Agency can tap $70M of Arkansas teachers retirement fund

The trustees for the Arkansas Teacher Retirement System have authorized the system to provide a revolving line-of-credit loan of up to $50 million to the Arkansas Institutional Fund LLC, which invests in venture capital funds in the state and is backed by the Arkansas Development Finance Authority.

The teacher retirement trustees also authorized the system to provide another revolving line of credit of up to $20 million to the Arkansas Development Finance Authority.

The up to $50 million line-of-credit loan has a term of 10 years and a fixed interest rate of 3.25 percent. The terms for the up to $20 million line of credit haven't been finalized.

Brad Henry, the authority's vice president for development finance, said Monday that his agency will tap at least $25 million of the $50 million loan to pay off $25 million of an existing line of credit with the Bank of the Ozarks.

"We need to refinance the existing line of credit," he said.

Henry said authority officials will determine later whether they tap any of the $20 million revolving line of credit.

The teacher retirement system is the state government's largest retirement system. It has more than 100,000 working and retired members with investments that system Director George Hopkins estimated at roughly $14.5 billion on Monday.

The system invests its money to ensure it has funds to pay retirement benefits for the system's retired members. The development finance authority administers tax-exempt bonds and other debt instruments to promote economic development, home ownership and affordable rental housing, according to its website. The authority's board approves the investment policy of the Arkansas Institutional Fund.

The system's trustees authorized the two lines of credit on Thursday.

When asked who suggested the investments, Hopkins explained that he suggested it during a meeting last year with development finance authority officials about a potential economic project.

"The [Arkansas Development Finance Authority] group mentioned that the Arkansas Institutional Fund ... could be used to invest in a private equity venture fund with Arkansas investment commitments, but that the variable rate [of the line of credit through the Bank of Ozarks] made the use of the [institutional fund] ... more difficult due to interest rate risk," he wrote in an email to this newspaper.

"I asked what rate that [the authority] was paying to the bank at the time and learned that the rate was 2.9%. I also knew the 2.9% rate was higher than the 2.5% return that [the retirement system] expected for the fixed income [bonds] portion of the [Arkansas Teacher Retirement System] trust fund over the next 10 years. I also asked about collateral for the loan and learned the security on the principal was rock solid and eliminated any principal risk," Hopkins said in his email.

He noted that the teacher retirement system and development finance authority have a history of working together on Arkansas projects.

"I asked if [the authority] would be interested in a 10 year fixed rate in a range of about 3% [and the authority] immediately expressed an interest," Hopkins said. "I also told [the authority] that [the retirement system] did not want to be in direct competition with Arkansas banks on the loan [and] to that end, I said that if any bank met the [retirement system] proposal, [the retirement system] would step aside and let a bank take the deal," he wrote in his email.

"[The authority] decided to do [a request for proposal] on the loan and recently completed that process," Hopkins said. The request for proposal from the authority sought vendors to bid on providing a loan to the authority.

"The rates offered by the responding banks varied, but tended not to extend for the 10 years that [the authority] wanted. [The authority] and [retirement system] staff had a discussion about 3 to 4 weeks ago about the [request for proposal]. I told [the authority] that the Fed's interest rate hike in December made me think the 3% originally discussed should be increased to 3.25% for a ten year fixed rate. I also reminded [the authority] that [the retirement system] would step aside if any bank would accept the same terms. A few days later [the authority] asked [retirement system] staff to take the next steps to have the [retirement system] Board look at the proposed transaction. We did and that is how we got here," Hopkins wrote in his email.

In a written report to the system's trustees, Hopkins said that the interest rate for the potential $20 million loan to the development finance authority for economic development projects for the state "may be negotiated as either a fixed or variable rate to be determined at the time of the loan request, but will not be less than 3.25 [percent] interest at any time."

Business on 04/26/2016

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