The board of trustees of the Arkansas Teacher Retirement System approved a slight but expected increase in the contributions of employers and most employees during a meeting Monday at which the board also learned that the system's investments increased in value by $797 million in the past quarter.
The system's investment return was 5.4% in the quarter that ended Dec. 31, said P.J. Kelly of Chicago-based Aon Hewitt Investment Consulting. That ranked in the top third among the nation's public pension systems, he said after the trustees' meeting. The investments totaled $18.3 billion at the quarter's end.
The trustees voted to increase the rate charged to system employers from 14.25% to 14.5% of their employees' payroll. The board also increased the rate charged to the system's members who pay into the system from 6.25% to 6.5% of their salaries in fiscal 2021, which starts July 1. (Most employees make contributions, but not all.)
The system received $430.8 million from employers based on a 14% rate charged on about $3 billion in salary in fiscal 2019, said Clint Rhoden, the system's executive director. Given the same amount of salary, the system can expect to receive about $7.6 million more in fiscal 2020, based on the 14.25% rate, and then about $7.6 million more in fiscal 2021 based on the 14.5% rate, he said.
Trustee Richard Abernathy said the state budget in fiscal 2020 includes funds to help school districts pay for the rate increase to employers. Putting those funds in the budget was suggested by Republican Gov. Asa Hutchinson.
The system received $141.8 million in contributions from working members in fiscal 2019 based on a 6% rate and salaries totaling about $2.3 billion, said Rhoden.
Given the same amount of salary, the system can expect to receive about $5.9 million more in fiscal 2020 based on the 6.25% rate and then about $5.9 million more in fiscal 2021 based on the 6.5% rate, he said.
The rate increases approved Monday are part of the trustees' plan -- initially adopted in 2017 -- to phase in an eventual increase to 15% of payroll for employers. Employees who contribute to the system will eventually see their rates increased to 7% of their salary when the four-year phase-in ends.
In November 2017, the trustees voted to implement several measures to raise money, including these rate increases, and cut costs over a seven-year period in response to the reduction in the system's projected annual investment return from 8% to 7.5%.
At that time, officials from Michigan-based actuary Gabriel, Roeder, Smith & Co. urged the trustees to cut the system's projected annual investment return because the median projected return for public pension systems was then 7.5%.
The trustees also voted Monday to increase the outsourcing surcharge to employers from 2% to 3% of outsourced salaries for fiscal 2021.
A 1% surcharge raised $783,226 based on about $78 million in salary in fiscal 2019, and the 2% rate in fiscal 2020 is expected to raise $783,226 more. The 3% rate in fiscal 2021 is expected to also raise $783,226 more, given the same amount of salary, Rhoden said. The plan is to increase the rate to the 4% limit allowed under state law in fiscal 2022, he said.
As of June 30, the system included 68,457 working members, who are not in its deferred retirement plan, with an average annual salary of $39,065, and 3,707 other working members, who are in its deferred retirement plan, with an average annual salary of $62,812, according to an actuary report from Gabriel, Roeder, Smith & Co.
The system also included 48,677 retired members with an average annual benefit of $23,588, Gabriel reported.
The trustees also adopted a policy that the system's goals include aiming for 100% funding and getting the system's projected payoff period for its unfunded liabilities below 18 years.
"I think it would be nice for us to state that our goal is to be 100% funded," Rhoden told the system's trustees. "We don't state that anywhere. ... I don't want us to get to a point when we get to 90% [funded] one day, we think that's good enough, because we should always be reminding ourselves the goal is to be 100% funded."
As of June 30, 2019, the system was 80% funded based on a $17.4 billion actuarial value of assets and $21.7 billion in liabilities, with a projected payoff period of about 28 years, Gabriel told the trustees in December. The unfunded liabilities totaled $4.29 billion.
Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.
In December, Gabriel officials told the trustees that the system is in solid financial health. But they also warned that in a few years they are likely to recommend the trustees reduce their 7.5% target for the system's annual investment return. The median return for the nation's public pension systems is now 7.25%, they said.
The system's average annual investment return is 8.5% over the past five years, 9.4% over the past 10 years and 8.6% since April 1986, according to Aon Hewitt.
In the quarter that ended Dec. 31, the investment consultant reported Monday that the system's stock market investments earned an investment return of 9.2% to total $10.1 billion, and its bond investments earned a return of 0.6% to total $2.6 billion.
The system's private equity investments last quarter earned an investment return of 2.3% to total $2.2 billion, while real estate investments earned a return of 0.7% to total $1.3 billion, and the system's opportunistic/alternative investments earned a 0.2% return to total $1 billion, the consultant reported.
The system's infrastructure investments earned a return of 1.6% to total $302 million in the quarter that ended Dec. 31, while timber investments earned a return of 2.6% to total $298 million and agriculture investments earned 0.9% to reach $199 million, according to the consultant.
In other action Monday, the trustees voted to redeem in full their investment in the York Credit Opportunities Fund, which is an opportunistic credit fund managed by New York-based York Capital Management. In April 2011, the trustees voted to invest $50 million in this fund.
"You still earned a positive return from it, but it was doing much better previously," Kelly told the trustees.
"They are just going to close that fund and return capital to investors as it becomes available. They offered if you wanted to move [the money] to one of their other funds they would maintain a high water mark from this fund, but we don't recommend doing anything along those lines at this time," he said.
The trustees also voted to invest up to $30 million in the BVIP Fund X, LP, a private equity buyout fund managed by Boston-based BV Investment Partners.
The fund is being formed primarily to make acquisitions of middle market companies in the United States in the "tech-enabled business services" and information technology sectors, according to the system's Pennsylvania-based private equity consultant Franklin Park.
A Section on 02/04/2020