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Arkansas Teacher Retirement System commits $74.5M for recycling tax credits; effort projected to produce $100M in revenue

by Michael R. Wickline | December 18, 2018 at 4:30 a.m. | Updated December 18, 2018 at 4:30 a.m.

Trustees for the Arkansas Teacher Retirement System on Monday authorized the system to spend up to $74.5 million to purchase from Big River Steel state recycling equipment tax credits projected to produce $100 million in revenue for the system.

The system's latest commitment to Big River Steel is tied to the expansion of the manufacturer's operations near Osceola. In June, the company announced plans for a $1.2 billion expansion that would double its hot-rolled steel production and result in the hiring of some 500 new employees.

Big River Steel opened its scrap-recycling and steel production facility south of Osceola last year, after an investment of about $1.3 billion. Big River Steel now employs 510 people, teacher retirement system Deputy Director Rod Graves said after the trustees' meeting.

The teacher retirement system is state government's largest retirement system with about $17 billion in investments and more than 100,000 working and retired members.

In 2016, the system's trustees authorized spending an estimated $151 million to purchase a projected $280 million in state income tax credits for recycling equipment from Big River Steel to enable the system to sell the tax credits to the state for a projected $224 million over a 14-year period under state law.

The latest plan is for the system to commit up to $74.5 million to Big River Steel for "an expected revenue stream of $100 million" worth of state recycling tax credits. The plan is similar to one the trustees approved in 2016, but this plan deals with the expansion of the Big River Steel project, Graves said.

"This proposal is really in two parts," he told trustees.

"The first part of it would be, essentially, the $74.5 million would be considered a loan for about two years during which period ATRS would earn an interest rate of 7.75 percent," he said.

"At the point that the tax credits are issued by the state and the revenue stream from those tax credits would begin, essentially, the interest that had accumulated on the purchase of that loan would turn into a loan at that rate. ... ATRS would also be getting the revenue stream paid by the state of Arkansas of a net $8.8 million [a year] over a 12-year period."

This investment would mean a net annual return of about 6 percent a year over the next 14 years, and "staff feels like that's a pretty good interest rate for what essentially could be considered a state of Arkansas obligation," he said. "For fixed-income [bonds], rates have been challenging. This could be a good addition to the fixed-income portfolio, offering attractive rates."

Big River Steel expects to be issued $125 million in recycling tax credits for its expansion, and the state will purchase the tax credits from the system for 80 percent of that under state law to net $100 million in proceeds for the system, Graves said after the trustees' meeting.

In other investment-related action, the trustees also approved investing up to $70 million more in Aeolus Catastrophe Keystone PF Fund LP, which is managed by Bermuda-based Aeolus Capital Management.

The fund is an opportunistic and alternative reinsurance fund specializing in property catastrophe insurance coverage, the system's staff said in a report to the trustees. The trustees approved investing $110 million in the fund in October 2015, up to $37 million in April of 2016 and up to $110 million in November 2017.

"Because of hurricanes during the recent underwriting seasons, Aeolus is reserving more funds than usual to deal with any potential claims," the staff report said.

The report said the $70 million additional commitment is needed this year "to take advantage of the current opportunity for increased expected returns" and also because "the higher than usual level of claims creates a need to reserve additional funds that would normally be released to investors in time for investment in the upcoming January tranche."

The investment will continue to diversify the system's investment portfolio and help reduce its reliance on the traditional stock and bond markets, the report said.

In other business, the trustees also directed the system's staff to draft legislation that would require new system members with an annual salary of at least $18,000 a year to pay 6 percent of their salary into the system, give the trustees authority to increase that salary threshold in the future, and allow new members whose salary is below the salary threshold to choose not to pay into the system.

Under current state law, members generally are only allowed to choose the option of not paying 6 percent of their salary to the system if they are part-time or working under a contract for 180 days or less. But basing that eligibility on employment contracts is troublesome, since the system doesn't have access to a member's actual contract, according to the system staff report. Salary information already is required to be reported to the system for each member, the report said.

Metro on 12/18/2018

Print Headline: Arkansas Teacher Retirement System commits $74.5M for recycling tax credits; effort projected to produce $100M in revenue

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