August ERS Board meeting highlights
The Employees Retirement System of Texas (ERS) Board of Trustees and Investment Advisory Committee (IAC) met Aug. 24.
Of note:
- John Rutherford, a former energy and finance executive, participated in his first Board and IAC meeting as a trustee. Rutherford was appointed in May to a term ending August 31, 2024.
- The Chief Justice of the Texas Supreme Court reappointed Craig Hester, first appointed to the ERS Board of Trustees in 2005, to serve another six-year term.
- The Board elected James (Jim) Kee, Ph.D., to serve as chair and Brian Barth to serve as vice-chair of the ERS Board of Trustees for one-year terms beginning Sept. 1, 2022.
- The Board approved premium rates for the HealthSelectSM Medicare Advantage Plan, a preferred provider organization (MA PPO), for Plan Year 2023, beginning Jan. 1, 2023.
- The Board approved rules for administration of the cash balance benefit (Group 4), and a methodology for computing the benefits.
A brief recap of the meeting follows. You can find more information, including the presentation slides and links to meeting materials and video recordings, on the ERS webpage.
The next joint meeting of the ERS Board and IAC is scheduled for Dec. 6 and 7.
Audit Committee
External Audit Reports
Tony Chavez, director of ERS’ Internal Audit, and Chris Rogers, managing principle of CliftonLarsonAllen LLP (ERS’ independent accounting auditor), outlined the upcoming 2022 financial opinion audit. The scope of the engagement is for CLA to issue an opinion on the retirement system’s Aug. 31, 2022 financial statements. CLA will also issue reports on the system’s schedules of employer allocations and collective pension and other post-employment benefits (OPEB) amounts.
During his project overview, Rogers presented the CLA and management’s responsibilities and provided a timeline and agendas to the Board on the audit process and expected deliverables. He also noted that based on ERS’ current staffing levels and elevated turnover rate, CLA added Employee Turnover as a risk assessment category for the first time, and will increase its review over ERS’ impacted operation areas.
Audit Administrative Items
Chavez and Internal Audit Manager Tressie Landry presented and the Board approved ERS’ Fiscal Year 2023 Internal Audit Plan. Chavez noted a risk assessment elevation in the Operational unit of the audit universe attributable to vacancies in the ERS workforce.
Joint Board and IAC meeting
The Board of Trustees and IAC welcomed John Rutherford as the new Board trustee. Gov. Abbott appointed Rutherford to the Board in May. This was the first Board and IAC meeting in which Rutherford participated as a trustee.
Investment updates
ERS’ Chief Investment Officer David Veal gave the quarterly investment report.
- As of the end of June 30, 2022, the Trust Fund’s performance has been consistently above the policy benchmark across one-, three-, five- and 10-year horizons.
- On a five-year annualized basis, which is the primary focus of ERS’ Investment Policy Statement, the Fund delivered 189 basis points of excess return, its best performance over three decades or more.
- The Fund’s strong five-year performance amounts to more than $3 billion in value added over that time and includes almost $1 billion over the last year.
Veal stated the Fund delivered an 8.49% rate of return over those five years and attributed the strong performance to strong asset allocation and security selection decisions. He discussed the recent rise in risk levels and the performance driven by bearing the investment risk. Veal also summarized the priorities for the Investments division during Fiscal Year 2023, which include continuing to improve key processes and filling its eight empty positions with new staff to help sustain the Trust’s strong performance.
Investment performance and risk update
Veal and Sam Austin of NEPC (ERS’ general investment consultant) discussed the ERS Retirement Trust Fund’s performance. NEPC reported that for the 12 months ending June 30, 2022, global public equity and private equity were the major contributors to the Fund’s relative returns, with infrastructure and absolute return being the largest detractors.
- Carlos Chujoy, director of risk management & applied research for investment operations at ERS, presented a quarterly risk review, noting the Trust delivered positive relative performance despite an economic slowdown and financial conditions continuing to tighten.
- Chujoy outlined the external factors pressuring the Fund’s future performance such as market stress, interest rate risk, monetary policy risk and inflation risk.
2022 Asset Liability Study and Investment Policy Statement
Rob Goldthorpe with NEPC joined Veal and Austin to present the 2022 Asset Liability Study, which provided a long-term financial outlook for the ERS retirement plans and ran alternative asset allocation mixes for the Fund for comparison against the Fund’s current allocation.
- Goldthorpe outlined strategic asset allocation parameters as presented in three potential mixes produced in the study.
- The panel discussed the mixes’ risk/reward over tradeoff and their 10- and 30-year expected return as well as the associated liquidity profiles.
- After deliberations with the panel on how each of the mixes would fulfill the long-term objectives of ERS, the Board approved the recommended mix of strategic asset allocation parameters for inclusion in the Investment Policy Statement.
ERS’ General Counsel Cynthia Hamilton and Investment Compliance Officer Kurt Cressotti joined Veal to provide an overview of the proposed Investment Policy Statement for Fiscal Year 2023. The Board considered the recommendations and approved the document as presented.
Incentive Compensation Plan
ERS’ Director of Human Resources DeeDee Sterns and ICP Program Specialist Jamey Pauley presented the proposed changes to the ERS Incentive Compensation Plan (ICP) for Fiscal Year 2023. After discussion, the Board approved the recommended changes to the plan and plan document.
Real Estate Program and Proposed Annual Tactical Plan for Fiscal Year 2023
- Managing Director of Real Assets Bob Sessa, Director of Private Real Estate Amy Cureton and Director of Public Real Estate Annie Xiao joined Veal to review the performance of the real estate program. Performance was strong across all time horizons for both the public and private real estate portfolios, with improving performances against their benchmarks.
- Sessa and Cureton presented the proposed tactical plan for Fiscal Year 2023, which the team expects to further diversify its strategies and complement existing allocations. The Board approved the plan.
Private Infrastructure Program and Proposed Annual Tactical Plan for Fiscal Year 2023
- Veal and Director of Private Infrastructure Pablo de la Sierra Perez reviewed the performance of the private infrastructure program. As of March 31, 2022, the portfolio’s one-year returns were significantly positive but lagged the benchmark due to the recent increase in inflation. However, the portfolio’s five-year annualized performance was strong both on an absolute basis and against the benchmark.
- Perez and Veal presented the proposed tactical plan for Fiscal Year 2023, which the Board considered and approved.
Board of Trustees meeting
HealthSelectSM Medicare Advantage Plan preferred provider organization (MA PPO)
ERS Director of Group Benefits Diana Kongevick and Blaise Duran of ERS’ Actuarial and Reporting Services proposed Plan Year 2023 monthly member contribution rates for the HealthSelect MA PPO. (The MA PPO plan is a calendar year plan.)
Duran reminded the Board that retirees who worked long enough to receive the maximum state contribution still pay nothing for their health insurance premium. However, the total monthly MA PPO cost will increase, largely due to the increase in the net cost of prescription drugs. Prescription drug costs are rising more rapidly than the related rebates and subsidies ERS uses to offset those costs. Even with the medical premium remaining at last year’s level, when factoring in the increased prescription drug cost, the monthly MA PPO cost will increase approximately 20%.
Duran and Kongevick noted that despite the rate increase, the proposed Plan Year 2023 HealthSelect MA PPO premium rates are still lower than 2020 rates. Following a competitive bidding process with subsequent Board approval of a new third-party administrator, MA PPO’s 2021 premiums dropped significantly.
Duran and Kongevick also noted ERS is not decreasing coverage or asking MA PPO participants to pay more in out-of-pocket costs for their care. ERS Benefits Communications Director Kathryn Tesar affirmed ERS is providing Medicare-eligible members advance notice of the Plan Year 2023 MA PPO rate increase via Fall Enrollment materials and the quarterly retiree newsletters.
The Board approved ERS staff’s proposed Plan Year 2023 MA PPO rates.
ERS Fiscal Year 2023 budgets
ERS Executive Director Porter Wilson opened discussion of ERS’ Fiscal Year 2023 operating and capital and property management budgets by providing information on key agency activities.
Fiscal Year 2022 accomplishments included, among other things:
- maintaining stable member-only contribution rates for the sixth consecutive year in the HealthSelectSM plans while providing competitive benefits;
- implementing the new cash balance benefit structure for Group 4 new hires (employees joining the state workforce on or after Sept. 1, 2022); and
- adjusting coverage in ERS’ prescription drug programs to include no-cost at home COVID-19 tests.
Planned Fiscal Year 2023 initiatives include:
- continuing to implement the new retirement benefit for Group 4 state employees;
- maintaining trust asset diversity and managing risk;
- engaging with legislators to encourage pension funding integrity and all retirement trust funds’ actuarial soundness; and
- continuing to offer tools and assistance that help enhance members’ retirement readiness.
Machelle Pharr, ERS’ chief financial officer, presented ERS’ proposed operations budget for Fiscal Year 2023, which would increase by about 8%, including an additional 12 full-time employees (FTEs). ERS needs more staff to support the growing retiree population and new benefits, such as the new cash balance retirement benefit. Pharr provided information on the proposed additional positions.
Pharr also presented ERS’ proposed Fiscal Year 2023 capital and property management budget, to support management of 1836 San Jacinto and ongoing renovations to ERS’ main building that will provide space for ERS’ growing staff.
The Board approved ERS’ proposed Fiscal Year 2023 budgets.
Cash balance benefit (Group 4)
Bernie Hajovsky, director of Enterprise Planning for ERS, Robin Hardaway, director of Customer Benefits, and Kathryn Tesar, director of Benefits Communications for ERS, provided information on the implementation of the Group 4 cash balance retirement benefit and proposed new rules related to its implementation. The panel also spoke about the importance of education on the new retirement benefit as a key component of its implementation. The multi-divisional effort is on schedule for the Sept. 1 start date.
The Board approved the proposed rules and a methodology for computing Group 4 annuities at the time of retirement.
Board of Trustees Self-Evaluation Report
Hajovsky presented the results of the 2022 Board self-evaluation, the periodic assessment each trustee takes anonymously to evaluate the Board’s performance. The 2022 results indicate an effective, high-functioning Board, with unanimous agreement among trustees on 95% of the 49 survey statements.
Executive Director’s report
Wilson presented highlights of the final quarter of Fiscal Year 2022, which included:
- customer service update (Action Beyond the Call);
- adjustment of Chapter 615 benefits for Fiscal Year 2023, to align with the Consumer Price Index for All Urban Consumers;
- strategic planning;
- Survey of Employee Engagement results;
- Plan Year 2023 Summer Enrollment for employees and non-Medicare retirees;
- ERS’ 75th anniversary; and
- recent agency developments.
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