The Arkansas Public Employees Retirement System's investments increased in value by $723 million in the quarter that ended March 31 to $8.89 billion with help of rebounding stock markets, the system's investment consultant reported Wednesday.
The system's investment return of 9.65% last quarter ranked in the top 11% of the nation's public pension systems, according to investment consultant Callan's report to the system's board of trustees. By comparison, the system's return for the past year is 3.91%, which ranked near the middle of systems nationally.
The system is state government's second-largest retirement agency with more than 80,000 working and retired members. The largest is the Arkansas Teacher Retirement System, which has about $17.1 billion in investments and more than 100,000 working and retired members.
During their meeting, the trustees decided to ask for more information and guidance from system Executive Director Duncan Baird -- the state's former budget administrator who began his new job April 1 -- about Callan's recommendation for changing the system's asset allocation.
In the previous quarter, the system's domestic stock market investments increased in value by $406 million to $3.5 billion, while international stock market investments grew by $195 million to $2.1 billion, according to Callan.
Bond investments increased in value by $51 million to $1.4 billion in that quarter, while investments in real assets such as real estate, energy and timber investments grew by $47 million to $1.35 billion, Callan reported. Investments in diversified strategies increased by $26 million in the previous quarter to $433.6 million.
The system's investments were valued at $9.1 billion as of April 30, Carlos Borromeo, the system's chief investment officer, said after the meeting.
Trustees also directed the staff to develop a rating system for securities monitoring firms seeking a contract with the agency. Trustee Andrea Lea, who is the state auditor, was asked by the board to assist the system's staff.
ASSET ALLOCATION
Callan's recommendation for the system to change its asset allocation triggered a wide-ranging discussion among trustees, although they took no action.
Callan recommended reducing the targeted share of investments in U.S. stocks from 37% to 33% and the targeted share in global stocks from 24% to 21%. Callan proposed increasing the targeted share of investments in bonds from 18% to 20% and the targeted share in diversified strategies from 5% to 10%. Callan recommended no change in the allocation for real assets, now at 16%.
Wednesday's meeting was trustees' first since the 92nd General Assembly adjourned its regular session on April 24. In that session, most of the trustees' bills to reduce the system's unfunded liabilities failed to clear the Legislature.
The system's unfunded liabilities were $2.27 billion on June 30, 2018, with a projected payoff period of 26 years, according to system actuary Gabriel, Roeder, Smith, & Co. Unfunded liabilities are the amount by which a system's liabilities exceed an actuarial value of assets. Actuaries often compare unfunded liabilities and the project payoff period to a mortgage on a house.
Trustee Larry Walther, director of the state Department of Finance and Administration, said he wants to work toward reducing unfunded liabilities "toward zero again."
"That's going to require some work on our part," Walther said.
The trustees need to decide on recommendations for the 2021 regular legislative session, he said.
"I think our investment policy right now seems to make sense to me where we are today," Walther said. "I am comfortable with the [investment] mix we have out there."
Lea said, "I don't want us to go way more conservative on it, especially because nothing happened in the Legislature that really moved the spigot part of it."
Trustee David Hudson asked his colleagues: "What is our plan for the unfunded actuarial liability?
"I have heard one board member say it is zero. I don't know if it is zero or not," said Hudson, who is the Sebastian County county judge. "Where is this board going to go in the next two years to make policy decisions to reduce benefits?"
Hudson said he doesn't see any reason to make any major changes in the investment allocation.
The system aims for an investment return for 7.15% a year.
The public employees system included 38,105 retired members who received total retirement benefits of $530.8 million (or an average of $13,929 a year) as of June, according to Gabriel, Roeder, Smith. The system also included 46,231 working members with an average annual salary of $37,302 as of June 30, 2018.
State and local governments paid $276.7 million into the system, while employees paid $64.7 million in fiscal 2018, which ended June 30, the actuary reported.
The governments pay the equivalent of 15.31% of their employees' wages into the system. Most of the working members pay 5 percent of their salaries into the system.
MONITORING FIRMS
The system's current securities monitoring firms include Bernstein Litowitz Berger & Grossmann; Cohen Milstein Sellers & Toll PLLC; Kessler Topaz Meltzer & Check LLP; Labaton Sucharow; Nix Patterson & Roach LLP; and Spector Roseman Kodroff & Willis, according to Baird.
In mid-January, trustees decided it's time to refresh their list of securities monitoring firms. The system last hired such firms in 2013. Securities monitoring firms are paid on a contingency fee basis.
Except for Spector Roseman Kodroff & Willis, the system's current firms reapplied.
Other firms that submitted their qualifications include: Berger Montague; Bernstein Liebhard along with Quinn Emanuel Urquhart; Block & Leviton; Bleichmar, Fonti & Auld; Kaplan Fox; Lieff Cabraser along with Thrash; and Lowey Dannenberg.
The other firms that submitted their qualifications included Pomerantz; Wolf Popper; Rosen Law; Wolf Haldenstein Adler; Hagens Berman; and Scott+Scott, according to the list.
Metro on 05/16/2019