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Linda Montalvo of Benton pressed state lawmakers Tuesday night about whether they are considering recommending changes to the annual cost-of-living adjustment to benefits paid to the Arkansas Public Employees Retirement System's more than 30,000 retired members.

That adjustment is 3%, compounded.

"What are you thinking?" she asked 10 state lawmakers attending the last of 11 meetings held across the state in the past two months by the Joint Committee on Public Retirement and Social Security Programs. The last meeting was in Benton.

"That's really what we are here for, to get your feedback on various provisions, including potential changes to the [cost-of-living adjustment]," said the retirement system's executive director, Duncan Baird.

Montalvo said she worked in the Saline County clerk's office for 32 years and retired in 2013.

"It sounds like you are saying that when you retired, you retired under the assumption that there would be a 3% COLA, and that was an important consideration for you," Baird said.

Montalvo emphasized that this is an important consideration for all of the system's retired members, not just for her.

"Our medicine goes up every month," she said to applause from many of the about 175 people attending the meeting, "and every time you go to the grocery store, everything has gone up, so I'm begging all of you, please don't take my 3% away."

Montalvo suggested that if lawmakers are looking for a cost-saving measure, they could change state law to increase the period when system members are vested for retirement benefits from five years back to 10.

The committee co-chairman, Sen. Bill Sample, R-Hot Springs, told Montalvo that "the reason the committee is here is so you can educate us and communicate with us about your ideas of what we need to be doing with all the [retirement] systems."

The meeting ended without any lawmakers saying whether they are considering tinkering with the compounded 3% cost-of-living adjustment.

That cost-of-living adjustment is a sensitive matter to retirees of state government's second-largest retirement system, which has more than $8 billion in investments.

In April at the regular legislative session, a bill failed to clear the retirement committee that would have altered the annual adjustment. It would have allowed the system's trustees to determine the size of the adjustment, up to a 3% simple -- not compounded -- increase a year.

ANNUAL INCREASE

After the committee's meeting on Tuesday, the other co-chairman, Rep. Les Warren, a Republican from Hot Springs, said, "One of the things that we have heard over and over is the retirees, those who are already retired and living on those paychecks, are going, 'Don't mess with our COLAs,' so that is something we're going to look at.

"Can we leave their COLA alone and what else can we look at to adjust as far as how much money we got going out?" he asked in an interview. "Can we change anything with new members going on? We are going to look at everything and come up with what we think makes this most solvent now and in the future and get a plan and present it to them.

"Some of the things that people have said is, 'We are OK with increasing our contribution as long as the employer increases theirs,'" he said.

After Tuesday's meeting, Sample said in an interview, "From all the meetings and everything we've had, I don't think the 3% COLA is going to change.

"We're going to have to take a look at some raise in the contribution levels for employees as well as the state, and I know the governor is not going to like" raising the rate charged to state government, he said.

The system's trustees set the rate for the employers, which are state and local governments. The system charges those governments 15.32% of their employee payrolls, and most of its members -- the employees -- pay 5% of their salaries into the system.

State and local governments paid $293.5 million into the system and members contributed $68.2 million in fiscal 2019, according to a report to the board in August.

The system's 36,914 retirees were paid $554.8 million (or an average of $14,758 a year) as of June 30, according to a preliminary report in August from system actuary Gabriel, Roeder, Smith & Co. The system also included 45,965 working members with an average annual salary of $39,213 as of June 30, the actuary reported.

"With the retirement [benefits], that's the only way that we've got to take and compete with the market rate employment out there," Sample said. "If you go into private industry, you're going to be on a 401(k) [retirement plan]. Here, we have got the retirement, so we ask them to work for a little less [in salary] because you got the retirement in their favor."

LOOKING AHEAD

Besides the public employees system, the retirement agencies include the teacher system, the highway employee system, the state police system, the judicial retirement system and the local police and fire retirement system.

On Tuesday, Warren told the audience what will happen in the aftermath of the committee's meetings.

"Sen. Sample and myself are going to be getting with the [retirement systems] directors and we are going to a debriefing of everything that we have had brought up to us in all 11 meetings," he said. "After we get all the different notes compiled, we are going to get everybody together and we are going to come up with a legislative agenda for 2021.

"We want to go back to the same 11 cities that we have been to ... talk about the legislative agenda that we are proposing for 2021 so that everybody knows what we are going to try to do for 2021 and hopefully we'll have everyone's support because you know what we are trying to do, why we are trying to do it and that what we are trying to do is to make the plans stronger," Warren said.

The co-chairmen decided to hold these meetings to tell retirement system members about the financial condition of the systems and to get feedback, in the aftermath of the committee not approving most of the bills proposed by the trustees of the Public Employees Retirement System. The bills were intended to reduce the system's unfunded liabilities.

During the regular session, the committee's meetings were packed with employees who were fearful of what might be approved.

"There have been people who have been saying that, 'We hear that you are going to combine all the retirement plans into one,'" Warren said Tuesday.

"That is not going to happen," he said. "There is no discussion about it, so if you hear that being said anywhere, you can say, 'We went to a meeting with the retirement committee and that is not in the works.'"

Warren said Arkansas' retirement systems are among 12 states with 70% to 79% of their liabilities funded with assets, and Arkansas is ranked 21st among the 50 states with 76.9% funding of its liabilities, based on information from the Pew Foundation.

Unfunded liabilities are the amount by which a system's liabilities exceed an actuarial value of a system's assets. Actuaries often compare them to a mortgage on a house.

"That's a good sign because we're in the upper half," Warren said of the state's ranking. "But the other thing that that tells us is there is room for improvement, so while we are in a position that we are healthy enough, we want to strengthen our programs while we can.

"Our goal as legislators is to make sure that this program is solid, not just for those of you who are already retired, but for those who are going to retire in five years, for those who are just now getting into teaching or a government job. We want these retirement plans to be solid indefinitely. We want to be one of those states ... 90[%] to 100% funded," he said.

The options for the retirement systems to reduce their unfunded liabilities include raising the rate charged to employers, the rate charged to the working members, reducing the cost of benefits and/or counting on strong investment returns. The Public Employees Retirement System's expected rate of return on investments is 7.15% a year.

The system's liabilities were 79% funded, with $8.4 billion in assets and $10.6 billion in liabilities at the end of fiscal 2018, Baird said Tuesday.

That's above the national median of 72% funding, he said. The system's unfunded liabilities are projected to be paid off within 26 years.

In an interview, Montalvo had other cost-saving suggestions for lawmakers besides increasing the vesting period for members.

She said lawmakers could consider changing the 3% compounded cost-of-living adjustment for future retirees; and basing the final average salary used in calculating benefits on an employee's five highest-paid years rather than the three highest-paid years.

In January, the system's trustees proposed a legislative package that included the ill-fated proposal on changing the cost-of-living adjustment. Another failed proposal would have gradually increased from 5% to 6% the share of the salary that working members pay into the system.

Other failed proposals would have affected newly hired members, by increasing the period for calculating the final average compensation and cutting the multiplier, both used in computing benefits.

BOARD CHANGES

Kevin Simpson, president of the Arkansas State Fraternal Order of Police, urged lawmakers Tuesday to change the law to allow the public employees system's members to elect some of the board of trustees.

Members of both the Arkansas Teacher Retirement System and Arkansas State Highway Employees Retirement System can elect board members, Simpson noted.

"I can tell you as a legislator that is something that's on our radar," Warren said.

Under state law, the governor appoints three state employees and three non-state employees to the Public Employees Retirement System board of trustees. In addition, three other trustees are the state's chief fiscal officer, treasurer and auditor.

These agencies have members chosen for their boards:

• Eleven of the Teacher Retirement System's 15 trustees.

• Three of the highway employees system's seven trustees.

• Two for the state police system's seven-member board.

• Five members of the Judicial Retirement System's board of trustees are appointed by the Arkansas Judicial Council.

Asked about the Public Employees Retirement System, Sample said in an interview, "I think that we're probably going to maybe an 11-person board on that with several of them being elected by the membership.

"Now that's just my idea. I'm just one member and it has got to pass through the Legislature," he said. "The governor is not going to like that either."

Last month, Republican Gov. Asa Hutchinson said, "The current appointment process has worked well for decades and I am satisfied that changes are not necessary."

Photo by Arkansas Secretary of State
Bill Sample
Photo by Cary Jenkins
Rep. Les Warren and Charles Hiett

SundayMonday on 11/10/2019

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