Arkansas teacher system quietly tweaked

Adding flexibility lawmakers’ goal

With little fanfare, the Arkansas General Assembly this year granted the Arkansas Teacher Retirement System more flexibility to raise money and cut costs in the case of an economic downturn.

The Legislature, in its 86-day regular session that adjourned nearly two weeks ago, also made other changes to benefit the system.

The teacher system is state government's largest retirement agency, with more than 100,000 working and retired members and more than $15 billion in investments.

School districts and other system employers paid $408.6 million into the system in fiscal 2016, while their employees contributed $128.6 million. Fiscal years end June 30.

Lawmakers over the years have tweaked the workings of the retirement system. In 2013, the Legislature enacted several laws allowing the system's trustees to increase rates charged to employees, school districts and other employers, and also to cut costs, but only if the system's projected payoff period for its unfunded liabilities exceeded 30 years.

This year, the Legislature granted the trustees this authority if the projected payoff period exceeds 18 years.

"The board wanted to have a broad spectrum of options and we didn't want to box ourselves in," said board Chairman Jeff Stubblefield, superintendent of the Charleston Public Schools. "We don't intend every year to start cutting."

The teacher retirement system included 68,368 working members with an average age of 44.4 years, average service of 10.3 years and average annual salary of $37,235 as of June 30, according to system actuary Gabriel, Roeder, Smith & Co. of Southfield, Mich. The system's 43,095 retired members were paid benefits totaling $984 million last fiscal year -- an average of $22,833 a year.

Rep. Douglas House, R-North Little Rock, said this year's General Assembly granted the trustees authority aimed at helping them comply with new actuarial standards and remain solvent.

The system's unfunded liabilities totaled $3.57 billion as of June 30, 2016, with a projected payoff period of 29 years, according to Gabriel, Roeder, Smith & Co. 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 a home mortgage.

"In times past, trustees have paid out benefits to its members that are over and above the minimums required by law," said House, a co-chairman of the Legislature's Joint Committee on Public Retirement and Social Security Programs. "So long as trustees could rely on the old mortality tables, a 30-year [unfunded liability payoff] schedule and optimistic assumptions, additional benefits could be paid."

"The trustees' first duty is now to keep the fund solvent and ensure that every member and retiree of ATRS absolutely will be paid what they have earned," he said.

The system's board of trustees has approved a few measures to implement the authority granted by this year's General Assembly, said George Hopkins, director of the retirement agency.

During the next fiscal year starting July 1, the trustees, executive staff members and actuaries will review the system's fiscal 2017 investment returns and "other facts to determine what, if any, additional changes may be justified as ATRS adopts progressive mortality tables and looks at its assumed rate of return [of 8 percent a year]," Hopkins said.

"No changes are expected to impact benefits or contributions in the coming fiscal year. At this point, there is no plan of action to make other changes," he said.

Hopkins said the system's investment consultant valued the investments at about $15.6 billion as of March 31 in a preliminary report. The current rate of return for this fiscal year is "just above" 13 percent, he said.

He said most public retirement systems are moving to reduce projected 8 percent annual investment returns.

"ATRS is also looking to make that change," Hopkins said. The system has averaged an 8.4 percent investment return over its history, he noted.

Hopkins said the system also is aiming for an 18-year projected payoff period for its unfunded liabilities rather than the 30-year payoff required under state law. The change is based on new actuarial recommendations that suggest public retirement systems should target the lower projected payoff periods to reduce risk and to maintain a more conservative profile, he said.

The board's approach is "to reach that goal over a period of years instead of attempting to do it immediately," he said.

This year's laws that could raise more money or cut the system's costs include:

• Act 821 -- Senate Bill 218 sponsored by Sen. Jeremy Hutchinson, R-Little Rock -- allows the trustees, under specific conditions, to increase the rate charged to employers from 14 percent to 15 percent if the system's projected payoff period for unfunded liabilities exceeds 18 years.

The increases are limited to 0.25 percent a year. Any increase may occur only if the system implements cost savings from member-benefit programs, increased member contributions, or both, measured after July 1, 2013. The savings must at least equal the value of the employer contribution increase. Any increase for school districts will be paid out of the state Department of Education budget.

Hopkins said the system's board and staff will review investment returns and changes in actuarial standards before deciding if any change in the employer contribution rate is appropriate after fiscal 2018, which ends June 30, 2018.

• Act 550 -- Senate Bill 187 sponsored by Sen. Bart Hester, R-Cave Springs -- allows the working member contribution rate to be increased above the 6 percent rate if the system's projected payoff period for unfunded liabilities exceeds 18 years. About 70 percent of the system's working members pay into the system, Hopkins noted.

"There is no immediate plan to increase the contribution rate. Therefore the member contribution rate will not change at least through fiscal year 2018," he said. "To the extent it is increased, it would likely be increased in 0.25 [percent] increases in the same way increases would occur with the employer contribution rate."

• Act 575 -- House Bill 1287 by Rep. Johnnie Rye, R-Trumann -- requires school districts that outsource system-covered jobs to a contractor to have contracted-out employees join the system or have the district pay a surcharge on their salaries. The surcharge starts at 0.5 percent in fiscal 2018 and gradually increases to 3 percent by fiscal 2021. The board could increase the surcharge to 4 percent starting in fiscal 2022.

"The surcharge does not offset all the impact of outsourcing on ATRS, but it lessens the impact somewhat," Hopkins said.

• Act 1049 -- Senate Bill 184 sponsored by Hester -- allows the board to determine interest rates paid on deferred retirement plan accounts on either a fixed rate or a variable rate formula tied to investment returns and to establish a participation incentive rate to reward longer participation in the plan.

Last month, the board adopted a 5 percent interest rate on deferred retirement plan accounts to be paid on June 30, 2018, and 6 percent interest on post 10-year deferred plans to be paid in fiscal 2018, according to Hopkins. The system had 3,864 deferred retirement plan participants as of June 30, according to Gabriel.

• Act 551 -- Senate Bill 186 by Hester -- allows the board to reduce the multiplier rate used for calculating retirement benefits for contributory service after 10 years if the system's projected payoff period for unfunded liabilities exceeds 18 years.

Lowering the contributory multiplier "appears to be a low priority option for the ATRS board in the event any changes are needed to react to actuarial changes or market downturns," Hopkins said. All multipliers ever earned in a fiscal year by system members cannot be reduced, because of changes enacted by the 2013 Legislature at the trustees' request, he said.

• Act 750 -- House Bill 1286 by Rye-- allows the trustees to further reduce retirement benefits for early retirees if the system's projected payoff period for unfunded liabilities exceeds 18 years.

A member who is not yet 60 and reaches 25 years of service is eligible to retire subject to an appropriate reduction in benefits, Hopkins said. The reduction is the lesser of years before age 60 or years before 28 years of service. For instance, a 59-year-old member with 25 years of service would have a one-year reduction -- not a three-year reduction -- in the early-retirement reduction formula.

Since new mortality tables assume members will live longer, the board of trustees last month adopted a resolution to increase the percentage that benefits are reduced for an employee retiring before reaching 28 years of service, Hopkins said. Current early retirees are unaffected by the changes, he said.

"The reduction through July 2017, is 6 [percent] per year and the reduction after July 1, 2017, is 10 [percent] per year," he said.

• Act 782 -- House Bill 1373 by Rep. Gary Deffenbaugh, R-Van Buren -- allows the trustees to cut the stipend for retired members from $75 a month to as low as $1 a month if the projected payoff period for unfunded liabilities exceeds 18 years.

Hopkins said there is no plan to reduce the benefit stipend in fiscal 2018.

"To the extent ATRS needs to adjust benefits to absorb actuarial changes or market conditions, the benefit stipend is one mechanism that the ATRS board could [use] that would apply to retirees," he said.

• Act 780 -- House Bill 1374 by Deffenbaugh -- allows the trustees to reverse the 2009 compounding of retired members' 3 percent cost-of-living adjustment if the projected payoff period exceeds 18 years.

"There is no plan to apply this authority in fiscal year 2018 and it is unlikely to ever be used thereafter," Hopkins said.

Metro on 05/14/2017

Upcoming Events