The Arkansas Teacher Retirement System is in solid financial health, actuaries told the system's board of trustees Monday.
But they warned that in a few years, they are likely to recommend the trustees reduce their 7.5% target for the system's annual investment return. The median return for the nation's public pension systems is 7.25% a year, they said. The Arkansas system earned a return of 5.3% in fiscal 2019, which ended June 30.
The system's annual investment return has averaged 8.5% since 1986, according to its investment consultant, Aon Hewitt.
During Monday's meeting, the trustees authorized up to $100 million in new investments; approved contracting with six securities monitoring firms; and reduced the interest charges to the Little Rock School District for failing to pay contributions on behalf of an employee.
The Arkansas Teacher Retirement System is the state government's largest such agency. Its investments were valued at about $17.7 billion as of Monday, system Executive Director Clint Rhoden said.
The system includes 68,457 working members with an average age of 44.1 years, average service of 10.1 years and average annual salary of $39,065, actuary Gabriel, Roeder, Smith & Co. said in a preliminary report for fiscal 2019. The system also has 48,677 retired members with an average annual benefit of $23,558.
In fiscal 2019, employers contributed $356.6 million based on a rate of 14% of payroll, while working members contributed $130 million based on a rate of 6% of their salaries. Both rates increased by 0.25 percentage point in fiscal 2020 and are to increase by 0.25 percentage point in each of the next three fiscal years.
The system is 80% funded based on a $17.4 billion actuarial value of assets and $21.7 billion in liabilities, with a projected pay-off period for unfunded liabilities of about 28 years, the actuary firm reported. The unfunded liabilities totaled $4.29 billion.
Actuaries often compare the projected pay-off period for unfunded liabilities to a mortgage on a house.
Trustee Andrea Lea, who is the state auditor, asked Gabriel's actuaries how the system's funding compared with the national average for similar public pension systems.
Actuary Brian Murphy said public pension systems were about 72% funded under "the most recent average that would be available nationally," through the end of 2017.
"So 80%, that's a good number," he said. "You are up there with the plans that are well-funded."
Actuary Judith Kermans added, "You have gone through [a] major financial crisis [in the recession] and some other things and been able to maintain a pretty strong position."
But, she said, if the system's unfunded liability was reduced "to 18 to 15 years ... then you start to make real progress in paying off the unfunded liability."
She said that in a few years, "unless something major happens in the investment markets that makes forecasting going forward look a lot more rosy than we have seen, we are probably going to come back and recommend that you lower the assumed rate of return" from 7.5% a year.
Lowering the target rate of return will increase the projected period to pay off unfunded liabilities, but the reduced rate of return is "a more realistic picture of what we think the plan can earn," Kermans said.
In November 2017, the trustees voted to implement measures to raise more money and reduce costs over seven years in response to the system cutting its target rate of return from 8% to 7.5% a year. At the time, actuaries said the median targeted return for public pension systems was 7.5%.
"It will be a long time before we can look at doing any benefit increase for our people, and that's one of the reasons I think that we need to work hard with everybody" for a 3% cost-of-living adjustment for retired members, said board Chairman Danny Knight.
Trustee Richard Abernathy said, "I just don't want us caught up in a scenario of expecting a doomsday because that is what some states have done, and some others would like it."
In other action Monday, the trustees authorized investments of up to $50 million in the Long Wharf Real Estate Partners Fund VI L.P., managed by Boston-based Long Wharf Capital; and up to $30 million each in Frank Park Venture Fund XIII L.P. and Franklin Park International Fund X L.P., which are both managed by Pennsylvania-based Franklin Park Associates.
They also authorized Franklin Park Associates to tap up to $30 million of accumulated funds for future investments and for Franklin Park's private equity fund that is focused on co-investments and other strategies. They also approved the investment of up to $20 million in the Thoma Bravo Explorer Fund L.P., a private equity buyout fund that's managed by Thoma Bravo, based in Chicago and San Francisco.
Also, in a voice vote with Lea abstaining and with no debate, the trustees voted to follow their staff's recommendation to contract with six securities monitoring firms. Fifteen such firms had submitted their qualifications.
The six firms are Bernstein, Litowitz, Berger & Grossmann; Kaplan, Fox & Kilsheimer; Kessler Topaz Meltzer & Check; Labaton Sucharow; Bleichmar Fonti & Auld; and Cohen Milstein Sellers & Toll.
The system's staff worked with the Office of State Procurement to go through the request-for-qualifications process and "selected six firms, which matches the board's current policy maximum for securities monitoring firms," system Deputy Director Rod Graves told the trustees.
Securities monitoring firms are paid on a contingency fee basis, with payments determined by a judge and coming out of any settlements and awards. Potentially millions of dollars are at stake in successful cases that are large and complex and involve many retirement systems.
Labaton has represented the system in a class-action lawsuit against financial services provider State Street in which there was a $300 million settlement and an award of $75 million in attorneys' fees. A dispute that arose afterward involved a $4.1 million referral fee paid to Texas attorney Damon Chargois.
In testimony to lawmakers in July 2018, then-system Executive Director George Hopkins said that until a special master raised questions about the referral fee, he didn't know that was part of the attorneys' fees awarded. He also testified that he directed the system's law firms not to pay any referral fees and that any fee that is shared with another firm in cases for the system has to relate to work done, has to be reasonable and "can't be just what they call a blanket referral fee."
Hopkins retired Nov. 16, 2018, after nearly 10 years as executive director.
Labaton later agreed to pay $700,000 to the class out of the payment to Chargois, as well as $2.75 million to other law firms in the lawsuit, according to a report issued by a special master.
Also on Monday, the trustees decided to reduce the interest charges of $61,928.53 to $16,938.86 for the Little Rock School District over the district's failure to pay contributions for Sandra Ledbetter, who has worked for the district since 1991. The district failed to pay $19,437.47 in contributions from fiscal years 1995-2000 on Ledbetter's behalf, in what Rhoden said appears to be a simple error in the bookkeeping process. Ledbetter works at Henderson Middle School.
The trustees also decided to bill the school district for the $19,437.47 in contributions, so the district will owe the system a total of $36,376.33. The district had asked the system to waive all of the interest charges.
Metro on 12/03/2019
Print Headline: Actuaries say Arkansas Teacher Retirement System in good shape