State retirees’ system cutbacks on hold to seek more money

HOT SPRINGS — The Arkansas Teacher Retirement System’s executive director told lawmakers Friday he plans no reductions in benefits, instead waiting while the system’s efforts to raise more money and cut costs are fully implemented in the next three years.

“We want to see if these reductions are effective and give them time to work, and hopefully we’re in really good shape,” Clint Rhoden, system executive director, told the Legislature’s Joint Committee on Public Retirement and Social Security Programs during its meeting in Hot Springs.

In response to questions from two retirees, Rhoden repeated the assurances two more times during the two-hour meeting that drew roughly 300 people, most of whom were members of state government’s several retirement systems.

The Teacher Retirement System is state government’s largest such agency, with investments exceeding $17 billion and more than 100,000 working and retired members.

Friday’s meeting was the second in a series of 11 meetings the committee’s leaders scheduled across the state through Nov. 5.

The meetings allow the directors of each retirement agency to educate the systems’ members about the financial condition of their systems, allow directors to explain whether changes are needed and get feedback.

The co-chairmen — Sen. Bill Sample and Rep. Les Warren, both R-Hot Springs — pledged to hold the meetings after most of the bills proposed by the Arkansas Public Employees Retirement System to reduce its unfunded liabilities failed to clear the committee during this year’s regular session. Among these proposals was a bill to allow the system’s trustees to set annual costof-living adjustments at up to a simple 3%. Existing law provides a compounded 3% adjustment annually.

The public employees system is state government’s second-largest such agency, with investments exceeding $8 billion and more than 75,000 working and retired members.

“There is room for improvement and what we want to do is address issues while we are still in a good position,” Warren said. “So what we are trying to do is

say we want to take care of these defined benefit plans, but we want to try to make them stronger while we can.”

Warren said the committee was working with system officials on what to propose in the 2021 legislative session.

“We are not trying to take anything away from you. We are trying to strengthen these plans so they are here for you as long as you retire and for the new people that come behind you when they retire,” Warren said.

Rhoden told lawmakers the Arkansas Teacher Retirement System’s unfunded liabilities were 80% funded as of June 30, 2018, with an actuarial investment value of $16.7 billion, which was well above the median of 72% of other public pension systems in the nation.

The system’s unfunded liabilities are projected to be paid off within 28 years, but “we are trying to get closer to an 18-year amortization,” he said. “We are in good shape. I like to say we got a B. We’re striving to get an A.”

Unfunded liabilities are the amount the system’s liabilities exceed an actuarial value of the system’s investments. Actuaries often compare unfunded liabilities to a mortgage on a home.

The system’s investments earned a return of about 5.3% in 2019, he said. The target return is 7.5%.

Rhoden said the system paid out $1.17 billion in retirement benefits in fiscal 2019, which ended June 30. Employers contributed $356.6 million, based on a rate of 14%

of payroll. Working members contributed $130 million, based on a rate of 6% of their salary.

“In 2017, we worked with the Legislature and basically asked for some tools to allow our board to manage the system and make some minor adjustments to the benefit structure,” he said. “We are currently in the middle of implementing these benefit reductions. Most of the heavy lifting has already been done, but they will not be completely implemented until 2022.”

“We did some difficult adjustments and I can attest that our retirees felt it in July,” Rhoden said. “They had to take a $25 reduction from what they were expecting and we obviously got a lot of phone calls where we patiently explained that to about 2,000 retirees. But the good news is, that to me, is the brunt of the reductions we are having to face in the future.”

In November 2017, the system’s trustees voted to implement several measures to raise money and cut costs over seven years. The actions were taken in response to the system’s annual projected investment return being reduced from 8% to 7.5%.

The measures included reducing the monthly stipend for retirees from $75 to $50, starting in fiscal 2020, and no longer granting cost-of-living increases to retirees based on their $75 monthly stipend, starting in fiscal 2019. Retirees get a 3% annual cost-of-living adjustment.

The trustees also voted to increase the rate charged to employers from 14% to 14.25% of payroll in fiscal 2020, and then increase by 0.25 percentage point a year in each of the

next three fiscal years until the rate reaches 15% in fiscal 2023. Each 0.25 percentage-point increase was projected to raise employer costs by about $7 million a year.

Trustees raised the rate charged to members who pay into the system from 6% of salary to 6.25% in 2020 and then by 0.25 percentage point for each of the next three fiscal years until it reaches 7% in 2023. Each 0.25 percentage-point increase was projected to raise members’ contributions by about $5.5 million a year.

Earlier in the meeting, Duncan Baird, director of the Public Employees Retirement System, told lawmakers the system was 79% funded as of June 30, 2018, with investments totaling $8.4 billion and liabilities totaling $10.6 billion, leaving an unfunded liability of $2.2 billion. The projected payoff period for the unfunded liabilities was 26 years as of June 30, 2018, he said.

The public employees system

paid $530 million in benefits and received $341 million in contributions from employers and employees in 2018, Baird said. Employers pay an amount equal to 15.32% of payroll. Most employees pay 5% of their salary.

Baird said the system earned an investment return of about 5.3% in 2019, and that’s lower than its targeted annual return of 7.5%.

“Some considerations that I just wanted to throw out there when looking to the future from a financial perspective would be that financial challenges tend to compound in size over time,” Baird said. “Small adjustments sooner can help avoid larger adjustments in the future.”