By Otto Fajen, MNEA legislative director
Trustees present
Jason Steliga, Chair
Beth Knes, Vice-Chair
Allie Gassman
Katie Webb
Trustees absent
Dr. D. Eric Park
SYSTEM OPERATIONS SYMPOSIUM
The Board met on June 12 to in a System Operations Symposium to hear information about the various components of the Systems’ operations.
BUDGET AND AUDIT COMMITTEE MEETING
Prior to the meeting of the Board of Trustees, the Budget and Audit Committee met at 8:30 a.m. to review and approve the Annual Banking Resolution that allows the administrators of the Systems to work with Central Bank without requiring further Board action of the details of each action.
The staff presented the FY 2024 budget proposal, and the Committee approved the budget for recommendation to the Board. Discussion highlighted various key initiatives that were completed in the current fiscal year and those initiatives that are new or will continue into the next fiscal year. The St. Louis office is under construction, while the staff are working in a temporary space.
The largest part of the budget is payment of member benefits. The budget represents an increase, primarily due to member benefit increases. The budget also includes investment fees and expenses and administrative expenses. Investment expenses are increasing as the Systems do more private equity investments. Additional expenses include increases in personnel and outside expertise relating to computer security. The Board reviewed the various expense categories within the broad categories of personnel, professional services, and operations.
SYSTEM OPERATIONS
The Board meeting started at 10:00 a.m. The Board approved the minutes from the April 16-17, 2023, meeting. The Board also approved amendment and correction of previously adopted minutes where certain votes were incorrectly noted as having been approved by roll call vote. The Board also established the order of business.
INVESTMENTS
Investment Performance Report – Craig Husting again reviewed the March 31, 2023, investment status. The Systems’ net returns for the fiscal year were +3.3% on March 31, 2023. Husting also reviewed the Systems’ returns as of May 31. The Systems showed an overall return of +3.5% for the fiscal year through May 31.
Technology and large-cap stocks fared better than other sectors during the first quarter of 2023. Growth companies have outperformed value companies by the second largest quarterly margin since the tech bubble. Regional banks and financials have lagged while the market overall remained positive.
Over the 12 months ended March 31, 2023, the Systems have seen negative absolute returns. The Systems had negative returns for both stocks and bonds during the period, while hedged assets and private markets provided some support.
The last three years have been a difficult investment market, and the Systems have benefitted from diversification of the portfolio. The Systems’ have had consistently strong returns over the last 3, 5 and 10-year periods during periods when different asset classes performed better or worse. The Systems manage to continue to obtain higher than average returns with lower-than-average risk when compared to other large public pension plans.
Real Estate Portfolio – Staff provided the annual review of the Real Estate Portfolio. Real Estate is part of the Private Credit Portfolio. The role of Real Estate in the PSRS/PEERS portfolio is to provide a stable income stream, capture property appreciation, serve as a hedge against inflation and provide diversification in the portfolio.
The Systems’ Real Estate portfolio includes three categories. Core properties are existing, income-producing properties that are at least 80% percent leased. Core properties have high-quality tenants and conservative leverage. Non-core properties include value-add and opportunistic strategies. These are usually under-utilized or distressed properties that require specialized skills to enhance the value of the property through leasing, repositioning and/or complete renovation. Infrastructure properties are hard, physical assets with a long duration (toll roads, ports, sewer systems, utilities, etc.) that provide the services and systems necessary for a society to function.
Real Estate has historically had a low correlation to other asset classes and is expected to generate returns greater than bonds and less than stocks with lower volatility (risk) than stocks. Staff expects the Real Estate Portfolio to outperform the Real Estate benchmark, the NCREIF Fund Index Open End Diversified Core Equity (NFI-ODCE) net of fees, over a rolling 5-year period.
Over the last 10 years, the Real Estate Portfolio has generated a net gain of $3.6 billion. Over a rolling 5-year period, the Real Estate Portfolio has outperformed its benchmark and returned 9.52%. Within the last year, the Real Estate Portfolio returned 2.75%, outperforming the benchmark by 6.67%.
MANAGEMENT REPORT
Meeting Dates – The Board approved its meeting dates for FY 2024:
August 31, 2023
October 30, 2023
December 11, 2023
February 5, 2024
April 15, 2024
June 10, 2024
Banking Resolution – The Board approved the Annual Banking Resolution that allows the administrators of the Systems to work with Central Bank to make needed changes to their banking relationship without requiring further Board action of the details of each action.
Budget – The Board approved the Systems’ FY 2024 budget as recommended Staff and approved by the Budget and Audit Committee. The largest part of the budget is payment of member benefits. The budget represents about a 7% increase, primarily due to member benefit increases, along with staffing and staff salary increases. The budget also includes investment fees and expenses and administrative expenses.
Legislative Report – Mike Moorefield gave the legislative report. The Governor has until July 14th to sign bills. The normal effective date for bills is August 28. Moorefield gave an overview of how the legislative session ended, noting that few bills passed and that no bill passed that would negatively affect the Systems.
ESG-related restrictions - Moorefield 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. None of these bills passed. 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.
PSRS-related package passed in two bills - Moorefield mentioned the package of PSRS/PEERS changes that passed in SB 20 and SB 75. This package includes:
1) Adding a 2.55% benefit factor for extended service of 32 years or more of PSRS service,
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.
SB 20 and SB 75 also address 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. SB 20 and SB 75 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.
Moorefield also updated the Board on the Systems’ work to prepare for the implementation of those provisions on August 28, 2023, if the Governor signs either SB 20 or SB 75 or both of those bills.
Key Accomplishments: Sarah Swoboda gave updates on recent accomplishments: the transition to electronic payments by all System employers, updates to the Business Continuity Plan during disasters, conducting the Board Symposium on system operations, positive legislative outcomes, and the official opening of the St. Louis Office.
CPI update/COLA review – The Board reviewed the COLA policy. Current CPI-U for 2022-2023 is 2.6378% through May 31, 2023. Given the value to date, the staff expect a final CPI of over 2% for the year, resulting in a 2.0% COLA for next year.
Public Comment – None.
The public meeting adjourned at 12:10, and the Board went into closed session.