The rate charged by the Arkansas Public Employees Retirement System to state and local governments will increase from 14.50 percent of their payrolls to 14.75 percent, effective July 1, the trustees decided Wednesday in a move projected to raise about $4 million more a year.
But trustees of the state's second-largest retirement system were told its investment-return projection is too optimistic and needs to be scaled back, which also would mean the system would have to rely more on other sources of money to be adequately funded.
An official for the system actuary, Gabriel, Roeder, Smith & Co. of Southfield, Mich., warned the trustees that they need to move next year to reduce the system's 7.5 percent annual investment-return projection to about 7 percent. Such a move could require trustees again to increase the rate charged to state and local governments, to 16.75 percent of their payrolls. Increasing the employer rate from 14.75 percent to 16.75 percent would cost those governments about $33 million more a year on the basis of a $1.685 billion system member payroll in fiscal 2016.
That would be the first cut in the investment projection. Eventually, the trustees need to cut the system's annual investment-return projection to about 6.5 percent, which could require them to increase the rate to employers up to 18.75 percent of their payrolls, said Mita Drazilov, an actuary for Gabriel, Roeder & Smith. Increasing the rate from 16.75 percent to 18.75 percent would cost state and local governments another $33 million a year on the basis of the fiscal 2016 payroll figure.
The system's other options include increasing the 5 percent rate of pay charged to many system members -- state and local government employees -- and/or changing the system's plan for retirement benefits, Drazilov said.
He emphasized that he's not promoting that the system propose changing the design of its retirement benefits.
State and local governments paid $263.5 million into the system in the fiscal year that ended June 30, while employees who are members paid $55.9 million, according to a system report. The system paid out $480.9 million in retirement benefits last fiscal year. Sources for the payouts include employer and employee contributions and investment returns.
The system's investments were valued at $7.87 billion as of Sept. 30, after increasing by $246 million in value in the last quarter as the system earned an investment return of 3.94 percent, according to Chicago-based investment consultant Callan Associates.
The system includes 45,676 working members with an average annual salary of $36,923 as of June 30 and 34,214 retired members with annual retirement benefits totaling $509.7 million, or an average of $14,897 a year‚ Gabriel Roeder Smith & Co. said in its annual actuarial report to the trustees.
Trustee David Hudson said it doesn't seem appropriate to place the entire financial burden of reducing the investment-return projection onto state and local governments.
"This is bigger than us," said Hudson, who is the county judge of Sebastian County.
System Director Gail Stone said any increase in the 5 percent rate of pay charged to many members would require legislative approval, and any retirement bills are required to be filed by Jan. 27 in the regular legislative session that starts Jan. 9.
Hudson said trustees also have an obligation to re-evaluate the system's retirement benefit program.
The trustees directed Stone to research the system's options, consult with state lawmakers and present any proposed legislation to the trustees for their review before it's filed. Stone said she would meet with officials of Gabriel, Roeder, Smith & Co. and develop options for cost savings for the trustees to consider.
Drazilov said Callan Associates, the investment consultant, is projecting an average investment return of about 6.42 percent a year over the next 10 years, and actuaries don't consider the system's 7.5 percent annual investment return projection to be achievable.
"Unfortunately, we have to go lower," he said.
The 2008-09 recession led to drops in values of public retirement systems' assets and have decreased expectations since then for future investment returns for stocks and bonds, he said.
The trustees had voted to gradually increase the rate charged to state and local governments from 11 percent of payroll to 14.88 percent over 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. When the stock markets rebounded, trustees dropped that rate to 14.76 percent and then to the current 14.50 percent.
The system's investment return is 10.72 percent for the one-year period ending Sept. 30 and averaged 10.95 percent a year for the five-year period ending Sept. 30 and 6.02 percent for the 10-year period ending Sept. 30, Callan Associates reported. The return ranked among the top 13 percent of public retirement systems in the one-year period, among the 8 percent during the five-year period and among the top 27 percent in the 10-year period, Callan said.
The system's unfunded liabilities totaled $1.894 billion as of June 30 with a projected payoff period of 21 years -- a decline from $1.943 billion as of June 30, 2015, with a projected payoff period of 25 years -- according to Gabriel, Roeder, Smith & Co.
Actuaries often compare unfunded liabilities to a mortgage on a house. Unfunded liabilities are the amount by which the system's liabilities exceed an actuarial value of the system's assets.
Trustee Bill Gaddy of Little Rock asked Stone about whether there is any move afoot to shift the public employees retirement system that provides a defined benefit program into providing a defined contribution plan.
Stone said she's not heard of a political will to do that at this time, although she doesn't think "we are the favorite child of legislators."
Asked whether he supports shifting the state government's retirement systems, including public employees retirement system, from a defined benefit program into a defined contribution plan, Gov. Asa Hutchinson said, "Our various pension systems have been a major recruiting and retention tool for quality teachers and state employees as they pursue careers in public service. We value these pension systems and want them to remain strong.
"We continue to monitor the unfunded actuarial accrued liability (UAAL) of the pension systems. At this point I see no need to change the system, but we will continue to keep a watchful eye," the Republican governor said in a written statement.
A Section on 11/17/2016