February 13, 2017 Board Meeting SummaryFebruary 16, 2017
The February 13, 2017 meeting of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees convened at 10 a.m. at the Retirement Systems office in Jefferson City, Missouri. In attendance were Board members Aaron Zalis, Yvonne Heath, Jason Hoffman, Scott Hunt and Jason Steliga. Also present were PSRS/PEERS 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, Ronda Peterson; Director of Employer Services, Omar Davis; Director of Legislation and Policy, Maria Walden; Internal Auditor, Jeff Hyman; Chief Technology Officer, Bill Betts; Director of Administrative Planning and Design, Nicole Hamler; and various other PSRS/PEERS staff members.
The Board voted unanimously to approve the open session minutes from the December 12, 2016 Board meeting.
Investment Performance Report (12/31/16)
Mr. Craig Husting from PSRS/PEERS and Mr. Michael Hall from Willis Towers Watson (the Systems’ investment consultant) reviewed the investment performance for the period ended December 31, 2016. The one-year PSRS/PEERS’ investment return was reported as 8%, while the fiscal year return (July 1, 2016 through December 31, 2016) was reported as 4.5%.
Ongoing Investment Activity
Mr. Husting and Mr. Hall reviewed ongoing investment activity, which included estimated investment performance through January 31, 2017. 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.
Anti-Terrorism Policy Review
Mr. Husting and Mr. Hall reviewed the Systems’ Anti-Terrorism and Economic Sanction Investment Policy. The Board adopted the policy in 2005 and last reviewed it in February 2016. The policy requires PSRS/PEERS staff to provide a report to the Board on an annual basis that identifies any investment actions taken due to links to terrorist or sanction-related activities.
Mr. Husting stated that the Systems have several safeguards in place to ensure compliance with the policy, including:
- On an annual basis, staff sends letters to selected federal officials requesting any information they can provide on companies that, in their opinion, have terrorist links.
- Based on guidance from the U.S. Department of Commerce and other sources, staff monitors several websites, including the Specially Designated Nationals List. The lists are compared to the PSRS/PEERS’ active holdings monthly.
- The Systems’ custodian bank (J.P. Morgan) is required by federal law to monitor all individual security holdings in the Systems’ investment accounts.
- The Systems have amended contracts with traditional External Investment Managers to require annual confirmation that each manager maintains appropriate policies, procedures and controls to comply with all U.S. and applicable non-U.S. economic sanction programs.
At the end of the report, Mr. Husting stated that both staff and general counsel recommended no investment action be taken this year with regard to the Anti-Terrorism and Economic Sanctions Investment Policy.
Affirmative Action Policy Review
Mr. Husting and Mr. Hall reviewed the Systems’ Affirmative Action Policy and Procurement Action Plan. The policy was last revised in October 2014 and last reviewed by the Board in February 2016. The policy requires PSRS/PEERS staff to provide a report to the Board on an annual basis regarding the Systems’ efforts to assure equal opportunities for minorities and women as money managers, brokers and investment counselors. Mr. Husting stated that the Systems are in compliance with the policy.
Sections 104.342.13(6), 104.621, 105.702, and 169.573, RSMo require the Systems to make an annual report to the Governor’s Minority Advocacy Commission and the Joint Committee on Public Employee Retirement regarding the progress made in the area of utilization of minority and women money managers, brokers and investment counselors. Staff submitted the required report on January 25, 2017.
At the end of the report, Mr. Husting stated that both staff and general counsel recommended no investment action be taken this year with regard to the Affirmative Action Policy and Procurement Action Plan.
Private Assets Program Review
Mr. Husting and Mr. Hall provided a broad overview of the Private Assets Composite. The long-term target allocation to Private Assets is 25% with an interim target allocation of 20%. The five-year annualized return for the Private Assets composite for the period ended December 31, 2016 was 12.9%.
Ms. Susan Conrad and Ms. Chhayhea Sam from PSRS/PEERS reviewed the Systems’ Real Estate portfolio including program objectives, long-term results and funding strategies. The five-year annualized return for the Real Estate composite for the period ended December 31, 2016 was 12.1%.
Mr. John Tuck and Mr. Dan Case from PSRS/PEERS reviewed the Systems’ Private Equity and Private Credit portfolios including program objectives, long-term results and funding strategies. The five-year annualized return for the Private Equity composite for the period ended December 31, 2016 was 14.6%.
Mr. M. Steve Yoakum presented the Board governance report recently completed by Cortex Applied Research, Inc. Cortex conducts a general review of the extent to which the Board is operating in accordance with its governance policies and charters. The process involves reviewing Board and committee meeting minutes and related documentation, as well as follow-up discussions with senior management. Mr. Yoakum explained that the primary goal of the annual review is to ensure that the Board’s governance policies and charters are living documents that truly guide how the Board functions, while also evolving to meet the changing needs of the Board and the Systems over time.
Cortex had recommended a few minor updates to the Board governance policies and did not have any recommendations for the charters. The changes bring the policy in line with current practices. Cortex combined the charters and the policies into one document to be reviewed in full each year. After review, the Board voted unanimously to approve the report with the suggested changes.
Mr. Dearld Snider, Ms. Susan Wood and Mr. Bill Betts demonstrated the PSRS/PEERS website, https://www.psrs-peers.org, to the Board. In particular, Mr. Snider focused on updates made to the Board section of the website. There is now a tab on the top of the home page entitled, “Board.” This link goes directly to a dedicated section containing Board of Trustees information.
Mr. Snider discussed other changes:
- A "send an email" link is now located next to each trustee’s name. The link kicks off a web form so an email can be directed to the Board member’s PSRS-provided email address. In addition, the email is copied to the Board secretary.
- The same "send an email" link is provided on each Board member’s personal biography page on the website, and is found directly under his or her name.
- Below the list of trustees, a link entitled, "Board Member Contact Form" is also available for sending a group email to all trustees.
- The same type of links were also added to the “Management” web page so emails can be sent directly to the appropriate inbox.
- On the top right corner of each page of the website there is a link to a web page entitled, "Contact Us." Within the email section of that page we also direct web users to the Board and Management web pages if they have specific inquiries.
Mr. Betts recommended that email addresses should not be posted on the PSRS/PEERS website due to cyber security concerns, and discussed the security threats that public web links to email addresses can pose to the Systems.
Ms. Wood reviewed the philosophy behind the structure and design of the website, as well as key attributes of the site including placement of news and other high priority information and Web Member Services login access. Ms. Wood also discussed recent statistics for the site including user demographics and usage of both the public site and the secure portion of the site (Web Member Services), which is accessed by login.
- The public site averages 20,000 unique users each month.
- Women over the age of 50 are the biggest users of both the public site and the secure portion of the site.
- There were 46,398 registered users of Web Member Services as of January 31, 2017.
- 70% were PSRS members
- 62% were active members
- 489 service retirement applications were completed online and approved.
- Of those filing online service retirement applications, the average user was age 59 with 20 years of service.
- Over 100,000 Benefit Estimates have been run by members via the benefit estimator found in the secure portion of the site.
- Of those using the online benefit estimator, the average user was age 52 with 18 years of service.
Ms. Maria Walden 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 January 2017 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 304 and SB 394 allow any retiree who selects a Joint-and-Survivor benefit plan and has a subsequent divorce to popup to the Single Life benefit plan payment amount upon receipt of an application. This will only occur if the divorce decree provides for sole retention of benefits. Retroactive benefits are not payable, and the divorce must occur on or after September 1, 2017. HB 304 was filed by Representative Patricia Pike and SB 394 was filed by Senator Gary Romine. The Systems’ actuary, PricewaterhouseCoopers’ (PWC) actuarial cost estimate of HB 304 estimates that there will be an insignificant fiscal savings to PSRS and PEERS.
- HB 305 requires that any retiree who is employed by a third party, or is performing work as an independent contractor as a temporary or long-term substitute teacher, be required to comply with the existing statutory working after retirement limits in 169.560 (50% salary and 550 hours). The bill would not prohibit a covered employer from hiring a third-party contractor for substitute teaching positions. HB 305 was introduced by Representative Patricia Pike. PricewaterhouseCoopers estimates that HB 305 will have no measurable fiscal impact to PSRS or PEERS.
- HB 650 establishes a fixed statutory cost-of-living adjustment (COLA) for PSRS and PEERS retirees, changes the effective date of the COLA for PSRS members, eliminates various ad hoc increases in past years from being exempt from the COLA cap and eliminates the ability for the Systems to decrease the COLA in years in which the CPI is under 0%.
- The cost to implement this provision is $2.86 billion for PSRS and $245 million for PEERS and would cause the contribution rates to reach maximums of 35.67% for PSRS and 15.76% for PEERS.
- HB 650 was introduced by Representative Steve Cookson and was withdrawn.
- HB 775 exempts information pertaining to the salaries and benefits of the executive director and employees of the Systems from being confidential.
- HB 891 establishes a fixed statutory cost-of-living adjustment of 2% whenever the CPI is between 0% and under 5%, fixes a statutory COLA of 5% whenever the CPI is over 5% and eliminates the ability for the Systems to decrease the COLA in years in which the CPI is under 0%. This bill was introduced by Representative Steve Cookson.
- PWC estimates the PSRS cost to implement this provision is $2.46 billion. The contribution rate for PSRS would reach a maximum amount of 34.75% (17.375% for the employer/17.375% for member).
- The PEERS cost to implement this provision is $245 million. The contribution rate for PEERS would reach a maximum amount of 15.76% (7.88% for the employer/7.88% for member).
- SB 308 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. This type of social investing bill could potentially have a long-term negative impact on the Systems by limiting the types of investments in which the Systems can invest, and therefore cost our members and employers additional funds.
- 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 US. 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.
- As of December 31, 2016, the PSRS/PEERS total market value of investments in Russian based companies was $117,111,587. This represented 0.30% (3/10’s of 1%) of total PSRS/PEERS assets ($39 billion). All of the PSRS/PEERS exposure was through public equities.
- The Russian index was up 54% for the one-year period ended December 31, 2016.
Ms. Walden also discussed other legislation the Systems are monitoring, but which does not have a direct impact on the Systems.
Following the legislative discussion, the Board voted unanimously to support legislation for the divorce popup (HB 304/SB 394) and also the legislation dealing with working after retirement and third-party consultant work (HB 305).
The Board voted unanimously to oppose any legislation that has a cost to the Systems or removes the Board’s ability to use discretion when setting the Funding Policy or COLA.
Mr. Yoakum reviewed the Comprehensive Annual Financial Report (CAFR) for the year ended June 30, 2016 with the Board. He discussed what to look for when reviewing a CAFR:
- Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association (GFOA)
- Management’s Discussion and Analysis
- Letters from Investment Advisor and Chief Financial Officer
- Independent Auditors’ Report
- Certification of Actuarial Results – from independent actuary
- Investment Historical Performance and Asset Allocation
- Schedules of Funding Progress
- Schedules of Employer Contributions
- Footnote - Net Pension Liability of Employers
- Footnote - Commitments and Contingencies
A PDF version of the CAFR can be found on our website or a hard copy can be requested by contacting our office.
Mr. Yoakum discussed the calculation of the Consumer Price Index (CPI) calculated by the Bureau of Labor Statistics (BLS). The CPI is the measure of the change in prices of goods and services purchased by urban consumers between any two time periods. The CPI is based on prices for major groups: food and beverage, housing, apparel, medical care, recreation, education/communication and other goods and services. There are a total of over 200 categories that make up the major groups used to determine the CPI and each category is weighted differently.
PSRS/PEERS’ regulation requires that the time period for the CPI calculation is from June to June. Based on the values provided by the BLS, the CPI-U, which is used for COLA calculations, is up just 0.16% for the last six months (fiscal year 2017).
The Board went into closed session at 1:15 p.m.
The Board adjourned at 1:32 p.m.
These are 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 scheduled for April 10, 2017 and will posted to our website at that time.