October 2018 Board Meeting Summary

The October 29, 2018 meeting of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees convened at 8:30 a.m. In attendance were Board members Aaron Zalis, Yvonne Heath, Beth Knes, Jason Hoffman, Scott Hunt, and Jason Steliga. Chuck Bryant, Board Member, was absent. 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 Member Services, Nicole Hamler; Director of Employer 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, Stacie Verslues; and various other PSRS/PEERS staff members.

System Operations

Minutes

The open session minutes from the August 27, 2018 meeting were approved by unanimous vote.

Other

Mr. Steve Yoakum of PSRS/PEERS presented a plaque to General Council, Alan Thompson recognizing his upcoming retirement from PSRS/PEERS and his nearly 20 years of service to Missouri educators.

Dr. Aaron Zalis congratulated Ms. Yvonne Heath on her recent awards. The first award was a 2018 Unsung Heroes of MSTA chosen by the MSTA field service coordinators. The award acknowledges members who have made a substantive yet unrecognized contribution to MSTA and our mission "to advocate for and empower public educators so they can teach."

Ms. Heath was also recognized for being the Lyon Hero of the Month where she was nominated by her peers. Because of this nomination she is now up for the RepMo Hero of the month. The winner of this award will be selected by the District Committee.

Investment Report

Ongoing Investment Activity

Mr. Craig Husting of PSRS/PEERS and Mr. Barry Dennis from Verus reviewed ongoing investment activity, which included estimated investment performance through September 30, 2018. The estimated return for the first quarter of fiscal year 2019 (July 1, 2018 through September 30, 2018) was approximately 2.5%. Mr. Husting discussed 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.

Actuarial Assumed Rate of Return Review

Mr. Husting reported that the actuarial assumed rate of return (discount rate) for PSRS/PEERS was moved from 7.75% to 7.6% for the period beginning July 1, 2017, with a bias toward moving the rate lower in the future as financial conditions warranted. He showed a summary of 10- and 20-year capital market expectations and hypothetical portfolio returns based on a National Survey of Pension Consultants. Mr. Husting also presented assumed rate of return information for public plans from both the National Association of State Retirement Systems (NASRA) database and the Center for Retirement Research at Boston College database. Mr. Husting stated that the actuary (PWC) would present additional analysis of lower discount rate options later in the Board meeting.

Proxy Voting Policy

Mr. Husting reviewed the Systems' Proxy Voting Policy. The Systems' active public equity investment managers are each responsible for voting proxies in the best interests of the members of the Systems. The managers are required to provide an annual report to the investment staff detailing how their proxies were voted during the year on behalf of PSRS/PEERS. Mr. Husting reported that the Systems received proxy voting reports from all public equity managers for fiscal year 2018. The internal PSRS/PEERS staff has not identified any operational issues with the proxy voting process during the review that was conducted this year and all investment managers are in compliance with the policy.

Hedged Assets Program Review

Mr. John Tuck and Mr. Chad Myhre from the PSRS/PEERS investment staff reviewed the Systems' Hedged Assets portfolio including program objectives, guidelines and long-term results. The five-year annualized return for the Hedged Asset composite for the period ended June 30, 2018 was 6.6% (net of all fees).

Public Credit Program Review

Mr. Frank Aten and Mrs. Jessica Wilbers from the PSRS/PEERS investment staff reviewed the Systems' Credit portfolio including program objectives, guidelines and long-term results. The five-year annualized return for the Credit composite for the period ended June 30, 2018 was 2.8% (net of all fees).

Real Estate Annual Review

Mr. Jack Koch and Mr. Seth Marcus from Townsend (the Systems' Real Estate Consultant), presented a number of items to the Board, including an update on Aon's acquisition of Townsend in December 2017. Mr. Koch and Mr. Marcus also provided a Real Estate market overview and then discussed the PSRS/PEERS real estate portfolio. Townsend reported that the PSRS/PEERS' Real Estate portfolio had produced an annualized return of 11.2% (net of all fees) for the five-year period ended June 30, 2018.

Report of the Actuary

June 30, 2018 Actuarial Valuation

Mr. Steve Yoakum and Ms. Anita Brand of PSRS/PEERS, and Mr. Brandon Robertson, Ms. Cindy Fraterrigo and Ms. Rebecca Brenza from PricewaterhouseCoopers (PwC) were present to discuss the results of the June 30, 2018 actuarial valuations for the Systems. Mr. Yoakum discussed the Board's fiduciary responsibility and discretion. Yoakum also reviewed Board of Trustees' Goals: 1. Provide for the security and financial stability of the Systems, including maintaining an 80% pre-funded ratio and allowing for a reasonable assumed rate of return given capital market estimates, 2. Maintain the contribution rates of both Systems at or below current levels, and 3. Provide a consistent cost-of-living adjustment (COLA) for PSRS/PEERS retirees to maintain their purchasing power, noting COLAs should be dependable and affordable without harming the stability of the Plans. Yoakum also discussed the prior year recommendation from PwC to review lowering the investment return risk when determining future contribution rates and the ability to maintain a consistent COLA policy. At the Board of Trustees' and staff's request, PwC will review investment return assumptions of 7.5%, 7.4% and 7.25%, in addition to the Systems' current assumption of 7.6%. A lower investment return assumption decreases risk which leads to greater stability of contribution rates, ability to provide future COLAs and ability to continuously meet the Board of Trustees' goals.

Ms. Fraterrigo provided an overview of the purpose of the annual actuarial valuations and the key components. Ms. Brenza reviewed the June 30, 2018 actuarial valuation information prepared by PwC. She noted the information being presented was based on no changes to the Systems' current funding policies and therefore is noted to be preliminary. Mr. Robertson reviewed the changes in membership, assets, liabilities, and the pre-funded status of each System. He reported that the June 30, 2018, preliminary pre-funded status based on the actuarial value of assets of PSRS was 84.9% and PEERS was 87.1%. The funded status of both Systems is viewed to be healthy and a result of appropriately set actuarial assumptions, consistent funding of the required contributions and diligent plan governance. The current market value of assets approximates the actuarial value of assets for both Systems. Ms. Fraterrigo discussed projections of contribution rates, funded status and the sensitivities of both to the overall investment returns for the plans.

Review Assumed Rate of Return

Based on the information presented by Mr. Craig Husting and Verus during the investment portion of the meeting and the information presented during the June 30, 2018 valuation presentation; the Board voted to reduce the assumed rate of return from 7.6% to 7.5%. The assumed rate of return was approved by unanimous vote.

Set Contribution Rates for 2019-2020

The Board voted unanimously to maintain the contribution rate for PSRS at 29% and PEERS at 13.72% as recommended by the actuary.

Set January 2019 COLA

The Board voted unanimously that the January 2019 COLA be set at 2% for eligible benefit recipients effective January 1, 2019, in accordance with the System's Funding Policy.

Funding Policy Changes

The Board voted unanimously to update the Funding Policy to reflect the changes made to the assumed rate of return.

Set Purchase Interest Rate

Ms. Anita Brand presented information to the Board of Trustees on the purchase interest rate. 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 which was approved by the Board at 7.5%. The Board of Trustees approved staff's recommendation of the purchase interest rate of 7.5% by unanimous vote.

Management Report

Strategic Plan Presentation

Mr. Dearld Snider of PSRS/PEERS provided an update on the strategic planning project. He provided a brief overview of the last couple of months, during which PSRS/PEERS management worked with a consultant to begin developing the plan. In May 2018, the management team spent a day discussing our mission and goals while participating in multiple exercises focused on the creation of the strategic plan. In mid-June, each Board member had a one-on-one interview with the consultant. Management then dedicated a half-day in July 2018 to discuss information gathered from the May meeting and June telephone interviews. The preliminary strategic plan was then presented at the August 2018 Board Meeting.

Mr. Snider briefly reviewed the mission statement, goals, focus areas and strategies with the Board, which had been previously presented in detail. The four focus areas include:

• System and Financial Stability – Focus on keeping the plan stable and secure for perpetuity
• Culture of Excellence – Focus on providing the highest level of customer service while maintaining a high-quality work culture for staff
• Engagement- Focus on a positive relationship with members, employers, education associations and all other constituents
• Innovation – Focus on being proactive and constantly looking for ways to improve all aspects of our organization

The Strategic Plan (2018-2021) was approved by unanimous vote.

Strategic Planning Policy

Mr. Snider also reviewed the Strategic Planning Policy that was prepared by Cortex Applied Research and sets out expectations regarding the process and timing for developing and executing the Systems' strategic plan. The policy specifies the strategic planning principles and assumptions that govern the strategic plan. It also requires formal updates to occur approximately every three years, while less formal reviews can take place annually. The Board policy also describes the guidelines and methodology expectations used in the following areas when developing and carrying out the strategic plan: 1. Development of strategic plan, 2. Implementation of strategic plan, 3. Budgets and measurement, and 4. Communicating the plan.

Mr. Snider explained that the policy will be part of the Board's Governance Policies and of the annual review conducted be Cortex each year. The Strategic Planning Policy was approved by unanimous vote.

Facility Analysis and Planning Presentation

Mr. Snider presented information about facility and planning needs for PSRS/PEERS. He discussed areas of concern with the present building regarding our ability to continue to provide exceptional services to our members in line with our System goals, including:

• The current facility is at capacity, with 136 employees plus seasonal staff. (Projected need for approximately 30 more spaces over the next 10 years)
• Accounting needs to be integrated with Investments.
• Human Resource needs a more private area.
• Additional meeting space is needed on all floors.
• Current boardroom concerns:
• Limits meeting sizes
• Not designed for group presentations
• Requires the utilization of two overflow rooms for Board Meetings
• Requires improved security
• Lack of restrooms
• Aging, inefficient infrastructure
• Need additional parking

Based on the demographics of PSRS/PEERS members and the design of the portfolio, this growth will continue. Our actuaries can predict the growth of the Systems participants with relative certainty. The retiree population will grow by approximately 50% before reaching its peak of over 175,000 retirees and beneficiaries in about 2040. During this same period, the assets of the Systems will grow to approximately $100 billion before reaching a plateau.
Mr. Snider reviewed options presented at the August 2018 Board meeting:

• Option 1: Remain in current facility and lease permanent space at a separate location
• Option 2: Renovate current facility and build an addition onto the back of the building
• Option 3: Construct a new facility on the adjacent land we currently own

At the August 2018 meeting, the Board requested more information on the following options: constructing a new facility and renovating the current facility, inclusive of an addition. Mr. Snider reviewed cost details of both options and specifically addressed updates to the cost and plans of renovating and building an addition. He also reviewed the budgeting schedule of this option which spans over the next three to four fiscal years. After an in-depth discussion regarding the cost of the project as well as the pros and cons of each option, the Board voted unanimously to delay the decision pending additional information on cost efficiencies as well as additional savings of a new building. It was also requested to have the full Board present for the final vote. Mr. Snider stated he would have additional information for the December Board meeting.

Amendments to Regulations

Critical Shortage Employment Amendment
The proposed amendment to the PSRS critical shortage rule specifically allows PSRS retirees to work less than full time in a critical shortage position and allows PSRS retirees to be employed in any position (not just a position requiring a certificate) under critical shortage. The proposed amendments to both the PSRS and PEERS critical shortage rules specifically require school districts to provide notice of the districts' intent to use critical shortage prior to hiring a retiree to fill a critical shortage position.

These amendments to the PSRS critical shortage rule will provide greater flexibility to the districts when filling critical shortage positions and make the PSRS rule more consistent with the PEERS critical shortage rule.

These amendments were approved by unanimous vote and will be filed with the Secretary of State, go through the rule making process and be published in the Missouri Register.

Senate Bill 892 (SB892) Working After Retirement Amendment
At the August 2018 Board meeting, the Board voted to amend 16 CSR 10-5.010 which deleted subsection (7) that sets forth the community college 550-hour working after retirement limit conversion formula. Subsequently, we have learned that there may be a few positions at community colleges that may require DESE certificates. Therefore, the 550-hour/50% of salary limits would apply to those positions, and the "conversion" language would still be necessary. So, an updated version of the proposed amendment was presented that does not eliminate the conversion formula in subsection (7).

Also, it is possible that legislation may be enacted next session that exempts community colleges from the working after retirement limits set in Senate Bill 892, which was passed during the last legislative session. In this case, the 550-hour/50% of salary limits would apply to all PSRS retirees working for community colleges. Therefore, the "conversion" language may be needed in the future.

The previously proposed amendment had not yet been filed after the August meeting, so this version of the amendment would be filed in lieu of the previous version.

The remainder of the changes are identical to those presented at the August Board meeting. The amendment rewords parts of subsection (6). The changes mostly track the language in section 169.560 as amended by SB 892. However, there is some additional detail provided in an attempt to make it clearer when the 550-hour/50% of salary limits apply, and when the SB 892 60% of minimum teacher salary limit applies. The amendment adds subsections under (6) to delineate between the different limits. No change is required for the PEERS regulation, as SB 892 applies only to PSRS retirees.

These amendments were approved by unanimous vote and will be filed with the Secretary of State, go through the rule making process and be published in the Missouri Register.

Mailing Policy Review

Mr. Alan Thompson of PSRS/PEERS reviewed a brief history of the PSRS/PEERS third-party mailing policy. He also presented two policy proposals to the Board:

Policy 1:

• Allows, but does not require, PSRS/PEERS to assist with one mailing per year
• Limited to Missouri not-for-profit associations with at least 1,000 members who are members of PSRS and/or PEERS
• Requires cooperation of at least three qualifying associations to create a single mailing
• Mailing may be sent only to members who retired within previous 12 months
• PSRS/PEERS must approve content
• PSRS/PEERS reimbursed for all costs associated with mailing
• No member information is provided to associations

Policy 2:

• Allows, but does not require, PSRS/PEERS to assist with one mailing per year per association
• Limited to one mailing per year for up to five associations
• Limited to Missouri not-for-profit associations with at least 1,000 members who are members of PSRS and/or PEERS
• Mailing may be sent only to members who retired within previous 12 months
• PSRS/PEERS must approve content
• PSRS/PEERS reimbursed for all costs associated with mailing
• No member information is provided to associations

Mr. Thompson asked for Board direction on the following: 1. Decide whether to maintain the current policy of providing no third-party mailing assistance; 2. Consider adopting the draft third-party mailing policy number 1; 3. Consider adopting the draft third-party mailing policy number 2; or 3. Ask staff to draft another third-party mailing policy for review in December 2018.

Following discussion, the Board voted to adopt policy number 2, which assists education associations in an annual mailing. The Board passed this policy with an amendment that increases the minimum number of association members who are members of PSRS/PEERS from 1,000 to 2,500. This request was approved by approved by unanimous vote

CPI-U Update

Mr. Steve Yoakum discussed the current COLA policy:

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 0.178% for the first three months of fiscal year 2019.

The October reading for the CPI-U will not be released until November 14, 2018.

Public Comment

Mr. Jim Kreider of the Missouri Retired Teachers Association (MRTA) encouraged the Board to consider perception of an office expansion versus building a new facility. Membership understands more space is needed, however, would be more supportive of an office renovation utilizing current space.

Mr. Kreider also spoke on the Show Me Institute's upcoming symposium entitled, 'The Looming Pension Crisis in Missouri: Costs Risks, and Pay' and stated, "the threat is real." He also voiced his appreciation to the Board on their vote to reinstate the mailing policy, as there is strength in numbers as we continue to fight.

Mr. Steve Yoakum of PSRS/PEERS congratulated Nicole Hamler on her new role as Director of Member Services and thanked her for her work as Board Secretary. Mr. Yoakum also introduced Stacie Verslues as the new Director of Administrative Planning and Design, who will be assuming the role of Board Secretary at the December Board of Trustees meeting.

Mr. Steve Yoakum of PSRS/PEERS presented a plaque to Mr. Allen Allred, lawyer for Thompson Coburn, recognizing him on his retirement and for two decades of dedication to the protection of Missouri educators and their pensions.

Mr. Steliga made a motion to move the April 8, 2019 Board Meeting to April 15, 2019. The date change was approved by unanimous vote.

Closed Session

The Board went into closed session at 1:30 p.m.

Adjournment

The Board adjourned at 2:00 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.