The Arkansas Judicial Retirement System's investments increased in value by $6.6 million to $235.1 million last quarter, the system's trustees learned this week.
The trustees also decided to cut the system's projected annual return from 6.25 percent to 5.75 percent at the recommendation of their actuary to reflect reduced expectations in investment markets.
The judicial retirement system -- created by the General Assembly in 1953 -- is for the state's Supreme Court, Court of Appeals and circuit judges. It's state government's smallest retirement system.
The system includes 139 working members. They have an average age of 59.5, service of 17 years and $160,489 salary. The system also has 138 retired members with an average age of 75.4 and average annual benefit of $86,752 as of June 30, 2016, according to its annual report. The state paid $4.9 million to the system in the fiscal year that ended June 30, while judges contributed $1 million and court fees contributed $586,818.
For the quarter that ended March 31, the system's investment return was 3.94 percent. That ranked in the bottom 25 percent of other public systems with portfolios between $100 million and $1 billion, according to Ryan Ball, senior vice president of Chicago-based investment consultant Callan Associates.
That ranking isn't surprising, given that most of the Arkansas system's peers have a larger share of their portfolios invested in the stock markets and a lower share in bonds, he said.
Ball said the "Trump bump" in stock markets continued last quarter, based on the expectation of reduced federal regulation, tax code changes and other changes under Republican President Donald Trump.
Last quarter, the system's domestic stock market investments increased in value from $91.9 million to $95.6 million, and international stock investments increased from $31.6 million to $34.1 million, according to Callan Associates. Bond investments increased from $83.3 million to $84.5 million, and real estate investments rose from $20.3 million to $20.8 million. The system's holdings also include cash and equivalents that totaled $7,973 on March 31.
During the board's meeting Thursday, Chairman Robert Edwards of Searcy, who is a circuit judge, said he hopes the system's investments of $235.1 million as of March 31 will continue to increase in value.
The return for the year that ended March 31 was 11.06 percent, and that ranked in the top 51 percent of its peers, according to Callan Associates.
By comparison, the return for the five-year period that ended March 31 averaged 8.31 percent a year, and that ranked in the top 23 percent of the system's peers. The average annual return over the last nearly 26 years was 8.41 percent, putting the system in the top 39 percent of its peers, according to Callan Associates.
Two years ago, trustees reduced the projected annual return from 7.25 percent to 6.25 percent at the recommendation of actuary Gabriel, Roeder, Smith & Co. of Southfield, Mich.
After Thursday's meeting, the projected return will be 5.75 percent, at the actuary's recommendation.
Edwards questioned why the actuary recommended a half percentage point cut in the projected return, when two years ago the cut by trustees was a full percentage point.
Actuary Mita Drazilov of Gabriel, Roeder, Smith & Co. said investment markets significantly reduced their expectations for returns after the 2008-09 financial crisis.
"Expectations have declined from two or three years ago some more, so we were proactive [two years ago]. We recognized all the facts that we knew at that time, but capital market expectations for asset classes are still coming down. Hopefully, they are leveling off," Drazilov said.
System Director Gail Stone told the trustees that the projected return would be viewed as "more real" if they adopted the more conservative assumption of 5.75 percent.
As of June 30, 2016, the system's unfunded liabilities totaled $32.5 million, according to the system's annual report. The unfunded liabilities as of June 30, 2017, will be computed with a projected 16-year payoff period.
Unfunded liabilities are the amount by which the system's future obligations -- such as the amount that will be needed to pay retirement benefits -- exceed an actuarial value of the system's assets. Actuaries often compare unfunded liabilities to mortgages.
Metro on 05/06/2017