February 2018 Board Meeting SummaryFebruary 12, 2018
The February 12, 2018 meeting of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees convened at 9 a.m. at the Retirement System offices in Jefferson City, Missouri. In attendance were Board members Aaron Zalis, Beth Knes, Jason Hoffman, Scott Hunt, Chuck Bryant and Jason Steliga. Yvonne Heath was present via conference call. 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.
Regular Board Meeting
The open session minutes from the December 11, 2017 meeting were approved by unanimous vote.
Introduction of Verus as the General Asset Consultant
The Board voted to hire Verus as the general asset consultant for PSRS/PEERS on December 11, 2017. Verus provided the Board with a short presentation on their firm and their personal backgrounds. The presentation was conducted by one of the primary consultants on the PSRS/PEERS relationship, Margaret Jadallah and the secondary consultant, John Meier.
Investment Performance Report
Mr. Craig Husting from PSRS/PEERS and Mr. Barry Dennis from Verus reviewed the investment performance for the period ended December 31, 2017. The one-year PSRS/PEERS investment return was reported as 14.9%, while the fiscal year return (July 1, 2017 through December 31, 2017) was reported as 6.7%.
Ongoing Investment Activity
Mr. Husting and Mr. Dennis reviewed ongoing investment activities, which included estimated investment performance through February 9, 2018. Mr. Husting discussed the recent market volatility, and the current asset allocation of the PSRS/PEERS portfolio, during 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 reviewed the Systems' Anti-Terrorism and Economic Sanction Investment Policy. The policy was adopted by the Board in 2005 and last reviewed with the Board 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 could provide on companies that, in their opinion, had 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 on a monthly basis.
- 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 review, Mr. Husting stated that both staff and the PSRS/PEERS general counsel recommended that no investment action be taken this year with regard to the Anti-Terrorism and Economic Sanctions Investment Policy.
Affirmative Action Policy Review
Mr. Husting reviewed the Systems' Affirmative Action Policy and Procurement Action Plan. The policy was last revised in October 2014 and last reviewed with the Board in February 2017. The policy requires PSRS/PEERS staff to provide a report to the Board on an annual basis regarding the Systems' efforts to ensure equal opportunities for minorities and women as money managers, brokers and investment counselors. Mr. Husting stated that the Systems were 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 29, 2018.
At the end of the review, Mr. Husting stated that both staff and the PSRS/PEERS general counsel recommended that no investment action be taken this year with regard to the Affirmative Action Policy and Procurement Action Plan.
Private Assets Program Review
Mr. Husting 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, 2017 was 13.8%.
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, 2017 was 11.9%.
Mr. John Tuck, Mr. Dan Case and Mr. Ben Frede 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, 2017 was 16.4%.
Mr. M. Steve Yoakum from PSRS/PEERS 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 recommended a few minor updates to the Board governance policies and did not have any recommendations for the charters. To bring the policy in line with current practices, Cortex recommended updating the frequency of the Member Service reporting requirements to yearly. They also recommended modifying the policy and charter review history sections to "last amended" to avoid confusion. After review, the Board voted unanimously to approve the report with the suggested changes.
Mr. Chuck Bryant left the meeting at 11:35 a.m.
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 January 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. Several bills 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 teacher 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 amount 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. PWC is still analyzing HB 1670 regarding its financial impact to the Systems.
- HB 1673 requires that each public pension plan in Missouri must 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 such 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
All of 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 to retirement for normal retirement and the projected benefit for the member at normal retirement.
Section 105.661 adds that additional information 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. This additional financial information must also be included in the pension statement and the bill states that each plan shall provide the statement annually to active participants regardless of whether the statement is requested. Currently, the Systems provide most of this information in a separate publication called Summary Report to Members that is available on our website to over 250,000 active and retirees separate from the Member Statement.
- HB 2200 authorizes schools of innovation. 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., allows a retired teacher of PSRS to return to work for a covered employer in these schools of innovation and not be subject to provisions the working after retirement limitations found in section 169.560, RSMo. Last school year, PSRS/PEERS had over 10,514 retirees who 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 limitation for schools of innovation.
This section also would circumvent the Critical Shortage Full Time Employment Exception provision. Last year, PSRS had 83 retirees (PEERS also 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 that work full-time for these schools of innovation or cooperatives.
PWC is currently working on the actuarial cost statement. Any of expansion or exclusion of our retirees from the working after retirement or Critical Shortage statutes will have a financial cost to the Systems.
- HB 2335 allows any teacher retired from the Public School Retirement System of Missouri to be employed in a position covered under the Public Education Employee Retirement System (PEERS) without stopping their retirement benefit.
These retired teachers 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 hiring employer must pay the employer's contribution. 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 unanimously in support of the bill as long as two provisions remained in the bill: the salary threshold and the employer contribution rates paid on those earnings.
- 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.
Several bills have been filed this year that have a direct impact on other 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 Public School Retirement System of Kansas City (KC PSRS). KC PSRS' contribution rate is 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. Dearld Snider from PSRS/PEERS presented the concept of developing a multi-year strategic plan. Mr. Snider referenced the mission statement and principles in place at PSRS/PEERS, while also highlighting an example of a strategic plan developed by the Illinois Municipal Retirement Fund (IMRF). The development of this plan would involve input from the Board, management and staff. The Board acknowledged the value of the project and would like to see the project begin during the summer of 2018 in hopes of adopting the plan during the 2018-2019 fiscal year.
Mr. Yoakum discussed the COLA policy that was set by the Board at the November 3, 2017 meeting. The COLA for January 2018 was 1.63%. 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 0.6405% for the month ended December 31, 2017.
The January reading for the CPI-U will not be released until February 15, 2018.
The Board went into closed session at 11:55 a.m.
The Board adjourned at 1:15 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 be posted to our website at that time.