MINUTES OF THE CITY OF SARASOTA GENERAL EMPLOYEES' PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF FEBRUARY 23, 2024 Present: Chair Ryan Chapdelain, Vice Chair Mark Nicholas, Treasurer Kelly Strickland, Secretary Shayla Griggs, Trustee Robert Reardon, Trustee Barry Keeler, and Trustee Jan Thornburg. Others: Attorney Scott Christiansen, Pension Plans Administrator Debra Martin, and Pension Specialist Peter Gottlieb. Absent: None. 1. CALLI MEETING TO ORDER: Chair Chapdelain called the General Employees' Pension Plan (Plan) Board of Trustees Regular meeting to order at 10:01 a.m. 2. PLEDGE OF ALLEGIANCE: Presenter(s): Secretary Griggs. Secretary Griggs led the Board and meeting attendees in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Chair Chapdelain stated for the record, "We may disagree, but we will always be respectful to one another. We will direct all comments to issues, and we will avoid personal attacks." 4. ROLL CALL: Vice Chair Nicholas joined the meeting at 10:02 a.m. Pension Plans Administrator Martin called roll. All trustees were present. 5. PUBLIC INPUT: None, 6. APPROVAL OF MINUTES: 6.1. Approval Re: Minutes of the General Employees' Pension Plan Board Regular Meeting of January 26, 2024. Presenter/s): Chair Chapdelain. Trustee Keeler made a motion to approve the minutes of the Regular Meeting of January 26, 2024; Vice Chair Nicholas seconded the motion. The motion passed unanimously (7-0). 7. APPROVAL OF RETIREMENT REQUESTIS): 7.1. Presentation and Discussion: Early Retirement Request of Francis Peter. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin stated that Mr. Peter requests to retire effective February 7, 2024, with 18.77 Book 1 Page 414 02-23-2024 10:00 a.m. Book 1 Page 415 02-23-2024 10:00 a.m. years of service at age 56; he selected the lifetime option. Vice Chair Nicholas made a motion to approve Ms. Suarez's request for retirement; Trustee Keeler seconded the motion. The motion passed unanimously (7-0). 8. INVESTMENT PERFORMANCE REVIEW: None. 9. UNFINISHED BUSINESS: None. 10. NEW BUSINESS: 10.1. Presentation and Discussion Re: Actuarial Valuation as of September 30, 2023. Presenter(s): Pete Strong, Consultant and Senior Actuary; Israel Bichachi, ASA, MAAA, Consultant and Actuary; Gabriel Roeder Smith & Company. Pete Strong and Israel Bichachi of Gabriel, Roeder, Smith & Company (GRS) appeared before the Board and introduced themselves. Mr. Strong explained that Mr. Bichachi has worked on the Plan's actuarial valuations throughout his career with GRS; if Mr. Strong is unable to appear before the Board for any reason, Mr. Bichachi will appear in his stead. Turning to the Observed Experience (A-2), Mr. Strong discussed the City of Sarasota's (City's) actuarially required contribution amount. The funded ratio is based on an actuarially smoothed basis and not a market value basis. The investment gains and losses are measured against the expected rate of investment return (ROR), which is currently 6.2%, and therefore the approximate -15% return in 2022 becomes an approximate -21.2% in the actuarial valuation; gains and losses are smoothed in over a 5-year period. He reviewed the key elements of the experience. Regarding Average salary increases, Mr. Strong reminded the Board that it had temporarily upwardly adjusted the salary assumption in the FY 2023 valuation to accommodate raises not included in the across-the-board raise; the FY 2024 valuation will assume salaries will increase by 5%. The largest impact to the experience was the number of participant deaths; while the mortality tables predicted 14 participants would die in FY 2023, 20 deaths were reported which reduced the amount of retiree payroll and is an experience gain for the purpose of the valuation. The overall experience on the liabilities resultedi in a gain of approximately $3.17 million, which offset most of the loss on the actuarial value of assets of $3.4 million, for a net experience loss of $247,833. Mr. Strong reviewed the Required Contributions In Later Years (A-3) and stated that he expects the required City contribution amount to remain in the $7.3 to $8.0 million range for a few years and then decline. He read the Relationship to Market Value section. Chair Chapdelain noted that the City's contribution in FY 2022 was approximately $6.8 million, as well as that the Board had also temporarily adjusted the inflation assumption for 1 year. Mr. Strong agreed that these factored into the increase to the City's contribution amount. To Chair Chapdelain's question, Mr. Strong explained that while thei investment losses in FY 2022 will continue to be phased into the valuation for the next 3 years, he does not anticipate the funded ratio to change significantly. When the FY: 2022 loss is fully realized, Mr. Strong expects the funded ratio to quickly increase because the Board is also reducing the amortization period by 1 year in each year for new bases. The amortization period had been as high as 20 years; it is currently 14 years, and it is expected to reach zero by the time the last active member is expected to retire, at which time the Plan will want to be 100% funded. To Chair Chapdelain's question regarding the expected ROR, Mr. Strong asserted that, while the current expected ROR of6.2% is reasonable now, the Board may consider reducing it over time because circumstances will change. A plan with all retirees should be more heavily allocated towards fixed income than a plan with active members. At the same time, fixed income yields are currently high due to high interest rates; if interest rates return to the 3% to 4% range, an expected ROR below 6% would be more reasonable. Turning to the page titled Low-Defaul-Risk Obligation Measure, Mr. Strong explained that the Actuarial Standards of Practice (ASOP) No. 4 was revised and reissued to require all actuarial valuations to include a calculation showing the impact of completely de-risking a portfolio by investing only in fixed income securities. The low-default-risk obligation measure (LDROM) of benefits earned for the Plan, based on a discount rate of 4.63%, is an approximate liability of $256 million; the Plan's current liability is $217 million at 6.2%. This is only a disclosure, and it does not change the Plan's funding in any way. Mr. Strong discussed the Contributions to Finance Benefits of the Pension Fund (B-2) and explained that one component of the contribution requirement is the total of the normal cost, which is the amount of benefits earned by employees, plus administrative expenses, less expected member contributions. The second and largest component of the contribution is the payment on the unfunded liability, which is sizable due to the shortening duration of the amortization period. Mr. Strong anticipates the unfunded liability to remain at its current level at least until the investment loss incurred in 2022 is completely smoothed into the valuation. On the page titled Unfunded Actuarial Accrued Liability (B-6), Mr. Strong explained that the actuarial present value of future benefits (line A) declined from 2022 to 2023 because of the greater than expected number of benefit recipient deaths; he also noted that the actuarial accrued liability (line C) is based on service through September 30, 2023. Regarding Sources and Financing of Unfunded Actuarial Accrued Liability (B-7), Mr. Strong briefly reiterated the 14-year amortization period; in the FY 2024 actuarial valuation, the amortization period for new bases will be 13 years, new bases in FY 2025 will have a 12-year amortization period, and continue to reduce accordingly, which targets paying off the unfunded liability by 2038. To Trustee Reardon's question, if the Plan were to adopt an LDROM investment portfolio at 4.6% rate of return and maintain the current 14-year amortization policy, the contribution requirement would increase by approximately $3 million each year. To keep the current contribution amount, the amortization period would need to be increased to 20 or 25 years. To Chair Chapdelain's questions, Mr. Strong explained the origin of the LDROM. Financial economists determined that pension plans should value cash fiows the same way as similar sets of guaranteed cash flows in the market, which is bonds. Traditional pension actuaries disagreed for a variety of reasons, including that pension time horizons are substantially longer than bond maturities, unpredictable events will occur during pension cashflows such as unexpected salary increases, and the lengthy time horizon of a pension plan allows it to take short-term risks in exchange for greater returns. Actuaries' disagreements with financial economists notwithstanding, the LDROM method allows a pension fund to compare its liability using a risk-based portfolio to one which has been completely de-risked. This is an annual disclosure and will be included in future valuations. Referencing the Unfunded Actuarial Accrued Liability Page, Chair Chapdelain analogized the $51 million unfunded actuarial accrued liability (line E) as a mortgage with a 14-year repayment term; Mr. Strong concurred and added that the Plan is paying off a $51 million mortgage in $5.9 million annual payments, which includes interest at the rate of 6.2%. Turning to the Reconciliation of Plan Assets (C-8), Mr. Strong discussed the Plan's assets. In B.2., Investment Income, the gains in 2023 were less than the losses experienced in 2022. In B.1., Revenues and Expenditures, incoming cashflows predictably declined while in B.3., Benefits and Refunds, outgoing cashflows also declined. The Development of Funding Value of Pension Fund Assets (C-9) page shows the calculations of smoothed values of assets. Mr. Strong explained that Section E, Line E1 in 2023 is the same figure as on page C-8, B.2.e.; at the expected ROR of 6.2%, the Actual Market Total would return line E3. The difference between E1 and E3 is line E4 and is the amount to be smoothed in over the next 5 years in $1.25 million increments as seen in lines F1 2023, F2 2024, F3 2025, F4 2026, and F5 2027. He added that the $34.7 million loss incurred in 2022 is smoothed in on lines F1 2022, F2 2023, F3 2024, F4 2025, and F5 2026 in -$6.9 million increments. While 2026 appears to have the largest negative phase-in amount due to the ending of the smoothing in of the gains earned in 2021, the gains or losses to be experienced in 2024, 2025, and 2026 are, as yet, undetermined. If no new amounts are phased-in through 2026, the contribution amount for that year will increase by $500,000 to $600,000. Had the valuation used market values, the contribution amount in 2023 would have been $7.9 million instead of $7.3 million. Book 1 Page 416 02-23-2024 10:00 a.m. Book 1 Page 417 02-23-2024 10:00 a.m. To Chair Chapdelain's question, Mr. Strong advised that the State of Florida limits the smoothing period to 5 years. While having a longer smoothing in period controls volatility, it also veers farther from reality; 5 years is an appropriate smoothing period in Mr. Strong's opinion. Attorney Christiansen noted that there is also a requirement for the actuarial value of assets to be within an 80% to 120% range of the market value of assets. Mr. Strong advised that annual investment returns which exceed the expected ROR will continue to reduce the unfunded liability and increase the funded ratio. Turning to the History of Investment Return Rates (C-10), Mr. Strong explained that the average return over 5 years is constrained because of the negative returns in FY2 2022. He noted that actuarial smoothing of gains and losses creates the difference between the actuarial values and market values of investment returns. Chair Chapdelain asked Mr. Strong to amend future reports to state, in the last sentence in the section titled Ratio of Actuarial Accrued Liability to Payroll (A-5), that the Plan is closed. Mr. Strong agreed. The Board thanked GRS for its presentation and work on the actuarial valuation. Treasurer Strickland made a motion to accept the actuarial valuation report as of September 30, 2023; Secretary Griggs seconded the motion. The motion carried unanimously (7-0). 10.2. Presentation and Discussion Re: Declaration of Expected Rate of Investment Return. Presenter(s): Chair Chapdelain. Mr. Strong advised the Board that an expected ROR of 6.2%, based on the current asset allocation, is a reasonable rate of return for the Board to declare. Treasurer Strickland made a motion to declare an expected rate of investment return of 6.2% for the next year, several years, and long term thereafter. Trustee Thornburg seconded the motion. The motion carried unanimously (7-0). 10.3. Presentation and Discussion Re: Mauldin & Jenkins, Financial Statements for the Fiscal Years Ending September 30, 2023, and 2022. Presenter(s): Alison Wester, CPA, Partner, Mauldin & Jenkins. Alison Wester and Jennifer Trotter of Mauldin & Jenkins appeared before the Board and introduced herself. Ms. Wester presented the Financial Statements for the Fiscal Years Ended September 30, 2023 and 2022. The opinion is clean and unmodified. She advised that pages 41 through 9, the Management's Discussion and Analysis, are unaudited, but reviewed and compared for consistency with the Financial Statements. Page 10 is the Statements of Fiduciary Net Position showing assets and liabilities; page 11 is the Statements of Changes in Fiduciary Net Position which shows investment volatility and the impact that has on the Plan's position. She noted that the Financial Statements differ from the actuarial valuation because Governmental Accounting Standards Board (GASB) requires both realized and unrealized gains and losses to flow through the Plan each year, and do not allow for actuarial smoothing over extended periods of time. Ms. Wester explained each of the Notes to Financial Statements beginning on page 12. To Chair Chapdelain's question, Ms. Wester explained that Custodial Credit Risk refers to investing with a counterpart which could not meet its financial obligations; she added that a responsible investment consultant would discourage a plan from investing with an institution that presented a custodial credit risk. Ms. Wester continued; regarding Note 4, Fair Value Measurements on page 19, Ms. Wester explained that securities classified in Level I are valued using prices of identical investments in an active market. Securities in Level 2 are valued using prices of similar securities in active markets. Securities in Level 3 are valued using any other valuation method with the exception of those valued at net asset value which includes real estate funds. Note 4, page 20 includes more information on the valuation methodology for real estate funds. Note 5, Net Pension Liability, is a disclosure for the Plan but is recorded on the City's financial statements. The total pension liability less the Plan fiduciary net position equals the Net Pension Liability. Note 5 also contains the actuarial assumptions. The Sensitivity of the Net Pension Liability to Changes in the Discount Rate shows how the net pension liability changes if the discount rate, which is based on the expected ROR, is increased by 1% and decreased by 1%. In the required Supplementary Information, the Schedule of Changes in the Plan's Net Pension Liability now shows a complete 10 years. The Total pension liability data at the top of the page comes from the actuarial valuations and the fiduciary net position data on the bottom comes from previous financial statements. The Schedule of Contributions may be changed in future reports to landscape to improve legibility. Page 26 shows a 10-year history of investment returns. Had Mauldin & Jenkins identified any significant deficiencies and/or material weaknesses, they would be reported int the Independent Auditor's Report on Internal Controls Over Financial Reporting And On Compliance And Other Matters Based On An Audit Of Financial Statements Performed In Accordance With Government Auditing Standards; Ms. Wester advised that, while Mauldin & Jenkins did not identify any significant deficiencies or material weaknesses, they cannot confirm none exist. The Board had no questions for Ms. Wester regarding the Financial Statements. Ms. Wester briefly reviewed the contents of the Auditor's Discussion and Analysis, Financial and Compliance Audit Summary. To Trustee Reardon's question, Ms. Wester advised that the total unfunded liability is not listed in the Statements of Fiduciary Net Position on page 5 because it is not a liability of the Plan, but a liability to the City. On behalf of the City, Treasurer Strickland thanked Pension Administration for their diligence and efforts throughout the audit process. The Board and Ms. Wester agreed. Treasurer Strickland made a motion to accept the Financial Statements for Fiscal Years Ending September 30, 2023 and 2022; Secretary Griggs seconded the motion. The motion carried unanimously (7-0). The Board thanked Mauldin & Jenkins for their presentation. 11. ATTORNEY MATTERS: Attorney Christiansen explained that Kessler, Topaz, Meltzer & Check, LLP (Kessler Topaz), the Plan's securities monitoring firm, advised it must change how it receives payment for its services. He explained that Kessler Topaz only receives payment from the Plan when the Plan is awarded monies as part of securities litigation; it deducts 4% of the total award and the Plan receives the remaining 96%. The Securities and Exchange Commission has revised its rules to now require 100% of the recovered amount be issued to the claimant; Kessler Topaz has accordingly revised its agreement to require the Plan to pay Kessler Topaz 4% of the total award amount it reçeives when Kessler Topaz acted on the Plan's behalf. By consensus, the Board approved revising the payment process for Kessler Topaz. There has been no new state legislation adopted which would directly affect the Plan, although there are additional positions which will be exempt from public disclosure. Veteran's records will be exempt from disclosure, however each veteran must specifically request that their records be withheld. 12. OTHERI MATTERS: Book 1 Page 418 02-23-2024 10:00 a.m. Book 1 Page 419 02-23-2024 10:00 a.m. 12.1. Presentation and Discussion Re: Asset Allocation as of February 14, 2024. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Administrative Budget as of February 14, 2024. The Board had no questions. 13. ADJOURN. Chair Chapdelain adjourned the General Employees Pension Plan Board of Trustees regular meeting at 10:49 a.m. S6E E Chair Ryàn Chapdelain Secretary/Shayla Griggs