Public workers' pension lode up by $1.1 billion

System’s local levy cut again

The Arkansas Public Employees Retirement System's investments increased in value by $1.1 billion in fiscal 2014 to $7.8 billion as the system reaped gains from robust stock markets, the system's investment consultant reported this week.

The investment gains prompted the system's board of trustees to cut the rate charged to state and local governments for the second-consecutive year.

The system's investment return was 19.68 percent in the fiscal year that ended June 30. The return ranked among the top 2 percent among the nation's public pension systems, investment consultant Callan Associates of Chicago said in a written report to the system's trustees.

"We had an awesome year," system Executive Director Gail Stone told the board of trustees for the Arkansas State Police Retirement System on Thursday. The state police retirement system's investments are managed as part of the public employees retirement system's investment portfolio and totaled $276 million on June 30 -- up from $236 million on June 30, 2013.

Stone said she is aware of only one other state retirement system that reported a better investment return in fiscal 2014: the Oklahoma Teachers Retirement System at 22 percent.

With more than 75,000 working and retired members, the Arkansas Public Employees Retirement System is state government's second-largest retirement system.

Only the Arkansas Teacher Retirement System, with more than 100,000 working and retired members, is larger. It handles $14.5 billion in investments after reporting a 19 percent investment return in fiscal 2014.

The public employees retirement system's trustees voted Wednesday to cut the rate it charges to state and local governments from 14.76 percent to 14.5 percent, effective July 1 next year, Stone said.

Last year, the trustees approved cutting the rate charged to state and local governments from 14.88 percent to 14.76 percent, effective July 1 of this year after the system's investments gained more than $750 million in value and posted a 15.58 percent investment return in fiscal 2013.

That rate cut came after the trustees had approved increasing those rates during each of the four previous years to help compensate for sharp investment losses. In fiscal 2009, the system's investments plummeted about $1.3 billion in value to $4.3 billion during a recession and stock market downturn.

The system's trustees also decided to cut the projected long-term annual investment return from 8 percent to 7.75 percent, Stone said.

"It's a good time to do that in that employer contribution rates for APERS are still falling despite lowering that assumption, so that there is no pain and suffering by lowering it [and] being more conservative in your return outlook," she said.

"Having had two fabulous years back to back, a reversion to the mean is going to be [unpleasant] when it happens, so it was a prudent thing to do," Stone said.

After the trustees' meeting, she said the trustees decided that cutting its projected annual investment return by 0.25 percentage point is "the prudent thing to do." That's because "many pundits" contend that retirement systems are assuming too much risk on investments to reach benchmarks that are higher than they should be, she said.

The system's trustees also adopted a funding policy limiting cuts in the rate charged to state and local governments to 0.25 percentage point a year during the next few years. The policy is aimed at helping "ensure the systematic accumulation of assets needed to pay future benefits for members of APERS," according to the five-page policy.

The system's investment return has averaged 14.26 percent a year during the past five fiscal years and 5.68 percent a year during the past seven fiscal years, Callan Associates reported.

Benefits and liabilities

State and local governments paid $264.8 million into the system in fiscal 2014, while system members chipped in $48.2 million, according to a report to the trustees.

The system includes 45,841 working members with an average annual salary of $35,733, an average age of 44.9 years old and average service of 9.3 years, the actuarial firm of Gabriel, Roeder, Smith & Co. of Southfield, Mich., said in its written report to the system's board of trustees.

The system also includes 30,112 retired members with an average annual benefit of $13,376 and 1,679 deferred-retirement participants with annual credits of $52.26 million, Gabriel reported.

The system's unfunded liabilities totaled $1.9 billion as of June 30 with a projected payback period of 23 years, Gabriel said. Unfunded liabilities are the amount by which the system's liabilities exceed an actuarial value of the system's assets. Actuaries often compare unfunded liabilities to mortgages on homes.

The system's unfunded liabilities have declined since June 30, 2013, when they totaled $2.1 billion with a projected 25-year payoff period, according to Gabriel.

Details on investments

The system's domestic stock market investments totaled $3.2 billion at the end of fiscal 2014 after earning an investment return of 24.5 percent, according to Callan Associates.

The system's international stock market investments were valued at $2 billion at the end of fiscal 2014 after obtaining a return of 24.4 percent, Callan Associates reported.

The system's domestic bond investments were valued at $1.2 billion at the end of fiscal 2014 after earning a return of 7 percent.

The system's investments in "real assets," including energy, real estate and timber funds, were valued at $921 million at the end of fiscal 2014 after reaping a return of 14.5 percent, Callan Associates reported.

Stone said the month of July wasn't "so good" for the system's investments.

They declined in value by almost $161 million in July, but "we cut that in half" so far in August, Stone said.

"I am very sanguine about bad returns in the first part of the fiscal year" because there are still 10 months left in fiscal 2015, she said.

Also Wednesday, the system's trustees voted to hire Heitman, a Chicago-based real estate investment management firm, to manage $250 million to $275 million for the system, Stone said.

Metro on 08/22/2014

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