April 2017 Board Meeting SummaryApril 11, 2017
On April 10, 2017, the Budget and Audit Committee of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees convened at 8:30 a.m. in the Retirement System offices in Jefferson City, MO, with the regular session of the Board of Trustees meeting following at 10 a.m. In attendance were Board members Yvonne Heath, Jason Hoffman, Scott Hunt and Jason Steliga. Board member Dr. Aaron Zalis was not able to attend. 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; 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 12, 2016 meeting were approved by a unanimous vote.
Preliminary 2017-2018 Budget Discussions
Mr. Dearld Snider and Ms. Anita Brand 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.
To maintain external competitiveness, the Systems conduct a compensation study every three years. After issuing a Request for Proposal (RFP), the Systems selected CBIZ to conduct this year’s study. The study focused on all System operation employees, and the results were presented to the Budget and Audit Committee.
The study results concluded PSRS/PEERS staff falls slightly below the market when comparing base salaries to the market's 50th percentile. The spread further separates below the market when compared to total compensation, since PSRS/PEERS does not provide bonuses or incentives to staff. However, most employees fell within their respective pay ranges and only marginal adjustments were recommended.
CBIZ identified benchmark jobs within the appropriate labor market by targeting:
- Geography: National data for management positions. Regional and local data for non-management positions
- Industry: Pension and retirement funds as well as the broader labor market as appropriate
- Size: Operating budget, assets under management and employee headcount
They also explained the difference between the cost of living and the cost of labor, since CBIZ 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|
Overall, CBIZ commended the Systems' reliance on their compensation strategy. They see the approach as good governance and best practice to keep compensation at or near the market.
Following CBIZ's presentation, Mr. Snider summarized the internal salary adjustments necessary to address the findings of the study. He also highlighted the importance of the Board’s continued investment in the PSRS/PEERS staff in an effort to attract and retain top-tier employees while remaining consistent with the Board of Trustees' compensation strategy.
Today's committee meeting lays the groundwork for constructing the annual operating budget in accordance with the Board of Trustees' planning and budgeting policy. 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 2017 meeting.
Staff anticipates the fiscal year 2018 budget request to be equal to or less than the fiscal year 2017 budget request, inclusive of any possible salary adjustments for fiscal year 2018.
External Auditor RFP Review
The Retirement Systems issued an RFP for professional auditing services on February 10, 2017. The RFP requested proposals from qualified firms of certified public accountants to audit the Retirement Systems' financial statements and schedules of pension information for participating employers for each of the fiscal years ending June 30, 2017, June 30, 2018 and June 30, 2019. These audits must be performed in accordance with U.S. generally accepted auditing standards as set forth by the American Institute of Certified Public Accountants.
Ms. Anita Brand and Mr. Jeff Hyman reported the Retirement Systems received two responses to the RFP. Ms. Brand and Mr. Hyman discussed the RFP process inclusive of the distribution method, the mandatory and technical requirements and overall evaluation of each response received. Staff recommended retaining Williams-Keepers, LLC as the Retirement Systems' external auditor. The Budget and Audit Committee approved staff's recommendation by unanimous vote.
Regular Board Meeting
The open minutes from the February 13, 2017 meeting were approved by a unanimous vote.
Order of Business
Mr. Yoakum recognized Dr. Zalis for two awards he recently received. Dr. Zalis received the 2017 Pearce Award from the Missouri Association of School Administrators (MASA) and was also named 2017 Administrator of the Year by the Missouri School Public Relations Association (MOSPRA).
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, 2017 through June 30, 2018. 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 the interest credit rate remain at the current rate of 1%. 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 7.75%. The Board of Trustees approved staff's recommendation by unanimous vote.
Ongoing Investment Activity
Mr. Craig Husting from PSRS/PEERS and Mr. Michael Hall from Willis Towers Watson (the Systems' Investment Consultant), reviewed ongoing investment activities, which included estimated investment performance through March 31, 2017. The estimated investment return for PSRS and PEERS for fiscal year 2017 (July 1, 2017 through March 31, 2017) was approximately 8.8%. 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 and Mr. Hall discussed the above average investment returns that all institutional investors have experienced since the 2008 financial crisis and provided expectations for lower investment returns in the future. Mr. Husting also reviewed the tentative Board investment calendar.
U.S. Equity Program Review
Mr. John Tuck and Mr. Travis Allen from PSRS/PEERS reviewed the Systems' U.S. Public Equity portfolio including program objectives, guidelines and long-term results. The five-year annualized return for the U.S. Public Equity composite for the period ended December 31, 2016 was 14.8%.
Private Equity Annual Review
Mr. Doug LeBon, Mr. Vincent Dee 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 2017. Pathway reported that the PSRS/PEERS' Private Equity portfolio had produced an annualized return of 10.9% for the 10-year period ended December 31, 2016 relative to the Russell 3000 public equity benchmark of 7.1%.
External Auditor RFP Review
Ms. Anita Brand and Mr. Jeff Hyman presented the staff's recommendation, which was unanimously approved earlier in the day by the Budget and Audit committee, to retain Williams-Keepers, LLC as the Retirement Systems' external auditor. The Board of Trustees approved the retention of Williams-Keepers, LLC as the external auditor by unanimous vote.
Ms. Maria Walden and Mr. Jim Moody updated the Board on the current legislative session. Mr. Moody reported briefly on state revenue and gave an update on March 2017 revenue to the Board. He also discussed sales tax growth and Missouri income from capital gains and dividends.
April is the most important revenue month in a fiscal year. March revenues set the table, but the real substance comes (or unfortunately does not come) when the April 15 envelopes containing either checks or refund requests come after the tax deadline. March revenues were slightly lower than March 2017, with a -.2% growth rate. This relatively mediocre revenue month reduced the year-to-date growth for fiscal year 2017 from +4.9% at the end of February to +4.3% growth at the end of March. For a negative month not to "move the needle" much in terms of year-to-date growth reflects that March is traditionally a relatively low revenue month.
Looking behind the numbers, sales tax year-to-date is +2.9%, which could be near what the final growth number will be for sales tax when the fiscal year ends. Individual income tax, which accounts for 70+% of general revenue, is at +5.4% growth, which looks great; however, that number could be overstated in the event refunds are being held. Corporate income tax receipts remain abysmal, at -37.6% growth. This loss of net corporate income tax receipts from Senate Bill 19 continues to drag down general revenue growth expectations. With sales tax growth at 3% or less and corporate income tax at -37.6% (after losing $155 million in fiscal year 2016), individual income tax has to really outperform to get to +3.0% growth for fiscal year 2017.
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/SB 394 allow any retiree who selects a Joint-and-Survivor benefit plan and has a subsequent divorce to pop up 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/SB 394 estimates that there will be an insignificant fiscal savings to PSRS and PEERS.
- HB 305/SB 441 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 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 the 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 the member).
- HB 918 requires all public pension plans to use an expected investment return that is equal to the 10-year average of actual plan investment returns.
- In essence, PSRS/PEERS would have had to use a 5.8% investment return assumption this year. If this bill would have been in place in early 2000 for example, the 10-year return for a 60/40 portfolio for the period ended June 30, 2000 was 13.92%. The 10-year return over the subsequent 10-year period (period ended June 30, 2010) was 1.92%.
- It also requires that the actuary set the mortality rate using assumptions that project future mortality improvements, which was part of the mortality changes that the Board adopted in 2016.
- This bill would remove the Board's ability to adopt the actuary's recommendation for investment returns and mortality rates when preparing the plan's actuarial valuation. It would increase the volatility in our investment portfolio as well as overcharge certain generations of active members while undercharging other generations.
- HB 936 allows for any PSRS retired member to return to work for a PSRS/PEERS covered employer without any limitation by the working after retirement statute as long as they are not hired for a position that requires an educator certificate under Section 168.021, RSMo.
- Furthermore, HB 936 does not require that a PSRS retiree who returns to work for a covered employer make any contribution on earnings to either PSRS or PEERS as long as the retiree does not return to work in a position that requires an educator certificate under 168.021, RSMo.
- PWC's actuarial cost statement estimates at minimum usage it will have the following cost:
- PSRS: $93.4 million (increase in the contribution rate of 0.24%)
- PEERS: $750,000
- HB 996 modifies provisions of the Pension Forfeiture Act to require the employers to notify the retirement plans when there is an employee who is charged or convicted of certain felonies with regard to their position.
- 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 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.
- 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.
The Board unanimously voted to oppose HB 918 and any other subsequent bills that remove the board's authority to set the Systems' assumed rate of return.
Mr. Yoakum discussed the Consumer Price Index for Urban Consumers (CPI-U) as 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 cost-of-living adjustments (COLAs) be from June to June. Based on the values provided by the BLS, the CPI-U, which is used for COLA calculations, is up just 1.06% for the first eight months of fiscal year 2017.
The March value for the CPI-U will not be released until April 15, 2017.
Mr. Yoakum recognized Ms. Heath, who was named chair of the Trustee Education Committee for the National Council on Teacher Retirement (NCTR). As such, Ms. Heath will help guide future educational curriculum for retirement system trustees across the nation.
The Board went into closed session at 1 p.m.
The Board adjourned at 2:30 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 June 12-13, 2017 and will posted to our website at that time.