June 2018 Board Meeting Summary

The Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees met for a Board education retreat June 11, 2018. The retreat included educational sessions with internal staff and external parties in compliance with Missouri statute section 105.666, RSMo.

The Budget and Audit Committee of the Board of Trustees convened June 12, 2018 at 8:30 a.m. at the Hilton Promenade at Branson Landing, 3 Branson Landing, Branson, MO, with the regular session of the Board of Trustees meeting following at 10:15 a.m. In attendance were Board members Aaron Zalis, Jason Hoffman, Chuck Bryant, Yvonne Heath, Scott Hunt, Beth Knes 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, Sarah Swoboda; 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.

Budget and Audit Committee

Minutes

The open session minutes from the April 9, 2018 meeting were approved by unanimous vote.

Banking Resolution

Ms. Anita Brand reviewed a memo regarding a banking resolution. The resolution provides continuing authority to Mr. Steve Yoakum, Mr. Dearld Snider 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.

Fiscal Year 2018 Budget Amendment

Ms. Anita Brand discussed a proposed budget amendment related to legal fees for the investment department. The proposal included an increase of $500,000 to the investment department legal fee budget. The increase in legal fees is due to an increase in private asset investment opportunities and contract negotiations during the fiscal year. The Budget and Audit Committee approved the budget amendment by unanimous vote.

Discussion and Approval of the 2018-2019 Budget

Ms. Anita Brand reviewed the 2018-2019 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 3.5% from the fiscal year 2018 adjusted budget. The overall increase is driven by an expected 3.2% increase in benefit payments to members. The investment expenses are comprised of investment fees and investment administrative expenses. Budgeted investment fees increased by 7.4% compared to the prior year. This is a result of increased market values from strong one-year returns, additional funding of active management and continued funding of private risk assets. Investment fees are aggressively negotiated when the Investment Management Contract is executed and continuously monitored for possible revision. Investment fees are paid and budgeted in accordance with current legal contracts. Actual expenses will be directly dependent on the market environment. The budget request includes a 5.9% increase in investment administrative expenses. The increase is attributed to the addition of an investment officer, increased due diligence expenses and a merit compensation pool for staff. 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 budget for these two areas has increased by 6.7% compared to the fiscal year 2018 budget. The increase is attributed to the implementation of a new financial and human resource system and a merit compensation pool for staff. The merit compensation pools for investment and administrative staff are in accordance with the Board of Trustees' Compensation Strategy and the April 2018 Compensation and Budget Discussion presented to the Board of Trustees.

The fiscal year 2019 budget request does not include a request for building improvements. However, the Systems continue to evaluate the replacement of the HVAC systems and other aging infrastructure needs.
The Budget and Audit Committee approved the budget as presented by staff by unanimous vote.

Strategic Planning Discussion

Mr. Dearld Snider provided an update on the strategic planning project which began in April. The management team spent a day in May to explore the mission statement, plan goals, and participate in multiple exercises focused on the creation of the strategic plan. Each board member will also be asked to provide feedback during the weeks ahead.

Mr. Snider provided a perspective by looking at the past, present and future growth of the systems. In 1994, when Mr. Yoakum became executive director, PSRS/PEERS had 39 employees to manage $10 billion in assets and pay monthly benefits to 31,027 retirees and beneficiaries. As of June 30, 2017, PSRS/PEERS employed 135 employees overseeing $41.7 billion in assets and paying 91,654 retirees and beneficiaries. The complexity and sophistication of PSRS/PEERS has grown while services to our members and school districts have expanded.

Based on the demographics of PSRS/PEERS members and the design of the portfolio, this growth will continue. Over the next 10 years, 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 system will grow to approximately $100 billion before reaching a plateau.

This growth requires proactive planning and the board would like to consider our future needs when creating our strategic plan. The three-year plan is projected to be complete this fall and will be presented to the board for approval.

Internal Audit Report

Mr. Jeffrey Hyman presented the internal audit annual report to the committee. The Internal Audit department completed 16 audit engagements and performed consulting services in various areas in accordance with, and in addition to, the fiscal year 2018 PSRS/PEERS audit plan. Mr. Hyman also reviewed the internal audit plan for fiscal year 2019.

Regular Board Meeting

System Operations

Minutes

The open session minutes from the April 9, 2018 meeting were approved by unanimous vote.

Order of Business

 
Investment Report

Investment Performance Report (March 31, 2018)

Mr. Craig Husting from PSRS/PEERS and Mr. Barry Dennis from Verus (the Systems Investment Consultant), reviewed the investment performance for the period ended March 31, 2018.  The 1-year PSRS/PEERS investment return was reported as 10.7% while the fiscal year return (July 1, 2017 thru March 31, 2018) was reported as 7.2%.

Ongoing Investment Activity

Mr. Husting and Mr. Dennis reviewed ongoing investment activities, which included estimated investment performance through May 31, 2018. 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.

Investment Policy Changes

The Investment Policy was originally adopted in 1995. The investment staff periodically conducts a full review of the Investment Policy and recommends changes to the Board. The last full review was conducted in December 2016.

Mr. Husting and Mr. Dennis discussed proposed Investment Policy changes. The recommended changes were primarily to bring the Policy in accord with Board action over the last year, to add language for clarity and some operational clean-up. Following discussion, the proposed investment policy changes were approved by unanimous vote.

Management Report

Board Education Wrap-Up

Mr. Dearld Snider provided a recap of the board education by reflecting on the various presentations from:

Board Meeting Dates for Fiscal Year 2018

The fiscal year 2019 Board of Trustees meeting dates were reviewed and approved by unanimous vote. The following dates were set for fiscal year 2019 meetings: August 27, 2018; October 29, 2018; December 10, 2018; February 11, 2019; April 8, 2019 and June 10-11, 2019.

Fiscal Year 2018 Budget Amendment

Ms. Anita Brand discussed a proposed budget amendment, which was unanimously approved earlier in the day by the Budget and Audit Committee, related to legal fees for the investment department. The proposal included an increase of $500,000 to the investment department legal fee budget. The increase in legal fees is due to an increase in private asset investment opportunities and contract negotiations during the fiscal year. The Board of Trustees approved the budget transfer by unanimous vote.

Banking Resolution

Ms. Anita 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. Steve Yoakum, Mr. Dearld Snider and Mr. Craig Husting to make necessary changes related to our banking relationship with Central Bank. The Board of Trustees approved the resolution by unanimous vote.

2018-2019 Budget Approval

The proposed 2018-2019 budget, as presented to the Budget and Audit Committee, was approved by the Board of Trustees by unanimous vote.

Legislative Update

Ms. Maria Walden and Legislative Consultant, Mr. Jim Moody, updated the Board on the 2018 Missouri Legislative Session. Mr. Moody reported briefly on state revenue and gave an update on May 2018 revenue to the Board. He also discussed sales tax growth and Missouri income from capital gains and dividends.

Ms. Walden reviewed the 2018 Missouri legislative statistics as well as the upcoming important 2018 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 the members and employers when this legislation is signed by the governor, including a question and answer summary.

Ms. Walden also presented a detailed list of the bills that did not pass this legislative session.

Consumer Price Index (CPI) Update

Mr. Yoakum discussed the COLA policy that was set by the Board of Trustees at the November 3, 2017 meeting. Effective with the January 2019 COLA, the policy will be:

2017 Board Approved Funding Policy Effective for January 1, 2019 COLA
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%
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 2.7078% through May 31, 2018.  

Raw CPI-U Index Values
  Index Values
June 2017 244.955 Month To-Date
July 2017 244.786 -0.0007 -0.0690%
August 2017 245.519 0.0030 0.2302%
September 2017 246.819 0.0053 0.7610%
October 2017 246.663 -0.0006 0.6973%
November 2017 246.669 0.0000 0.6997%
December 2017 246.524 -0.0006 0.6405%
January 2018 248.991 0.0054 1.1888%
February 2018 248.991 0.0045 1.6476%
March 2018 249.554 0.0023 1.8775%
April 2018 250.546 0.0040 2.2825%
May 2018 251.588 0.0042 2.7078%

Public Comment

Ms. Carol Weatherford, representing MNEA and MNEA-R, thanked the Board for the invitation to attend the educational sessions, which she found very informative.

Other

Mr. Jason Steliga requested that the Board review the retiree mailing policy that was adopted by the Board in October 2016. The current policy replaces the original retiree mailing policy set by the Board in 1984. Staff will review the policy and bring additional information to the Board for discussion at the August 2018 Board Meeting.

Closed Session

The Board went into closed session at 12:15 p.m.

Adjournment

The Board adjourned at 1:10 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.