Audit Committee Meeting
External Audit Reports
A representative of CliftonLarsonAllen LLP (ERS’ independent accounting auditor), joined Tony Chavez, director of ERS’ Internal Audit, and Tressie Landry, audit manager at ERS, to present results of ERS’ Fiscal Year 2021 Annual Comprehensive Financial Report audit. The audit was unqualified or “clean”: the audit found no weaknesses or deficiencies; ERS’ financial statements were presented in accordance with accounting principles generally accepted in the United States.
A representative of Bolton (ERS’ independent pension actuary auditor) joined Chavez and Landry to present results of the Pension Forecasting Audit. The audit found that the actuarial liabilities are reasonable and the methods and assumptions are correctly applied. The audit also found that actuarial valuation reports meet actuarial standards. The actuarial auditors did suggest some improvements to the disclosures of the valuation report. A consultant at Gabriel, Roeder, Smith & Company (GRS, ERS’ pension actuarial consultant) stated that GRS would consider the audit recommendations when it performs the fiscal year-end actuarial valuations.
Internal Audit Reports
Chavez and Landry updated the Board on the status of audit recommendations. According to managers in the relevant ERS divisions, all recommendations by Internal Audit had been implemented or partially implemented.
Chavez and Landry also presented the Internal Audit Charter and Audit Committee Charter for the Board’s consideration. No changes or updates were identified for either charter.
Joint Board and IAC meeting
Investment Advisory Committee appointments
The Board approved new appointments to the Investment Advisory Committee. Ryan Bailey and Ruby Muñoz Dang began their three-year terms at the meeting. Their terms end March 31, 2025.
Texa$averSM 401(k) / 457 Program updates
ERS’ Director of Group Benefits Diana Kongevick; Georgina Bouton, assistant director of Group Benefits; and a portfolio strategist from Great-West Investments (third-party administrator of Texa$aver) gave the annual Texa$aver performance review. As of December 31, 2021, the program’s assets under management totaled $5.02 billion, up from $4.26 billion in 2020. The split between the two plans remained the same, with 73% of those assets in the 401(k) plan and 27% in the 457 plan; 64% of participants in the 401(k) plan are on track for retirement readiness, based on savings rate and income replacement goal; 62% of participants in the 457 plan are on track for retirement readiness.
Investment compliance updates
Kurt Cressotti, investment compliance officer at ERS, presented the annual investment compliance report. Cressotti reported that ERS had no significant compliance risks in 2021. Further, ERS’ compliance policies and procedures are working effectively to help prevent, detect and correct violations of applicable laws, regulations and policies.
IAC members’ eligibility
Cressotti also reported on the eligibility status review of IAC members. All current Committee members met eligibility requirements, based on their ability to fully discharge duties, record of attendance for scheduled Board meetings and lack of potential conflicts of interest.
Investment updates
ERS’ Chief Investment Officer David Veal gave the quarterly investment report, which showed that returns for the ERS Trust Fund, overall, were above the policy benchmarks across the one, three, five and 10-year timeframes. By outperforming its benchmark, the Trust added $2 billion of value over the last year.
Veal noted that priorities for 2022 include:
- updating key policies and procedures,
- addressing consultant and audit recommendations,
- assessing organizational structure and
- completing the asset/liability study.
Veal was joined by a representative of NEPC (ERS’ general investments consultant) to present ERS' investment performance for the last quarter of CY21. In CY21, the Trust outperformed the policy benchmark by 6.1%. This performance put ERS in the top 5%, performing better than 95% of its peers during this period.
Challenges for 2022
Carlos Chujoy, director of Risk Management & Applied Research at ERS, presented the quarterly risk review. Overall, three main drivers added to risk in the last quarter:
- the omicron variant of COVID-19, a major source of uncertainty,
- higher inflation expectations and lower economic projections, and
- rising geopolitical tensions.
On the positive side, omicron proved to be less severe than expected and there are signs of supply-chain improvements that could help with inflation.
Chujoy also outlined the challenges that investors will face in the rest of 2022, including how lower economic growth and inflation will affect returns. However, while the amount of risk borne by the Trust has been rising, investment returns have tolerated and should continue to tolerate that risk.
Annual review of capital market assumptions
John McCaffrey, portfolio manager for Risk Management & Applied Research at ERS, joined Veal to discuss the outlook for capital markets over the medium term. He noted several key themes that will help guide ERS’ investment strategy, including:
- the broadly changing, global economic backdrop marked by significant and persistent inflation,
- the diversification benefits of inflation-oriented assets, such as Treasury Inflation Protected Securities (TIPS) and commodities,
- a continued move away from globalism toward nationalism,
- the potential for improved productivity due to tight labor markets and rising wages,
- increased personal savings and reduced debt levels of consumers and
- the outlook on China.
Fixed income review
Leighton Shantz, ERS’ director of Fixed Income, joined Veal to discuss the Fixed Income Program. Shantz explained that the ERS Fixed Income program is comprised of two separate portfolios, each with a distinct purpose:
- The rates portfolio, which has an 11% target allocation, provides short-term liquidity for the Trust. In CY21, the rates portfolio yield was 1.17%
- The credit portfolio, with a 13% target allocation, produces risk-adjusted returns and generates cash without selling its underlying assets. The credit portfolio yield was 4.22% for CY21.
ERS continues to believe that the dual portfolio structure within fixed income is the best strategic approach for the Trust, as it serves to reduce risk and generate returns. ERS is not currently recommending any changes within this asset class.
Securities lending program
Shantz reported that the securities lending program earned $2.0 million in FY21. In FY22 thus far, net revenue is $773,000 and is expected to grow, thanks to the increase in short-term interest rates and higher demand for borrowing. Since its inception in FY12, the program has netted $50.2 million.
Board of Trustees meeting
Texas Employees Group Benefits Program (GBP) update
Blaise Duran of ERS’ Actuarial and Reporting Services joined Kongevick to provide the following updates:
- The HealthSelect of Texas® plans are expected to experience the highest COVID-19 pandemic costs to date during PY22, projected at an estimated $110 million. This includes testing and vaccine administration costs.
- Early in the pandemic, Delta Dental, the insurer of the DeltaCare USA DHMO, committed to not profiting from the pandemic. With few people visiting dentists for several months, the plan realized savings of more than $980,000—equivalent to about one month of total plan premiums—on behalf of GBP participants. Delta Dental refunded the money to ERS, and the refund will be included in the rate recommendations at the May 11 Board meeting.
- Kongevick and Duran also reviewed the annual non-financial performance measures for self-funded HealthSelect plans. These HealthSelect plans met all performances measures. Overall satisfaction with the HealthSelect of Texas and Consumer Directed HealthSelectSM medical plans was at 86.4%, up from 84.9% in the prior period and beating the benchmark of 85%.
- Updates were also provided on the Assess, Manage and Prevent (AMP) wellness program; and the State of Texas Dental Choice PlanSM.
- The AMP measures were up, with more participants completing health assessments and more engaging in weight management programs. Preventive health visits were up from 38.9% to 44.1%, although the relatively low percentage for the previous period was probably due to the pandemic.
- The State of Texas Dental Choice PPO met the standard for participants’ access to services. Participants making a preventive dental visit was up from 45.1% to 47.2%.
Approval for tenant construction projects
After some discussion, the Board approved a motion to delegate to ERS the authority to approve “job order” construction projects that exceed $500,000. This will help expedite construction of space for leasing tenants in ERS’ 1836 San Jacinto building.
Agency update
ERS’ Executive Director Porter Wilson reported on the agencies activities in the first quarter of CY22, including the following:
- ERS Customer Benefits Director Robin Hardaway joined Wilson to give an update on the “Action Beyond the Call” initiative to increase customer service staff and improve the member experience for those who contact ERS.
- Bernie Hajovsky, director of Enterprise Planning for ERS, provided information on the implementation of the Group 4 cash balance retirement benefit. This multi-divisional effort is on schedule for the September 1 start date.
- ERS published the FY21 GBP Annual Report in February.
- ERS has scheduled the biennial Staying Connected retiree events for April 26 and 27 in Austin. Due to the complications of booking venues during the pandemic, there will not be events in the Dallas-Fort Worth area or Houston this year, but we look forward to being back in those regions in 2023.
- ERS celebrates its 75th Anniversary this year. Would you like to share an ERS memory? Visit our anniversary webpage to submit your recollections.
- Employees around the agency will be engaged in strategic planning.
- In the statewide Get Fit Texas challenge, ERS is looking for its fifth-in-a-row 1st place win among mid-size agencies.
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