Bolstered by rebounding stock markets, the Arkansas Teacher Retirement System's investments increased in value last quarter by $737 million to $17.4 billion, the system's investment consultant said Monday.
The system earned a return of 5.9% in the quarter that ended Sept. 30 to rank in the top 10% of its peers across the nation, Katie Comstock of Aon Hewitt Investment Consulting said.
"We are expecting a ... return July through the end of November for ATRS [the retirement system] of north of 13% as it stands today, so a very strong start to the  fiscal year," she told the system's board of directors. Fiscal 2021 started July 1.
Since Sept. 30, the system's assets have increased to $18.2 billion as of Monday, system Executive Director Clint Rhoden said after the board of trustees meeting.
The substantial increase so far in fiscal 2021 comes on the heels of those investments dropping by $921 million to $16.6 billion in fiscal 2020.
In July, the system filed a complaint in federal court seeking to recover losses estimated at $700 million to $800 million that it claimed it incurred earlier this year as a result of negligence and breach of fiduciary and contractual duties by Allianz Global Investors U.S. LLC and related defendants. A spokesman for Allianz has called the system's allegations flawed and said the company would vigorously defend itself in court.
The teacher retirement system is state government's largest retirement system with more than 100,000 working and retired members.
The system's target investment return is 7.5% a year.
In contrast, the average target investment return for public pension systems is 7.18% a year and the median target return is 7.25%, based on information from the National Association of State Retirement Systems, said Brian Murphy of the system's actuary, Gabriel, Roeder, Smith & Co.
During the past 10 years, the system's return has averaged 8.5% to rank in the top 10% of its peers, Aon Hewitt reported.
As of June 30, the system's liabilities totaled $22.3 billion and an actuarial value of its assets totaled $18 billion, so the system was 81% funded, Gabriel, Roeder, Smith & Co. reported to the trustees.
The unfunded liabilities totaled $4.34 billion, with a projected payoff period of 27 years as of June 30, according to Gabriel.
Unfunded liabilities are the amount by which the system's liabilities exceed the actuarial value of its assets. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a home.
By comparison, the system had a 28-year projected payoff period as of June 30, 2019, said Judith Kermans of Gabriel.
"It is true we dropped a year, but in fact the investment performance on a market value basis was very bad, like many plans [in fiscal] 2020," she said.
"The reason why it doesn't look worse is because of the smoothing mechanisms that we have in place, which really helped this year," she said. Those mechanisms spread out recognition of gains or losses from each fiscal year over a four-year period.
Kermans said the system needs to record strong investment gains to make up for the losses the system will recognize in the next three years.
In fiscal 2020, employers paid $475 million into the system, while working members who pay into the system contributed $151.6 million.
In fiscal 2021, employers pay 14.5% of payroll into the system, while working members contribute 6.5% of their salary.
The employer rate was 14% of payroll in fiscal 2019 and is slated to increase 0.25% each year over a four-year period to 15% in fiscal 2023.
The employee rate was 6% in fiscal 2019 and is slated to increase 0.25% a year over four years to 7% in fiscal 2021.
They are among several measures the trustees approved in November 2017 to raise money and cut costs over seven years in response to reducing the target investment return from 8% to 7.5% a year.
As of June 30, the system included 66,900 working members not in the deferred retirement plan, 3,639 members in the deferred retirement plan, and 50,133 retired members, Gabriel reported.
The working members not in the deferred retirement plan earned an average salary of $40,709 a year and had an average age of 44.3 years and average service of 10.3 years as of June 30, Gabriel reported. The members in the deferred plan earned an average salary of $63,477 a year, according to Gabriel.
The 50,133 retired members received an average annual benefit of $23,833 as of June 30, Gabriel reported.
In the quarter that ended Sept. 30, stock market investments earned a return of 8.9% to reach a value of $9.48 billion. Bond investments posted a return of 1.4% to end at $2.32 billion, according to Aon Hewitt.
Private equity investments had a return of 7.8% last quarter to end up valued at $2.51 billion, and real estate, timber, agriculture and infrastructure investments earned a return of -1.3% to reach a value of $2.09 billion on Sept. 30, the consultant reported.
Opportunistic and alternative investments earned a return of 2.1% to end the quarter at $874 million, Aon Hewitt reported.
The trustees approved changing the system's direct investment in Highland Pelletts LLC to a limited partnership. The company operates a wood-pellet manufacturing plant in the Pine Bluff industrial park near White Hall.
In 2016, the trustees authorized an investment of up to $25 million in Highland Pellets. In 2017, they approved a $26 million loan to the company. In 2018, the trustees decided to guarantee a $150 million loan and interest owned by Highland Pellets.
South Harbor LLC, a Highland management entity, owns the rest of the company, system Deputy Director Rod Graves said after the meeting.
There are 34 Highland employees at the Pine Bluff plant and about 70 construction contractors working on plant upgrades, and Highland is expected to employ about 94 people when the upgrades are complete, he said.
Graves told trustees that the system's staff members have been working with legal counsel and Highland management to look for ways to simplify the investment structure.
"This restructuring could help make it more attractive for other investors to come in [and] ... add some capital that would allow ATRS [Arkansas Teacher Retirement System] to ... diversify and expand the footprint of that Highland plant and the one location in Pine Bluff to maybe some adjacent areas, or even areas in other locations," he said.
Graves said system officials believe this restructuring is the best way to diversify the investment without the system putting in more capital.
Trustees also authorized an investment of up to $40 million in Los Angeles-based Mesa West LLC's Mesa West Real Estate Income Fund V, a real estate fund focused on originating senior debt on value-added and transitional commercial real estate properties. Mesa West is a wholly owned subsidiary of Morgan Stanley.
Monday's board meeting was the first for two new trustees -- Michael Johnson, a teacher in the Pulaski County Special School District, and Mike Hernandez, executive director of the Arkansas Association of Educational Administrators.
Last month, the board appointed Johnson to fill the vacancy created by the resignation of Janet Watson of Bryant, and Hernandez to fill the vacancy created by the resignation of Richard Abernathy of Benton, Hernandez's predecessor at the association.