By Otto Fajen, MNEA legislative director
Trustees present
Jason Steliga, Chair
Beth Knes, Vice-Chair
Dr. Kyle Collins
Allie Gassman
Dr. D. Eric Park
Katie Webb
The Board met on April 16 to review the Systems’ Non-U.S. Equity Portfolio and Real Estate Portfolio and met again on April 17 to conduct the remainder of the meeting agenda.
SYSTEM OPERATIONS
The Board approved the minutes from the February 5-6, 2023, meetings and established the order of business.
Board Membership – The Board noted that Board member Sharon Kissinger has resigned due to personal concerns. The Board also recognized the service of outgoing Board member Kyle Collins, whose term will expire on June 30, 2023.
Election of Officers - As required by Board regulation, the board of trustees unanimously elected Jason Steliga as Chair and Beth Knes as Vice-Chair to each serve one-year terms starting July 1, 2023.
Interest Credit Rate and Purchase Interest Rate - The interest credit rate for the current fiscal year is 2.0%. The Board increased the interest credit rate for next fiscal year to 4.0%, based on staff recommendation. The Board also approved the staff recommendation to set the purchase interest rate for next fiscal year at the current assumed rate of return of 7.3%.
INVESTMENTS
Investment Performance Report - Craig Husting reviewed the estimated March 31, 2023, investment results. Non-US markets have been showing higher returns than U.S. equity returns in recent quarters. The report provided a broad overview of how the PSRS/PEERS’ portfolio was structured including estimated asset allocation for PSRS/PEERS as of March 31, 2023.
Staff noted that the treasury yield curve is unusual compared to what it was in 2018, the last time the Fed was raising interest rates. A normal yield curve increases the rate of return for longer terms up to 30 years. The current yield curve is inverted, with the yield for less than five-year maturity being significantly above the longer period rates. The rising rates have resulted in losses in the safe assets portfolio.
Public equity markets dropped through the first half of 2022, followed by a sudden rise in the second half of 2022. The Systems’ allocation mitigates downside risk while it lags in fast market increases.
As expected, the Systems’ returns have lagged during this recent rise. The Systems are up 3.3% FYTD, which is 2.4% below the policy benchmark. The delay inherent in private equity returns also contributes to this lag below the policy benchmark. Private equity returns remain strong overall.
The Systems’ preliminary investment return for the fiscal year to date (July 1, 2022, through March 31, 2023) was approximately 4.0%. The Systems have lost 2.3% this calendar year, relative to a 5.3% loss for the Russell 3000. Staff discussed the Systems’ allocation policy and the asset positioning relative to those policy benchmarks.
MANAGEMENT REPORT
Member Services Information Center – Staff presented an update on the information center section within the Member Services department. The Staff gave updates on yearly volume of calls, chats and emails. Member interactions have increased significantly over the last ten years. Interaction times have increased due to the addition of slower paced chats. Also, improved technologies allow staff to answer more detailed questions on the call, rather than waiting for an off-line response. Retirement of many experienced staff in recent years has led to an increase in calls and chats being handled by overflow staff. Recent hiring of additional staff has improved customer service and shortened wait times.
Funston – Sarah Swoboda from the Staff and representatives from Funston Advisory Services, the governance and policy advisor recently hired by the Board discussed the results of Funston’s review of the Systems’ various governance policies, including the Governance Policy and Charter Review and the InGov Peer Benchmarking Survey. Funston outlined a few recommendations on governance policies for future Board consideration. Overall, PSRS/PEERS is efficiently operated with costs and staffing relative to peer funds and could be considered a high-performing organization with effective policies and practices.
Funston found the Systems’ policies to be comprehensive, appropriate and with a few exceptions, consistent with prevailing peer practices. Funston made five main recommendations: 1) have the Chief Audit Executive report directly to the Board, 2) develop a coordinated approach to enterprise performance, risk and compliance, 3) develop a multi-year strategic policy agenda to better anticipate key future board needs and as input to continuing education needs, 4) make charters and investment policies available on the website, and 5) provide greater public Board meeting transparency via the website. The Systems will need to determine how to use the recommendations.
Ms. Swoboda also showed a preview of the governance timeline which Board members will have access to, and which shows all the regular components of the six board meetings each year, including those that are annual and those that are done over a multi-year period.
Legislative Report – Mike Moorefield, Doug Nelson, and Jim Moody gave the legislative report. Mr. Moody gave a revenue update including his analysis of the budget, tax changes, and the impact of various federal revenues on state and local revenues over the next few years.
The state General Revenue fund has a $5.3 billion cash balance. FYTD growth in GR is $982 million. Moody emphasized that further state income tax cuts will take effect over the next five years and will have a cumulative annual cost estimated at $1.8 billion. If the economy also experiences a recession, that will further reduce state general revenue in coming years. Moody estimates that revenues will decline in April through June, leaving a final fiscal year growth of about $222 million and FY 2023 GR of about $13.1 billion. Moody estimates that tax cuts will reduce FY 2024 GR to $12.1 billion.
Moorefield and Nelson mentioned various bills that would require pension systems, including PSRS/PEERS, to not consider environmental, social or governance factors in a manner that would override their fiduciary duties. The Systems already have a policy of this type addressing fiduciary duty and proxy voting. Some bills, such as SB 436 (Jill Carter), would interfere with the current practices of PSRS and PEERS and force the Systems to significantly change investment allocations in ways that would reduce return on investments. HB 769 (Bill Owen), on the other hand, would accomplish the same policy goal without harming the status and function of the Systems.
Moorefield and Nelson also mentioned the package of PSRS/PEERS changes being amended to various bills. This package includes:
1) Adding a 2.55% benefit factor for extended service of 32 years or more,
2) Increasing critical shortage option from 2 years to 4 years,
3) Expanding the number of Critical shortage positions,
4) Critical shortage flexibility between PSRS and PEERS provisions,
5) For PSRS retirees in non-certified positions, increase allowed earnings from $15,000 to 133% of the Social Security earnings limit for five years and to 100% of that limit thereafter, and
6) In the case of SB 75, also including a benefit pop-up for same sex relationships.
The legislature is also addressing the speech implementers issue. In 2022, DESE ended the speech implementer model of delivering speech and language services and required those services be delivered by a Speech Language Pathologist (SLP) or an SLP Assistant (SLP-A). This caused a shift for existing speech implementers who had been certified by the State Board and participating in PSRS to non-certified positions that would require a shift to PEERS. Sen. Rusty Black has drafted language to require DESE to consider the speech implementers as being certificated by the State Board, thus allowing them to continue to participate in PSRS. This provision does not affect the administration or fiscal condition of the Systems.
CPI update/COLA review – The Board reviewed the COLA policy and COLA history for the current fiscal year. The current CPI-U is up 1.8646% through March 31, 2023. Under current policy, the Board will make a COLA for eligible retirees for next year if the cumulative figure at the end of this fiscal year exceeds 2.0%.
Public Comment – None.
The public meeting adjourned, and the Board went into closed session.