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Market's upheaval cut $60M at system

APERS trustees hear consultant by Michael R. Wickline | August 20, 2020 at 3:11 a.m.
Arkansas Public Employees Retirement System Executive Director Duncan Baird is shown in this photo.

The Arkansas Public Employees Retirement System's investments dropped by $60 million in value to $9.09 billion last fiscal year in turbulent stock markets, an investment consultant told the system's board of trustees Wednesday.

The system's investment return for fiscal 2020, which ended June 30, was 2.41%, which lagged the median return of 3.26% of similarly sized systems, investment consultant Callan reported. The system's target investment return is 7.15% a year. Its return has averaged 9.16% a year over the past 10 years.

The value of the system's investments declined slightly in fiscal 2020 because retirement benefits paid out that year were greater than the combination of investment gains and contributions paid by employers and members.

"For the last quarter, the total fund was up 14.61% ... so we are back to where we kind of were at the end of [fiscal] 2019, despite all the noise from the first and second quarter," Brianne Weymouth, senior vice president of Callan, told the trustees.

The trustees voted to maintain the system's 15.32% of employee payroll charged to state and local governments in fiscal 2023, which starts July 1, 2022.

"If we change that in any way, we're about to go into a legislative session [and] that could create all sorts of issues," said trustee Daryl Bassett, who also is secretary of the Department of Labor and Licensing. "We don't want to do that."

The trustees last month approved draft legislation aimed at improving the system's financial status and reducing its unfunded liabilities. The proposals would be considered by the Arkansas General Assembly in the regular session starting in January. One proposal would increase the salary rate charged to members who pay into the system from 5% to 7% over eight years.

FISCAL 2020

State and local governments paid $299.4 million into the system in fiscal 2020, while system members paid $71.4 million, according to a report. The system paid out $587.4 million in benefits in fiscal 2020, the system reported.

As of June 30, the system included 44,373 working members with an average salary of $40,469 a year and 39,805 retired members, including deferred retirement plan participants, with $637 million in annual retirement benefits or an average of $16,003 a year, system actuary Gabriel Roeder, Smith & Co. indicated in its preliminary report to the board.

Gabriel said the system's assets were valued at $9.09 billion and actuarial accrued liabilities totaled $11.51 billion as of June 30, so the system is 79% funded.

Unfunded liabilities totaled $2.42 billion June 30 and are projected to pay off over a 23-year-period, Gabriel said. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.

Callan reported Wednesday that the system's domestic stock market investments earned a 6.06% return in fiscal 2020 to reach $3.6 billion, while international stock investments had a negative 1.45% return and totaled $2.1 billion.

Bond investments recorded a return of 6.81% to total $1.5 billion, while so-called real assets posted a negative 4.37% return to reach $1.2 billion, according to Callan. Real assets include energy, real estate and timber investments.

Callan said the energy investments recorded a return of negative 21.9% in fiscal 2020 to end up valued at $134.7 million.

Diversified strategies investments posted a return of minus 1.17% and totaled $445.2 million, Callan reported.

SECURITIES LITIGATION

The trustees Wednesday asked Executive Director Duncan Baird to revise a proposed policy under which the board would delegate to him the authority to review, evaluate and authorize securities litigation appropriate for the system, and the authority to make all administrative, procedural or strategic decisions to meet the board's goals and objectives.

Under this proposal, "[p]rior to seeking lead plaintiff status or initiating securities litigation, the Executive Director will provide a recommendation for a securities litigation claim to the board for consideration."

The system has 18 securities monitoring firms. The firms are paid on a contingency-fee basis and potentially millions of dollars are at stake in some successful and complex cases.

Trustee Dale Douthit of Russellville said he disagreed with the proposed policy because he "would not want to approve a policy that keeps the board out of the loop on what litigation we are engaging in and what firms are going to be engaged for that litigation.

"Each individual board member could have a conflict, could have other information that would be important for all board members to know at a meeting rather than delegating to the director the authorization for securities litigation," he said.

Trustee Andrea Lea of Russellville, who also is the Republican state auditor, said she viewed the proposed policy as authorizing the staff to do the background on proposed cases and "bring it to the board meeting. and at that point, if we have objections we say, "Hey, wait I have an objection.'"

But Douthit, who is chairman of the state's Workers' Compensation Commission, said, "I don't want to wake up one morning and open the paper and see we have engaged one of these firms that have a national ethics problem.

It "is very sensitive to me," he said. "I went to work for a wise attorney 25 years ago and the first thing he said is when someone tells you it's not about the money, it's about the money.

"I don't want to give authorization to Duncan to bind this board to a case or a firm until we have a chance to vet why because we all know ... that this is subject to a lot of outside influences, and I believe that in the effort of transparency and in the spirit of the transparency, all those things should come to light at a board meeting and everyone can see you," Douthit said.

Trustee Larry Walther, who also is secretary of the state Department of Finance and Administration, said, "We want to be the final decider of when we become the lead plaintiff ... and that needs to be crystal clear in this policy."

Baird said the intent of the proposed policy "was to do exactly that," and "if it's not crystal clear enough, we can go back and delete that section and we can draft it just like the board would like it drafted."

"I think we have to be careful and very responsible in how we do that, so I want that to be reflected in any policy we have," he said.

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