Teacher retiree-system gain hits 4.8% in quarter

The Arkansas Teacher Retirement System’s investments increased in value by $762 million last quarter to end at $21.7 billion, an investment consultant told the system’s board of trustees Monday.

The system’s investment return was a strong 4.8% in the quarter that ended Dec. 31, but there has been a bit of “a rocky start” in investment markets this year, said Katie Comstock of the system’s Chicago-based investment consultant, Aon Hewitt Investment Consulting.

Afterward, system Executive Director Clint Rhoden said the investments are now valued at about $21.1 billion.

The trustees authorized more than $200 million in new investments, including up to $82.1 million to purchase tax credits linked to U.S. Steel’s planned $3 billion expansion in Mississippi County.

They also authorized increases in the rates charged to employers and to members who pay into the system.

The Teacher Retirement System is the state government’s largest retirement agency, with more than 100,000 working and retired members.

Aon Hewitt reported that the system’s stock investments earned a 5.8% return last quarter to end up valued at $12.8 billion, while bond investments had a minus 0.4% return to end the quarter valued at $2.6 billion.

The system’s private equity investments earned a return of 4.6% last quarter to reach $2.7 billion, and its real estate investments posted a 6.2% return to end up valued at $1.4 billion, according to the consultant.

The opportunistic/alternative investments for the system recorded a 2.2% return last quarter to end up at $966 million. Its infrastructure investments posted a return of 3.3% to reach $339 million, timber investments earned a return of 2% to be valued at $309 million, and agriculture investments recorded a return of 1.5% to reach $218 million, Aon Hewitt reported.

The system’s investment return has averaged 11.8% a year over the past five years and 10.9% a year over the past 10 years, according to the consultant’s report.

The system’s target investment return is now 7.25%, after the trustees voted in November to reduce it from 7.5%.

As of June 30, the system’s liabilities totaled $23.9 billion and its actuarial value of assets totaled $19.3 billion, leaving $4.6 billion in unfunded liabilities, according to the system’s actuary Gabriel, Roeder, Smith & Co. That means the system is 81% funded. The projected payoff period is 32 years, according to Gabriel.

Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.

The nation’s public pension systems are on average 72% funded, based on information from the National Association of State Retirement Administrators, according to Brian Murphy of Gabriel.

INCREASED RATES

The trustees voted to increase the employer contribution rate from 14.75% to 15% of payroll and increase the rate charged to employees who pay into the system from 6.75% to 7% of their salary. Both changes start in fiscal 2023, which starts July 1.

In fiscal 2021, employers paid $451.2 million into the system at a rate of 14.5% of employee payroll, while working members contributed $165.6 million at a rate of 6.5% of their salaries, Rhoden has said.

In 2017, the trustees implemented several measures to raise money and cut costs over several years in response to the system reducing its target return from 8% to 7.5%.

In fiscal 2019, the employer contribution rate was 14% of payroll and the rate charged to members who pay into the system was 6% of salary. The rate increases approved Monday are the final ones from the 2017 plan to raise the rates by 0.25% a year over four years, Rhoden told the trustees.

As of June 30, the system had 66,663 working members not on the deferred retirement plan, with an average age of 44.2 years, average service of 10.5 years and average salary of $42,901 a year, according to Gabriel. The system also had 3,465 working deferred retirement members with an average salary of $65,732 a year.

The system had 51,405 retired members receiving an average retirement benefit of $24,175 a year as of June 30, Gabriel reported.

INVESTMENT APPROVAL

The trustees approved an investment of up to $82.1 million to purchase the revenue stream of up to $123.2 million generated by state income tax credits connected to U.S. Steel Corp.’s planned Big River Steel expansion.

Arkansas Capital Corp. recommended the proposed investment.

As an incentive for the $3 billion expansion in Mississippi County and the creation of 900 positions at defined compensation levels under Act 3 of the Dec. 7-9 special session, U.S. Steel has been offered state income tax credits equal to $154 million by the Arkansas Economic Development Commission in an amount equal to 30% of the cost of waste reduction, reuse or recycling equipment, Arkansas Capital Managing Director Rush Deacon said in a letter dated Friday to Rhoden.

The tax credits may be sold by the company under the terms of a recycling tax credit incentive agreement, which is expected to be executed by the relevant parties March 10, according to Deacon.

“No more than $11 million in Tax Credits may be submitted to [the state Department of Finance and Administration] for sale during any calendar year,” he wrote in his letter to Rhoden.

The Teacher Retirement System’s subsidiary, Pinnacle Mountain Holding Co. III LLC, is an equity holder in Big River Steel and is eligible under Act 3 to acquire possession and control of the tax credits from the company through a transaction, Deacon said.

“With acquisition by Pinnacle of possession and control of the revenue stream from the Tax Credits, it may then notify [the state finance department] on or before July 15 of each year of the annual amount of the Tax Credits in its possession and [the finance department] shall then pay Pinnacle for the Tax Credits submitted for sale at 80% of the face value of the Tax Credits with payment due on or before June 30 of the year following notification by Pinnacle,” he wrote.

The tax credits are considered earned upon the company’s achievement of the investment requirement and the job creation requirement, Deacon said.

“We have been advised that Achievement Date is expected to occur on or before June 30, 2024, and the Transaction and our recommended purchase price for the Tax Credits contemplates that fact,” he wrote. “With Achievement Date on or before June 30, 2024, and taking into account the factors cited above, the first payment by [the finance department] to Pinnacle for the tax credits will occur on June 30, 2025, and thereafter on the same day of the year for 13 additional years,” he said. The annual payment is projected at $8.8 million a year from 2025 through 2038.

Deacon told the trustees that the proposed investment envisions slightly more than $40 million in profit over a 16-year period for the system and “goes into your fixed income bucket in terms of the equivalent of a fixed income.” The internal rate of return for the investment is projected at 4.41%.