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The trustees for the Arkansas Public Employees Retirement System on Tuesday asked their staff to draft bills aimed at reducing the system's unfunded liabilities by changing different factors affecting retiree benefits.

During nearly two hours of wide-ranging discussion about options, trustees decided the staff should draft bills that would:

• Increase the amount paid into the system by newly hired members and members with less than five years of service.

• Reduce their benefit multiplier.

• Increase the period for determining their final average compensation that is used to calculate their retirement benefits.

• Reduce the interest paid on members' contributions to the system.

In a voice vote with Trustees Steve Faris of Central and David Hudson of Fort Smith dissenting, the trustees approved a motion by one of their colleagues -- state Auditor Andrea Lea -- for the staff to draft these bills for state lawmakers to consider in the regular session starting Monday. The filing deadline for retirement bills is Jan. 24.

The trustees also asked their actuaries at Gabriel, Roeder, Smith & Co. of Southfield, Mich., to estimate potential savings for the system if state law were changed to let trustees determine retirees' cost-of-living adjustment each year up to 3 percent a year.

Retirees now receive a compounded 3 percent cost-of-living adjustment each year.

Under the proposed legislation, the annual cost-of-living adjustment would be up to 3 percent -- either compounded or not compounded -- or it would not exceed the change in the consumer price index.

Their deliberation came with several dozen people watching the meeting, including some retirees who worry about possible cuts in their annual 3 percent cost-of-living adjustment in benefits.

The system is state government's second-largest retirement agency, with more than 75,000 working and retired members and more than $8 billion in investments. The Arkansas Teacher Retirement System is the largest state retirement agency.

"The $2.3 billion in unfunded liability is a huge concern," said Lea, a Republican from Russellville.

The system had $2.27 billion in unfunded liabilities to pay off over a projected 26-year period as of June 30 as of last year, the Gabriel firm said. Unfunded liabilities are the amount by which the system's liabilities exceed the value of their assets. Actuaries often compare a projected payoff period to a mortgage on a house.

Trustee Larry Walther, who also is the director of the state Department of Finance and Administration, said he wants to leave a legacy of improving the solvency of the retirement system, and the system has been providing a compounded 3 percent cost-of-living adjustment to retirees that exceeds the inflation rate.

Board Chairman Candace Franks, who also is the state bank commissioner, said she wants trustees to be granted the flexibility to set the cost-of-living adjustment.

The system included 35,959 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 provided by the Gabriel firm Tuesday.

The system also included 46,207 working members with an average annual salary of $37,302 of June 30 of last year, according to a report presented by Gabriel last month.

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. Most of the working members pay 5 percent of their salaries.

The four bills that trustees authorized staff to draft would:

• Increase from 5 percent to 6 percent the share of salary that newly hired members and those with less than five years of service pay into the system. If the proposal had been in effect on June 30 of last year, the system's unfunded liability would not have changed, according to Gabriel.

• 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. If it had been in effect on June 30 of last year, it would have reduced unfunded liabilities by $8.9 million, according to Gabriel.

• 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 after the effective day of the change. If it had been in effect on June 30 of last year, it would have reduced unfunded liabilities by $14.9 million, according to Gabriel.

• Cut the interest earned by system members on their contribution balances from 4 percent a year to 2 percent a year, after the effective day of the proposed change. If it had been effect on June 30 of last year, it would have reduced unfunded liabilities by $100,000, according to Gabriel.

According to Gabriel, changing the cost-of-living increase to the lesser of 3 percent or the consumer price index would have reduced unfunded liabilities by $724.4 million if it had been in effect on June 30 of last year.

Retired Department of Health employee Lex Dobbins and four other retirees said in a letter to trustees that "a possible reduction or elimination of the cost of living adjustment will have a greater negative impact on retired state employees due to the fact that the majority are on fixed income.

"It should be noted that working members would have the flexibility to adjust their portfolio and possibly work longer in order to compensate for any potential losses of income due to a reduction or elimination of the COLA. As retired employees, we do not have that option," Dobbins said. "If the board of trustees decides to reduce or eliminate the COLA for retirees, we propose an amendment be added that would maintain the 3 [percent] COLA for those who have already retired."

Mita Drazilov, an actuary for Gabriel, said the trustees would have to consider making cost reductions elsewhere if the cost-of-living adjustment doesn't change.

Trustee Gary Carnahan mentioned that Health Department retirees don't want their cost-of-living adjustment changed.

Rep. Doug House, R-North Little Rock, said he plans to introduce legislation soon to grant the trustees of several state government retirement systems "the discretion to decide if they can afford a cost-of-living [increase] and how much that cost-of-living [increase] is." The adjustment would be limited to 3 percent each year or the consumer price index, whichever is less, under his legislation, he said.

Two years ago, the Legislature and Gov. Asa Hutchinson enacted a law that changed the annual fixed 3 percent cost-of-living adjustment for retired state highway employees to the lesser of 3 percent or the change in the consumer price index for urban wage and clerical workers. The move was aimed at reducing that system's unfunded liabilities.

Metro on 01/09/2019

Print Headline: Arkansas Public Employees Retirement System targets debts; trustees ask staff to draft bills on potential cuts, pay-ins

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