin & Jenkins appeared before the Board and introduced herself. Ms. Wester presented the. Audit Engagement Letter and addendum. There are minor changes since the prior audit; the most notable is on page 3, which provides information about third-party services Mauldin & Jenkins may use during the audit process. Because some investments cannot be valued using the NASDAQ or available stock exchanges, Mauldin & Jenkins uses third-party services, such as Harvest, which provide valuations to test information supplied by the custodial bank; the Plan's identity is not revealed to the third party. She outlined the audit timeframe and noted its fee has increased, mostly due to the market rates and increases to hard costs. Ms. Wester explained that all services will be performed domestically, in Manatee and Sarasota Counties, by Mauldin & Jenkins employees. At Attorney Christiansen's request, Ms. Wester confirmed that the engagement letter can be modified to reflect it will be signed by the Board Chairman and Board Secretary instead of Management and Governance. Attomey Christiansen advised the Board he reviewed and approved the engagement letter and addendum. Trustee Baty made a motion to approve the audit engagement letter provided by Mauldin & Jenkins as amended; Vice Chair Todd seconded the motion. The motion carried unanimously (4-0). 11. ATTORNEY MATTERS: To Attorney Christiansen's questions, Pension Plans Administrator Martin advised the Summary Plan Description will be distributed at the conclusion of today's Board meeting because the document is dated September 22, 2023. She also advised that the Chapter 185 monies are still in transit from the Department of Retirement (DOR) to the Plan because the DOR's accounting department incorrectly sent the check to the City's now-defunct post office box; the DOR cancelled and re-issued the check, and Pension Administration anticipates it will be received within the week. Attorney Christiansen advised the amount is approximately $847,000, and has increased substantially from the prior check, mostly due to the increases in insurance premiums. The proposed ordinance addressing the Secure Act 2.0 passed the City Commission; Pension Plans Administrator Martin confirmed a copy was sent to the State of Florida. Attorney Christiansen asked how the City's payroll system transition has progressed, and if it would be Book 1 Page 368 09-22-2023 8:15 a.m. Book 1 Page 369 09-22-2023 8:15 a.m. appropriate to implement an 'easy pay' process to allow employees to pay indebtedness associated with service purchases through payroll deduction. Secretary/Treasurer Griggs and Pension Plans Administrator Martin advised that the payroll transition is still in progress, and that the Payroll department is not able to accommodate new processes at this time; that notwithstanding. Pension Plans Administrator Martin advised she has notified the Payroll department that this is being considered and may become a new process to develop. 12. OTHER MATTERS: 12.1. Presentation and Discussion Re: Administrative Expense Budget Analysis April 1, 2023 through June 30, 2023. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Administrative Expense Budget Analysis. The Board had no questions. 12.2. Presentation and Discussion Re: Check Register, April 1, 2023 through June 30, 2023. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Check Register, and noted the payments to named persons are related to DROP payments or refunds. The Board had no questions. Pension Plans Administrator Martin advised that the term for Seat 4, currently held by Chair Konstantopoulos, ends on January 31, 2024, and that Pension Administration will send out nomination forms to active members within the next week. 13. ADJOURN. Chair Konstantopoulos adjourned the meeting at 9:24 a.m. A Ahypo Chair Démétri Konstantopoulos Seofelaryreasurer ShaylGriggs