State pension fund declined in last quarter

Stock, bond market losses cut investment return 4.84%

The Arkansas Public Employees Retirement System’s investments dropped by about $662 million last quarter to $11.3 billion, amid declines in both the stock and bond markets, an investment consultant told the system’s board of trustees Wednesday.

The system’s investment return in the quarter that ended March 31 was minus 4.84%, the consultant Callan reported.

“It wasn’t as bad as I expected,” board chairwoman Candace Franks said after the trustees’ meeting.

“Of course, it wasn’t good,” she added.

Brianne Weymouth, a senior vice president for Callan, said stock markets and bond markets declined last quarter.

The war in Ukraine, the covid-19 pandemic and supply-chain bottlenecks created this anomaly in which bond markets dropped last quarter along with the stock markets, she said.

Over the past 100 years, there have been only 37 quarters in which the bond and stock markets both declined, Weymouth said.

She said it’s difficult to project when this anomaly will subside, but the system’s bond investments eventually will benefit from increases in interest rates.

The investments for the system have declined in value since the end of the last quarter on March 31. Through the end of April, the system’s investments were valued at $10.69 billion, system Chief Investment Officer Carlos Borromeo said after the trustees’ meeting.

In other business, the trustees authorized a $75 million investment in a real estate fund to further diversify its investment portfolio.

Franks also announced the board plans to interview the four remaining candidates for the system’s permanent executive director job June 1.

The public employees retirement system is state government’s second-largest retirement system with more than 75,000 working and retired members.

The Arkansas Teacher Retirement System is the state government’s largest retireLawmakers

ment system with more than $20 billion in investments and more than 100,000 working and retired members.

LAST QUARTER

The system’s domestic stock market investments dropped in value from $4.84 billion to $4.50 billion in the quarter that ended March 31 and posted an investment return of minus-5.87%, Callan reported.

The system’s international stock market investments fell in value from $3 billion to $2.75 billion last quarter and recorded an investment return of minus-8.15%, according to Callan.

The value of the system’s bond investments declined in value from $2.12 billion to $1.99 billion in the quarter that ended March 31, posting an investment return of minus-5.98%, Callan reported.

However, the system’s real asset investments, including real estate and timber, increased in value from $1.44 billion to $1.5 billion, earning an investment return of 6.27%, Callan said.

The system’s diversified strategies investments dipped from $528 billion to $517 million last quarter, posting an investment return of minus-1.91%, according to Callan.

Through March 31, the system’s investment return for fiscal year 2022 that ends June 30 was minus-0.26%, according to Callan.

The system’s target rate of return is 7.15% a year.

Trustee Larry Walther, who is secretary of the state Department of Finance and Administration, questioned whether the system made the right move to end an energy investment portfolio in favor of investments in real estate, farm and timber.

“Energy is up 39% [last quarter] and we missed that,” he said.

Weymouth said the system moved out of a dedicated energy investment portfolio as a result of the volatility of that portfolio, but the system’s stock and bond managers are still allowed to invest in energy-related investments. The change made the system’s real assets investment portfolio less volatile and provides more diversity for the rest of the system’s investment portfolio, she said.

In February 2021, trustees voted to change the composition of the system’s real asset investments.

They voted to increase their target percentage of those investments for core real estate from 61% to 70% and for value-added real estate from 14% to 20%, trim the share for real estate investment trusts from 6% to a range of 0-5%, cut the target percentage for energy stocks from 13% to zero and for timberland from 6% to 5%. They increased the share for farmland from zero to 5%.

On Tuesday, the trustees subsequently authorized a $75 million investment in the Boston-based TA Realty’s Fund XIII, which has a target size of $1.25 billion and net target returns of 10% to 12.5% a year. The fund aims to invest in industrial, multifamily, office and grocery-anchored real estate investments in primary and strategic U.S. markets, Callan reported. The system previously invested in TA Realty Funds X, Xi, XII and XIII.

During the past five years, the system’s overall rate of investment return has averaged 10.10% a year to rank in the top 21% of the nation’s similar-sized public pension systems, Callan reported. Over the past 10 years, the system’s overall rate of return has averaged 9.26% a year to be in the top 20% of the nation’s similar-sized public pension systems. During the past 20 years, the system’s overall rate of return has averaged 7.73% a year to rank in the top 26% of the nation’s similar-sized public pension systems, according to Callan.

In fiscal 2021 that ended June 30, the system’s investment return was 31.49%.

Buoyed by robust markets, the system’s investments increased in value from $9.09 billion on June 30, 2020, to $11.6 billion on June 30, 2021.

FISCAL 2023 CHANGES

System members, who contribute, currently pay 5% of their salary into the system, and that rate will increase to 5.25% in fiscal 2023, starting July 1.

In fiscal 2021, state and local governments paid $306.5 million into the system and system members contributed $75 million.

Act 365 of 2021 will gradually increase the amount that members of the system contribute. The law will increase the percentage of salary that a member pays from the current 5% by 0.25% a year, starting July 1, over an eight-year period until that percentage reaches 7%.

In addition, Act 366 of 2021 will change the cost-of-living adjustment for retirement benefits for system members hired on or after July 1, 2022, from 3% a year to the lower of 3% or the consumer price index each year.

Act 370 of 2021 will change how the system computes the final average compensation that is used in calculating retirement benefits for a member hired by a system-covered employer, starting on or after July 1, 2022. The final average compensation will be based on the average of the five highest years of annual compensation rather than the average of the three highest years of annual compensation.

In November, trustees decided keep the system’s current 15.32% of payroll rate charged to state and local governments in fiscal 2024, which starts July 1, 2023.

Last August, trustees signaled that they wanted to stick with the existing employer rate rather than reduce it for fiscal 2024 because they want to reduce the system’s unfunded liabilities and the projected period for paying them off.

Unfunded liabilities are the amount by which a system’s liabilities outstrip an actuarial value of its assets. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.

The system’s actuary phases in the recognition of investment gains and losses over four years in an attempt to stabilize the rate charged to employers, which are state and local governments.

As of June 30, the system’s actuarial accrued liabilities totaled $11.8 billion and an actuarial value of its assets totaled $9.8 billion, leaving unfunded liabilities at $1.9 billion with a projected payoff period of 16 years, according to the actuary, Gabriel, Roeder, Smith & Co.. The system’s funded ratio was 84% on June

30.

The system included 42,669 working members with an average salary of $41,759 a year, and 40,762 retired members, including deferred retirement plan participants, with total benefits of $658.8 million or an average of $16,162 a year as of June 30, Gabriel reported.

EXECUTIVE DIRECTOR

Franks said the trustees plan to interview four candidates for executive director on June 1.

They are:

■ State Department of Transformation and Shared Services Secretary Amy Fecher.

■ State treasurer’s office Senior Investment Manager Steve Pulley.

■ Fredericksburg, Texas, City Manager Kent Myers, who is a former Hot Springs city manager. Myers said in a letter to the system’s board of trustees that he will leave his current position to relocate to Little Rock this summer to be closer to family members.

■ Borromeo, who is the system’s chief investment officer.

The system received 21 applications for the system’s executive director post before trustees selected four finalists April 28.

The salary range for the executive director’s job is $149,862 to $181,500, according to the job description. Former system Executive Director Duncan Baird’s salary was $165,396 a year when he departed the system.

Baird departed April 9 to begin work as senior manager of benefit services at Walmart, where he is responsible for administering Walmart’s 401 (k) plan.

Baird, a former Republican state representative from Lowell and state budget director, served as the system’s executive director for three years. Allison Woods, who has been the system’s deputy director since November 2020, serves as interim executive director.

In 2019, the system’s board of trustees hired Baird as the executive director over actuary Jody Carreiro and Borromeo.