TMRS Board Meeting September 26-27

The TMRS Board Meeting was held in Austin, September 26-27.

Agenda Item #1:  Receive presentations and consider and act on selection of search firm for executive director position

  • The board spent nearly three hours on this item, indicating its importance.  The board wants to sustain the positive efforts that David Gavia has brought to the position, and several of the firms that gave presentations made positive comments about TMRS’ governance and culture.
  • Three firms gave presentations and were interviewed – EFL Associates, Hudepohl & Associates, and Korn Ferry.  Each team made a 10-15 minute presentation, and then took questions from the board.  The total presentation and interview process took about two hours.
  • The board’s questions focused on how the process would work with potential internal candidates (Casey previously reported that former board member Jim Parrish expressed interest, and there may likely be one or two other potential internal candidates), what kinds of challenges the search firm believed the position would have, how the firm would describe and market TMRS, and how they vet their candidate pool.
  • Ultimately, after about an hour of discussion, TMRS voted to hire Hudepohl & Associates subject to contract negotiations.  Hudepohl is based out of Florida, and expects the search will take about four months.  They have handled several recent recruitments for large-size and statewide systems in Texas.

Agenda Item #4:  Consider and act on alternative board processes for approval and/or delegation of investment manager selections and terminations

  • This was a continuation of a discussion from the prior month – currently the board approves all investment managers and their terminations.
  • Two models were presented to the board, and each was similar to the other, with minor nuances.  The first model would set thresholds for public markets, generally up to three percent of fund assets.  Below those thresholds, TMRS could make investment selections under the executive director’s authority.  Terminations could occur for up to five percent of the fund assets.  A smaller purchase threshold would be set for private market transactions.  Public transactions would be reported to the board at its next meeting as an informational item and private transactions would be ratified as part of the board’s consent agenda.  The second model was essentially the same except that private transactions would be informational and not require board ratification.  The board agreed to accept the first model and it will be incorporated into their upcoming investment policy.

Agenda Item #5:  Review and discussion of preliminary experience study results

  • GRS shared the initial results of their experience study.  Overall, they are recommending minor changes as a result of the study, which will increase contribution rates an average of 28 basis points system-wide, starting in 2021.
  • GRS noted that the national investment return median assumption for pensions has dropped from 7.75 percent to 7.25 percent since they last conducted a study in 2015.  They believe that TMRS’ 6.75 percent return is still appropriate, but my personal belief is that this rate will be lowered at the next study which will occur around 2023.  Mortality expectations are increasing slightly, meaning we will all live a little longer in retirement.  Now, due to the large number of TMRS retirees, they can base mortality assumptions on TMRS-specific data with some data supplemented by the Employees’ Retirement System of Texas.
  • Payroll growth assumptions will decrease from three percent to 2.75 percent due to the changing workforce – over half of the TMRS active workforce can retire within the next 10 years.   Also, Senate Bill 2 impacts were considered in that change.  GRS feels that ultimately, this assumption will be lowered down to the 2-2.25 percent range.
  • The biggest change of note is that starting in 2020, amortization of unfunded liabilities will change from 25 years to 20 years, and ad hoc benefit amortization will change from 15 years to 12 years.
  • The board will vote to adopt these recommendations in October.

Agenda Item #6:  Consider and act on asset allocation

  • The asset allocation study defines the investment classes and sets allocations for the system portfolio.  The current portfolio is expected to yield 6.83 percent per year.
  • TMRS’ consulting team is recommending slight changes to the portfolio – increasing private equity from five percent to 10 percent and dropping global equity from 35 percent to 30 percent.  This is expected to create a portfolio that will yield 6.94 percent and slightly decrease the overall risk.

All handouts are available on the TMRS website.  Please let me know if you have any questions.

 

Keith Dagen
Director of Finance
City of Richardson

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