The trustees of a state retirement agency on Wednesday decided to ask lawmakers to give trustees the flexibility to set the annual cost-of-living adjustment for retired members somewhere between the consumer price index and a 3 percent rate that is not compounded.
The Arkansas Public Employees system's retired members now receive a compounded 3 percent cost-of-living adjustment each year under existing state law.
During a 90-minute special meeting, the trustees also voted to ask lawmakers to approve a bill to increase the contribution made by working members who pay into the system. The contribution is now 5 percent of salary and would be raised to 6 percent over a four-year period. Most working members pay into the system.
The trustees directed staff members to seek approval of a bill allowing them to decide the amount of the annual cost-of-living adjustment after Rep. Doug House, R-North Little Rock, told the board that he plans to propose a different method.
House said his plan would allow the trustees for each of state government's retirement systems to decide the amount of the annual cost-of-living adjustment. The trustees would start with the lesser of the consumer price index or a 3 percent rate that's not compounded, and then choose a figure between that amount and zero.
"The overall effort is to make sure that the boards of trustees run the thing, not the Legislature, and my intention ... is that you may award the COLA up to 3 [percent] or CPI, whichever is less," under his legislation, House said.
"When I say 'may,' under certain circumstances like in a major downturn, it may have to be zero. That's your call, not the Legislature's," he said. He noted that all 135 lawmakers will determine the fate of his legislation, which hasn't been introduced yet.
Candace Franks, chairman of the Arkansas Public Employees Retirement System and the state bank commissioner, said she suggested the proposal approved by trustees as a compromise.
The trustees rejected Trustee David Hudson's proposal that would grant retired members an uncompounded 3 percent cost-of-living adjustment each year.
"I know that this has got statewide attention and that people are concerned about the measures that we have already discussed," said Hudson, who is the county judge of Sebastian County.
But Trustee Andrea Lea said, "I think we have a good system and I want to keep it strong for people 30, 40, 50 years from now."
The system included 35,959 retired members, who received total retirement benefits of $528.1 million a year (or an average of $14,687 a year) as of June 30 of last year, according to a report Wednesday from system actuary Gabriel, Roeder, Smith & Co. of Southfield, Mich. The average age of the system retirees is 69.8 years and their average service is 17.8 years, the report shows.
Lea, who is the state auditor, initially raised the possibility of raising the 5 percent of salary paid by contributing system members to 7 percent. Then the trustees decided to seek approval of legislation to boost that rate by 0.25 percentage points a year over a four-year period.
The interim system director, Jay Wills, said raising the contribution rate from 5 percent to 7 percent "is going to make some people unhappy."
Then, Lea, a Republican from Russellville, suggested seeking approval of legislation to raise the contribution rate to 6 percent.
Trustee Larry Walther, who is director of the state Department of Finance and Administration, said the trustees could consider the possibility of raising that rate to 7 percent after seeing how the increase to 6 percent works out.
The system also included 46,207 working members with an average salary of $37,302 a year as of June 30 of last year, according to a Gabriel report presented last month.
The impetus behind a handful of bills that the trustees want the General Assembly to approve in this year's regular session is their aim to reduce the system's unfunded liabilities.
The system is state government's second-largest retirement agency with more than $8 billion in investments. The Arkansas Teacher Retirement System is the largest state retirement agency.
The system had $2.27 billion in unfunded liabilities to pay off over a projected 26-year period as of June 30 of last year, according to system actuary Gabriel, Roeder, Smith. Unfunded liabilities are the amount by which the system's liabilities exceed the value of its assets. Actuaries often compare a projected payoff period to a mortgage on a house.
State and local governments paid $275.7 million into the system, while system members paid $63.2 million in fiscal 2018, which ended June 30, the Gabriel firm reported last month. The governments pay the equivalent of 15.32 percent of their employees' pay into the system. The trustees decided in August to keep that amount for the next two fiscal years, starting July 1, 2019.
During their meeting Wednesday, the trustees also recommended lawmakers approve legislation that would:
• Calculate the final average compensation used in computing retirement benefits for newly hired members and those with less than five years of service in the system based on their highest 60 months of compensation rather than the 36 months under current state law, starting July 1, 2020.
• Cut the multiplier used in computing retirement benefits for newly hired members and those with less than five years of service. The multiplier is now 2 percent of the final average compensation times years of service after July 1, 2007. The proposal would change it to 1.8 percent of final average compensation times years of service, starting July 1, 2020.
• Cut the interest earned by system members on their contribution balances from 4 percent to 2 percent a year, effective July 1, 2019.
Metro on 01/17/2019