For the second-consecutive year, the Arkansas Public Employees Retirement System's trustees on Wednesday decided to increase the rate that the system charges employers, which are state and local governments.
The trustees voted to increase the rate to governments that participate in the system from 14.75 percent of their payroll to 15.32 percent, effective July 1, 2018. The rate increase is projected to cost the employers roughly $10 million more in fiscal 2019, based on their total payroll of $1.66 billion as of June 30, 2017. The employer contribution is one of several sources of funds for the retirement system.
Board of trustees chairman David Morris, who also is Searcy's mayor, said in an interview that no employer likes to pay an increased rate to the retirement system, but the rate has to be increased to make sure that the system stays solvent and sound.
"I hate that [rate increase]," state Rep. Johnny Rye, R-Trumann, said after attending the trustees' meeting.
"That's going to affect county government. They aren't going to like that," said Rye, a former Poinsett County assessor who is a retired member of the system.
State and local governments paid $261 million into the system in fiscal 2017, which ended June 30, while the system's members -- the employees -- contributed $57.5 million, according to system actuary Gabriel, Roeder, Smith & Co. of Southfield, Mich.
About 70 percent of the system's approximately 46,000 working members pay 5 percent of their salary into the system based on a 12-year-old policy that requires new members to contribute that much, said system Director Gail Stone. She said all of the system's working members will be paying into the system within seven to 10 years and that should help ease the burden on employers.
The system's investments are valued at about $8.67 billion, Stone said.
One of the factors putting pressure on the rate charged to state and local governments is the trustees' decision in May to cut the projected annual investment return from 7.5 percent to 7.15 percent for Gabriel's June 30, 2017, actuarial valuation for the system.
The cut was based on advice from Gabriel's actuaries, who a year ago said the projected return should be cut even further -- to 7 percent -- because investment consultants expect lower returns in the future. The cut means the system will have to rely more on other sources of funds and reduced costs to be adequately funded.
The system's return has averaged 8.10 percent a year over the past 26-plus years, consultant Callan Associates of Chicago said in a report to the trustees.
Another factor affecting the rate charged to state and local governments is the phased-in recognition of actuarial losses from recent years in which the system failed to reach its projected return, Stone said in August.
The system includes 46,094 working members with an average annual salary of $36,204, and 36,260 retired members that were paid $540.1 million in retirement benefits (an average of $14,895 a year) in fiscal 2017, Gabriel said.
The system's unfunded liabilities totaled $2.35 billion with a projected payoff period of 30 years as of June 30, compared with $1.89 billion with a projected payoff period of 21 years as of June 30, 2016, Gabriel said. Actuaries often compare unfunded liabilities to a mortgage on a home. Unfunded liabilities are the amount by which the system's liabilities outstrip the system's assets.
During the meeting Wednesday, trustee David Hudson, who is the Sebastian County judge, said the unfunded actuarial report "kind of blows my mind."
But trustee Larry Walther said he's pleased with the system's investment return over the past seven years, which Callan said averaged 9.58 percent a year to rank among the top 13 percent of similar-size public pension plans.
"Our results are pretty good" and have exceeded the 7.15 percent projected return, said Walther, who also is director of the state Department of Finance and Administration.
Hudson asked whether the system should seek approval of legislation that would reduce the the annual cost-of-living increase granted to retirees -- now 3 percent -- by using another index.
During this year's regular session, the Legislature enacted a law that changed the annual 3 percent cost-of-living increase for retired highway employees to the lesser of 3 percent or the change in the consumer price index for urban wage earners and clerical workers.
Trustee Steve Faris, a former Democratic state senator from Malvern, said the Arkansas Teacher Retirement System is facing many of the same financial challenges as the public employees system.
He noted that the teacher retirement system's trustees on Monday adopted a series of phased-in measures to increase revenue from employers and members as well as to reduce costs. One step was to extend from three years to five years of an employee's highest salary for determining the final average salary used in calculating benefits.
"I'm open to exploring every option," Faris said after the trustees' meeting. He said he would like for the public employees system to follow the teacher system's lead in conducting a lengthy review of options and develop a multipronged plan.
The public employee system's rate charged to state and local governments has fluctuated over much of the past decade.
After the system's investments dropped in value by about $1.3 billion to $4.3 billion in fiscal 2009 during the recession and stock market downturn, the trustees increased the employer rate for four consecutive years. The initial increase went from 11 percent to 12.46 percent of employee payroll, effective July 1, 2010, before it was increased three more times and peaked at 14.88 percent. Trustees then voted to reduce that rate after stock markets continued to rebound after the recession.
A year ago, the trustees voted to increase the employer rate from 14.5 percent to 14.75 percent, effective July 1 of this year. That action came after Gabriel urged the trustees to cut the projected annual investment return.
In other business, the trustees learned from Callan Associates that the system's investments increased in value by $262 million to $8.5 billion in the quarter that ended Sept. 30. Most of the investment gains were in the domestic and international stock markets.
The system's investment return of 3.81 percent last quarter ranked among the top 23 percent of similar public pension systems. The return is 12.15 percent for the year that ended Sept. 30, ranking the system in the top 54 percent of such pension plans, Callan said.
A Section on 11/16/2017