The Arkansas Teacher Retirement System’s options in reducing its unfunded liabilities range from asking the Legislature for authority to increase the rate it charges school districts and other system employers to cutting or eliminating a $75-a-month stipend paid to most system retirees, the system’s executive director told the board of trustees last week.

Executive Director GeorgeHopkins said he expects the system’s actuary to project next month that it would take more than 100 years for the system to pay off its unfunded liabilities as of June 30.

The projected payback period was 66 years as of June 30, 2011, he said, and it’s expected to increase as a result of the system’s “zero return” on investments in the past fiscal year.

As of June 30, 2011, the system had $4.375 billion in unfunded liabilities, according to system actuary Gabriel, Roeder, Smith & Co.

“Unfunded liabilities” is 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.

The system’s investment portfolio has increased in value from about $11.4 billion to $11.7 billion since July 1, Hopkins said in a report to the system’s trustees Thursday.

Actuaries estimate that the system needs $80 million more a year through either increased revenue or cost savings to reduce the projected pay-off period for the system’s unfunded liabilities to 30 years, which is the system’s goal, he said.

“If you don’t take care of this yourself, somebody is going to take care of it for you,” Hopkins told the trustees Thursday.

He said he expects the trustees to make final decisions on whether to pursue these options during their meeting next month in advance of the legislative session that begins Jan. 14.

Hopkins said the system would have to raise its 14 percent rate of employee payroll charged to school districts and other system employers to 16.75 percent to raise $80 million more a year.

But, he said, “we are not going to ask [the Legislature] for that. It wouldn’t happen, even if we did.”

At the 14 percent rate, the system’s employers pay about $400 million a year to the system, Hopkins said.

Hopkins wrote in his report that the trustees could ask the Legislature for authority to raise the rate by 1 percent of employee payroll to raise about $28 million a year more for the system.

“This proposed legislation could be drafted in such a way that the board could scale the contribution rateback to a lower amount as the unfunded liabilities diminish,” Hopkins’ report said.

The 14 percent rate hasn’t been changed since July 2004.

Board Chairman Richard Abernathy said Friday that he expects the system’s trustees to ask the Legislature for the authority to increase the rate to 15 percent.

“Is the state going to help out or it is all going to be on the backs of the employees,” he asked during an interview.

Abernathy noted that the Arkansas Public Employees Retirement System trustees voted to increase the rate that the system charges state and local governments from 14.24 percent to 14.88 percent of employee payroll, effective July 1, 2013.

Asked about how legislators would react to the system seeking a 1 percent increase in the rate, state Sen. Michael Lamoureux, a Republican from Russellville who will be the Senate president pro tempore in 2013 and 2014, said he wants to hear all the facts.

But, he said, “my personal preference is to do some of the other options before going to that.”

Hopkins said the rate charged to system members (individual employees) has been 6 percent of their salary for 43 years. Retirement systems in many other states have increased their rates in recent years, he said.

Increasing the rate charged to system members from 6 percent to 7 percent of their salaries would raise about $20 million a year, he said, and increasing the rate from 6 percent to 8 percent would raise about $40 million a year.

Hopkins said increasing the rate charged to system members would require legislative approval. The members contribute about $117 million a year to the system, he said.

The system has 72,293 working members, whose average annual salary is $33,995 each, and 32,099 retired members with total annual benefits of $657 million (an average of $20,467 a year), Gabriel, Roeder, Smith & Co. said in a report last year.

While Abernathy noted that the teacher retirement system’s members pay in 1 percent more of their salaries than the public employees retirement system’s members do, he said, “Right now, everything is on the table.”

Higher investment earnings would also ease the pressure.

If the teacher retirement system earns an investment return of 17 percent on its investment portfolio in the fiscal year that started July 1, that would reduce the system’s projected period for paying off its unfundedliabilities to roughly 30 years, Hopkins said.

Because the system assumes an 8 percent annual investment return, the system needs to earn more than 8 percent a year to help reduce its unfunded liabilities, he said.

In the three-month period that ended Sept. 30, the system’s investment return was 4.2 percent based on a preliminary report from Chicago-based investment consultant Hewitt Ennis Knupp. The system’s annual average investment return is 1.9 percent during the past five years and 8.3 percent during the past 10 years, the consultant said.

Hopkins said the system also could reduce certain payments of benefits to retirees.

For example, he said, the system could eliminate its $75 monthly insurance stipend paid to most of the system’s retired members. That would save about $42 million a year, he said.

Reducing the stipend to $50 a month would save about $13 million a year, Hopkins said.

But Hopkins wrote in his report to the trustees, “Reducing the income of retirees would be a difficult undertaking. ATRS realizes many retirees are dependent on the added amount of $75 from the stipend each month.”

He told the trustees that the system’s staff didn’t look at the potential savings fromreducing the 3 percent annual cost-of-living adjustment paid to retired members because there are possible “legal issues” with cutting the cost-of-living adjustment.

The system also could slow down the accural of future retirement benefits paid to system members, Hopkins said.

These options include cutting from 2.15 percent to 2.10 percent the multiplier used for calculating retirement benefits for certain service earned after July 1, 2012; or retirement benefits could be based on members’ four or five highest-salaried years rather than their three highest-salaried years, a move that could lower payouts.

The system could also create a new tier of retirement benefits so that people hired in the future would receive reduced retirement benefits, Hopkins said.

Among other things, the trustees Thursday voted to terminate global stock investment manager UBS Global Asset Management of London, which manages about $495 million for the system. Hewitt Ennis Knupp had made that recommendation, citing the departure of a manager from the firm.

Then, the trustees authorized the hiring of Black Rock Institutional Trust Co. as a transition manager to transfer system assets managed by UBS Global Asset Management to a global stock market index fund.

Northwest Arkansas, Pages 7 on 11/19/2012