LITTLE ROCK — The trustees for the state’s largest public retirement system voted Monday 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.
In the somewhat arcane world of actuarial computations, one effect of the change is to hold down the size of the increase in the amount of time that is projected to be needed to pay the system’s unfunded liabilities as of June 30, 2011.
Currently the time is 52 years. Extending it to 80 years had been mentioned as a possibility by a system adviser, but the system’s executive director said Monday’s change could mean the period will be projected to expand only to some point between about 60 and 70 years.
The system is the Arkansas Teacher Retirement System, which includes 72,208 working members with an average annual salary of $32,980, and 30,587 retirees with benefits of $613 million a year (an average of $20,041), according to system actuary Gabriel, Roeder, Smith & Co. of Southfield, Mich.
The trustees review the system’s economic assumptions every five years for annual wage inflation for its members and annual investment returns for the system, said George Hopkins, executive director for the system.
The trustees decided to stick with their assumption of an 8 percent annual investment return.
These assumptions will be used by Gabriel in an actuarial report on system liabilities and assets for the system as of June 30, 2011. Judith Kermans of Gabriel said the trustees will receive the report during their meeting in December.
Making such projections is uncertain, at best. “Whatever assumption we choose, the only thing we know is we’ll be wrong,” Hopkins told the trustees. “The only question is: ‘By how much?’”
There has been heightened concern during the past few years about public retirement systems across the nation as market changes have eaten into the value of their assets, a sputtering economy has affected government revenue that finances the systems, and the size of projected obligations to future retirees grows with the possibility of larger future burdens on taxpayers.
“Essentially, the lower the wage-inflation assumption, the lower the liabilities that ATRS will reflect for salaries,” the system’s staff said in a report to the trustees.
Trustee Jeff Stubblefield of Charleston said he doesn’t foresee 4 percent annual wage growth for system members. Board Chairman Richard Abernathy of Bryant said he doesn’t think system members “will be getting a lot of raises” for the foreseeable future.
Trustee Hazel Coleman of Helena-West Helena made the motion to set the assumption for the annual wage-inflation rate at 3.25 percent.
“Eventually, there will be a catch-up,” said Brian Murphy of Gabriel, though he said it makes sense for the trustees to cut their 4 percent assumption for annual wage inflation.
The system’s staff “is convinced that based upon considerations of the political climate, the state of the Arkansas economy, the requirement for a balanced budget within Arkansas, and other considerations, it appears the 4 [percent] wage-inflation assumption should be lowered,” the staff report told the trustees. “... 4 [percent] appears to be unrealistic as a long-term expectation of wage inflation for ATRS at this time.”
With these assumptions, trustees are projecting members’ annual wage growth until the members retire, Kermans explained to the trustees.
As of June 30, 2010, the system’s unfunded liabilities totaled $3.8 billion, the latest figure available from Gabriel.
It was estimated by the firm that the system would need 52.4 years to pay them off.
Unfunded liabilities are the amount by which liabilities exceed an actuarial value of the system’s assets. Actuaries compare the pay-off period to mortgages on homes.
Murphy of Gabriel told the trustees that the pay-off period may be 80 years as of June 30, 2011, but after the meeting he said the period could be 70 years or so, depending on calculations that haven’t been completed.
After the meeting, Hopkins said he expects the period to range between 60 and 70 years.
Kermans of Gabriel told the trustees that it’s unlikely that the rate that the system charges system employers — 14 percent of employee payroll — might lead the system to its goal of 30-year pay-off period “in the near term.”
That 14 percent charge rate raises about $390 million a year for the system. It is paid by employers of teachers, but the money comes ultimately from taxpayers.
“These are tough times for us and everybody across the country,” Kermans said.
The system needs either to earn investment returns of more than 8 percent a year or charge a higher rate to system employers to return to a 30-year pay-off period in the near term, according to Kermans.
She noted that the pay-off period was about 125 years about a decade ago. “We came back from that,” she said.
Hopkins said he projects the system will save about $30 million a year after several years from a package of bills enacted by the Legislature this year.
The trustees learned Monday that the value of the system’s investments increased by nearly $2 billion from $9.75 billion to $11.7 billion in the fiscal year that ended June 30. The system’s investment return of 22.3 percent last fiscal year ranked in the top 33 percent of public pension systems, said Laurel Nicholson of investment consultant Hewitt Ennis Knupp of Chicago.
But she added, “We should expect volatile markets through the end of the year.”
The system’s investment gains and losses are phased in over a four-year period for actuarial purposes. The system is still recovering from fiscal year 2009 when it lost $2 billion in value to $8.8 billion amid a recession and stock market downturn.
Arkansas has six retirement systems (teachers; public employees; state police; local police and firefighters; judges; and highway employees). Combined, their total assets are valued at more than $20 billion. They have more than 126,000 working members and more than 60,000 retired members. The six systems cost the public more than $600 million a year combined.
Their unfunded liabilities total more than $6 billion.
The teacher system’s trustees also learned Monday in a report from the system’s staff that the system purchased 2,866 acres of farmland in Cross County known as the Duvall Farm for about $10.034 million or $3,500 an acre. It included a 160,000-bushel grain storage facility.
The purchase was on Aug. 11 from HE and SF Duvall LLC, according to system real-estate manager Jerry Meyer.
The trustees also approved a $50 million investment in the New York-based Blackstone Real Estate Partners Fund VII. The fund will focus on acquiring “attractive opportunistic real estate investments at this point in the investment cycle with a target fund size of $10 billion,” according to the system staff report.
Front Section, Pages 1 on 10/25/2011