Teacher system's ventures earn 19%

Fiscal-2014 gains driven by stocks

Fueled by rising stock markets, the Arkansas Teacher Retirement System's investments increased in value by nearly $1.8 billion to $14.57 billion in fiscal 2014, the system's investment consultant said.

The system's overall investment return was 19 percent in the fiscal year ending June 30; the performance ranked in the top 8 percent among about 80 of the nation's public pension systems with more than $1 billion in assets, said the Chicago-based Hewitt Ennis Knupp investment consulting firm.

The system gained "strong absolute returns, largely driven by equity markets," said Katie Comstock of Hewitt Ennis Knupp in an email dated Friday to system officials.

In fiscal 2013, the system's investments increased by $1.4 billion and posted a 14.3 percent overall investment return, the firm reported. The system has averaged an investment return of 13.3 percent during the past five fiscal years and a return of 8.1 percent during the past 10 fiscal years.

"Ultimately, these strong returns mean that members and retirees should expect benefits to remain steady and stable," said system Executive Director George Hopkins.

System officials are working to cut the portion of its portfolio invested in stocks from 61 percent to 50 percent, while increasing investments in private equity, real estate, timber, farmland and other alternatives, such as hedge funds, he said.

The teacher retirement system is state government's largest retirement system with more than 100,000 working and retired members.

School districts and other system employers paid $405 million into the system, while system members contributed $123.5 million in fiscal 2014, Hopkins said.

He estimated that the system's recent investment gain helped reduce the projected period for paying off the system's unfunded liabilities from about 70 years on June 30, 2013, to about 39 years at the end of fiscal 2014.

The system's unfunded liabilities totaled $4.47 billion at the end of fiscal 2013. The system's actuary will report unfunded liabilities for fiscal 2014 later this year.

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 mortgage on a house.

The teacher-retirement system includes 70,660 working members with an annual average salary of $34,920; 4,265 deferred-retirement participants with an annual average salary of $60,927; and 36,254 retired members with an average annual pension of $21,067, according to system actuary Gabriel, Roeder, Smith & Co. of Southfield, Mich.

Future options

In 2013, the Legislature granted more authority to the trustees of the Arkansas Teacher Retirement System to raise rates and cut costs to trim the system's unfunded liabilities. As of June 30, 2012, the estimated payoff period was more than 100 years.

But the trustees have held off making any major changes because of the system's growing investments.

Act 1446 of 2013 allows the trustees to increase the rate charged to system employers starting July 1, 2015.

The current rate is 14 percent of employee payroll, and the act allows the rate to increase by 0.25 percent per fiscal year if unfunded liabilities are projected to exceed 30 years. Another law -- Act 1399 of 2013 -- requires any employer-rate increase to be paid from funds allocated to the state Department of Education.

Trustees could also increase the amount charged to working members under Act 602 of 2013 if the projected payoff period for the system's unfunded liabilities remains above 30 years. Working members pay 6 percent of their salaries, a rate that hasn't changed in more than 40 years. Act 602 allows the rate to be increased up to 7 percent, and the maximum increase would raise about $20 million more a year.

Hopkins said the system's board of trustees has been "methodical and patient in implementing cost savings and adjusting the ATRS investment profile to achieve strong risk-adjusted gains while decreasing the dependence upon the stock markets."

With the system having an estimated 39-year period to pay off its unfunded liabilities, Hopkins said he doesn't see the board "making more cuts to member benefits or seeking an increase in the employer contribution rate at this time."

"However, these options provide the ATRS board the tools necessary to adjust benefits to stay financially strong, even in a deep economic downturn," he said. "These tools remain important even if the tools are not used at this time."

Board Chairman Richard Abernathy said the trustees aren't considering raising rates for system employers or members, or granting any retirement benefit increases, either.

If the system earns an 8 percent investment return in fiscal 2015, Hopkins said, he estimates the system's payoff period for unfunded liabilities will drop below 30 years for the first time in seven years.

Fiscal 2014 overview

The system's domestic stock investments ended fiscal 2014 valued at $4.02 billion after earning an investment return of 25.6 percent, according to Hewitt Ennis Knupp.

The system's global stock investments ended fiscal 2014 valued $4.9 billion after posting a return of 25.3 percent, the investment consultant said.

The system's bond investments were valued at $2.32 billion after receiving an investment return of 6.1 percent in fiscal 2014.

The system's private-equity investments ended fiscal 2014 valued at $1.3 billion after earning a return of 20.6 percent, and the system's investments in real estate, timberland, farmland and infrastructure ended the fiscal year valued at $1.6 billion after earning a return of 6.3 percent, Hewitt Ennis Knupp said.

A section on 08/20/2014

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