County Council - Regular Meeting

We're live. Ready? I'd like to call this meeting to order, if you could all rise for the Pledge of Allegiance.

I pledge allegiance to the flag of the United States of America, and to the republic for which it stands, one nation, under God, indivisible,

All right, good evening everyone. First up we have Rolf. Present.

Yes, here. Here. Here.

Yes.

Here. Present.

Here. Next up, we have the approval of Foundation Minutes for October 14, 2025. If I can get a motion. I make a motion, Mr. President.

Second.

Okay, first and second. Any discussion? Hearing none. All those in favor, signify by saying aye.

Aye.

All those opposed, same sign. Motion carries. All right, next up to the capital city presentation.

Great. Thank you. Good evening, everyone. Is my volume okay? Yes. I do apologize for the hard copy materials. It appears that with the long weekend, I take full blame. I left the office with one bag and there was a second bag. So, it's enough for the middle group and then sharing on the ends. Again, I do apologize for that. That's not our normal plan. So what I plan to cover for you tonight is the first quarter performance. I do have some updated figures for you as well here into the second quarter in May. And then I do have the annual portfolio construction study, and that includes a recommendation that we have for you. We're recommending a slight change to your underlying manager lineup, so I want to make sure we leave a little time at the end of that. So just diving right into the report, if you look at page two, the market overview. Thank you so much, Joy.

Can you give Andy one? I stole his. Sure.

So I'll dive right into the market review while she's doing that again. Much appreciated. So what we saw in the first quarter in the broad investment markets was, especially at the end of the first quarter, at the end of March, we saw volatility really re-enter the markets. And that, of course, occurred as the Middle East conflict started. sort of roared on and does to this day. So that did cause investor fear. It caused equities to pull back or detract, as well as some muted returns in the fixed income markets. During the quarter, we saw the Fed, the Federal Reserve, keep interest rates steady where they are. We saw them keep interest rates steady again here at their April meeting. But a lot of questions remain around what the Fed will do. So some of the big stories in the markets just continue to be the war in Iran, as well as federal interest rate policy. With all that said, remember that you have a diversified portfolio that's meant to be invested for the long term, and you really have pieces that will really help you weather that storm. And you can see how that played out here in just a second in the first quarter. With that said, broad markets, you're looking at the middle of the page. The S&P 500 is that first blue bar in the middle to the left. The S&P 500 was negative 4% for the quarter. Large cap growth or large company growth stocks were down almost 10% for the quarter. So that was a sharp reversal from what we've seen in three quarters. So those are your large mega cap information technology names down 10%. And then at the bottom of the page, you'll see that returns were very muted for fixed income or bonds. The blue bars are quarterly returns, and you can see that most of them are hard to even see, which means they were all hovering right around zero. The highest return really came from cash. So that just shows you what type of volatility we were experiencing in the first quarter. If you go ahead a couple pages, we'll land on page six. This shows the Porter County total portfolio summary. You ended March 31st in that blue row. at 197,300,000 or so. That did represent a slight negative return for the quarter. So below that you'll see the return was negative 0.4%. So not quite negative half a percent. So 40, oops, yes.

I didn't mean to cut you off.

You're good.

Does this include the 7 million we're going to pull out?

Yes, so if you just turn one page, you'll be able to see that. So this includes the 9.1 million that came out in February.

Okay.

So the annual distribution, so you take one major distribution from this, you know, typically per year, that occurred in February. So you can see at the bottom of page eight where you see that last line, the net cash flow was 9,181,000. So that's that 5% distribution for 2025.

additional seven correct may pass this correct okay thank you you see it it

Does the $7 million or does not?

We know of the $9.1 million that came out, that was your spending policy, the 5% times the rolling market value of all the previous quarterly values. So that's the $9 million that came out.

We voted last year to remove additional $7 million for roads and different things, and that's what we're looking at tonight. So that $7 million is coming out of this $197 million.

I don't want to say the wrong thing here. I'm not sure if there are multiple holding accounts.

Okay.

No. So. Okay. So it would not include this. Okay. I didn't know if you were taking it out of the nine. No. That's what I just didn't want to misspeak to. Okay. For reference, my confusion is that we are not accountants. We are . No, I just, that's why I was asking. And there are times where you may have assets in your own account that you then pull from that we wouldn't have awareness of. Okay. All right. So back on the performance summary on page six. Negative 0.4%, of course we don't like to report a negative number to you, but I do want to compare that to your benchmark. Your benchmark is just a light representation of your allocation, and that benchmark was negative 1.7%. So your portfolio did hold up better than the benchmark. I'm going to show you a couple more things. On page seven, real quickly, you're going to see two managers with red lights on this page. This is your stoplight grid. What this tells you is that we have recommended action pertaining to these two managers, AQR and GMO. I do have a separate couple of slides to show you to walk you through that recommendation here in just a second. All of your other managers are green. Page 8, we already looked at that briefly, but again, I just want to show you what you're looking at here. This goes down the page row by row as calendar year by calendar year, showing you the beginning market value, any cash flows or investment gains and losses, ending market value, and then the corresponding total return on the far right. The short story here is that since inception, going through March of 2026, you've earned an average annual return of 6.9% on these assets. On page, let's go to page 11. So here you see a different depiction of that same performance history. So I just told you that you earned 6.9% on an average annual basis going all the way back to September of 2016. On a cumulative basis, you can see that number in the far top right, almost a 92% return for these assets. So then the summary of how to reconcile that is at the bottom in that blue row. You started with about $135 million. On a net basis, you have withdrawn $50 million from this pool, but you've made a little over $113 million in investment gains over that time period. So we view this as a really big success story for this foundation and for the statutory code that allowed this to be invested in the markets during this time. Looking at that line chart broadly, I mean, you can see, I know people in this room felt some of those dips. You know, we all had a lot of indigestion kind of going through some of these periods and watching these assets, you know, unfortunately, as they all do, be a little bit volatile with the markets. But thanks to staying put, you know, staying adhering to your policy, you've been able to achieve this really strong growth. I do have some updated numbers for you. I always hesitate to give you these because you are long-term investors. But since I was reporting a negative quarter, I want to tell you that you've since added another 10 million in returns to this market value. So the assets are sitting around 207 million. So positive year-to-date calendar year, positive 4.6% return. I wanted to be brief with the performance summary because of all of the materials in the second half. But let me pause here and see if there are any questions. Okay. Looks good. All right. Let's flip to the second tab. And for the computer, it's the second attachment. I appreciate it. It's the portfolio construction review. I'll go ahead and just start setting it up broadly while he's pulling it up. So on an annual basis, remember that you all obviously are fiduciaries of these assets, but Capital Cities is as well. So what that means is, you know, when you are entrusted with the care of assets that are for the benefit of others, you have certain laws that you have to follow. One of the most important decisions you make in that oversight function is the asset allocation of these assets. That is the mix between stocks and bonds. And the reason that's the most important decision that you make is because it is the primary determinant of your risk and return. You know, if you were just sitting in cash, you know, that would be your outcome. But we know that in order to achieve growth, keep up with inflation, we know that we have to subject these assets to some market risk. And this exercise is meant to make sure that we are all comfortable with the current mix that you have. So on page four, Just to dive right into it, this is your asset allocation. So 55% in equity and the remainder in different styles of fixed income and then a little bit of cash. Remember that your asset allocation in some ways is prescribed by the statutory code. You could not have 80% in equity in this portfolio if you wanted to. So by nature, you end up being a little bit more conservative than some other foundations out there. You also only have equities and fixed income. You don't have any alternatives. That's alternatives meaning hedge funds, private equity, private capital, or excuse me, credit, things like that. There have been times over the years where we've discussed that, but for the time being, this group has decided that this is the asset allocation you wanted to land on. Now, in general, you're not making vast changes to this allocation on a year in and year out basis, but there have been some times along the way where you have incrementally changed this. For instance, you've added to equity a little bit over time, but you've still stayed within those statutory guidelines. Our job is to kind of bring this information to you, use this touch point as a decision as to whether changes are needed, and then make sure you understand kind of the output of this type of allocation. So what I mean by that is we can take your allocation, we can look at capital market expectations for risk and return. And for reference, we have these saved in the back. There's a page that says, You know, U.S. equity is expected to return 7.4% in the future. Fixed income is expected to return 4%. So we can use these updated figures, apply them to your mix, and then generate an estimated return. In this case, your estimated return is 6.5%. And that's a really important number for this group to know because that really, It tells you, you know, how much can you spend out of this portfolio and what does that mean. So looking at page five, this is really kind of basic math, but it's important. So one way to look at this is on the one hand you have your return of these assets, but on the other hand you're trying to accommodate the county needs through distributions. You also want to keep up with inflation. So right now, your spending rate is 5%. So let's say 5% spending, 2.5% inflation. That would suggest that you need to earn 7.5% just to keep up. Ideally, you'd like to have some growth too. So these are just very important things for us all to consider. Now, it's also important that you all know that foundations, universities, municipalities, everyone is grappling with this type of equation right now with their own assets that they're overseeing. You know, think about universities that are trying to support operating. They're drawing more than their spending policy says. A lot of community foundations are drawing slightly more than their return would suggest so that they can support the needs of their county or community. So nonetheless, we want to show you that a 5% spending policy does mean that on, you know, in math, you're spending more than your portfolio is generating.

Now, in all fairness, we only passed that spending policy for this year. Exactly. So going forward, as it's currently set up, back to 3.25.

Great point. So right now, that 5% is very specific to two calendar years, and there was a lot of other analysis, as you all know, that went behind that. Your long-term rate is 3.25%. So when you look at that figure, 3.25 plus, again, an estimated inflation 2.5, that gets you to 5.75, which suggests that you should earn more than that, and you should grow these assets over time.

Can I just ask you what the inflation rate has been for the past couple years?

So, well, this right now, I wrote it, the latest print was 3.8%. We did see it get down into the twos. It's now jumped back up closer to four. But if we're looking at the last three-year period, what, six to 8% inflation? So it has been much higher. So with that said, we've also had investment returns much higher than the 6.5% number. So thankfully, we've had that to keep pace. When we look at these figures, we're trying to not guesstimate what's going to happen over the next year. We're trying to look at the next 10 years so that we can help you make long-term strategic decisions. The next page I think might be a little bit helpful to just put it all into context. Of course, we're trying to look ahead and say, here's what we think you might earn, and here's how this might impact your overall outcome. But on page six, you can see here's what you actually have earned. Now, this is a little different than the page I showed you a minute ago. This one, it goes through December 1st. So basically, you've earned almost 7% on an average annual basis with these assets, which has really been outstanding, and that has exceeded the expectations. Let me pause here and just see if this generates any questions, concerns, feedback, anything that would cause us to, so I guess let me put it differently. When we look at your situation, we understand your distribution needs. We understand the analysis you put into changing the spending rate for the short term. We think you've done very well with your performance. So we're not coming to you with a recommended change to your asset allocation. But we want to hear from you what you all think.

What I think would be really helpful is if you also had a column that put what the inflation rate was.

Yep, I think you're right.

And then put the average.

Yep, we can do that. You think CPI, would you just use CPI?

Well, every four years we have a loss and it's an election year and it's the fourth year now. Are we going to see a loss?

You know, I just random or there's a I mean, I cannot predict any of that. But there if you do look back in history, March, every there are so many years where really bad things happened in March. Really, it's really strange.

I was just curious.

Okay, so any questions, concerns? Even if we don't make a change here, it's really important that we all as fiduciaries have taken this formal look at this and agreed that we should stay put. You don't have to take a formal vote, but I think it's nice to, you know, the minutes will document that you've evaluated this. Okay. I do have a, and Barb, I'm sorry, I have a short recommendation for you just to set it up, and it's behind the next pages. You all know that we do not have any discretion to act on your behalf with these assets. We serve as your advisor. We bring recommendations to you, but then you ultimately have to vote to put them into action. I do want to briefly mention that we do have clients who give us the discretion to act in terms of manager-related changes. So we would never go to a client and say, oh, we just increased your equity by 20 percentage points. But we would go to them and say, since you gave us discretion, we went ahead and swapped out manager A for manager B. So if that's ever something that you would like for us to do for you, that would just require a quick change to your contract. We wouldn't change our fees or anything like that.

What would be the benefit?

The benefit is that I would be showing you one slide that says, here's the decision we made in your portfolio. Here's why. We want to make sure that we're transparent about it. But it wouldn't be taking you through the background, the education, the analysis, and then putting the vote on you. So different boards have different ideas of how much control they want to have over these types of decisions. So the benefit is just time, but yes,

I'm sorry, I was just going to ask, would another benefit be, I was going to say at the time, the timing of something where you could make a move before you would have to come to a vote and anything like that?

So that's a great point. I'll tell you, though, when we're talking about swapping out one large cap manager for another large cap manager, you're still basically participating in the same part of the market. It's not like we're saying, you know what, we're going to take your equities and move them to cash. So in that regard, even though we think that our recommendation is an improvement for your portfolio, I don't know that I can really say that the time would be a huge factor. The other part of that is if there has ever been an issue where And this has happened. You had an investment manager where, very surprisingly, there was the SEC came down with a charge against the firm. This is Western Asset, a fixed income manager. Very unusual. At that point, we immediately contacted you all and asked if we could take action. So if we do think time is critical, we'll make it happen. We'll figure out a way to make it happen. But I think that's a good point. It's more about just this committee want to sit here and kind of hear the pros and cons of this and then decide, or do you want to entrust us with something like that? So that's food for thought. Okay, so on page nine, a second ago I was talking about your broad asset allocation. You can see that depicted in a pie chart with a little bit more detail delineated here. The blue slices of the pie are your equity, is your equity component. You have traditional equity, diversifying equity. On the next page, I'm gonna just point you to a couple things to describe that in more detail. So on the right-hand side of the page, All I'm doing here is pulling out the equity component of the portfolio on the right-hand side. So the traditional piece is at the top, and then these diversifying funds. What you see in these lines, these are all underlying mutual funds that make up your portfolio. The traditional equity is composed of just broad passive indices, index funds. You have the US S&P 500 index, and then you have a non-US passive index. The diversifying group is meant to do just that, diversify your exposure away from those momentum-based passive index funds. What we're ultimately going to be recommending to you, just so you hear the short story here, is that you eliminate two of these funds, the GMO fund and the AQR fund, in favor of one single fund, which is a fundamental index strategy. These two funds that we're recommending that you eliminate have been additive on an absolute basis in terms of adding money to your portfolio. With that said, we have found that it is increasingly difficult for active managers within specifically the U.S. large company space to outperform. It is very difficult. And frankly, we don't think it makes sense to pay active management fees to U.S. large cap managers. With that said, we still think it's really important to diversify what you are exposed to in that S&P 500 piece. So short story on page 11, eliminate these two managers in favor of one single fundamental index. And I'm going to give you a little bit more background in just a second. But the benefit that we're seeking here on page 11 is be more efficient with your large company stock exposure in the U.S., preserve some defensive characteristics, reduce your concentration to mega cap names, and then a nice byproduct is that your go down. On page 12, bear with me while I just show you a little bit of sort of context as to the difference between a traditional index and a fundamental index. So if you look at the S&P 500, which you have in your portfolio, the way the underlying stocks are, the way it's determined what weight they should have is based on their market cap outstanding. So basically the price of their shares and how many shares are outstanding. So the companies that are the biggest and with the highest prices end up having the biggest weight in the portfolio. So think of Nvidia, Microsoft, Apple, and so on. When the markets are doing well, those stocks are momentum types of stocks and they will tend to do well at the same time and they will also become bigger components of the index because their prices are increasing. If they do not do well, they tend to be the first to fall. Long term, you've benefited from exposure to this fund, but it's our job to help you have a smoother ride over time, and that's why we think you need a little diversification around the edges to this S&P 500 fund. We think you can get that through a fundamental index, So, on the right-hand side, the thing about a fundamental index, it's still passive, meaning no person is saying, I want to buy Nvidia instead of Apple. Instead, they have computer programs that basically calculate all sorts of fundamentals like revenue relative to book value, free cash flow, dividend strategies, and then that those numbers spit out a ranking, and that's how they compose that index. So you end up with just a different snapshot of the U.S. large company market. We think that in doing so, or by having this and combining it with the other index, you have a much more diversified exposure to U.S. markets. Thank you for bearing with me on all that. In the end, you decrease your mega cap exposure relatively significantly. So right now, you know, just by virtue of having that piece to the S&P 500, you have about 15% exposure to mega caps. So that's the NVIDIAs of the world, the Googles. If you were to implement this fundamental index, it brings that down to about 9 to 10 percent. So, again, we think that's good exposure to have, but we would just like to put our eggs in more baskets. You also, if you were to make this change, again, we're not doing this solely because of fees. The fees are a nice byproduct of this, but you would save 68,000 in annual fees through this move. So there is a lot more info here. We're recommending that you, again, replace AQR and GMO with the Schwab U.S. Large Company Index. Schwab has been doing this for many years. They've been doing this fund since 2007, 700 stocks in this fund. There's more detail in the back, but the recommendation is summarized on page 14. Let me pause and see if this generates any questions or feedback.

What do our advisors think? Make sense? You guys never get to talk. I mean, did you guys agree with this? Does it make sense?

I guess I would have to look at how much we actually made in that piece over the last four or five years, right? Compared to what their return was the last four or five years. It would be more.

I think what you were saying was that they're having a harder and harder time meeting the benchmark. Right. What I personally like about this is you've got your traditional index, which is based on market capitalization, and this one is based on fundamentals. And that gives you two different things that you're looking at. They're both algorithms. We don't have people doing it. So I like the fact that you've got two different strategies. So the weighting between the traditional index and the fundamental district would be, a fundamental index would be what? How much would be in the traditional? How much would be in the fundamental?

I think the easiest way to see that would, and I apologize for this, because we're still considering this a diversifying. So bear with me. And I'm sorry for those in the room. We're going to have to look at the hard copy because we're going back to the other deck. If you go... In the front part of your book, if you go to page 12, right now, I think the easiest way to see this, and that's a perfect question. I just don't have a chart that nicely shows that. But page 12, we can get to it. So right now, you have Schwab S&P 500 on page 12 is 13.6% of the portfolio. That will remain. You have AQR and GMO at 9.4% and 8.5%. Those would then combine to form that new allocation. So, call it what, I can't, yeah, 9.4 plus 8.5 is 18%. So, you'll have 13.6% in the S&P 500 and then 18% in the Schwab fundamental.

And you like that split? Yes. We do. And why?

Well, so what we try to do with your portfolio is maintain market neutrality between capitalization and style. So what I mean by that capitalization is large company versus small style is growth versus value. So right now. that those numbers get you to that. We look at this every so often. And we don't have a reason to come to you and say, you know what, we think small cap is going to be better for the next 10 years. Let's overweight small cap relative to what the market is telling us it should be. So that maintains that neutrality.

Okay. Since inception. You are at 8.27% return and GMO at 14.3% return.

That's right. But they've absolutely trailed the broader market. But where that gets important is when times are bad, they tend to be the ones that do better. So we want to maintain a piece of your portfolio to perform that role. And we think the Schwab Fundamental Fund does that more efficiently and hopefully more effectively than what they have done. So in the order of operations, a change like this will not be as impactful to your portfolio Really, the time we've dedicated to it might suggest. I don't mean to say that flippantly. But, you know, it's important to cap cities that when we are suggesting a change that you fully understand why in the background behind it.

Oh, I think we beat them up. So what do you guys want to do? I'll make a motion.

Can we drop AQR and come on ahead to Schwab Fundamental Fund?

I second. Okay, we've got a first and second. Is there any further discussion?

No.

Is this a voice phone?

Roll call.

Roll call, please. Hearing none, roll call, please.

Mr.

Yes.

Mr. Yes.

Yes. Yes.

Yes. Yes. Yes.

Yes. Yes.

Yes.

Okay, motion carries.

Okay, thank you. I appreciate that. That's what I had planned to cover.

Well, we appreciate it. Again, as always, we're going to overhaul this. Next up on our agenda, we have the resolution transferring the foundation earnings to the foundation holding account for $7 million. And that's the move for the road funding.

one takes it from the Schwab account to the holding account. The next resolution takes it from holding account to the budget account.

So I need a motion to move it from the earnings to holding.

So moved.

Second. First and second. Any discussion? Hearing none, roll call, please. Roll to transfer.

Yes. Yes. Yes. Yes. Yes.

Yes. yes yes yes yes yes yes okay motion carries next up we've got uh or we need a motion to transfer from the earnings to the holding i'm sorry from the holding fund to the budget fund for roads and ambulances make a motion second Any further discussion? And just to clarify, this is for the $7 million. Okay. Roll call, please. Yes. Yes.

Yes.

Yes.

Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes.

Yes.

Yes.

Motion carries.

Okay.

Next up, we have the attorney's report. Okay. Nothing else. Okay. Next up, we have any other matter that comes properly before the board. First of all, we've got approval of claims, the Cat, Sapper, and Miller invoices for $4,000 and $7,000. Make a motion we approve, Mr. President. Second. Yeah, first and second. Here, any discussion? Hearing none, all those in favor, signify by saying aye. Aye. Those opposed, same sign. Motion carries. Next up, we've got the Capital Cities invoice.

First quarter. Can we approve, Mr. President, for $6,250?

Okay, we've got first and second. Any discussion? Hearing none, all those in favor, signify by saying aye. Aye. All opposed, same sign. Motion carries. Next up, we've got the public comment session. Does the public have anything to say?

Mr. President, not the public, but I do have something to say just to kind of refresh our memories, like actually refresh my memory a little bit, was when we were at the 3.25%, we went to 5% for, I believe, 25 and 26 years, budget 25 and 26. Just so everybody's aware, going from 3.25% to 5% ended up being about 2.9 million additional dollars. from 3.25 to five on top of the $7 million for roads. We funded our ambulance. We funded our road. We kind of did this all inclusive as like a, a two year plan to get us to where we were going to adjust lit.

We were able to not raise taxes. Yeah.

Well, which is great. But the other thing is, is I think the legislature moves it out a year to 29. So our two year plan, we have to be very cognizant of getting stuck in 28 or it'd be 27, 27, because we can roll the 28, um, of that plan. So we have to really keep an eye on what the legislature is going to do and see how our lit rates going to affect cities, towns, and you know, how, how this whole debacle in my opinion is going to, get worked out through the legislature. But this is a two-year plan to get us through that, hopefully. I'm just saying we might have to address this in the next two years, depending on how our budgets shake out. So I just wanted to keep that in everybody's back of their mind.

Did anyone else have anything else? Looking for a motion to adjourn.

So moved. Second.

First and second. Any discussion? All those in favor, please signify by saying aye. All those opposed, same sign. Motion carries. Have a good evening. Because Greg used to have discussions. There's quite a few times when we had discussions about a journey.

Thank you. Hopefully you don't have to worry about an accident.

Aviation needs And he understands how they're screwing up over there.

Yeah, she married a good friend of mine that I grew up with, Brian.

I show up on time.

I will. Yeah, that's good.

All right. I'm not going to mention it.

Pen won't work. Jacking away with something we can do.

You don't have to train him, you don't have to convince him. He already gets it.

Do we move? Are we moving? I don't know what to tell you. I got a story for you. And you know what? Years ago, they'll be pulled in that exactly. I've been watching this for a long time. I've been watching this for a long time. I've been watching this for a long time. I've been watching this for a long time.

You don't even control the time you die.

Well, let me go take care of stuff and stuff with stuff.