June 2021 Board Meeting
The June 8, 2021 meeting of 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. at the Hilton Promenade in Branson, Missouri, with the regular session of the Board of Trustees meeting following at 9:30 a.m. In attendance were Board members Jason Hoffman, Jason Steliga, Kyle Collins, Sharon Kissinger, Beth Knes. Board member Melinda Moss was absent. Also present were Executive Director, Dearld Snider; Chief Investment Officer, Craig Husting; Assistant Executive Director, Bill Betts; General Counsel, Sarah Swoboda; Chief Financial Officer, Anita Brand; Director of Member Services, Nicole Hamler; Director of Legislation and Policy, Maria Walden; Director of Communications, Susan Wood; Chief Technology Officer, Lisa Scheulen; Director of Human Resources, Kim Harris; Director of Internal Audit, Jeff Hyman; Director of Executive and Board Administration, Stacie Verslues; and various other PSRS/PEERS staff members.
Budget and Audit Committee
The open session minutes from the April 12, 2021 meeting were approved by unanimous vote.
Annual Banking Resolution
Chief Financial Officer, Ms. Anita Brand reviewed a memo regarding a banking resolution. The resolution provides continuing authority to Mr. Dearld Snider, Mr. Bill Betts and Mr. Craig Husting to make necessary changes related to our banking relationship with Central Bank. The banking resolution authorizes appropriate individuals to execute documents with the bank without additional approval by the Board of Trustees. The resolution automatically expires each June 30 or when a new resolution is received by Central Bank. The Budget and Audit Committee approved the resolution by unanimous vote.
Discussion and Approval of the Fiscal Year 2022 Budget
Ms. Brand reviewed the 2021-2022 proposed budget request. Ms. Brand provided information regarding the processes utilized to develop the budget. The budget was compiled based on the Systems' mission of providing retirement security to Missouri's educators and public school employees in the most efficient and cost-effective manner possible. Ms. Brand provided the following budget highlights and provided detailed discussion on significant changes from the prior year.
The total request has increased by 4.4% from the fiscal year 2021-2022 adjusted budget. The overall increase is driven by an expected 4.0% increase in benefit payments to members.
The investment expenses are comprised of investment fees and investment administrative expenses. Budgeted investment fees increased compared to the prior year. The increase is directly related to the substantial increase in assets under management during fiscal year 2021, and exceptional performance by the Systems' investment managers. Investment fees are paid and budgeted in accordance with current legal contracts. Investment fees are aggressively negotiated when the Investment Management Contract is executed and continuously monitored for possible revision. The Systems account for and budget all investment fees, including performance and incentive fees. Actual expenses will be directly dependent on the market environment.
The budget request also includes an increase in investment administrative expenses. The increase is attributed to the addition of two investment positions, a merit compensation pool for staff and the allocation of a portion of the Executive Director's salary and benefits to investment functions. Investment returns are reported net of investment fees and investment administrative expenses.
The total administrative budget is made up of the capital asset budget (items over $10,000 that are capitalized) and the administrative budget. The fiscal year 2022 budget request for capital assets is inclusive of the current building expansion and renovation project. The Board of Trustees and staff spent three years evaluating the Systems' current facility and anticipated growth in membership, employees and invested assets under management. The Board approved the building expansion and renovation project at their December 2018 meeting to ensure the Systems continue to deliver a high level of service to all current and future members. The proposed budget request included a separate section providing additional details on the building expansion and renovation project and capital assets in total. The building expansion and renovation project is scheduled to be completed in the fall of 2021.
Administrative expenses increased by 1.8% from the previous year. The increase is attributed to the addition of four full-time positions and a merit compensation pool for staff. The increase is partially offset by a reduction in base salaries due to the retirement of long-tenured leadership positions that were subsequently filled at a lower base salary. In addition, effective with the fiscal year 2022 budget request, the Executive Director position (salary and benefits) is allocated 50% to investment administrative expenses. Throughout the proposed budget request, the Systems have decreased the budget where appropriate. However, the overall proposed budget request has increased in order to meet the Systems' long-term goals and strategic objectives. The Systems' administrative expenses are funded through investment earnings.
The Budget and Audit Committee approved the budget as presented by staff by unanimous vote.
Internal Audit Report
Director of Internal Audit, Mr. Jeff Hyman presented the internal audit annual report to the committee. The internal audit department completed 12 audit engagements and performed consulting services in various areas in accordance with, and in addition to, the fiscal year 2021 PSRS/PEERS audit plan. Mr. Hyman also reviewed the internal audit plan for fiscal year 2022.
Regular Board Meeting
The open session minutes from the April 11 and April 12, 2021 meeting were approved by unanimous vote.
Order of Business
Investment Performance Report (March 31, 2021)
Assistant Executive Director, Investments, Mr. Craig Husting and Ms. Margaret Jadallah from Verus reviewed the investment performance for the period ended March 31, 2021. The one-year PSRS/PEERS investment return was reported as 29.5%, while the fiscal year return (July 1, 2020 through March 31, 2021) was reported as 19.3%.
Ongoing Investment Activities
Mr. Husting reviewed ongoing investment activities, which included estimated investment performance through May 31, 2021. The estimated fiscal year investment return (July 1, 2020 through May 31, 2021) was reported as approximately 25.3%. Mr. Husting discussed the investment markets, rebalancing activity in April and May, and the current PSRS/PEERS asset allocation.
Board Meeting Dates for Fiscal Year 2022
The fiscal year 2022 Board of Trustees meeting dates were reviewed and approved by unanimous vote. The following dates were set for fiscal year 2022 meetings: August 30, 2021; October 25, 2021; December 6, 2021; February 7, 2022; April 11, 2022, and June 6-7, 2022.
Annual Banking Resolution
Ms. Brand reviewed a memo regarding a banking resolution, which was unanimously approved earlier in the day by the Budget and Audit Committee. The resolution provides continuing authority to Mr. Dearld Snider, Mr. Bill Betts and Mr. Craig Husting to make necessary changes related to our banking relationship with Central Bank. The Board approved the resolution by unanimous vote.
Fiscal Year 2022 Budget Approval
The proposed fiscal year 2022 budget, as presented to the Budget and Audit Committee, was approved by the Board by unanimous vote.
Actuarial Experience Studies and Actuarial Funding Policies
Ms. Brand presented a review of the 2021 Actuarial Experience Studies and proposed revisions to the Actuarial Funding Policies.
The actuarial experience studies review the differences between the Systems' assumed and actual experience over multiple years (typically three to five), with the goal of examining the trends related to actual experience and recommending changes to assumptions, if needed. The Systems perform an experience study at least every five years. The purpose of the studies are to confirm that the actuarial assumptions (economic and demographic) used in the annual valuations are: 1) reflective of the actual demographics and behaviors of the members, to the extent historical experience is measurable and expected to be an indicator of future experience, and 2) reflective of current economic conditions affecting members and their benefits. The actuarial methods utilized by the Systems are also reviewed as part of the studies.
The overall results of the experience studies are excellent. The studies indicate the actual experience of the Systems over the past five years is very close to the assumptions that were utilized. There were no surprises in the results. The most significant discussion in the studies is inflation. Inflation is an underlying component of all other economic assumptions. PricewaterhouseCoopers (PwC) has proposed recommendations to several of the Systems' actuarial assumptions, largely due to movements in inflation. Changes to economic assumptions related to inflation are driven by many factors within the market and do not represent a mismatch of prior assumptions. PwC has also recommended revisions to the Systems' mortality tables and improvement scale. Such recommendations are consistent with prior experience and discussions.
Based on recent economic developments, PwC proposed a revision to the cost-of-living adjustments (COLA) assumption recommendation made at the April 2021 Board of Trustees' meeting. The proposed recommendation is to assume 2.0% for the next three years and then 1.35% for all years thereafter.
The actuarial funding policies are to be reviewed every five years in conjunction with the Actuarial Experience Studies. The purpose of the policies is to record the funding objectives and policy set by the Board of Trustees for the Systems. The Board established the Policies to ensure the systematic funding of future benefit payments for the Systems' current and future members. The Policies include the Board's Principles of Funding and Risk Factors that must be considered. The Policies govern the methods used by the actuarial consultants in performing the actuarial valuation which is the basis for the determination of the annual contribution rate charged to employers and members.
The actuarial funding policies were updated to include all recommendations provided by PwC. The most significant changes were as follows: reducing the inflation assumption from 2.25% to 2.0%, lowering the Expected Return on Assets from 7.5% to 7.3%, revising the COLA assumption to 2.0% for the next three years and then 1.35% every year thereafter, lowering the payroll and individual salary growth rates beyond just the decrease in the inflation assumption to accurately reflect the actual growth experienced over the last 15 years, and revisions to the Systems' mortality tables and improvement scale, which are consistent with the prior experience and discussions.
The Board of Trustees approved the revisions to the PSRS and PEERS Funding Policies by unanimous vote.
Set Purchase Interest Rate for Fiscal Year 2022
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 setting the fiscal year 2021-2022 purchase interest rate at the actuarial assumed rate of return of 7.3% approved as part of the 2021 Actuarial Experience Studies. The Board of Trustees approved staff's recommendation by unanimous vote.
Proposed Regulation – Part-Time Election
General Counsel, Ms. Sarah Swoboda presented to the Board a proposed new regulation that involves the "part-time election" statute found at 169.712 RSMo. The part-time election statute provides that membership for certificated part-time employees (of at least 17 hours per week on a regular basis) defaults to PSRS, where members will earn partial service credit. However, the statute gives members who are "first employed" in this part-time certificated manner 90 days from that "first such employment" to elect to either become or remain a member of PEERS.
The regulation is desired in order to codify rules for those that avail themselves of the part-time election statute and then undergo certain changes in their work/positions. For this limited group of members who utilize the part-time election statute, then transition back to full-time work, then transition back to part-time work, this regulation states that once they become members of PSRS they will remain members of PSRS even if they transition back to part-time work (as long as they remain certificated). The Board of Trustees approved the proposed regulation by unanimous vote.
Assistant Executive Director, Operations, Mr. Bill Betts provided a high-level recap of the construction timeline for the new building addition and building renovation. Renovation continues throughout the current building and remains on target to be complete in September 2021. Mr. Betts also shared with the Board that we reopened the building to visitors on June 1, 2021.
Director of Legislation and Policy, Ms. Maria Walden updated the Board on the 2021 Missouri Legislative Session. Ms. Walden reviewed the 2021 Missouri legislative statistics, as well as the upcoming important 2021 legislative dates. She also reviewed bills that passed with a direct impact on the Systems. Internal implementation teams were established and have been working on steps to ensure a smooth transition if those bills are signed by the governor. The governor has until July 14 to sign or veto truly agreed to and finally passed legislation. The Systems will provide additional information to members who are impacted.
Senate Committee Substitute (SCS) House Committee (HCS) and House Bill (HB) 362 modifies provisions relating to Government Transparency.
- PSRS/PEERS Sunshine Law Provisions
- The amendment expands the types and amount of records that may be closed to include certain evacuation and lockdown procedures and information, email addresses/telephone numbers submitted to an entity for the sole purpose of receiving communications such as newsletters, alerts, advisories, etc., and customer usage and billing records for municipality utilities.
Senate Committee Substitute (SCS) House Committee (HCS) and House Bill (HB) 349 establishes the "Missouri Empowerment Scholarship Accounts Program"
- PSRS/PEERS has no direct impact but plans to monitor the overall impact to public education.
Ms. Walden also presented a detailed list of the bills that did not pass this legislative session and other legislative issues of interest to the Systems.
Working After Retirement
Executive Director, Mr. Dearld Snider presented the Board with potential modifications to the current working after retirement provisions as he had originally discussed at the February Board meeting. Mr. Snider reminded the Board that the PSRS/PEERS staff feels a pay-based limitation of 25% of the retiree's final average salary (FAS) is an option that would benefit over 90% of those working after retirement. In addition, employers would be able to expand their utilization of retired educators to address the ongoing need for substitute teachers. Mr. Snider explained that we will continue the discussion through the summer and into the 2021 legislative meeting.
Mr. Snider shared with the Board that our long-time Board Governance consultant, Cortex, was dissolving and would no longer be providing these consultant services. We have already begun the search for a new governance consultant.
Mr. Snider reviewed the COLA policy that was set by the Board at their November 3, 2017 meeting. According to the policy, COLAs may be granted based on the Consumer Price Index for Urban Consumers (CPI-U) as follows:
|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*|
|2.0%-5.0%||2.0% when the CPI-U is at least 2.0%, but less than 5.0%|
|5.0% or more||5.0%|
|*resets cumulative calculation after a COLA is provided|
Mr. Snider explained that the 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' regulations require 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 3.5908% through April 30, 2021.
The May reading for the CPI-U will not be released until June 10, 2021.
The Board went into closed session at 12:20 p.m.
The Board adjourned at 12:45 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.