TMRS Highlights from May 28 Board Meeting

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By Casey Srader, TMRS Advisory Board Representative

Agenda Item #1 – Consider and Act on Consent Agenda and Receive Report on Private Market Investments

  • TMRS staff member TJ Carlson gave the Board an overview of recent major transactions, buys, liquidations, and terminations The Investment Committee approved all items. This process represents the newly adopted process whereby the Investment Committee approves.
  • Motion made to accept the consent agenda and the report on private market investments. The motion passed.

Agenda Item #2 – Consider and Act on Proposed TMRS Rule Amendments 

  • The Board discussed various amendments and additions to chapter 123 (Actuarial Tables and Benefit Requirements) of the TMRS Rules. All amendments and additions will be submitted for publication in the Texas Register.
  • Motion made to accept the proposed amendments/additions to chapter 123. The motion passed.

Agenda Item #3 – Governance Manual Update and Consider and Act on Possible Amendments to the Board’s Bylaws and Other Governance Documents

  • Amy McDuffee, with Mosaic Governance Advisors, reported status updates to the TMRS Board and staff regarding certain governance issues and revised bylaws.
  • The first update discussed was the previously approved combining of the Budget Committee and the Compensation Committee into one. Most of the discussion focused on whether the development of some type of work plan would be beneficial to provide structure to the newly formed Committee.
  • TMRS legal staff member Christine Sweeny suggested developing a work plan that would not necessarily be subject to Board approval and discussed how a work plan could be modified as changes are needed throughout the year.
  • Motion made to adopt charter for the newly formed budget and compensation committee with the addition of a work plan. The motion passed.
  • TMRS legal staff member Christine Sweeny discussed various changes to the bylaws and focused on any changes since the February 2020 meeting.
  • There was discussion among the Board members on the hiring and firing of consultants. Much of the discussion focused on having board representation during the request for proposal (RFP) process when hiring consultants. The suggestion made was to have at least two TMRS board members involved during any RFP process when hiring consultants.
  • Another topic of discussion focused on having flexibility for the board to conduct meetings via teleconference and video conference during times when it’s not practical to have in-person meetings.
  • Motion made to adopt bylaw amendments and changes. The motion passed.

Agenda Item #4 – Review and Discussion of 2021 TMRS Legislative Agenda and Consider and Assign Topics to the Advisory Committee on Benefit Design

  • TMRS staff member Dan Wattles gave a preview of the upcoming 87th legislative session in 2021. The purpose of this on-going initiative is to review the TMRS Act and Rules to identify the need for possible statutory or rule changes to improve TMRS’ plan design and operations.
  • For this interim, TMRS staff presented 11 medium and high priority items to the Board at the March 23-24 meeting. None of the 11 proposals are critical to the operations of TMRS.
  • Of the 11 proposals:
    • Five were presented to the Board the last interim and were not included in Senate Bill 1337
    • Three are new suggestions identified by staff
    • Three were partially addressed or made clarifications to previous changes
  • Also, of the 11 proposals:
    • 2 Benefit Design Proposals:
      1. Cost of Living Adjustments (COLA) – alternate COLA, provide this, and be adopted on an ad-hoc or repeating basis. Eliminate the catch-up feature. Could increase the cost overall.
      2. Return to Work – codify the bonafide termination. Do away with the current eight-year gap for employees. Provide for a one-year bonafide termination with the same city.
    • 3 Administrative City-Related Proposals:
      1. Mandatory electronic submission of city payroll contributions and reports
      2. Payments to formerly participating municipalities – for inactive cities, stop enrolling new employees.
      3. Repeal statutory maximum eate of contribution (“Stat Max”) – 529 out of 889 participating entities have repealed or not subject; 360 cities are subject. Would keep control of costs in the city’s hands.
    • 3 Administrative Governance Proposals:
      1. Clarify trustees eligibility to serve on board
      2. Clarify oath of office requirements for new trustees
      3. Investment of assets – amend investment policy to give TMRS investment staff more flexibility.
    • 3 Administrative Various Proposals:
      1. Interest on late contributions – fix interest owed on late reports and add a fixed administration fee.
      2. Responsibility for certain ministerial and administrative duties (“Board to System”) – relieve certain responsibilities currently with the Board to TMRS staff and executive director.
      3. Investment of assets – amend investment policy to give TMRS investment staff more flexibility.
  • After much discussion among the Board on all proposals, it was decided to move forward with the proposals for possible inclusion in the 87th session in 2021.

Agenda Item #5 – Consider and Act on Results of 2019 Actuarial Valuation and Approval of 2021 Retirement Contribution Rates and Supplemental Death Benefit Contribution Rates

  • Key findings of the actuarial valuation report:
    • As of December 31, 2019, the overall funded ratio was 88 percent. This figure is up from 87.4 percent and 87.1 percent in the two previous calendar years. The funded ratio is expected to increase even more in the upcoming two calendar years.
    • As of December 31, 2019, the unfunded actuarial accrued liability (UAAL) was $4,271 (millions). This figure was down from $4,346 in 2018 but up from $3,998 in 2017. The UAAL is expected to decrease in the upcoming two calendar years.
    • More than 25 percent of participating units in TMRS are fully funded.
    • Overall system-wide “health” continues to improve. The median funded level continues to improve. Contribution rates have remained relatively stable.
    • The expectation is for a slowly increasing funded ratio over the next few valuations and continued stability in the system-wide contribution rates.
    • A motion was made and passed to accept the findings of the actuarial valuation and also the approval of the 2021 retirement contribution rates and supplemental death benefit contribution rates.

Agenda Item #6 – Public Pension Trends Presentation

  • Keith Brainard, with the National Association of State Retirement Administrators, gave an update on the future of public pensions.
  • In summary, sub-par investment returns will increase unfunded actuarial liabilities going forward. This will increase pension plan costs. Sustained low inflation and interest rates will continue pressure to reduce investment return assumptions. This, too, will increase pension plan costs. Employers are likely to face fiscal pressure from lower revenues. Finally, additional reforms are likely to be made to pension plans meaning more risk-sharing, lower benefit levels, and higher employee contributions.

Agenda Item #7 – Annual Economic Outlook Presentation

  • A presentation on the economic outlook was presented. A couple of noteworthy takeaways include:
    • There are so many unknowns at this time as a result of the COVID-19 situation and as it relates to the economy.
    • Unemployment has skyrocketed the past couple of months.
    • No substantial interest rate increases are predicted for the next couple of years.

Agenda Item #8 – Review and Discussion of Senate Bill 322 Investment Practices Report

  • RVK Consulting was tasked with conducting an independent evaluation of the appropriateness, adequacy, and effectiveness of TMRS investment practices and performance and to make recommendations for improving the TMRS investment policies, procedures, and practices. Per Texas Government Code 802.109, each valuation must include five specific sections.
  • Overall, there were no significant concerns or negative findings. Various recommendations presented by RVK were discussed with the Board. All recommendations are just that – they are not required to be adopted by the Board.
  • The evaluation of investment practices will be submitted to the Texas Pension Review Board by June 1, 2020.

Agenda Item #9 – RVK Quarterly Report/Asset Class Updates

  • The first quarter of 2020 was a very weak quarter across the board.
  • As of the end of the first quarter, the total fund market value was $28.7 billion, and the TMRS Total Fund performance for the quarter ended at (-8.63 percent), net of fees. Compared to peers, TMRS did much better. For the same time period, the overall median was (-12.43 percent).
  • For the calendar year 2019, the TMRS Total Fund performance ended at 14.71 percent, net of fees.
  • Inception-to-date (01/01/1989), the TMRS Total Fund performance is 8.07 percent. The goal is 6.75 percent.

Agenda Item #10 – Discussion of Investment Beliefs

  • An anonymous investment beliefs survey was conducted among the Board members last year and was grouped into four categories:
    1. Investment Policy and Governance
    2. Risk
    3. Portfolio Construction
    4. Implementation
  • Based on the Board’s direction through the Strategic Plan and on the survey results, the Board worked diligently, focusing its attention from July 2019 to February 2020 on Investment Policy and Governance, and in particular on investment authority and roles and responsibilities.
  • As the next step, the Board will continue to address the survey statements centered around investment policy and governance, including a statement related to environmental, social, and governance (ESG) factors.

Agenda Item #11 – Chief Investment Officer Management Update: Governance, Personnel, Manager Updates, and Other Investment Related News or Matters 

  • TMRS Chief Investment Officer TJ Carlson reported that an offer had been made to fill the vacant real asset analyst position. He is currently recruiting for the hedge fund analyst position.
  • 533 meetings were conducted in the first quarter of 2020.

Agenda Item #12 – Executive Director Update

  • TMRS Executive Director David Gavia reported that the majority of TMRS staff are still working remotely with about a ten-person staff working in the office. There will be a gradual return of employees to the office location, but overall, more staff will continue to work remotely.
  • There has not been a significant increase in call volume.
  • The Travel Team and Communications Group have been very busy.
  • Bi-weekly meetings are currently being held with Texas Municipal League (TML).

Hand-outs and Agenda for the TMRS Board Meeting are available on the following site: https://www.tmrs.com/governance.php.

Please let me know if you have any questions or need clarification on any of the items on the agenda.

Next TMRS Board Meeting: June 25-26, 2020.