Retiree system investments up

Increase $676M for fiscal ’17

The trustees for the Arkansas Public Employees Retirement System on Wednesday signaled their intent to raise the rate charged to state and local governments in fiscal 2019, after they learned the value of the system’s investments increased by $676 million to $8.3 billion in the fiscal year that ended June 30.

The trustees tentatively decided to increase the employee payroll rate charged to state and local governments from the current 14.75 percent to 15.32 percent, effective July 1, 2018, the start of fiscal 2019. The trustees will make a final decision on the increase during their November meeting.

“I think it’s the responsible thing to do,” said Trustee David Hudson, who is the county judge for Sebastian County. He said he wants to find out how much the increased rate would cost state government, cities and counties.

The proposed rate increase of 0.57 percentage point would cost state and

local governments roughly $10 million more in fiscal 2019, based on the most recent available total payroll figures of nearly $1.7 billion.

State and local governments paid $262 million into the system in fiscal 2017, which ended June 30, while system members — the employees — chipped in $58.2 million, according to a fiscal 2017 annual report. The system reported paying out $508.2 million in retirement benefits that year.

One of the factors putting upward pressure on the payroll rate is the trustees’ decision in May to cut the projected annual investment return from 7.5 percent to 7.15 percent for one year for the June 30, 2017, actuarial valuation. The cut was based on advice from a system actuary who said investment consultants expect reduced returns. The cut means the system will have to rely more on other sources of money or reduce costs, such as benefits, to be adequately funded.

Cutting the projected return from 7.5 percent to 7.15 percent a year “was a difficult vote, a difficult issue,” Hudson told his fellow trustees Wednesday.

Another factor affecting the payroll rate is the phased-in recognition of actuarial losses from recent years in which investments failed to reach the projected annual return, said system Director Gail Stone. Investments increased in value by $20 million to $7.8 billion in fiscal 2015, and then dropped by $196 million, to $7.6 billion, in fiscal 2016. The fiscal 2016 drop occurred during what a consultant described as “a very tumultuous year” for stock markets.

The Arkansas Public Employees Retirement System is state government’s second-largest retirement system with more than 75,000 working and retired members. The largest is the Arkansas Teacher Retirement System, which has more than $14 billion in investments and more than 100,000 working and retired members. Information about the teacher retirement system fiscal 2017 investment performance should be ready in the next two or three weeks, said its director, George Hopkins.

RETURN DETAILS

The Public Employees Retirement System’s investment return in fiscal 2017 was 12.30 percent, ranking in the top 51 percent of the nation’s public retirement systems, its Chicago-based investment consultant Callan Associates reported. The firm reported that the median return among systems nationally was 12.42 percent in the past fiscal year.

Investment markets are moving forward, despite all of the “geopolitical” issues around the world, said Ryan Ball, senior vice president at Callan Associates.

The Arkansas system’s investments increased $676 million in value in fiscal 2017 with the help of rebounding stock markets that reported double-digit returns.

The year-end report showed that the system’s domestic stock market portfolio ended up valued at $3.24 billion after earning a return of 17.52 percent, while its foreign stock market investments totaled $2.05 billion after earning a return of 18.39 percent, Callan reported.

Bond investments were valued at $1.33 billion at the end of the fiscal year after showing a return of 3.04 percent, while real assets — including real estate, timber and energy investments — totaled $1.24 billion with a return of 3.27 percent, according to Callan Associates.

Over the past five fiscal years, the Arkansas system’s investment return has averaged 9.85 percent a year to rank in the top 17 percent nationally, Callan Associates said.

Over the past 10 fiscal years, its return averaged 5.46 percent a year, ranking in the top 49 percent nationally, Callan Associates reported. This 10-year period included the 2008-09 recession, noted Brianne Weymouth, senior vice president of Callan Associates.

PAYROLL RATES

After the system’s investments plummeted about $1.3 billion in value to $4.3 billion in fiscal 2009 during the recession and stock market downturn, trustees increased the rate charged to state and local governments for four consecutive years. The initial rate increase went from 11 percent to 12.46 percent, effective July 1, 2010.

During the current decade, the payroll rate charged peaked at 14.88 percent in fiscal 2014 before the trustees reduced that rate after stock markets continued to rebound after the recession.

Last November, the trustees voted to increase the rate charged to state and local governments from 14.5 percent to 14.75 percent, effective July 1 of this year. That action came after an actuary for Wisconsin-based consultant Gabriel, Roeder, Smith & Co. advised the trustees to reduce the system’s 7.5 percent annual investment return projection to about 7 percent this year.

Instead, the trustees in May voted to reduce the rate to 7.15 percent for the June 30, 2017, actuarial valuation to allow the trustees time to study projected costs to state and local governments with further drops in the projected return. At that time, Stone said a cost-saving option would be for the trustees to ask for legislation to allow the system to grant costof-living adjustments.

According to the system’s latest actuarial report as of June 30, 2016, the system included 45,676 working members with a total payroll of $1.68 billion and an average annual salary of $36,923, and 34,214 retired members with an average annual benefit of $14,897, totaling $509.7 million, according to Gabriel.

The system’s unfunded liabilities totaled $1.89 billion as of June 30 with a projected payoff period of 21 years, Gabriel reported. The system’s unfunded liabilities are the amount by which the system’s liabilities exceed an actuarial value of the system’s assets. Actuaries often compare unfunded liabilities to a mortgage on a home.

In other business, the trustees also elected Trustee David Morris, who is the mayor of Searcy, as the board’s chairman and Larry Walther, director of the state Department of Finance and Administration, as the board’s vice chairman.

They voted to terminate international stock market investment manager Manning & Napier of New York and shift its holdings into an international stock market index fund. Stone said roughly $380 million managed by the firm would be moved into an index fund. In addition, they decided to hire LSV Asset Management that has offices in Chicago and San Diego as a domestic stock market investment manager over Boston Partners. The firm will receive about $150 million, Stone said.