By Otto Fajen, MNEA legislative director
Jason Steliga, Chair
Beth Knes, Vice-Chair
BUDGET AND AUDIT COMMITTEE MEETING
Comprehensive Annual Financial Report - Prior to the meeting of the Board of Trustees, the Budget and Audit Committee met to review the June 30, 2022, Audit Report. Representatives of Williams-Keepers (WK) presented their audit of the Systems’ Comprehensive Annual Financial Report (CAFR) for last fiscal year. The audit reviews the Systems’ internal controls, contributions received, investment activities, payments to retirees, and member data. The committee voted to approve the audit report.
Budget adjustment for new PSRS/PEERS Investment Office 4.0 – The PSRS/PEERS Investment Office has grown in stages throughout the last 25 years as new asset classes and strategies were implemented. The first stage began with creating the Investment office in 1996. The second stage added hedged assets and private equity beginning in 2003. The third state began with private equity co-investing in 2014 and private credit direct investing in 2019. The expansion of direct investments and co-investments in private equity and private credit, with a larger number of smaller allocations, has increased the staff workload and the number of deals that must be evaluated. Management believes the Systems are understaffed relative to workload, and this is limiting the ability of staff to travel to increase relationships and deal flow and to continue professional development.
The Systems’ staff considered various options for meeting the long-term objectives, including expansion of staff at the Jefferson City office, hiring remote staff, and slowing the growth of private investments. The staff recommended the creation of a satellite investment office in St. Louis as the best option to support the increased investment workload. The increased capacity would seek to maintain top-tier investment returns, control risk, and reduce fees. Several other public pension plans have created satellite offices in larger cities to support this investment work.
The recommendation is to approve a budget request of an increase of $1.3 million, hire up to five additional investment professionals, and start up and operate an office in St. Louis. The budget request would apply during the six months from Jan. 1, 2023, to June 30, 2023, and staff expects the actual expenditure will likely be less, as it will take some portion of that time to hire the additional staff.
The committee approved the recommendation to open the St. Louis satellite office. The committee also approved the $1.3 million budget adjustment to fund the satellite office and additional investment staff.
The Board meeting started at 10:15 a.m. The Board approved the minutes from the October 24, 2022 meeting and established the order of business. The Board heard a presentation on the new group of staff participants in the Systems’ LEAD leadership program. The LEAD curriculum is a twelve-month program on leadership, handling stress and burnout, and influencing change. The Board also recognized the service of Bill Betts, who has accepted the position of Executive Director for LAGERS.
Investment Performance Report - Craig Husting reviewed the September 30, 2022, investment update and provided more recent information. Updated figures showed 2.2% growth in FY 2023 through October 31, 2022. The Systems continue to maintain strong earnings performance over 10-year, 5-year, and 3-year periods.
The Systems’ overall total return for the last 12 months was -7.39%. Losses in US Equities and Non-US Equities were the primary factors for the lower overall return over the last 12 months. The Systems’ plan returns have remained at or above top quartile performance over time periods from the last quarter to the last 10 years. The Systems also continue to earn higher returns with lower risk compared to other public plans.
Global Investment Performance Standards (GIPS) – The Staff reports that the Systems can now claim compliance with GIPS. GIPS are voluntary ethical standards for calculating and presenting investment performance based on the principles of fair representation and full disclosure. Compliance with GIPS helps ensure investment performance is consistent, complete, and fairly presented. This transparency benefits both asset owners and stakeholder groups.
Investment Policy Review – The Board reviewed the Systems’ investment policy. The investment policy consists of a general policy, eleven specific activity policies, and five implementation manuals. The staff conducted a review and recommended minor revisions to several policies and manuals. The Board approved the policy and manual changes as presented by Staff.
Proxy Voting Process – The Staff recommended that the Systems fully direct the proxy voting process for public equity managers. The Staff also recommended that the Systems adopt the Glass Lewis Governance-Focused Thematic Policy for proxy voting with passive managers (BlackRock) and for all actively-managed public equity separate accounts. This voting policy will vote in favor of governance structures that will drive positive performance and enhance shareholder value. The Board approved both recommendations.
Real Estate Portfolio – Townsend Group presented a report on real estate markets and the Systems’ real estate portfolio. The real estate portfolio has earned an unusually high 30.3% over the 2022 fiscal year but returns in the second quarter of 2022 declined to 3.1%. The System has now reached the increased allocation of 11.0% in real estate. Several key factors are affecting real estate: the Fed increasing interest rates, high inflation, increasing construction costs, and an excess of job openings over unemployed workers. Investors will slow new commitments leading to a reduction in equity available in the real estate sector. Industrial and apartment sectors may continue to see growth in demand. Higher interest rates are now making it harder for residential home buyers. Office and retail sectors show lower demand and create value risks and lower expectations.
PSRS/PEERS Investment Office 4.0 – The PSRS/PEERS Investment Office has grown in stages throughout the last 25 years as new asset classes and strategies were implemented Management believes the Systems are understaffed relative to workload.
The Systems’ staff considered various options for meeting the long-term objectives, including expansion of staff at the Jefferson City office, hiring remote staff, and slowing the growth of private investments. The staff recommended the creation of a satellite investment office in St. Louis as the best option to support the increased investment workload.
The Board approved the committee recommendation to open the St. Louis satellite office.
Budget Adjustment - The Board approved the committee's recommendation to approve a budget request for an increase of $1.3 million. This funding will allow the Systems to hire up to five additional investment professionals and to start up and operate an office in St. Louis. Approximately $925,000 of the request is for additional personnel. The budget request will apply during the six months from Jan. 1, 2023, to June 30, 2023, and staff expects the actual expenditure will likely be less, as it will take some portion of that time to hire the additional staff. The ongoing annual cost for the new positions and the St. Louis office will be about $1.9 million.
Independent Auditor’s Report - The Board reviewed the FY 2022 Annual Comprehensive Financial Report (ACFR). An ACFR report is required by law, but the Systems’ ACFR goes beyond the minimum requirements. Ultimately, the ACFR serves to document the activity conducted by the Systems and ensure transparency and accountability to members. The financial section includes an unmodified or “clean” independent auditor’s opinion, indicating that the financial statements may be relied upon by all stakeholders.
The FY 2022 Annual Comprehensive Financial Report (ACFR) can be viewed at the following webpage:
Williams-Keepers provided the independent auditor’s presentation to the Board. The Board reviewed and approved the June 30, 2022, Audit Report referred by the Budget and Audit Committee.
Legislative Update – Jim Moody gave a report on state fiscal news. Since the pandemic, excess savings have resulted from the federal relief payments. Excess savings as determined by the Fed are expected to be 8% or a total of $1.7 trillion in excess savings. General Revenue collections have been distorted (increased) by federal stimulus infusions since the pandemic began. November 2022 GR collections were at +4.84%. The GR balance is currently about $4.9 billion, due to federal stimulus payments.
Moody believes the state is at a high funding point and expects the tax cuts will start to reduce GR collections. However, state tax cuts will begin to reduce revenues. The top state income tax rate will drop from 5.3% to 4.95% for the tax year beginning in January 2023.
Jim Moody will be retiring from this role as consultant and the Systems will hire a new consultant by the beginning of session.
Mike Moorefield gave the legislative report. Moorefield gave a presentation on the new legislative leadership. Sen. Caleb Rowden will be Senate Pro Tem, Sen. Cindy O’Laughlin will be Majority Leader and J.J. Rizzo will continue to be Minority Leader. In the House, Dean Plocher will be Speaker, Rep. Jonathan Patterson will be Majority Floor Leader, and Rep. Crystal Quade will continue as Minority Leader.
Themes for the session will include: spending the influx of federal dollars on infrastructure, teacher pay, broadband, more funding for MOSERS, funding for private schools and charter schools, and other returning education issues.
Retirement-related issues will likely include: mandates on investing or contracting, pension proxy voting, working after retirement (WAR), critical shortage, retirement multiplier, education funding, general pension issues, and education issues.
Current CPI-U Update – The Board reviewed CPI-U data. The current fiscal year CPI-U is 0.1677% through September 30, 2022, and 0.5741% through October 31, 2022. Under the current policy, when the final CPI-U for a fiscal year is between 2.0% and 5.0%, the Board will make a COLA for eligible retirees of 2.0%. When the CPI-U is between 0.0% and 2.0%, the Board will make a COLA for eligible retirees of 2.0% when the cumulative CPI-U growth reaches or exceeds 2.0%.
Public Comment – No public comment was offered.
The public meeting adjourned, and the Board went into closed session.