By Otto Fajen, MNEA Legislative Director
Trustees present: Jason Steliga (Chair), Chuck Bryant, Allie Gassman, Beth Knes (Vice-Chair), Dr. D. Eric Park, Katie Webb
The Board met on April 14 to review the Systems’ Portfolio and Portfolio and met again on April 15 to conduct the remainder of the meeting agenda.
SYSTEM OPERATIONS
The Board approved the minutes from the February 5, 2024, meeting and established the order of business.
Certification of Election Results – The Board certified the election results for the re-election of Katie Webb and the election of Dr. Nathan Moore to the Board of Trustees. Both terms begin on July 1, 2024.
Election of Officers - As required by Board regulation, the board of trustees unanimously re-elected Jason Steliga as Chair and Beth Knes as Vice-Chair to each serve one-year terms starting July 1, 2024.
Interest Credit Rate and Purchase Interest Rate - The interest credit rate for the current fiscal year is 4.0%. The Board maintained the interest credit rate for next fiscal year at 4.0%, based on staff recommendation. The Board also approved the staff recommendation to set the purchase interest rate for the next fiscal year at the current assumed rate of return of 7.3%.
INVESTMENTS
Investment Performance Report - Craig Husting reviewed the estimated March 31, 2024, investment results. US markets have been showing higher returns than non-U.S. equity returns in recent quarters. Emerging markets have improved. Treasury yields are currently high. The Systems have an 8.1% return over a 10-year timeline and have outperformed the 60/40 portfolio benchmark, which has yielded 6.0% over a 10-year period.
For FY 2024, the Systems have a net return of 8.7%. For the first quarter of calendar 2024, the Systems have a return of 4.5%. Total System assets are $58.0 billion. The investment report provided a broad overview of how the PSRS/PEERS’ portfolio was structured including estimated asset allocation for PSRS/PEERS as of March 31, 2024.
Private Equity and Private Credit – The Board heard a report on the Systems’ Private Equity Portfolio.
Staff presenters were John Tuck, Dan Case, Ben Frede, and Connor Quinn. The Private Equity and Private Credit Programs are now mature and successful, and both are performing extremely well. The Systems will need to continue to make commitments to meet target allocations. The Systems have good working relationships with strong partners (Pathway and Albourne).
Co-Investments and Direct Credit offer fee savings and investment for PSRS/PEERS. Current initiatives include: 1) purchasing private equity fund interests in the secondary market under the Co-Investment Program, 2) increasing the emphasis on secondary market transactions with the Direct Credit Program, and 3) developing an internal portfolio management system to monitor and analyze the Direct Credit Program and the Co-Investment Program.
Private equity and private credit have been flat for the last two years following several years of high returns. This occurred along with a large decline and then a large rise in public markets. Long-term returns have exceeded private equity and private credit benchmarks. The cumulative effect of outperforming the benchmarks in the long-term has added billions in value to the Systems’ portfolio.
MANAGEMENT REPORT
Actuarial Services - Ms. Anita Brand (PSRS staff) discussed the actuarial services provided to the Systems by the actuary PwC US. The current contract ends in the fiscal year 2023. The Systems remain satisfied with the quality of services and relationship with PwC. Staff negotiated a new contract with the current actuary (PwC) for review and recommended the Board of Trustees renew the contract. The Board approved the new contract.
Actuarial Audit - The Systems must conduct an actuarial audit of the retained actuary no less than every 10 years, and the Board conducts an audit every five years. The staff report included an overview of the most recent actuary audit and the current RFP for actuarial audit services. Staff conducted an RFP process, and three firms were interviewed. The Staff recommended that the Board approve Milliman as the actuarial firm to conduct the audit at a cost not exceeding $45K. The Board unanimously approved Milliman as the firm for the actuarial audit.
Legislative Report – Mike Moorefield and Doug Nelson gave the legislative report and began with a review of legislative deadlines. Five weeks remain in session and four weeks to complete the budget. Legislative action is being affected by people running for office. SJR 74 regarding initiative petition (IP) has been changed and must go back to the Senate. SB 727 is the big education bill. It is not clear if it has the votes to pass the House.
Budget - The federal reimbursement allowance (FRA) is the healthcare provider tax. It is a self-imposed tax that substitutes for General Revenue. The FRA has a two-year sunset and must by renewed this session. Without it, the state will need to use an additional $4 billion in General Revenue. The federal government is not eager to continue the FRA process, so if it lapses, Missouri may not be able to reestablish it. Missouri relies heavily on federal healthcare funding. There will be a political cost in getting the FRA done. The Freedom Caucus is saying it will block all new budget decision items. However, the Senate wants to add in more of Governor’s budget which the House removed.
System improvements - Several of the Systems’ positive retirement issues are positioned to pass. Working after retirement improvements include: 1) reducing the WAR penalty to actual overearnings, 2) removing the disability block on WAR, 3) allowing employer to set WAR salary, and 4) adding a 2.6% multiplier for 33+ years of PSRS service.
These four provisions are contained in SB 898 (Rusty Black) which has passed the Senate. Similar provisions are contained in HB 2431 (Barry Hovis) which has passed the House.
Language to update the critical shortage for PEERS to be the same as new PSRS provisions is contained in HB 1722 (Aaron Crossley), but this bill is not moving.
Investment mandates - Harmful retirement provisions, primarily restrictive and costly investment mandates, are not positioned to pass but there could be floor amendments. The Systems’ proactive position on proxy voting has been helpful. Investment mandates this session come in two varieties: 1) chapter 105 public pension-only and 2) state contractor restrictions that affect a broader group.
SB 835 (Crawford) pertains mostly to the State’s linked deposit program. Sen. Eigel did an anti-ESG amendment that does not impact the Systems.
HB 1937 (Bill Owen) and SB 1113 (Rusty Black) are the Systems’ proxy voting policy. These bills are not moving.
HB 1869 (Dirk Deaton) would create a China disinvestment like a recent Indiana statute. Public pension systems would not be allowed to invest in restricted entities or products. The bill prohibits “future” private investments and passively held public stocks. The bill has been heard in committee but is not moving.
Key accomplishments – Staff reviewed recent staff work in the key areas, including Web Member Services (WMS) Visual Refresh, implementation of Observe.AI, implementation of the Working After Retirement Wizard in Employer Web Portal (EWP), and hiring Joe Susai as the new Chief Information Security Officer and Tory Brondel as the Deputy CFO. The Systems have conducted training on maintaining a respectful workplace, provided a second wave of armed intruder training and conducted board elections.
CPI update/COLA review – The Board reviewed the COLA policy and COLA history for the current fiscal year. The current CPI-U is up 2.3674% through March 31, 2024. 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%. At this point, it appears likely that eligible retirees will receive a 2.0% COLA in January 2025.
Public Comment – None.
The public meeting adjourned, and the Board went into closed session.