April 2018 Board Meeting Summary
The Budget and Audit Committee of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees convened at 8 a.m. on Monday, April 9th in the Retirement System offices in Jefferson City, MO, with the regular session of the Board of Trustees following at 8:45 a.m. In attendance were Board members Aaron Zalis, Yvonne Heath, Beth Knes, Jason Hoffman, Scott Hunt, Chuck Bryant and Jason Steliga. Also present were Executive Director, M. Steve Yoakum; Assistant Executive Director, Investments, Craig Husting; Assistant Executive Director, Operations, Dearld Snider; General Counsel, Alan Thompson; Chief Financial Officer, Anita Brand; Director of Retirement Services, Omar Davis; Director of Legislation and Policy, Maria Walden; Internal Auditor, Jeff Hyman; Director of Communications, Susan Wood; Chief Technology Officer, Bill Betts; Director of Administrative Planning and Design, Nicole Hamler; and various other PSRS/PEERS staff members.
Budget and Audit Committee
The open session minutes from the December 11, 2017 meeting were approved by unanimous vote.
Preliminary 2018-2019 Budget Discussion
Mr. Dearld Snider and Ms. Anita Brand of PSRS/PEERS led a compensation and budget discussion in preparation for the upcoming fiscal year. Mr. Snider reviewed the Board of Trustees' compensation strategy by highlighting the purpose, principles and overall approach of the strategy.
Mr. Snider also explained the difference between the cost of living and the cost of labor, since CBIZ, PSRS/PEERS' compensation consultant, recommends market data adjustments based on the cost of labor.
|Cost of Living||Reflects the cost of goods utilized by a typical consumer, including items such as housing, groceries and transportation|
|Measured by the government through the Consumer Price Index (CPI)|
|Cost of Labor||Reflects what a particular geographic market offers as compensation for a specific type of work|
|Reflects the supply and demand for labor for specific roles|
|Measured through third-party salary surveys|
Mr. Snider discussed the comprehensive compensation study that is conducted every three years, the last of which was conducted by CBIZ in April 2017. CBIZ previously concluded that the current compensation strategy aligned with good governance and best practices.
Ms. Brand described the budgeting process, which begins in the second quarter of each calendar year. The breakdown of the budget includes two broad categories:
- Investment expenses
- Administrative expenses, inclusive of capital assets
Final detailed budget requests will be presented to the Budget and Audit Committee and the Board of Trustees during the June 2018 meeting.
Regular Board Meeting
The open session minutes from the February 12, 2018 meeting were approved by unanimous vote.
Order of Business
Mr. Steve Yoakum of PSRS/PEERS presented a plaque to Ronda Peterson recognizing her recent retirement from PSRS/PEERS.
The certification of the petition audit committee, which declares both Jason Hoffman and Jason Steliga elected to serve new four-year terms effective July 1, 2018 – June 30, 2022 was accepted by unanimous vote.
Election of Chair and Vice Chair
Dr. Aaron Zalis was elected to serve as chair of the Board and Mr. Jason Hoffman as vice chair of the Board for the period of July 1, 2018 through June 30, 2019. Both were elected by unanimous vote.
Interest Credit Rate
Each June 30, interest is credited to the memberships of active members at the rate set by the Board of Trustees. If a member requests a refund of his or her contributions, any accumulated interest is paid as part of this refund. If a member retires from the Systems, the amount of interest credited to the membership will not affect the retirement benefit calculation. In the event that there is an unused balance in the membership at the death of the member and any Joint-and-Survivor benefit plan beneficiary, the remainder is paid in a lump sum to a beneficiary named for that purpose. Ms. Anita Brand presented information on current membership balances, as well as historical interest rates and payments. Staff recommended increasing the interest credit rate from 1% to 2% effective June 30, 2018. Staff's recommendation was based on recent increases in the Federal Funds Rate. The Board of Trustees approved staff's recommendation by unanimous vote.
Purchase Interest Rate
Ms. Anita Brand presented information to the Board of Trustees on the purchase interest rate. According to Board Regulation (16 CSR 10-4.012 (4)), prior to July 1 each year, the Board of Trustees shall establish a "purchase rate" of interest based on the actuarially assumed rate of return on invested funds of the Retirement Systems. The purchase interest rate shall apply to any amount due for reinstatement of service or for the purchase of service, except as otherwise specified by law. Staff recommended the purchase interest rate be set at the current assumed rate of return of 7.6%. The Board of Trustees approved staff's recommendation by unanimous vote.
Dr. Zalis congratulated Ms. Heath on being named Southwest Region Elementary Educator of the Year by the Republic Community Teachers' Association (CTA). She will receive her award tonight at the regional Teacher Education and Professional Standards meeting.
The Board voted to hire Verus as the general asset consultant for PSRS/PEERS on December 11, 2017. In April, two representatives from Verus (Barry Dennis and Margaret Jadallah) provided the Board with a short presentation on the firms' initial observations regarding the PSRS/PEERS' investment portfolio and governance process. Verus also presented current items under discussion with the PSRS/PEERS' investment staff.
Ongoing Investment Activity
Mr. Craig Husting from PSRS/PEERS and Mr. Barry Dennis from Verus, reviewed ongoing investment activities, which included estimated investment performance through March 31, 2018. The estimated investment return for PSRS and PEERS for fiscal year 2018 (July 1, 2017 through March 31, 2018) was approximately 7.1%. Mr. Husting presented the current asset allocation of the PSRS/PEERS portfolio, in which he reviewed the long-term strategy, portfolio themes and the broad portfolio expectations. Mr. Husting also reviewed the tentative Board investment calendar.
U.S. Equity Program Review
Mr. John Tuck, Mr. Travis Allen and Mr. Chad Myhre from PSRS/PEERS reviewed the Systems' U.S. Public Equity portfolio including program objectives, guidelines and long-term results. The five-year annualized returns for the Large-Cap and Small-Cap U.S. Public Equity composites for the period ended February 28, 2018 were 14.3% and 12.0% respectively.
Private Equity Annual Review
Mr. Doug LeBon, Mr. Vincent Dee, Mr. Wayne Smith and Mr. John Ruggieri from Pathway Capital Management (the Systems' Private Equity Consultant), presented a number of items to the Board, including: an organizational update of Pathway; a review of the private market environment; an update on the PSRS/PEERS' Private Equity, Private Credit and Co-Investment portfolios; recent commitments; and, an investment plan for calendar year 2018. Pathway reported that the PSRS/PEERS' Private Equity portfolio had produced an annualized return of 11.8% for the 10-year period ended December 31, 2017 relative to the Russell 3000 public equity benchmark of 8.6%.
Ms. Maria Walden from PSRS/PEERS and Mr. Jim Moody, legislative consultant, updated the Board on the current legislative session. Mr. Moody reported briefly on state revenue and gave an update on March 2018 revenue to the Board. He also discussed sales tax growth and Missouri income from capital gains and dividends.
Ms. Walden reviewed the upcoming important legislative dates, the legislative statistics and new legislation filed. There are several bills that have been filed this year that have a direct impact on the Systems:
HB 1670 removes the current requirement for a school district to have a salary schedule applicable to all teachers and replaces it with a required compensation plan.
This bill also impacts the System's working after retirement statute. Currently, a retired PSRS member may work a total of 550 hours on either a part-time or temporary-substitute basis and be paid up to 50% of the annual compensation payable under the district's salary schedule for the position filled, without a discontinuance of his or her retirement allowance.
HB 1670 changes the 50% annual compensation limit to 50% of the salary paid to the person who last held the position.
Any enhancement or adjustment to the working after retirement statute has an increased cost to the Systems. This bill creates some concerns about the school districts' ability to adequately monitor such a change. It also poses some concern over the ability to adequately enforce the working after retirement provision.
The Systems have an actuary firm, PricewaterhouseCoopers (PWC), that prepares actuarial cost statements on any proposed legislation, as well as the annual actuarial valuation reports for the Systems. PWC is still analyzing HB 1670 regarding its financial impact to the Systems.
The Board made a motion not to support any working after retirement legislation that would have a cost and increase the liabilities of the Systems.
HB 1673 requires that each public pension plan in Missouri provide a pension statement to their members. The pension statement must be provided annually and must include:
- The participant's accrued contributions to the plan
- The date the participant is first eligible for a normal retirement benefit
- The participant's projected benefit at normal retirement and may include the percentage of the participant's salary that will be replaced by the pension benefit upon reaching normal retirement
- The date of the plan's valuation
- The plan's funded ratio
- A notice if the plan is on the joint committee on public employee retirement's annual watch list
- A notice if the actuarially determined contribution to fund the plan has not been made as of the most recent annual actuarial valuation, unless the plan is unable to make such contribution due to statutory limitations
- An electronic link or website address to view the plan's Comprehensive Annual Financial Report
This information is already available on our Member Statements and our website. The Systems send over 151,000 Member Statements every year to our active membership. The Member Statement consists of 10 pages of information regarding the member's accrued contributions, current account balance, the date the member is first eligible for normal retirement and the projected benefit for the member at normal retirement.
Section 105.661 of this bill requires additional information be included in the pension statement, such as the date of the plan's valuation, the plan's funded ratio, notification if the plan is on the Joint Committee on Public Employee Retirement's annual watch list, notification if the actuarially determined contribution to fund the plan has not been made as of the most recent annual actuarial valuation, and an electronic link to view the plan's Comprehensive Annual Financial Report. It also requires that each plan provide the statement annually to active participants regardless of whether it is requested. Currently, PSRS/PEERS provide most of this additional information in a separate publication called Summary Report to Members that is available on our website to over 250,000 active and retired members separate from the Member Statement.
SCS HB 2044/SCS SB 1021 is an omnibus public pension retirement bill. The SCS impacts more than eight different retirement plans in the state. There are three provisions that impact PSRS/PEERS directly. First, this bill allows any teacher retired from PSRS to be employed in a position covered by PEERS without stopping their retirement benefit. Such retired teacher may earn up to 50% of the minimum teacher's salary ($12,500) and will not contribute to the Retirement System or earn service. The employer's contribution rate will be paid by the hiring employer. If such person is employed in excess of these limitations, the person will not be eligible to receive their retirement allowance for any month the person is employed, and such person shall contribute to the Retirement System if he or she is in an eligible position.
Second, this bill allows municipal firefighter pension plans to enter into cooperative agreements with other pension plans, including PSRS and PEERS, for the transfer of service between the plans in accordance with 105.691. PSRS or PEERs would have discretion to choose whether to enter into such agreement.
And finally, this bill exempts information pertaining to the salaries and benefits of the executive director and employees of PSRS/PEERS from being confidential.
One provision in the bill that we are closely monitoring applies to the Public School Retirement System of the City of St. Louis and the Kansas City Public School Retirement System, and deals with member benefits. This provision allows members' benefits to be modified, changed, reduced or repealed for any member of these two retirement systems hired on or after August 28, 2018. The modification or repeal would only apply to service rendered by the member after the effective date of the changes. This provision would potentially allow the General Assembly to make changes at any time to the benefits of members who are actively employed (hired after August 28, 2018) without impairing their constitutional guarantee to provide promised benefits.
HCS HB 2200 authorizes schools of innovation. Under this bill, the board of education of a school district may establish a school of innovation offering a program with a curriculum, delivery method, or instructional model different from the traditional school model. The governor shall award 10 competitive grants per year to school districts for the establishment, implementation, or expansion of schools of innovation.
The bill also permits a school district to enter into an agreement with another school district to provide students access to courses or schools, or to cooperatively provide schools to educate resident students of all participating districts.
Section 160.430.10, RSMo. of this bill allows a retired teacher of PSRS to return to work for a covered employer in these schools of innovation and not be subject to the working after retirement limits found in section 169.560, RSMo. Last school year, more than 10, 514 PSRS/PEERS retirees returned to work for a covered school district. This group of retirees earned more than $70 million dollars, and while the average earnings were $7,092 for PSRS ($4,800 for PEERS retirees), there is still a financial impact to the Systems, particularly if this statute is expanded without any working after retirement limits for schools of innovation.
This section of the bill also would circumvent the Critical Shortage Full-Time Employment Exception provision. Last year, PSRS had 83 retirees (PEERS had 83 retirees) return to work under the Critical Shortage provision. The employers of these 166 positions were required to pay contributions on all salary earned. This new change does not require any employer contributions for those retired members who work full-time for these schools of innovation or cooperatives.
As of July 2017, PSRS had 14,704 active members eligible to retire (7,381 with unreduced benefits). Of those, 2,601 actually retired, which is approximately 17.7% of the 14,704 who were eligible. The proposed change in this bill could affect future retirement patterns of PSRS members. If that occurs, PSRS/PEERS' actuaries would have to make a change in the current retirement assumptions, which would also impact the Normal Cost of the System, which could further increase the Actuarially Determined Contribution Rate and result in a long-term cost increase for the System.
PWC's actuarial cost statement regarding the impact to PSRS will have, at minimum, a cost of over $101.1 million to the Unfunded Actuarial Accrued Liability to PSRS, and a potential increase to the contribution rate of 0.26% for our members and employers. There would also be a change in the present value of future benefits of $76.2 million. If the bill becomes law and is used by 200 retirees per year, HCS HB 2200 will likely have a cost of over $187.1 million to the Unfunded Actuarial Accrued Liability to PSRS and a potential increase to the contribution rate of 0.47% for our members and employers. There would also be a change in the present value of future benefits of $144.4 million.
HCS HB 2247 makes various changes to charter schools. It removes provisions authorizing a charter school to operate in a school district that has been classified as provisionally accredited. Instead, a charter school may operate in any school district in which at least one attendance center has received an annual performance report (APR) score of 60% or less for two of the three most recent reports available when the charter school applies to open a school. There are numerous other provisions in this bill that also relate to charter schools.
There is an amendment to this bill, drafted by Representative Rocky Miller, that would modify the Board structure of PSRS/PEERS. Currently, the Board is composed of seven trustees: four elected, active members (three PSRS and one PEERS) and three governor-appointed members. Of the three governor-appointed positions, one of those positions is required to be a retired member of PSRS or PEERS. The amendment would require that one of the two remaining positions appointed by the governor be a member of a school board of a school district or a trustee of a community college.
There are also two amendments to this bill drafted by Representative Rhoads that would add HCS for HB 2200, which deals with working after retirement, to this bill.
HCS HB 2335 allows any teacher retired from PSRS to be employed in a position covered by PEERS without stopping his or her retirement benefit.
These retired teachers may earn up to 60% of the minimum teacher's salary ($15,000) and will not contribute to the Retirement System or earn service. The employer's contribution rate must be paid by the hiring employer. If such person is employed in excess of these limitations, the person will not be eligible to receive their retirement allowance for any month the person is employed, and such person shall contribute to the Retirement System if he or she is in an eligible position.
According to PWC, there will be an insignificant cost savings to this provision as it is currently drafted, this is a result of the fact that the bill will not incent any retired teachers to retire early, there is a low salary cap and the employer contributions are collected on any salary earned.
The Board went on record again in support of the HCS HB 2335 as long as two provisions remain in the bill: the salary remains at 60% of the minimum teacher's salary and the employer is required to pay contributions on those earnings.
HB 2505 clarifies that educational requirements for public employee retirement plan board members only apply to defined benefit pension plans, and for board members who have served at least one year and administered a defined benefit plan. Individual participants in a defined benefit plan may request an annual pension benefit statement.
HB 2619 makes some changes to PSRS/PEERS' working after retirement statute. Currently, a retired PSRS member may work a total of 550 hours on either a part-time or temporary-substitute basis and be paid up to 50% of the annual compensation payable under the district's salary schedule for the position filled, without a discontinuance of his or her benefits. Currently, a retired PEERS member may work a total of 550 hours on a part-time or temporary basis. This bill changes the 550-hour limitation to 700 hours for both PSRS and PEERS.
PWC provided the cost statement regarding this provision. The Actuarial Accrued Liability would cost PSRS between $24.8 million and $300.1 million, depending upon the number of people who take advantage of this increase. The Actuarial Accrued Liability would cost PEERS between $5.01 million and $66.8 million, depending upon the number of people who take advantage of this increase.
HB 2633 repeals the July 1, 2014 termination date of a provision allowing members of PSRS who have 31 or more years of service to have their retirement benefit calculated using a benefit factor of 2.55%.
PWC provided the cost statement regarding this provision. The Actuarial Accrued Liability would save PSRS approximately $91.2 million and reduce the Actuarial Determined Contribution rate by -0.21%.
HB 2660 also changes the Board structure of PSRS/PEERS. Currently, the Board has three elected trustees from PSRS (certificated) and one elected trustee from PEERS (non-certificated). This bill will restructure the seven-member Board to have two elected trustees from PSRS and will add one elected trustee from a school board of a school district.
This proposal also requires the PSRS/PEERS to pay to a covered employer any contributions made on behalf of members who no longer are active and who take a refund of their contributions and interest from the Systems.
Currently, if a member is no longer an active member, he or she can take a refund of his or her contributions and interest from PSRS or PEERS. The employer contributions remain in the System and are utilized to offset the cost of retirement benefits for the other members and employers.
PSRS and PEERS are defined benefit, tax-qualified governmental pension plans. For PSRS and PEERS to maintain their tax-qualified status, the Systems must meet several requirements set forth in the Internal Revenue Code, Section 401(a)(2). This section does not allow for any part of the trust assets or income to be used for any other purpose other than for the exclusive benefit of the employees or their beneficiaries, this is known as the Exclusive Benefit Rule.
The provision in this bill to include payment to the employer that is equal to the accumulated value of contributions paid to members who take a refund of their contributions would violate the Exclusive Benefit Rule and raise tax qualification issues for PSRS/PEERS under the IRS Code.
PWC provided the cost statement regarding this provision. This provision will have an actuarial cost of over $508.2 million to the Unfunded Actuarial Accrued Liability for PSRS, and a potential increase to the contribution rate of 2.07% for our members and employers. This cost does not take into account the amount the System would have to pay to the IRS if our tax-qualified status was revoked.
The Board went on record to oppose any legislation (HB 2660) that alters the tax qualified status and requires the return of employer contributions for members who take a refund from the Systems. The Board also made a unanimous vote to support any legislation that affirms the current structure of the Board, which already has a mechanism in place for employers to be represented.
HB 2728 permits a retired teacher to exceed the 550-hour limit on substitute teaching without impacting the teacher's retirement benefits, if the teacher has an annual income, not counting income from substitute teaching, of less than $15,000. PWC is still analyzing HB 2728 regarding its' financial impact to the Systems.
SB 686 prohibits PSRS/PEERS and all public pension plans in Missouri from contracting with or investing in individuals, partnerships, corporations or other legal entities investing or doing business with Russia, or any territory occupied by Russia. Existing contracts shall not be renewed and shall be cancelled or divested as soon as prudently possible.
The PSRS/PEERS Board of Trustees has adopted a policy to monitor all investments to comply with the U.S., and applicable non-U.S., economic sanction programs from the U.S. Treasury's Office of Foreign Assets Control (OFAC). Monthly, quarterly and annual verifications are conducted by PSRS/PEERS investment staff and custodian to ensure compliance. It is the role of the federal government to set the foreign policy that the states should follow.
The Board has a resolution that respectfully urges the General Assembly not to adopt any legislation or mandate any changes that would diminish or impair the PSRS/PEERS Board of Trustees' full authority for directing the Systems' investment program.
There are several bills that have been filed this year that have a direct impact on other public employee retirement systems in Missouri:
SB 747 provides that statewide elected officials and members of the General Assembly serving for the first time on or after January 1, 2019, who have not been employed in a position covered by the Missouri Department of Transportation and Highway Patrol Employees' Retirement System or the Missouri State Employees' Retirement System, shall not be eligible to participate in the Year 2000 Retirement Plan (defined benefit plan).
Such elected officials shall participate in a 401(a) defined contribution plan established by the bill. Each plan participant and employer shall contribute 4% of the participant's pay to the participant's account. Employers must also pickup and pay the participant's contributions in accordance with federal law.
HB 2184 and SB 856 modify provisions relating to the Kansas City Public School Retirement System (KC PSRS). KC PSRS have their contribution rate set by statute. Currently, any increase in the contribution rate has to be approved by the General Assembly. This bill changes the contribution rate for their employers over the next two years, and then allows the Board to set the contribution rate based upon the actuarial recommendation.
The member contribution rate for 2019 and subsequent periods shall be 9% of compensation unless a lower member contribution rate applies as set forth in the bill. For calendar year 2019, the employer contribution rate shall be 10.5%. From January 1, 2020, through June 30, 2021, the rate shall be 12%. For the 12-month period beginning July 1, 2021, and for each subsequent 12-month period beginning July 1 of each year, the employer contribution rate shall be determined as set by the actuarial determined contribution rate.
Mr. Yoakum discussed the COLA policy that was set by the Board of Trustees at the November 3, 2017 meeting. Effective with the January 2019 COLA, the policy will be:
|CPI-U||COLA per Board-Approved Funding Policy|
|Less than 0.0%||0.0%|
|0.0%-2.0%||0.0% when CPI-U is cumulatively below 2.0%|
|0.0%-2.0%||2.0% when CPI-U cumulatively reaches 2.0% or more*|
|more than 5.0%||5.0%|
|*resets cumulative calculation after a COLA is provided|
Mr. Yoakum explained that the Consumer Price Index for Urban Consumers (CPI-U) is calculated by the Bureau of Labor Statistics (BLS). The CPI-U is the measure of the change in prices of goods and services purchased by urban consumers between any two time periods. PSRS/PEERS' regulation requires that the time period for the CPI-U calculation used in the determination of a COLA be from June to June. Based on the values provided by the BLS, the CPI-U is up 1.65% for the first eight months of fiscal year 2018.
The March reading for the CPI-U will not be released until April 11, 2018.
Mr. Jim Kreider, Missouri Retired Teachers Association, stated he was concerned about the bill that modifies the Public School Retirement System of the City of St. Louis and the Kansas City Public School Retirement System, allowing changes to the benefit structure for new hires after August 28, 2018. Mr. Kreider indicated he believed that PSRS/PEERS may be next, and stated that he would like our Board to take a position against the bill.
The Board discussed the bill and understands the potential harm. However, they do not want to take a position on bill that does not impact PSRS/PEERS directly.
Mr. Michael Stearly, PSRS retiree, expressed his concern for the bill that changes the structure of the PSRS/PEERS Board of Trustees. He believes that PSRS/PEERS is a model plan and that is partly because of the current structure of the Board. He also stated that he believes that the current structure does represent the employers and a change is not necessary. He stated that he planned to testify against the bill at the Capitol. Dr. Zalis thanked Mr. Stearly for his comments.
Dr. Zalis congratulated Mr. Yoakum on his recent 40th anniversary in the pension industry and his upcoming 20 years with PSRS/PEERS in August.
The Board went into closed session at 11:30 a.m.
The Board adjourned at 12 p.m.
This summary is not official minutes of the PSRS/PEERS Board of Trustees Meeting. The official minutes will be approved at the next PSRS/PEERS Board of Trustees meeting and will posted to our website at that time.