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The trustees for the Arkansas Public Employees Retirement System will ask the Arkansas General Assembly in the 2021 regular session to enact legislation that would phase in an increase in the 5%-of-salary rate charged to members who pay into the system, the trustees decided on Tuesday.

The system's trustees also decided to ask lawmakers to enact legislation that would change the three-year period for computing the final average salary upon which system members' retirement benefits are calculated and change, for newly hired members, the compound, 3% cost-of-living adjustment paid each year to the system's retirees.

The trustees said their aim is to improve the retirement system's financial status and to reduce the system's unfunded liabilities.

The public employees system is state government's second-largest retirement system with more than $9 billion in investments and more than 80,000 working and retired members.

"If we adopt a final package today, that's not the last day stop in this process," system Executive Director Duncan Baird told the trustees at the outset of their nearly two-hour meeting.

"We expect that the joint [legislative] retirement committee is going to do a virtual town hall and give us an opportunity to talk about the financial status of the system, talk about the pieces of legislation that we are proposing and hear additional feedback and take questions from our members," he said.

Mita Drazilov, an actuary for Gabriel, Roeder, Smith & Co., told the system's trustees that the system earned an investment return of about 2% in fiscal 2020 that ended June 30.

In fiscal 2020, the system's investment portfolio earned 2.38%, based on the system chief investment officer's figures and was valued at $9.09 billion on June 30, Baird said afterward. The system's target rate of return is 7.15% a year. The system's investment consultant, Callan, "will provide the detail and final numbers on our investments" at the Aug. 19 meeting, he said.

The legislative package, approved Tuesday by trustees in a voice vote with no audible dissenters, would:

• Phase in an increase in the 5%-of-salary rate paid by members to 7% of salary over an eight-year period.

• Base the final average salary used to calculate retirement benefits on the five highest-paid years rather than the three highest-paid years for active members.

Under this proposal, a snapshot of the three-year final average salary would be taken at a specific date upon enactment of the legislation. When a member retired, that member's actual five-year final average salary calculation would be compared with the original three-year snapshot taken at the previously designated date and the member would get to use the higher calculation.

• Change the compound, 3% cost-of-living adjustment to a compound cost-of-living adjustment based on the lower of the consumer price index or 3% for the retirement benefits of only newly hired members.

FOUR PROPOSALS

The trustees' proposed legislative package that they approved is one of four that the trustees considered Tuesday. The other package that drew considerable discussion included the same three changes and also would have increased the five-year vesting period from five years to eight years for newly hired members.

Board Chairwoman Candace Franks, who is the state's bank commissioner, said "We do hope that we do get some good success in our [legislative] session next year."

Trustee Daryl Bassett, who is secretary of the state Department of Labor and Licensing, said that "our ultimate goal is to try to attack that 800-pound gorilla in the room, the unfunded liability."

The system's unfunded liabilities totaled $2.39 billion as of June 30, 2019, with a projected payoff period of 24 years. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a home.

Trustee David Hudson said that it is preferable to phase in an increase of the member pay-in rate over an eight-year period rather than four years based on feedback from the associations representing cities, counties and state employees.

"Even in many counties, many municipal governments, they are not an annual increases, so people would be taking a 0.5% reduction in pay on four years versus an 0.25 % [reduction] on a eight-year," said Hudson, who is the Sebastian County judge.

Trustee Gary Carnahan of Hot Springs said basing the final average salary used to calculate retirement benefits on the five highest-paid years rather than the three highest-paid years for active members would be a good change.

"It is more fair to everyone if we spread that out and make it more difficult for someone to manipulate those last three years," in order to boost their retirement benefits, he said.

Hudson said that "final average compensation will be somewhat controversial.

"It is not going to be uniformly accepted most likely, depending upon where an individual sits within the system," he said.

WORRIES ON FUTURE

Carnahan said he favors changing the compound, 3% cost-of-living adjustment to a compound cost-of-living adjustment based on the lower of the consumer price index or 3% for the retirement benefits of newly hired members because "that has the greatest impact on unfunded liability in the long-term, although we may not have, frankly, legislative support of anything related to the COLA."'

Trustee Andrea Lea of Russellville, who is the Republican state auditor, said there were a considerable number of retired members who attended the legislative public retirement committee meetings in the 2019 regular session, and there were very few working members "hoping that [the system] is going to be there for them when they retire."

"When I think of [the trustees'] fiduciary responsibility I think long term, what's the viability of this system for the people that got hired this year, that hope to retire in 25, 28 years," she said.

"I saw it when all of these retirees are there with the big buttons that said, 'Hands off my retirement,'" Lea said. "I get that on one hand they're already retired, but I thought, 'What about all those people currently in the system making $25,000, hoping the system is secure for when they retire?'"

In the 2019 regular session, most of the trustees' proposals aimed at cutting the system's unfunded liabilities failed to clear the Legislature's public retirement committee.

The system charges state and local governments 15.32% of their annual payrolls, while most employees pay 5% of their salaries into the system. State and local governments paid $293.5 million into the system in fiscal 2019, which ended June 30 2019, while employee members paid $68.2 million, according to a system report.

As of June 30 of 2019 , the system had 45,965 members with an average salary of $39,212 and 38,543 retired members and beneficiaries with annual retirement benefits of $609.1 million (an average of $15,803 a year), according to Gabriel, Roeder, Smith & Co.

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