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After falling with the onset of the covid-19 pandemic, the Arkansas Teacher Retirement System's investments have risen in value during the past two months, an investment consultant told the system's board of trustees Monday.

The investments are now valued at roughly $16.2 billion, system Executive Director Clint Rhoden said after the meeting.

They fell from $18.3 billion to $15.1 billion in the quarter that ended March 31, to post a minus 16.4% investment return for that period, the system's consultant, Aon Hewitt Investment Consulting, said in a written report.

So far in fiscal 2020, which ends June 30, the system's investment return through the end of May is about minus 3%, said Katie Comstock of Aon Hewitt.

The investments were valued at $17.5 billion at the end of fiscal 2019, according to Aon Hewitt.

"We saw a sharp comeback, post the first quarter of 2020, in April, and it has continued through May," Comstock said.

Board Chairman Danny Knight asked Aon Hewitt officials "with all this political unrest and all what is going on in this country now, how do they anticipate this is going to affect the market in the next 10 days, 20 days?"

P.J. Kelly of Aon Hewitt replied, "I don't think we have the answer to that yet.

"Looking at today's markets, they actually opened positive," he told the trustees Monday morning. "I think the market somehow has been able to separate and look much more forward. Even with a lot of the covid-19 issues still lingering and questions that are unanswered, the market seems to be looking beyond ... that based on the way it has been performing.

"The stock market is much more of a speculative market and sometimes it can overreact to short-term issues and sometimes it can look past them as well, so that seems to be the case here at least initially," Kelly said. "But we don't know what the next year or two holds."

As of June 30, 2019, state government's largest retirement system included 68,457 working members who are not in its deferred retirement plan, with an average annual salary of $39,065. It also has 3,707 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 has 48,677 retired members with an average annual benefit of $23,588, Gabriel reported.

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 reported. The unfunded liabilities totaled $4.29 billion, Gabriel said.

Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.

The system received $430.8 million in employer contributions and $141.8 million from members in fiscal 2019, Rhoden said.

The trustees voted in February to increase the rate charged employers from 14.25% of payroll to 14.5%, starting July 1. Trustees also increased the rate charged to working members who pay into the system from 6.25% to 6.5%, starting July 1. Most working members contribute. The increases are part of the trustees' plan adopted in 2017 to eventually raise the rate paid by employers to 15% of payroll and that paid by working members to 7% of salary.

NEW INVESTMENTS

The trustees authorized up to $210 million in new investments that included:

• Up to $50 million in Torchlight Debt Fund VII, an opportunistic real estate fund focused on high-yield debt instruments in public and private markets. The fund manager is Torchlight Investors LLC.

• Up to $50 million in CBRE Strategic Partners U.S. Value 9, a value-added real estate fund focused on institutional quality multifamily, office and retail properties in the United States. The fund manager is OBRE Group Inc.

• Up to $50 million in Macquarie Infrastructure Partners V, a core infrastructure fund focused primarily on North American infrastructure assets. The fund manager is Macquarie Infrastructure Partners Inc.

• Up to $30 million in LLR Equity Partners VI, a growth equity fund focused on small and middle market companies in technology and health care. The fund manager is LLR Partners.

• Up to $30 million in Franklin Park Venture Capital Fund XIII, a fund of funds managed by Franklin Park Investing in venture capital private equity funds. Franklin Park is the system's private equity manager.

SECURITIES MONITORING

The trustees voted to allow securities monitoring firms to complete their active cases for the system and require Rhoden to present to the trustees any future litigation that he wants the firms to pursue.

Several state lawmakers said last month they wanted the boards of the Teacher Retirement System and the Arkansas Public Employees Retirement System to reconsider their decisions to rehire New York-based securities monitoring firm Labaton Sucharow.

In December, the trustees for the Teacher Retirement System voted to contract with six securities monitoring firms.

The firms are Bernstein, Litowitz, Berger & Grossmann; Kaplan, Fox & Kilsheimer; Kessler Topaz Meltzer & Check; Labaton Sucharow; Bleichmar Fonti & Auld; and Cohen Milstein Sellers & Toll.

Kessler Topaz; Bernstein, Litowitz; and Labaton each represent the system in pending securities lawsuits in which the the system is the lead plaintiff, according to a system report to the trustees.

Securities monitoring firms are paid on a contingency fee basis, with payments determined by a judge and coming out of any settlements and awards. Potentially millions of dollars are at stake in successful cases that are large and complex and involve many retirement systems.

Labaton has represented the Teacher Retirement System in a class-action lawsuit against financial services provider State Street in which there was a $300 million settlement and an initial award of $75 million in attorneys' fees that was later reduced to $60 million. A dispute that arose involved a $4.1 million referral fee paid to a Texas attorney.

In testimony to lawmakers in July 2018, then-system Executive Director George Hopkins said that until a special master raised questions about the referral fee, he didn't know that was part of the attorneys' fees awarded. Hopkins retired Nov. 16, 2018.

Trustee Richard Abernathy initially recommended that the trustees allow Labaton to complete its active cases for the system, and "if the administration believes Labaton is the best firm to represent ATRS in future cases, the administration will bring the recommendation back to the [board] for discussion and/or approval."

[CORONAVIRUS: Click here for our complete coverage » arkansasonline.com/coronavirus]

But Knight said he wants to treat each firm the same.

"I don't want to single this company out," he said of Labaton. "Things happened a long time ago and situations changed, personnel changes. Sometimes, it takes a long time to live it down."

The trustees approved Abernathy's revised recommendation to have the board decide whether to engage in future litigation over investments.

Metro on 06/02/2020

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