LITTLE ROCK — People are living longer, and that’s one reason the unfunded liabilities of the state’s largest retirement system rose half a billion dollars over the past year. The longer a retiree lives, the longer the retirement benefit has to be paid.
The Arkansas Teacher Retirement System’s unfunded liabilities increased half a billion dollars from June 30, 2010, to $4.375 billion as of June 30, 2011, an actuary told the system’s trustees this month.
It would take 66 years to pay the unfunded liabilities, which are the amount by which the total liabilities exceed an actuarial value of the system’s assets. That’s up from 52.4 years on June 30, 2010, according to actuary Gabriel, Roeder, Smith &Co. of Southfield, Mich.
Since 2000, the number of years projected to be needed to pay off the unfunded liabilities has varied from 19 on June 30, 2007, to 125 on June 30, 2001, Gabriel said.
The report caused some observers to wonder what factors caused the increase.
The actuary’s latest experience study materially increased the projected liabilities because of members living longer and receiving benefits for more years than under the previous assumption, said the system’s executive director, George Hopkins.
The system charges school districts and other employers of its members 14 percent of employee payroll to raise about $400 million a year, said Hopkins.
Gabriel said in its latest report that the system now would have to charge a rate of 15.4 percent of employee payroll to reduce the payoff period to 30 years. The aim of each of the state’s six retirement systems is to have a 30-year payoff period.
A 1.4 percent rate increase would cost school districts (and thus taxpayers) about $40 million more a year, Hopkins said.
But the trustees aren’t asking lawmakers to increase the rate. Instead, they are counting on a combination of hoped-for investment gains and cost-cutting measures to improve the system’s financial condition.
“Unless there is a substantial investment gain in fiscal year 2012, [the 66-year payoff period] is likely to increase significantly next year,” Gabriel said.
The system has 72,293 working members who are not participants in the deferred retirement plan, and their average salary is $33,995 a year; 4,487 working members who are deferred-retirement-plan participants with an average salary of $60,323 a year; and 32,099 retired members with an average annual retirement benefit of $20,470, Gabriel said. The system also includes 12,439 nonworking members who are vested and have a projected annual benefit of $4,613.
As of June 30, 2011, the system’s total liabilities (funded combined with unfunded) totaled $15.521 billion, up from $14.697 billion a year earlier, Gabriel said.
Judith Kermans of Gabriel said the system’s liabilities are expected to increase again each year as members gain one more year of service and, thus, earn more retirement benefits.
The system assumes an annual investment return of 8 percent. Based on information from eight investment consultants, there is a 39 percent chance of meeting the 8 percent investment return assumption in the long run, she said.
The actuarial value of the system’s assets totaled $11.146 billion as of June 30, up from $10.845 billion the year before. That value is based on the actuary recognizing system investment gains and losses over a four-year period.
Accrued liabilities for retirement benefits expected to be paid to current retirees and beneficiaries increased from $6.433 billion to $7.054 billion, and those expected to be paid for other reasons - disability benefits, death benefits or survivor benefits - increased from $739 million to $849 million, Gabriel said.
Accrued liabilities for retirement benefits expected to be paid based on total service, age and salaries to current working members dipped from $5.240 billion to $5.203 billion.
Liabilities for retirement benefits expected to be paid based on total service, age and salaries likely to be rendered by current deferred-retirement plan participants increased from $2.285 billion to $2.415 billion, according to Gabriel.
Brian Murphy of Gabriel said the firm has included some expected increases in the life expectancy for retired members.
A 60-year-old woman previously was expected to live to age 85.7 years. She is now expected to live to age 86.8 years, Murphy said.
Kermans of Gabriel said the increase for men is 3.64 years.A 60-year-old man is now expected to live to be 84.28 years old, she said.
At older ages, the increase in life expectancy is much shorter, according to Murphy.
In a move aimed at reducing the increase in liabilities, the trustees in October decided to cut the system’s projected annual wage-inflation rate for its members, meaning they expect the members’ pay over the next 25 or so years to be less than previously was anticipated. The change lowers the projected rate from 4 percent to 3.25 percent.
RECOGNIZING LOSSES
A second reason for the increase in unfunded liabilities is that as of June 30, 2011, the system recognized more investment losses from fiscal 2008 and 2009, and they exceeded the gains that it could recognize at that point. This happens because the actuary recognizes investment gains and losses over a four-year period, Hopkins said.
This “at times ... provides a brighter or darker view than the real status of a retirement system,” he said. “The current actuarial valuation provides a darker view due to two years of quality returns by ATRS being realized in the future” rather than immediately.
“The real view of ATRS” without recognizing investment gains or losses over a four-year period “is a 34-year [payoff] period and unfunded liabilities of $3.7 billion, which is down $1.1 billion from the ... $4.8 billion in real unfunded liabilities for June 30, 2010,” he said.
Recognizing gains and losses over four years made the Arkansas Teacher Retirement System appear to be worth about $11.1 billion on June 30, 2011, when its real value was about $11.8 billion, Hopkins said.
The investments are now valued at roughly $11 billion, he said.
SAVINGS TO COME
A third reason for the increase in unfunded liabilities is that the vast majority of the legislation enacted in 2009 and 2011 to save money is not projected into the future as savings of the plan but will be incrementally realized after the fact each year through a gain-loss study that the actuaries will do, Hopkins said. This requirement is based upon actuarial standards, he said.
“An analogy [is that] if a homeowner refinances their mortgage and obtains a lower interest rate, their house payment may be $300 less per month in the future for the life of the loan. If that same person made improvements to the home to reduce utility bills by $300 per month, that same $300 reduction would not be used from a bank’s standpoint as a savings when determining eligibility for a car loan,” Hopkins said.
He has estimated that legislative actions this year will save an average of $38 million a year (about $1 billion over the next 30 years).
Gabriel said that of the legislation enacted in 2011, only two bills “produced immediate results and impacted the [payoff period] in the June 30, 2011, valuation.”
The effects of 15 laws enacted in 2011 “will emerge gradually over the next several years,” Gabriel said.
The system’s board of trustees and staff “remain committed to closely monitor” all of these things “to make appropriate decisions, as need be, in the future,” Hopkins said.
Kermans said the system recovered from the downturn in the stock market from 2001-03, and “we are in a good position to get through this.”
Murphy added that there still is a lot of uncertainty in the financial markets.
The state’s six retirement systems cover teachers and other school employees; public employees; state police; local police and firefighters; judges; and highway employees. Combined, their assets are valued at more than $18 billion.
They have more than 130,000 working members and more than 65,000 retired members. The systems cost the public about $700 million a year. Their unfunded liabilities total more than $7 billion.
Front Section, Pages 1 on 12/26/2011