The Arkansas Public Employees Retirement System's investments dropped by $196 million in value last fiscal year to $7.62 billion in what its investment consultant described as "a very tumultuous year" for stock markets, the system's trustees learned Wednesday.
After a discussion of more than 30 minutes, trustees tentatively decided to increase the rate charged to state and local governments that participate in the system from 14.5 percent of employee payroll to 14.75 percent, effective July 1, 2017. The proposed rate increase would cost those governments about $4 million more a year.
Trustees will consider final action on the rate increase during their Nov. 16 meeting. After Wednesday's meeting, system Executive Director Gail Stone said investments have rebounded since the end of fiscal 2016 on June 30 to $7.82 billion.
State and local governments paid $263.5 million into the system in fiscal 2016, while individuals in the system paid $55.9 million, according to a system report. The system paid out $480.9 million in retirement benefits last fiscal year.
During the current decade, the rate charged state and local governments peaked at 14.88 percent in fiscal 2014 before the trustees voted to reduce that rate after the stock markets continued to rebound after the recession.
The trustees had voted to gradually increase the rate for four consecutive years, after the system's investments plummeted about $1.3 billion in value to $4.3 billion in fiscal 2009 during the recession and a stock-market downturn.
The tentative approval of the rate increase came after consultant David Hoffman of Southwich, Mich.-based Gabriel, Roeder, Smith & Co. actuarial firm said he expects to recommend that the trustees raise the rate charged to state and local governments in the next few years.
The system's investment return in fiscal 2016 was a 0.30 percent, said Ryan Ball of the Chicago-based investment consultant Callan Associates. The median return for the nation's public retirement systems was a 0.54 percent last fiscal year, the consultant reported.
The system's investment value dropped in fiscal 2016, despite its gains, in part because payments for retirement benefits exceeded contributions, according to a report.
The system's return has averaged 7.29 percent a year during the past five fiscal years, according to Callan Associates, but the system's long-term goal is for an average return of 7.5 percent a year.
The median investment return for the nation's public retirement systems averaged 6.42 percent during the past five years, so the Arkansas system's performance during this period ranked better than 81 percent of other public retirement systems, Callan said.
Trustee David Hudson, who is the Sebastian County judge, said he would rather slowly increase the rate charged to state and local governments, rather than the other option of not raising the rate at all in the next fiscal year and then substantially increasing it afterward.
"I know that the cities and the counties are not going to like that ... but it looks a little bit irresponsible if we don't," he said.
Trustee David Morris, who is Searcy's mayor, agreed with Hudson.
He said cities' sales-tax revenue has been reduced partly as a result of increased online sales, but "I think that we need to be responsible."
Morris said he hates to increase the rate charged to state and local governments, "but I look at it as a small increase instead of a big one three or four years down the line."
The system is state government's second-largest retirement system with more than 75,000 working and retired members.
The Arkansas Teacher Retirement System is state government's largest retirement system, with about $14 billion in investments and more than 100,000 working and retired members. The system hasn't yet reported its investment performance for fiscal 2016.
The Public Employees Retirement System includes 45,417 working members with an average annual salary of $36,840 as of June 30, according to Gabriel, Roeder, Smith & Co.'s preliminary report. These figures don't include 1,526 participants in the deferred retirement plan.
The system also includes 32,567 retired members with an average annual retirement benefit of $14,124, Gabriel reported.
The system's unfunded liabilities totaled $1.9 billion as of June 30 with a projected pay-off period of 24 years, Hoffman reported. Actuaries often compare unfunded liabilities to a mortgage on a home. Unfunded liabilities are the amount by which a system's liabilities exceed an actuarial value of its assets, in which the actuary factors in recognition of the system's investments gains over a four-year period.
According to Callan Associates, the system's domestic stock-market investments totaled $2.90 billion at the end of fiscal 2016 after they earned an investment return of minus 0.38 percent, while the system's international stock-market investments reached $1.76 billion after they earned an investment return of minus 6.88 percent.
In fiscal 2016, the system's bond investments totaled $1.30 billion after earning a return of 5.06 percent; energy, real estate and timber investments reached $1.23 billion after reaping a return of 8.29 percent; and diversified-strategies investments totaled $373 million after a 2.86 percent return, according to Callan Associates.
The system's $7.62 billion in investments on June 30 also included cash.
Metro on 08/18/2016