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HomeMy WebLinkAbout12-15-2020 Minutes - Not SignedCITY OF SEBASTIAN POLICE PENSION BOARD MINUTES OF REGULAR QUARTERLY MEETING DECEMBER 15, 2020 Call to Order -- Chairman Jason Gillette called the meeting to order at 10:00 a.m. Roll Call Present: Board Members: Jason Gillette Tim Wood Paul Williamson Andrea Ring Albert lovino (Zoom) Also Present: Bonni Jensen, Klausner, Kaufman, Jensen & Levinson, Attorney for the Board of Trustees (Zoom) Ken Killgore, Plan Administrator Andy Mcllvaine, Morgan Stanley Scott Owens, Morgan Stanley Douglas Lozen, Foster & Foster (Zoom) Todd Wishnia, Highland Capital (Zoom) Barbara Brooke -Reese, MIS Manager Janet Graham, Technical Writer (Zoom) III. Vote to Excuse Absent Board Member — None IV. ADoroval of Minutes — September 15, 2020 Chairman Gillette asked if there were any changes or corrections to the Minutes of September 15, 2020. No changes having been voiced by any Board member, Chairman Gillette called for a motion to approve the Minutes as presented. A motion approving the Minutes as presented was made by Officer lovino, seconded by Officer Wood, and approved unanimously via voice vote. V. Old Business A. Approval of Payments — Ken Killgore, Plan Administrator i. Highland Capital — July to September, Value, Growth, ADR $10,944.31 ii. Highland Capital — July to September, Fixed Income 3,106.94 POLICE PENSION BOARD PAGE 2 MINUTES OF REGULAR MEETING OF DECEMBER 15, 2020 Boston Partners — July to September, Fixed Income $1,821.93 iv. Fiem Capital — July to September 1,908.87 V. Renaissance — July to September 1,701.10 vi. Brookfield Public Securities Group, July to September 434.27 vii. Klausner, Kaufman, Jensen & Levinson, Sept/Oct/Nov 3,610.00 viii. City of Sebastian, Janet Graham 9/15/2020 meeting 126.00 ix. City of Sebastian, October to December 6,000.00 X. City of Sebastian, Annual Fiduciary Liability Insurance Policy 2,991.00 A. Salem Trust -- July to September 4,025.00 Mr. Killgore reviewed these payments and asked for a motion for approval. A motion to approve the payments as listed above was made by Officer lovino, seconded by Mr. Williamson, and approved unanimously via voice vote. B. Report on Foster & Foster Cyber Liability Insurance Coverage Mr. Killgore stated that Foster & Foster sent him a notice saying that they are increasing their cyber insurance up to the $2 million level that was being asked for by this Board. VI. Public Input — None in Chambers or on Zoom. The public can submit questions and/or comments to the Plan Administrator's email at kkillgore@cityofsebastian.org. Mr. Killgore stated he had not received any emails from the public. VII. New Business A. Presentation of October 1, 2020 Actuarial Report — Douglas Lozen, Foster & Foster Mr. Lozen reviewed the Actuarial Valuation Report as of October 1, 2020 (SEE ATTACHED). He reviewed the update on the Citys funding requirements and why it changes from one year to the next and an update on its funded status. There were a couple of assumption changes, which he also reviewed. These were mandated by Florida statute. Mr. Killgore asked regarding the payroll change which in the current year added 1.7% to the City's contribution. Mr. Lozen stated it did, but at this point, now that it is down to 1.51 %, it is going to be less of an impact going forward. Mr. Lozen reviewed that the funded status for the Pension Plan is continuing to improve, and in the last year it grew from 79.6% to 81.7%. He expects this to continue to grow at POLICE PENSION BOARD PAGE 3 MINUTES OF REGULAR MEETING OF DECEMBER 15, 2020 a rate of 1 % to 2% in the future. He reviewed two new pages contained in his report, the first of which covers a history of the funded status going back to 2015. He stated that the State has its own ideas of what long-term assumption should be. They are not mandating it, but they are stating their thoughts, and it is 5.25% to 6.5%. He stated that a discussion probably needs to be had on lowering the assumption within the next couple of years. Mr. Killgore asked what assumption rate the State FRS is using now. Mr. Lozen stated it is 7%, and the City is at 7.2%. Mr. Williamson asked if this matter should be discussed now rather than putting it off. Mr. Lozen stated because he did not give the Board any notice that this would be discussed today, he opined that, because of some time constraints on his part and the fact that it will be a weighty discussion, he would like to address this matter at a future meeting. He offered to do a study for the next meeting in order to see what the 7% would look like. It was the consensus of the Board that that would be acceptable. Mr. Killgore asked what the fee would be for that study. Mr. Lozen said it would be $500.00. Mr. Williamson asked what the minimal acceptable funded ratio is. Mr. Lozen stated his main concern is what the trend is, what is the funded ratio doing from one year to the next. This Police Pension funded ratio being in the 80s is fine. Chairman Gillette called for a motion. A motion to have Mr. Lozen do a study that he will present at the next meeting was made by Officer lovino, seconded by Mr. Williamson, and approved unanimously via voice vote. Mr. Lozen then turned to the second new report, History of Asset Values, and explained that graph. There being no further questions/comments from the Board members, a motion to approve the report from Mr. Lozen was made by Mr. Williamson, seconded by Chairman Gillette, and approved unanimously via voice vote. As a point of clarification, Ms. Jensen reiterated that this Board has approved an actuarial evaluation that had an anticipated rate of return of 7.2%. The State requires an annual declaration of the Plan's expected rate of return over the short term, the midterm, and the long term thereafter. She stated it would be appropriate to make a motion to anticipate a 7.2% rate of return. That can be reconsidered next year along with the report Mr. Lozen was approved to do on the expected rate of return for purposes of the actuarial evaluation. Chairman Gillette called for a motion. A motion to approve the 7.2% anticipated rate of return was made by Ms. Ring, seconded by Mr. Williamson, and approved unanimously via voice vote. Ms. Jensen stated that information needs to be provided to the State. Mr. Killgore stated he typically does that. Mr. Williamson asked, if the Board looks at going from 7.2% to 7%, is that a big enough jump, since it is only 20 basis points. Mr. Lozen stated that this subject can be discussed when he makes the presentation at the next meeting. Mr. Killgore asked if that can be implemented to be effective with the next evaluation. Mr. Lozen stated it could. He would not be recommending revising what the Board has approved today. There being no further discussion, Mr. Lozen ended his presentation. POLICE PENSION BOARD PAGE 4 MINUTES OF REGULAR MEETING OF DECEMBER 15, 2020 B. Report from Investment Monitor/Continue Discussion on Search for International Growth and Large -Cap Growth Managers/Discussion and Action on Setting the Expected Rate of Return Mr. Scott Owens from Morgan Stanley talked about the market and the economy and what has happened, what is expected to happen, and stated he would then ask Mr. Mcllvaine to talk about some of the action items that took place since the Board's last meeting and some of the things that need to be done in order to implement some of those action items. Mr. Mcllvaine will then review the managers as well. Mr. Owens discussed the uniqueness of this past year, and how this affected the market. He reviewed that during the first quarter the market fell over 30%. There was discussion about the pandemic, there was discussion about the market shutting down, but nothing had happened in the first quarter, except for the fact that the market fell. That is because the market is a leading indicator, and the market and the economy are not on the same cycle. When the second quarter hit and the market actually shut down, the market was going through the roof, up 30+%. That happened because the Fed said it was going to provide fiscal stimulus of roughly $6 trillion to put into the economy. The market thus went up, even though the first dollar had not been paid out yet. The third quarter by historical standards is a good quarter, and the market is expecting things to be great six months to a year from now. However, if something negative happens such as a problem with the vaccine, that could have an effect on the market. There will certainly be some volatility going forward, but it should not be as much as there was in the second quarter of this year. He stated that most economists believe that with a Biden presidency, it would be more geared to a bigger stimulus. If there is a bigger stimulus, that will affect the market positively. The downside to providing that bigger stimulus is that, if the government is providing money to the economy that is not normal, that is great at that moment in time. But when that money stops, that could have a negative impact on the market. Then eventually, that money will have to be paid back in the form of reallocating assets. Mr. Owens then reviewed his report (SEE ATTACHED), which addressed small -cap and large -cap growth over the last year. He explained several pages in depth, and he then called for questions/comments from the Board. Officer Gillette asked whether the stimulus that the government provided during the pandemic will have an effect on inflation at some time in the future. Mr. Owens answered it will. Officer Gillette stated that a lot of people retire with their pension or their retirement plans in their mid-60s to late 60s, but a lot of the officers could qualify to retire in their early or mid-50s. So that retirement plan that they have could potentially have to last them 30 years or more. Right now, the cost -of -living increase on the pension plan is POLICE PENSION BOARD PAGE 5 MINUTES OF REGULAR MEETING OF DECEMBER 15, 2020 somewhere around 1%. He questions that it might be important to bump that up because of inflation that might be coming in the future. Mr. Owens stated that is a very real concern. He further stated that inflation has been negligible for the last 10 years. It would be hard to think that the next 10 years in regard to inflation is going to look anything like the last 10 years, and he stated that future inflation is something this Board needs to be thinking about. Officer Wood suggested that the minimum wage increase will also have an effect on inflation, and Mr. Owens agreed. There being no further discussion on Mr. Owens' presentation, Mr. Mcllvaine presented information on action items that were taken between last quarter and this quarter. He reviewed that last quarter there was a review of the asset -allocation study and it was ultimately decided to bring on an infrastructure manager, which is a 5% allocation, and actually get rid of MLPs, which was also a 5% allocation. It was thus necessary to send over an updated investment policy statement, which was done. That has to be filed, but there is a 31-day waiting period before new managers can be implemented. Ms. Jensen stated that this document can be sent to Mr. Killgore for filing. Mr. Mcllvaine stated that in conjunction with that, a few letters were sent from his office: one to terminate MLPs, one to have Salem Trust purchase the Lazard Infrastructure Mutual Fund, and an additional letter to some managers that went along with the investment policy statement to rebalance. Mr. Mcllvaine stated there was an action item at the last meeting calling for searches in large -cap growth and international growth during the last quarter, and the Board decided to table those and agreed that those would be brought back if there was underperformance on the quarter. So a search was done for Highland large -cap growth, but the international growth manager, Renaissance, actually outperformed on the quarter. So Renaissance will continue to be watched. Mr. Mcllvaine stated that the portfolio did well on the quarter. It was a good quarter, 5.96% versus the policy index of 4.68%. He went through the report and explained the different pages (SEE ATTACHED). He also reviewed how the portfolio has grown since its inception. Mr. Owens asked how much of the cash is needed that is in the portfolio. Mr. Killgore stated regarding cash flow that the City makes the annual cities requirement in this quarter. Mr. Owens stated that about $50,000.00 will be left in the account, and the rest of the cash will be disbursed in equities. Mr. Mcllvaine reviewed the managers and stated a search will be done regarding Highland Capital. Regarding Boston Partners, it was a solid quarter. Fiera has had a stellar performance. They have been a great contributor to the portfolio. Renaissance POLICE PENSION BOARD PAGE 6 MINUTES OF REGULAR MEETING OF DECEMBER 15, 2020 International Growth had a good quarter, up 1.2%. Mr. Mcllvaine stated Renaissance is being watched closely, and if another bad quarter is seen, there will probably be a search performed. He stated Center Coast (MLPs) will be gotten rid of, so they will not be recorded in the next quarterly report. Intercontinental —Private Real Estate has outperformed their index and has been a good addition to the portfolio. Mr. Owens gave an in-depth review of the real estate market. Mr. Owens left the meeting at this point. In reviewing the IPS checklist, Mr. Mcllvaine related that the Plan is in compliance in each one of the sectors with the exception of a single issue, that being not to exceed 10% of the total portfolio. Actually, in the recent IPS language, a revision was made, as his company wants to give the managers the flexibility to make decisions. So the revised IPS thatjust came back actually has revised language that a single issue is not to exceed 5% of the total portfolio. He then reviewed each manager, their history, and information on their performance. Mr. Mcllvaine then addressed the large -cap growth situation in the portfolio. He reviewed the search that was done regarding Highland and explained how searches are done. He then called for questions/comments from the Board. Mr. Williamson asked If the Monitor has any suggestions. Mr. Mcllvaine stated that, if the goal is to mitigate risk, he would say Polen has the lowest standard deviation. They seem to protect the most. At the same time, they are the most concentrated. Officer Gillette questioned that, where all three managers are compared with the index, under Foreign Securities Highland has 10 max, Clearbridge has 10 max, Polen has 20 max. He asked if there is a reason for that and is that good or bad. Mr. Mcllvaine said he does not think it is something to be concerned about. Ms. Jensen asked if these companies use stocks that are traded on the American exchanges, and Mr. Mcllvaine said yes. Mr. Kilgore asked if Highland would no longer have the large -rap growth.. Mr. Mcllvaine stated that is correct, they would no longer have the large -cap growth. Ms. Ring asked for an explanation about the 10%. If Polen has a maximum of 20%, is that allowable. Mr. Mcllvaine explained that Polen has a maximum of 20% in their portfolio, meaning they could invest up to 20% of foreign companies, but Clearbridge has a mandate up to 10% that they can invest in foreign securities, and Highland has the same mandate of up to 10%. Each company has a different strategy. Ms. Jensen added that it depends on how many securities are being held in relation to the number of securities each manager holds. POLICE PENSION BOARD PAGE 7 MINUTES OF REGULAR MEETING OF DECEMBER 15, 2020 Officer Gillette asked if fees are also considered since Highland's appear to be somewhat higher than the others. Mr. Mcllvaine stated that is correct. Mr. Killgore asked if the fees are negotiable. Mr. Mcllvaine stated that sometimes they are. Some of the managers have what is similar to "most favored nations," so if they lower the fees for one group, they have to do it across their whole portfolio, so they do not want to do that. Mr. Williamson stated his concern about the smaller number of holdings that Polen has. Following a lengthy discussion, it was the consensus of the Board that the funds now with Highland be diversified by blending half with the Russell 1000 growth index and half with the active manager Polen. Mr. Gillette called for a motion. A motion to move funds from Highland and split that portion of the portfolio, which after rebalancing is going to be 16% or so, split it 50/50 between Polen and the Russell 1000 index, was made by Officer lovino, seconded by Mr. Williamson, and approved unanimously via voice vote. Ms. Jensen reported that Salem Trust has implemented new procedures for trades. Since the rebalancing of part of this Plan's portfolio is coming up, she would encourage Mr. Mcllvaine and Mr. Killgore to be certain that the Plan in compliance with those changes. C. Report from Investment Manager — Highland Capital Mr. Wishnia reviewed the report of Highland Capital and how the market has been affected by events of this past year (SEE ATTACHED). Basically, he agreed with the comments of Mr. Owens. He explained that one of the things Highland has done in their value portfolio is they have taken some of the larger -cap names and moved them out of the portfolio and added some names that have a smaller market cap, still staying within the index. He pointed out that the underperforrnance in value for the last quarter came from energy, which was down approximately 19%-20%, which was a complete reversal from the previous quarter, where energy was up approximately 20%. He stated that currently the international portfolio is performing solidly, being up about 14.15%, outperforming the index. Ms. Jensen reviewed that there was an executive order that was entered into by the President back in November which restricts U.S. citizens' ability to invest in China. So there are 31 stocks that beginning January 11th cannot be purchased by U.S. citizens. She asked that Mr. Wishnia plan for the next meeting to talk about what his thoughts are on it and how Highland is going to be dealing with that particular executive order. Mr. Wishnia said that he will do that. POLICE PENSION BOARD PAGE 8 MINUTES OF REGULAR MEETING OF DECEMBER 15, 2020 Mr. Wishnia addressed that fixed income was a solid quarter as well, over the index by 1.2%. He stated that Highland is typically neutral duration. They are anticipating at some point a rise in rates. Highland has about 42% in corporate bonds and about 45% in mortgages, which has helped the portfolio. The underperformance this fiscal year goes back to the first quarter. If you were not in treasuries in fixed income, you pretty much got crushed, and that is what happened to Highland, as they do not hold much in the way of treasuries. He called for questions or comments. Hearing no comments/questions from Board members, Mr. Wishnia also commented that, if Highland is underperforming and not doing what was expected, he does not want this Board to feel that there are any hard feelings. They want what is best for the Plan and appreciate the Pension Plan allowing Highland to hold their assets. Vill. Legal Updates A. Status of Proposed City Ordinance Amending the Plan for New IRS Rules Ms. Jensen stated her firm had been working with Manny Anon, City Attorney, to put together the IRS memorandum. The City is looking at a provision where it proposed a best practices, discretionary piece to allowthe Board to incorporate IRS -required changes via policy so that it would always be in IRS compliance. The City does not like that provision. It feels it is outside of their ability to grant. She did provide the City with some information from the charter which she thought was helpful, but the City would prefer that she come back to them always and make sure that the Plan is kept in compliance. Mr. Anon is at the position where he has got to take a look at it one more time, and Ms. Jensen thinks it will be going onto the agenda at the beginning of 2021. She added that her fine has provided Mr. Killgore with the new, updated special tax notice, which incorporates the age 72 requirement provision language, which is what is being implemented through the IRS amendment. She will let the City know if there is an issue, but she thinks it will be going forward, and hopefully before the Board's next meeting it will be passed. B. Other Legal Matters Regarding upcoming conferences, she stated the conferences coming up will be virtual, and there are not any conferences that can be attended in person. She suggested that her fine along with Graystone, may be able to provide some educational pieces for the Board. If there is a particular thing anyone from the Board would like to know about from the law area, let her know, and she will put something together for the next meeting. IX. Board Member Reports and Comments -- None POLICE PENSION BOARD PAGE 9 MINUTES OF REGULAR MEETING OF DECEMBER 15, 2020 X. Plan Administrative Reports and Comments A. Notification of Intent to Enter DROP from Sergeant Steven Marcinik. Mr. Kilgore stated that Patrol Sergeant Marcinik has put in for the DROP program. He has made his formal application. Mr. Kilgore had gotten some initial numbers from the actuary. Mr. Kilgore has to formalize those and give Sergeant Marcinik a schedule of what his future accumulation will be under the DROP, Also, Officer Greg Witt is already under the DROP program, so those are two who have taken advantage of that option. B. Review Budget Report and Annual Calendar of Board Activities Mr. Killgore stated the activities were on schedule according to what is in the Plan. Regarding the budget report, with the first quarter results in, almost $37,000.00 has been expended out of the $224,000.00. C. Other Administrative Matters -- None XI. Next Scheduled Quartedv Meetinc -- March 16, 2021 XII. Adlourn There being no further business, the meeting was adjourned by Chairman Gillette at 12:25 p.m. By: Date' 19