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Home My Public Portal About267th Finance Committee Agenda 6-1-2021 267th MEETING OF THE FINANCE COMMITTEE METROPOLITAN ST. LOUIS SEWER DISTRICT Tuesday, June 1, 2021 AT 8:00 A.M. 2350 MARKET STREET ~ 1st FLOOR CONFERENCE ROOM #109 AGENDA 1. Roll Call 2. Approval of Minutes – May 4, 2021 3. Quarterly Pension Review 4. Portfolio Update 5. Management Audit 6. Next meeting – Tentatively Scheduled for Tuesday, June 29, 2021 Adjournment Journal of the 266th Meeting of the Finance Committee of the Metropolitan St. Louis Sewer District May 4, 2021 The 266th meeting of the District’s Finance Committee was called to order at approximately 7:55 a.m. at the District’s Headquarters located at 2350 Market Street, St. Louis, MO 63103, Room 109. In attendance were the following individuals: District Trustees Staff A. Fehr B. Hoelscher T. Snoke M. Evans S. Myers R. Unverferth B. Wahby M. Gee T. Coleman R. Wilson B. Berthold T. Clinton B. Watson J. Fenton G. Nicozisin The Finance Committee met on May 4, 2021 with Trustees Fehr, Evans, Wahby, Wilson, Watson and Nicozisin in attendance. The minutes from the March 30, 2021 meeting were approved. The first item on the agenda was a report by staff on the District's Operating Fund Portfolio as of April 30, 2021. Staff stated that the portfolio complies with the District’s Investment Policy. Next on the agenda was a resolution authorizing the staff to enter the fourth and final option year of the contract with Brown Smith Wallace to provide internal audit services to the District. This will be Resolution #3666 on tonight's agenda. The next topic addressed was an update on adjustments to the District's FY2022 Preliminary Budget. Staff indicated that the Finding of Fact Board Committee has been established to consider the level of the District's proposed 2021 property tax levies. Also included on tonight's agenda is the introduction of the FY2022 Budget as discussed at the March 30th and May 4th Finance Committee meetings. This will be Ordinance #15671 on tonight's agenda. Next on the agenda was an ordinance authorizing the staff to approve new wastewater user charge rates based on the Rate Commission Recommendation accepted by the Board of Trustees. This will be Ordinance #15669 on tonight's agenda. Staff discussed the introduction of an ordinance to establish the District's 2021 property tax levies to be applied to customers' Real and Personal Property Assessed Values to produce required revenues for stormwater operation and infrastructure projects. This will be Ordinance #15670 on tonight's agenda. Staff also stated that a public hearing to review the FY2022 budget, taxes, user charges and CIRP is scheduled, as required by Charter, tonight after this meeting. Next, the Adjustment Review Committee report for the quarter ended March 2021 was presented as required by ordinance. Staff also reported on the current financial condition of the District indicating it continues to be financially stable. The meeting adjourned at approximately 8:20 a.m. The next tentatively scheduled meeting is Tuesday, June 1, 2021. This concludes the Finance Committee Report. Investment advice and consulting services provided by Aon Investments USA Inc. Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon. The Metropolitan St. Louis Sewer District Employees’ Pension Plan First Quarter 2021 June 1, 2021 Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.2 Table of Contents Section 1 Market Environment ▪Current Market Update Section 2 Quarterly Performance Update ▪First Quarter 2021 Performance ▪Year-to-Date 2021 Performance Update ▪Fund Fee Comparison Appendix Public Peer Comparisons Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.3 Market Environment Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.4 Market Trends in Q1 2021 Sector Rotation Equity markets have rotated into pro- cyclical and value sectors and away from growth stocks Yield Rises Significant Treasury yield rises cause the worst quarter of bond returns since 1980 Another Stimulus Bill $1.9trn Covid support package passed, with the promise of more to come Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.5 Economic Highlights Source: Factset, Aon Earnings growth expectations rising US Treasuries Yield Surge Source: Factset, Aon Past performance is no guarantee of future results. -30% -20% -10% 0% 10% 20% 30% 40% Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 USA UK Europe ex-UK Japan EM 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2014 2015 2016 2017 2018 2019 2020 US Benchmark Bond - 10 Year - Yield US Benchmark Bond - 2 Year - Yield 85 90 95 100 105 110 115 Jan-21 Feb-21 Mar-21 Apr-21 Growth Value 5Y Forward 5Y Inflation Expectations Total returns in USD for MSCI World Value and MSCI World Growth, Jan 21 = 100 Rotation into value and pro-cyclical stocks Reflation Potentially Turning into Inflation Forecasted YoY earnings growth 1.6 1.7 1.8 1.9 2 2.1 2.2 2.3 2.4 2.5 2.6 Sep 20 Dec 20 Mar 21 Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.6 Major Capital Markets Performance Summary As of March 31, 2021 As of May 25, 2021 1Q2021 1 Year 3 Years 5 Years 10 Years Quarter- to-Date Year-to- Date Global Stocks MSCI All Country World IMI Index 5.1%57.6%11.9%13.2%9.2%5.1%10.5% US Large Cap Stocks Russell 1000 Index 5.9 60.6 17.3 16.7 14.0 5.3 11.6 US Small Cap Stocks Russell 2000 Index 12.7 94.8 14.8 16.4 11.7 (0.6)12.1 Non-US Stocks (Developed) MSCI EAFE Index 3.5 44.6 6.0 8.8 5.5 6.2 9.9 Non-US Stocks (Emerging) MSCI Emerging Markets Index 2.3 58.4 6.5 12.1 3.7 2.5 4.8 US Investment Grade Bonds Blmbg. Barc. U.S. Aggregate Index -3.4 0.7 4.7 3.1 3.4 1.2 (2.2) US High Yield Bonds Blmbg. Barc. U.S. High Yield Index 0.9 23.7 6.8 8.1 6.5 1.2 2.1 Core Private Real Estate NCREIF ODCE 1.9 1.5 4.0 5.3 8.7 ---- Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.7 Quarterly Performance Update Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.8 Total Pension Plan Performance As of 3/31/2021 1st Quarter 2021 1-Year 3-Year 5-Year 10-Year Since Inception Total Pension Plan 1.7%31.8%8.4%8.3%6.5%7.5% Policy Benchmark 2.5 30.8 9.0 8.8 6.8 -- Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.9 Historical Market Values $327 million $- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 Ma r k e t V a l u e ( i n t h o u s a n d s ) Total Plan Market Value History Ending 3/31/2021 Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.10 Asset Allocation vs. Policy Targets as of 3/31/2021 38.3% 18.6% 32.9% 0.4% 9.1% 0.7% 35.0% 18.0% 35.0% 0.0% 12.0% 0.0% 3.3% 0.6% -2.1% 0.4% -2.9% 0.7% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Total Domestic Equity Total International Equity Total Fixed Income Hedge Funds Real Estate Cash Asset Allocation Policy Target Difference Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.11 Pension Plan -Trailing Period Performance as of 3/31/2021 *Performance prior to 9/30/2018 has been calculated by MSD’s previous investment consultant. Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.12 Pension Plan -Trailing Period Performance as of 3/31/2021 (cont’d) *Performance prior to 9/30/2018 has been calculated by MSD’s previous investment consultant. **The EnTrust Capital Diversified Fund and the UBS Trumbull Property Fund are currently in the process of liquidation. ▪The Total Pension has returned an additional +3.0% in April (compared to a Policy Benchmark +2.2%) ▪The Total Pension has returned an estimated +0.3% Month-to-Date through May 25th ▪Aon’s asset-liability team continues to closely monitor the Pension’s asset allocation positioning in relation to the Plan’s liabilities and with consideration to the current market environment ▪We continue to think the current policy allocation for the Pension remains appropriate Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.13 DC Plans –Asset Allocation As of 3/31/2021 Defined Contribution Plan Deferred Compensation Plan Combined DC Plans $%$%$% Tier I 13,954,622 72.7 25,882,489 26.7 39,837,111 34.3 Tier II 3,249,229 16.9 34,911,546 36.0 38,160,775 32.9 Tier III 2,003,884 10.4 34,637,078 35.7 36,640,962 31.6 Tier IV ----1,474,476 1.5 1,474,476 1.3 Subtotal $19,207,735 100.0%$96,905,589 100.0%$116,113,324 100.0% 16.3% 83.7% % of Combined DC Assets as of 12/31/2020 Defined Contribution Plan Deferred Compensation Plan 16.5% 83.5% % of Combined DC Assets as of 3/31/2021 Defined Contribution Plan Deferred Compensation Plan Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.14 DC Plans -Trailing Period Performance as of 3/31/2021 Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.15 DC Plans -Trailing Period Performance as of 3/31/2021 (cont’d) Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.16 Pension -Fund Fee Comparison 3/31/2021 Asset Market Values Fund Expense Ratio Institutional Peer Comparison Fund Name %$%$Universe Median % Universe Median $ eVestment Alliance Universe BlackRock Russell 1000 Index Fund 26.6%$87,055,340 0.035%$30,469 0.06%$52,233 US Passive Large Cap Kennedy Mid Cap Value Fund 6.1%$19,824,700 0.75%$148,685 0.75%$148,685 US Mid Cap Value TimesSquare Small Cap Growth Fund 5.7%$18,506,768 0.80%$148,054 0.98%$181,366 US Small Cap Growth Morgan Stanley Int’l Equity Fund 12.4%$40,464,899 0.91%$368,231 0.75%$303,487 All EAFE Equity Morgan Stanley Emerging Markets Fund 6.2%$20,438,638 0.95%$194,167 0.98%$200,299 Emerging Mkts Equity Income Research Fund 13.0%$42,593,377 0.33%$140,558 0.36%$153,336 US Core Fixed Income Prudential Core Plus Bond Fund 11.8%$38,667,968 0.30%$116,004 0.40%$154,672 US Core Plus Fixed Income Brandywine Global Opp. FI Fund 8.0%$26,240,470 0.45%$118,082 0.51%$133,826 Global Agg Fixed Income Entrust Capital Diversified Fund*0.4%$1,215,129 0.00%$0 0.00%$0 -- UBS Trumbull Property Fund*9.1%$29,815,066 0.87%$259,391 1.00%$298,151 NCREIF ODCE Peers1 Cash 0.7%$2,214,825 0.20%$4,430 0.21%$4,651 US Taxable Money Market Funds2 Total Pension 100.0%$327,037,180 0.47%$1,528,071 0.50%$1,630,706 -- *The EnTrust Capital Diversified Fund and the UBS TPF are currently in the process of liquidation. 1Average annual investment management fee of ODCE peers (26 funds) for similar sized mandates. 2From the 2019 Aon mutual fund expense analysis. Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.17 DC Plans -Fund Fee Comparison *2019 Aon Mutual Fund Expense Analysis 3/31/2021 Asset Market Values Fund Expense Ratio Institutional Peer Comparison Fund Name %$%$Universe Median % Universe Median $Peer Group Vanguard Institutional Target Retirement Income 1.2%$1,360,054 0.09%$1,224 0.15%$2,040 Mixed-Asset Target Today (Passive) Vanguard Institutional Target Retirement 2015 1.1%1,259,427 0.09%1,133 0.12%1,511 Mixed-Asset Target 2015 (Passive) Vanguard Institutional Target Retirement 2020 3.1%3,554,234 0.09%3,199 0.13%4,621 Mixed-Asset Target 2020 (Passive) Vanguard Institutional Target Retirement 2025 5.9%6,759,291 0.09%6,083 0.13%8,787 Mixed-Asset Target 2025 (Passive) Vanguard Institutional Target Retirement 2030 3.5%3,971,672 0.09%3,575 0.13%5,163 Mixed-Asset Target 2030 (Passive) Vanguard Institutional Target Retirement 2035 4.4%4,990,485 0.09%4,491 0.14%6,987 Mixed-Asset Target 2035 (Passive) Vanguard Institutional Target Retirement 2040 3.6%4,121,548 0.09%3,709 0.14%5,770 Mixed-Asset Target 2040 (Passive) Vanguard Institutional Target Retirement 2045 5.6%6,370,259 0.09%5,733 0.15%9,555 Mixed-Asset Target 2045 (Passive) Vanguard Institutional Target Retirement 2050 3.7%4,250,169 0.09%3,825 0.15%6,375 Mixed-Asset Target 2050 (Passive) Vanguard Institutional Target Retirement 2055 1.8%2,025,603 0.09%1,823 0.15%3,038 Mixed-Asset Target 2055 (Passive) Vanguard Institutional Target Retirement 2060 0.9%1,084,679 0.09%976 0.15%1,627 Mixed-Asset Target 2060+ (Passive) Vanguard Institutional Target Retirement 2065 0.1%89,689 0.09%81 0.15%135 Mixed-Asset Target 2060+ (Passive) Vanguard Institutional Index Fund 13.4%15,367,112 0.04%6,147 0.20%30,734 U.S. Large Cap Core Equity (Passive) Vanguard Mid-Cap Index Fund 5.3%6,070,584 0.05%3,035 0.06%3,642 U.S. Mid Cap Core Equity (Passive) Vanguard Small-Cap Index Fund 4.1%4,713,149 0.05%2,357 0.20%9,426 U.S. SMID Cap Core Equity (Passive) Vanguard Total Bond Market Index Fund 4.3%4,882,576 0.05%2,441 0.08%3,906 U.S. Broad Market Core FI (Passive) Vanguard Balanced Index Fund 6.2%7,127,354 0.06%4,276 0.15%10,691 Mixed-Asset Target Today (Passive) Vanguard Windsor II Fund 9.7%11,125,799 0.26%28,927 0.69%76,768 U.S. Large Cap Value Equity Vanguard U.S. Growth Fund 8.9%10,248,783 0.28%28,697 0.79%80,965 U.S. Large Cap Growth Equity Vanguard International Growth Fund 7.1%8,173,479 0.33%26,972 0.91%74,379 International Large Cap Growth Equity Vanguard Cash Reserves Federal MMF 2.7%3,108,292 0.16%4,973 0.21%6,527 U.S. Taxable Money Market Vanguard Retirement Savings Trust III 3.5%3,984,608 0.30%11,954 0.45%17,931 Stable Value Total Combined DC Plans 100.0%$114,638,846 0.14%$155,633 0.32%$370,580 -- Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.18 Appendix: Public Peer Comparisons Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.19 Risk-Return vs. Peers (<$1B) as of 3/31/2021 *All Public Plans < $1B contains 455 peer portfolios for the 3-Year period and 432 peer portfolios for the 5-Year period. Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.20 Metropolitan St. Louis Sewer District (MSD) Investment Return Assumption versus Peers1 Key Takeaways: ▪Median actuarial assumption for investment return has declined from 8.00% in 2001-2010 to 7.25% based on the latest survey data ▪MSD’s assumption for FYE 2020 (6.75%) is between the 5th and 25th percentile relative to its peers ▪If MSD exceeds (or falls short of) the actuarial return assumption, lower (or higher) funding will be needed in future years Sources: Historical MSD actuarial valuation reports; Public Plans Data (publicplansdata.org) as of April 2021; Expected Retur ns are the assumptions made by the plans included in the data set. 1 Peers defined as public funds published within publicplansdata.org as of April 2021; Number of plans per year are shown in parentheses 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.21 Metropolitan St. Louis Sewer District (MSD) Funded Ratio (Based on Actuarial Value of Assets) versus Peers1 Key Takeaways: ▪The median funded ratio as of FYE 2020 was 74% based on the latest survey data ▪MSD’s FYE 2020 funded ratio (86.2%) was just above the 75th percentile relative to its peers Sources: Historical MSD actuarial valuation reports; Public Plans Data (publicplansdata.org) as of April 2021 1 Peers defined as public funds published within publicplansdata.org as of April 2021; Number of plans per year are shown in parentheses 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.22 Metropolitan St. Louis Sewer District (MSD) Support Ratio versus Peers1 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile 50th 95th 75th 25th 5th Percentile Key Takeaways: ▪“Support Ratio” defined as the ratio of inactive participants to active participants ▪MSD’s closed status has caused the support ratio to increase over time as actives decline in number ▪MSD is more mature than most U.S. public pension plan sponsors Sources: Historical MSD actuarial valuation reports; Public Plans Data (publicplansdata.org) as of April 2021 1 Peers defined as public funds published within publicplansdata.org as of April 2021; Number of plans per year are shown in parentheses Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.23 Periodic Table of Performance *U.S.Equity -Dow Jones U.S. Total Stock Market;EAFE –MSCI EAFE; EM –MSCI EM; REITs –FTSE NAREIT All Equity REITS; Bonds –Blmbg. Barc. U.S.Aggregate; High Yield – Blmbg. Barc. U.S.Corporate High Yield; Cmdty –Bloomberg Commodity Index; HFOF –HFR FOF;PE -Burgiss Private Equity Time Weighted Returns; PRE -Private Real Estate - NCREIF ODCE Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc.24 (This page left blank intentionally) Metropolitan St. Louis Sewer District Operating Fund Portfolio As of May 28, 2021 Summary Statistics Portfolio Benchmark Total Par $648,777,900 ML 1-3 Yr. Treasury Yield to Maturity .53%.15% WAM (Years).94 1.85 Average Credit (S&P)AA+AA+ Sector Allocation Portfolio Policy Limit Int. Bearing Collaterized Dep. 9.9%100% US Treasury Bond/Note 53.1%100% Fed Agency Bond/Note 28.4%60% Commercial Paper 8.6%25% TOTAL 100.0% Fund Summary Portfolio WAM YTM Debt Reserve Funds $20.9 1.07 0.97% Debt Project Funds $104.1 0.20 0.11% MSD Operations $455.5 0.74 0.56% SRF Operating Fund $68.3 2.48 0.36% TOTAL $648.8 58.0% 12.3%16.6% 9.0%4.1%5.4% 55.4% 39.2% 0% 10% 20% 30% 40% 50% 60% 70% 0-0.5 Yrs 0.5-1 Yrs 1-2 Yrs 2-3 Yrs 3-4 Yrs MSD Operating Portfolio ML 1-3 US Treasury IndexMaturity Distribution METROPOLITAN ST. LOUIS SEWER DISTRICT MANAGEMENT AUDIT RECOMMENDATION Page 1 REQUIREMENT: SECTION 7.060. Management audit. -- An independent audit shall be made of the management of the District at least every five years by a nationally recognized management consulting firm which shall be engaged by the Board. Such management consulting firm shall have no personal or financial interest, direct or indirect, in the fiscal affairs of the District or have any material financial relationship with any trustee or any officer of the District. Additionally, no such consulting firm shall conduct two consecutive management audits as required by this section. PURPOSE: The goal of this audit is to provide assurance to the rate payers, Rate Commission, and Trustees that the management and staff of the District have the appropriate controls in place to efficiently and effectively manage the District’s resources, including funds provided by ratepayers. The District will issue an RFP to obtain competitive proposals from qualified individuals and firms interested in conducting a management audit for The Metropolitan St. Louis Sewer District (the “District”) to assess and report on the effectiveness and completeness of the District’s entity- level controls, including providing recommendations for improvements, across the following components of the updated COSO – Internal Control Framework: • Control Environment • Risk Assessment • Information & Communication • Monitoring Activities Staff will support the effort by providing materials as requested, being available for interviews and questions, and implementing and monitoring recommendations, as appropriate. This is an entity-level controls audit and, as such, is not an audit of Control Activities nor is it an audit of the District’s financial statements. CONTRACTOR’S RESPONSIBILITIES: Perform an entity-level controls audit of the District, using four of the updated COSO – Internal Control Framework components and the related principles as the guideline to measure effectiveness and completeness of controls: • Control Environment o Organization demonstrates a commitment to integrity and ethical values o Board independent from management and exercises oversight of development and performance of internal control METROPOLITAN ST. LOUIS SEWER DISTRICT MANAGEMENT AUDIT RECOMMENDATION Page 2 o Appropriate oversight, structures, reporting lines, and responsibilities are established to pursue objectives o Commitment to attract, develop, and retain competent individuals o Accountability for internal control responsibilities • Risk Assessment o Specified, clear objectives to enable identification and assessment of risks relating to objectives o Risks to achievement of objectives identified and analyzed as basis for determining how the risks should be managed o Consideration of potential for fraud in assessing risks o Identification and assessment of changes that could significantly impact the system of internal control • Information/Communication o Use of relevant, quality information to support functioning of other components of internal control o Internally communicates objectives and responsibilities necessary to support internal control o Externally communicates regarding matters affecting the functioning of other components of internal control • Monitoring o Organization selects, develops, and performs evaluations to ascertain whether the components of internal control are present and functioning o Evaluates and communicates deficiencies in a timely manner to those responsible for oversight and corrective action The selected firm will lay out a plan to conduct the audit and execute the plan in an efficient manner and within its cost proposal. A written report will be prepared that summarizes the firm’s findings and recommendations, including any opportunities for improvement. The report will be shared with District staff, presented to the Board of Trustees, and become a public document that will be available to the public.