Teacher retirement system up $2 billion

LITTLE ROCK — Buoyed by rising stock markets, the Arkansas Teacher Retirement System’s investments rose in value by $2 billion last quarter to $19.4 billion, according to the latest report from its investment consultant.

The system’s investment return was 12.8% in the quarter ending Dec. 31 to rank among the top 4% of its peers, investment consultant Aon Hewitt Investment Consulting said. The portfolio increased from $17.4 billion to $19.45 billion last quarter.

The teacher retirement agency is state government’s largest such system with more than 100,000 working and retired members.

The large increase in investment value didn’t come up during Monday’s meeting of the Legislature’s Joint Committee on Public Retirement and Social Security Programs, which endorsed several bills tweaking state laws covering the system.

“I’ll take it,” a committee co-chairman, Rep. Les Warren, R-Hot Springs, said when informed about the $2 billion gain. “Can we lock it in?”

System Director Clint Rhoden said Monday he’s pleasantly surprised about the performance last quarter.

“But [with] the volatility of the last couple of years, we can’t bank that until June 30,” the end of fiscal 2022, he said.

The system’s investments are now valued at about $20.2 billion, Rhoden said.

The substantial increase comes on the heels of the investments dropping $921 million to $16.6 billion in 2020, which ended June 30.

In July, the system filed a complaint in federal court seeking to recover losses estimated at $700 million to $800 million it claimed were a result of negligence and breach of fiduciary and contractual duties by Allianz Global Investors and related defendants.

A spokesman for Allianz has called the system’s allegations flawed and said the company would vigorously defend itself in court.

The system’s target investment return is 7.5% a year.

The system’s return averaged 10.3% a year over the past five years to rank in the top 10% of its peers, and 9.1% a year over the past 10 years to rank in the top 7%, the investment consultant reported.

LAST QUARTER

In the quarter ending Dec. 31, the system’s stock market investments earned a return of 20.3% to reach $11.3 billion, and its bond investments posted a 2% return to end up at $2.3 billion, according to Aon Hewitt.

The consultant reported the system’s private equity investments posted a 7.7% return to reach $2.6 billion last quarter, and its real assets — including real estate, timber, agriculture and infrastructure — earned a 1.2% return to total $2 billion.

The system’s opportunistic/alternative investments earned a 2.4% return last quarter to end up valued at $915.2 million.

As of June 30, the system’s unfunded liabilities totaled $4.34 billion with a projected payoff period of 27 years, according to system actuary Gabriel, Roeder, Smith & Co.

Unfunded liabilities are the amount a system’s liabilities exceed the value of its assets. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a home.

An actuary for Gabriel told the system’s board in December the system needs to record strong investment gains to make up for the losses it will recognize over the next three years. The system spreads out the fluctuations over a four-year period for actuarial purposes.

In fiscal 2020, employers paid $475 million into the system, while working members who pay into the system contributed $151.6 million. In 2021, employers pay 14.5% of payroll into the system, while working members contribute 6.5% of their salaries.

The employer rate was 14% of payroll in 2019 and is slated to increase 0.25% each year over a four-year period to 15% in 2023. The employee rate was 6% in 2019 and is slated to increase 0.25% a year over four years to 7% in 2023.

They are among several measures the trustees approved in November 2017 to raise money and cut costs over seven years in response to reducing the target investment return from 8% to 7.5% a year.

As of June 30, the system included 66,900 working members not in the deferred retirement plan, 3,639 members in the deferred retirement plan, and 50,133 retired members, Gabriel reported. The working members not in the deferred retirement plan earned an average salary of $40,709 a year and had an average age of 44.3 years and average service of 10.3 years as of June 30. The members in the deferred plan earned an average salary of $63,477 a year.

The retired members received an average annual benefit of $23,833 as of June 30, Gabriel reported.

SYSTEM BILLS

On Monday, the legislative retirement committee recommended lawmakers approve several bills relating to the system, including:

• House Bill 1279 by Rep. Stu Smith, R-Batesville, allowing a Social Security determination of disability to be used as a presumption of meeting the system’s disability retirement requirements.

“The actual decision will still be made by the ATRS [Arkansas Teacher Retirement System] medical committee,” Smith said. The bill also would add a one-time opportunity for a second review, if a system member is denied disability benefits by the system’s medical committee and additional medical documentation is provided, he said.

• House Bill 1339 by Rep. Brian Evans, R-Cabot, to support the system’s practice of including compensation for any unused sick leave in the final average salary used to calculate a member’s retirement benefits.

“The purpose of the bill to repeal some language in the law that has never been enforced by the Teacher Retirement System,” he said. “The repealed language, if enforced, would result in some members not having compensation for accumulated unused sick leave included in the calculation of their final average salary.”

• House Bill 1340 by Evans to allow the system to correct certain errors reported by an employer.

Occasionally, an employer fails to accurately report service earned by a member, and “most of these are just human, good-faith error,” Evans said.

“Unreported or underreported service is often not discovered until the time that the ATRS member applies for their retirement, which could certainly be a number of years,” he said. “This could very well be past the five-year lookback period that currently prevents ATRS from correcting the member’s service record, after five years have passed.”

He said the bill would specify if unreported or underreported service is well documented and undisputed, the five-year lookback period wouldn’t apply.

The bill also would allow the conversion of contributory to non-contributory service, if members owe contributions on their salary due to errors.

• House Bill 1319 by Rep. John Maddox, R-Mena, to simplify the system’s rule regarding computing the final average salary to calculate retirement benefits for service in a reciprocal retirement system.

He said the system requires five years of service in a reciprocal retirement system in order for a higher final average salary from a reciprocal system to be fully used in the computation of the retirement benefit.

“The purpose of this bill is to replace the current complicated formula that involves blending service rendered in a reciprocal retirement system with ATRS service to calculate a final average salary,” Maddox said. “Under this bill, members still get the full benefit of their reciprocal service credit, but they only need to be a member of a reciprocal system for two or more years to get the benefit of a higher final average salary from a reciprocal system.”

The bill protects the system from having to pay an inflated retirement benefit from small amounts of reciprocal service, he said.

• House Bill 1320 by Maddox to require employers to remit contributions to the system electronically each month and allow employers unable to do so to submit a written request for a waiver to the system’s board by July 1, 2022.