By Otto Fajen, MNEA legislative director
Trustees present: Jason Steliga, Chair; Dr. Kyle Collins; Sharon Kissinger; Dr. Melinda Moss; Dr. D. Eric Park
Trustees absent: Beth Knes, Vice-Chair
The Board met on June 5 to hear detailed reports and information on the Systems’ Public Credit and Real Estate portfolios.
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 approval the Annual Banking Resolution that allows the administrators of the system to work with Central Bank without requiring further Board action on the details of each action.
The staff reviewed the Systems’ strategic plan and plan policy. The staff recommended minor revisions to the plan policy to use the term “key initiatives” rather than “tactics.” The staff also presented the FY 2022 budget proposal, and the Committee approved the budget for recommendation to the Board. The largest part of the budget is the payment of member benefits. The budget represents an increase, primarily due to member benefit increases, along with staff salary pay increases and funds to add two additional investment staff, an IT specialist, and four information center specialists. The budget also includes new software to better track investment manager fees. The budget assumes a 5% COLA will be provided next year to retirees based on the cumulative CPI increase for the current year to date being above the 5% threshold. The budget also includes investment fees and expenses and administrative expenses.
The Internal Auditor also reported to the Board. The audit included the Employer Services year-end review. Accurate information from employers is critical to the financial functions of the Systems. The auditor reported that there are no findings needing the committee’s attention. The auditor presented the audit plan for the next fiscal year.
The Board meeting started at 10:00 a.m. The Board approved the minutes from the April 10-11, 2022, meeting and established the order of business. The Board also gave recognition to the Systems’ LEAD leadership development class of twelve staff members. Training was provided both by PSRS management and by the Missouri Training Institute. The program identifies and develops internal leadership capacity within the staff.
Investment Performance Report – Craig Husting again reviewed the March 31, 2022, investment status. Husting also reviewed the Systems’ returns as of May 31. The Systems showed a market value of $55.7 billion and an overall return of +1.0% for the fiscal year to date.
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.
Private equity has provided strong absolute and relative a 10-year return of 20.13%. The Systems are implementing the recently approved allocation shifts to increase private equity to 20% and reduce safe assets to 15%.
Recent returns show lower absolute returns, and both public assets and safe assets have had negative returns. Now hedged assets are providing support. The Systems have been purposely underweight in public credit and overweight in hedged assets, which has helped System earnings.
This fiscal year has been unusual in that both global stocks and U.S. bond have had negative performance. Market indicators show: 1) higher market volatility due to rising interest rates and the Russian invasion of Ukraine, 2) increased Treasury yield, 3) lower unemployment and 4) lower consumer sentiment due to inflation and geopolitical uncertainty. Home prices are rising at a high rate and overall inflation is high at 8.22%. Indicators are not all aligned with a single economic outcome in the future.
Meeting Dates – The Board approved its meeting dates for FY 2023:
August 29, 2022
October 24, 2022
December 5, 2022
February 6, 2023
April 17, 2023
June 11 & 12, 2023
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 2023 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 assumes a 5% COLA will be provided next year to retirees based on the cumulative CPI increase for the current year to date being well above the 5% threshold. The budget also includes investment fees and expenses and administrative expenses.
Strategic Plan and Plan Policy – The Board approved three-year strategic plan and the strategic plan policy as recommended by the Budget and Audit Committee.
Plan Policy Compensation Limit – The Board approved an amendment to the plan policy in implementing and clarifying the calculation of benefits for members who have earnings in excess of IRS limit for tax-qualified plans but do receive a full year of credit.
Legislative Report – Mike Moorefield and Jim Moody gave the legislative report. Mr. Moody gave a revenue update including his analysis of the budget, future state tax changes and the impact of various federal revenues on state and local revenues over the next few years.
May 2022 GR collections were at “unfathomable” levels. Gross sales taxes are up 13.72% this fiscal year over last year, when they were up 4.7%. Income tax collections through May are up by $849 M over a year ago compared to a year ago, which was already elevated by $783M from tax due date changes in 2020. This reflects $1.632 B in increased income tax revenues. Correcting for the income tax due dates shift from FY20 to FY21, net GR is about $12.5-$12.8B, compared to $9.6B several years ago.
The primary factor for increased revenues is an increase in state income due to federal stimulus funding and the PPP funding. Many businesses operate as pass-through to individual returns. Many businesses did not recognize that increased income through a forgivable loan until tax year 2021, and that income tax is now being processed with 2021 returns.
Several tax cuts are coming. SB 509 (2014) cuts of 0.1% for both 2022 and 2023 are already triggered along with the SB 153 cut of 0.1%. If the Governor vetoes the one-time tax credit bill, Moody thinks the Governor may consider a special session where one of the pending tax cuts might be moved forward more quickly.
Mike Moorefield discussed the PSRS Benefit Resolution, Investment Resolution and COLA Resolution and mentioned that PSRS tracked over 458 bills that would affect the Systems.
62 bills passed during the 2022 Regular Session. A portion of SB 681 affects the Systems. This was primarily a bill on literacy in the Senate, but the House added many other provisions. The final version of SB 681 has the substitute teaching waiver from HB 2304. That provision has an emergency clause and runs through June 30, 2025.
The K-12 budget bill, HB 3002, adds several items: $214.5M increase for pupil transportation, $21.7M for teacher pay, $37M to reinstate Career Ladder, $25M for literacy programs and $27M to remove lead from drinking water in schools.
Provisions that would affect the Systems that did not pass:
1) various bills included one or more changes to the PSRS/PEERS Critical Shortage Statute. The changes included extending the maximum full-time retirement employment option under the critical shortage statute from two years to four years. Another provision would have allowed a PSRS retiree to be employed under critical shortage as a superintendent after a one year waiting period. A third change was to set the maximum number of retired members working for a school district under critical shortage to not exceed the lesser of 10% of the total number of employees for that district or 10 employees.
2) several bills would have allowed for a retired PSRS teacher to be employed in a non-certificated position covered under PEERS without impacting their retirement benefit (the “bus driver” provision) while earning up to the Social Security earnings limit for this employment. The earnings limit has an automatic inflation factor and currently is $19,560.
3) reinstatement of the 2.55% multiplier for more than years of service. PricewaterhouseCoopers (PwC) estimates the bill would create a $16.8 million per year savings for PSRS. increased 2.55% benefit factor for PSRS retirees with more than 30 years of service credit. One version would have provided this benefit for retirees with 32 or more years of service credit.
Moorefield also discussed other bills that did not pass but would have restricted the investment decisions and options for one or more public pension plans in Missouri.
WAR Rule on Substitute Teacher Waiver – The Board approved the proposed rule to implement the WAR waiver for substitute teaching under SB 681.
2023 Special Election Schedule Approval – The Board approved the schedule for the special election to fill the vacancy that will be created by the retirement of Dr. Moss. Nominating petitions will be available by October 24, 2022, and completed petitions will need to be postmarked by December 8, 2022. Ballots will be mailed to members on January 13, 2023, and votes will be counted February 15, 2023.
CPI update/COLA review – The Board reviewed the COLA policy. Current CPI-U for 2020-2021 is 6.4090% through April 30, 2022. The May 2022 figure will be released on June 10, 2022. Given the value to date, the staff expect a final CPI of over 5% for the year, resulting in a 5.0% COLA for next year. If the CPI exceeds 5.0% for the year, the COLA would for next year would be 5.0%.
Public Comment – None.
The public meeting adjourned at 11:54, and the Board went into closed session.