TMRS Highlights from the August 22 Board Meeting

Summer has certainly not slowed things down when it comes to TMRS happenings. Since the last meeting in June, Jim Parrish has resigned from the TMRS Board and his position in the City of Plano to pursue other opportunities. As a result of Parrish’s resignation from the Board, two vacancies on internal committees needed to be filled. TMRS Vice-Chair David Landis was appointed to serve as vice-chair of the legislative committee, and TMRS Board Member Jim Jeffers was appointed to serve as vice-chair of the technology committee.

As mentioned in my last report, TMRS Actuary Gabriel, Roeder, Smith & Company (GRS) gave an overview of various studies. During this overall funding process review, the question for TMRS becomes: “Where will the money come from to pay all benefits to its members?” There are three studies to address this question: the experience study, the asset allocation study, and the asset liability modeling study.

At the August meeting, GRS reported on one of the three studies: the asset liability modeling study. Takeaways from this study:

  1. The current portfolio is expected to return 6.3 percent over the next 10 years with a standard deviation of 10.65 percent, which means that the investment portfolio is slightly underperforming the 6.75 percent return assumption.
  2. Assuming this, the Unfunded Actuarial Accrued Liability (UAAL) will not be fully amortized (reduced to zero) at the expected rate of return.
  3. How much risk would be acceptable to try and get the additional return? Current policy annually calculates the required contribution for each city based on 25-year layered, closed amortization of a UAAL with 25-year open amortization of any surplus and 10-year smoothing. With 10-year asset smoothing and a 25-year amortization strategy, the current process could take 35 years to fully recognize a significant event. This combination would not fall under best practice. GRS is recommending that one of the two parameters be decreased by five years. A 20-year amortization/10-year asset smoothing combination appears to be optimal compared to a 25-year amortization/five-year asset smoothing strategy going forward.

Amy McDuffee with Mosaic Governance Advisors gave a summary of the TMRS Board Governance Workshop which occurred in July. Key takeaways from the workshop:

  1. Evaluate alternative models for Board officers.
  2. Reduce the strategic planning cycle from five years to three years.
  3. Clarify the process for education and travel. (What opportunities ought to be in focus; refresh list of high-value conferences.)
  4. Evaluate alternative models for specific investment manager related actions.
  5. No change is needed to the legislative committee, advisory committee on benefit design, or internal audit committee.
  6. Merge the budget and compensation committees.
  7. Maintain the technology committee as an ad hoc committee.
  8. Explore if/how internal investment management could work for TMRS.
  9. Proceed with the development of a TMRS governance policy manual.

Another item discussed related to the Workshop included TMRS Board investment beliefs and possible alternative processes for approval and delegation of investment manager selections and terminations. At the Workshop, it was determined that there was no perceived need to establish an investment committee. Instead, the Board should continue to rely on TMRS staff to make all investment decisions. The purpose of the current discussion was to explore and discuss alternative authorization processes/models and to seek direction on how to proceed. The various models for retaining, managing, and terminating investment managers include:

  1. Consent agenda (board approval)
  2. Consent agenda (ratification)
  3. Delegated authority (annual board approved investments by asset class)
  4. Delegated authority (percentage limit by asset class set by board)

The current model is board approval in advance of nearly all investment. Board Member Julie Oakley expressed that she would be interested in a hybrid of options one and two. Benefits of these options could give internal staff more flexibility to act on investments in a timely manner but within certain limits and boundaries. Board Member Jesus Garza expressed his desire for a model which would allow staff to make investment decisions whereby allowing members more time to focus on “big picture” items and training opportunities. Jim Jeffers expressed his favor of option four as well as Oakley’s hybrid recommendation. Mosaic Governance Advisors will bring back additional information on what a hybrid model approach would look like.

A lengthy discussion was held regarding how best to organize Board leadership. In particular, there was a lot of discussion among members as it relates to both the chair and vice-chair positions. The current model for the chair position is a one-year term, no term limit per bylaws, a preference for rotation of chair, and a presumption that the vice-chair becomes chair. After much discussion, which included the length of term, maximum number of terms, the inherent obligation for vice-chair to become eventual chair, a preliminary consensus was reached for the chair position. The consensus was a one-year term, no term limit, and vice-chair not required to become eventual chair. Another preliminary consensus was reached that chair does not necessarily have to chair the legislative committee (as is current practice) but is required to be a member of the legislative committee. Roles, responsibilities, and other pertinent items as a result of the discussion will be outlined and brought back at a future meeting date.

A quarterly report was given by RVK Consultants. The second quarter of 2019 has been a seesaw quarter with a strong April, a weaker May, and a rebound in June. As of the end of the second quarter, the total fund market value was $30 billion, and the TMRS total fund performance for the quarter ended at 2.58 percent, net of fees. Current year-to-date performance is 9.07 percent.

Finally, a status update was given by Amy McDuffee with Mosaic Governance Advisors on the search to replace the current executive director who will be retiring in May 2020. Amy reported that an RFI has been issued to four recruiting firms with responses from three of the four received. At the September TMRS Board meeting, McDuffee will provide a summary report on the three firms and their respective proposals. At that time, a discussion will be held regarding the recruitment package, advertising plan, job description, etc.

The next TMRS Board meeting is set for September 26-27, 2019, at the headquarters in Austin.

 

Casey Srader, TMRS Advisory Board Representative

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