LITTLE ROCK The trustees for the Arkansas Public Employees Retirement System on Tuesday whittled down the system's potential legislative packages aimed at reducing its unfunded liabilities in the 2021 regular session.
The system's actuary, Gabriel, Roeder, Smith & Co., presented the trustees with 11 packages of potential legislative changes.
The proposals include changes to the 5%-of-salary rate charged to members who pay into the system; the three-year period for computing the final average salary on which retirement benefits are determined; the five-year vesting period for system members; and the compound, 3% cost-of-living adjustment paid each year to the system's retirees.
The trustees on Tuesday reduced the 11 packages of proposed changes to two and asked system Executive Director Duncan Baird to develop a third package of proposed changes based on the two other packages and feedback from the trustees.
The trustees plan to decide upon final legislative proposals during their next meeting, which will be held in July, said board Chairwoman Candace Franks, who is the state's bank commissioner.
The Legislature's public retirement committee is going to have a series of town halls across the state or possibly one remote town hall during the August and September period, and "we are really working toward the [legislative] package that at the end of day we'll take out, we'll talk to the members about, we'll get more feedback on, so whatever we do here isn't the last stop," Baird told the trustees.
"It's just a step along the process as we work toward the 2021 legislative session," Baird said.
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's investments were valued at roughly $9.12 billion on Monday, after rising from $8 billion on March 31 to $8.9 billion on May 31, Baird said after the trustees meeting. The system started fiscal 2020 on July 1 with $9.15 billion in investments. The system's target rate of investment return is 7.15% a year.
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.
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, while employee members paid $68.2 million, according to a system report.
As of June 30, the system had 45,965 members with an average salary of $39,212 a year 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.
One of the packages of potential legislation that the trustees selected for further consideration would:
• Phase in an increase in the 5% of salary rate paid by system 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 on the three highest-paid years for active members, excluding deferred retirement plan participants.
Under this proposal, a snapshot of the three-year final average salary would be taken at a specific date upon the enactment of the legislation, Baird said. When a member retired, that member's actual five-year final average salary calculation would be compared to the original three-year final average salary snapshot taken at the previously designated date, and the member would get to use the higher final average salary calculation, he said.
• Increase the five-year vesting period to eight years for newly hired members only.
• 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 newly hired members only.
The other package of potential legislation that the trustees decided to consider further would:
• Phase in an increase in the 5%-of-salary rate paid by system members to 7% of salary over a four-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 non-vested and newly hired members.
• Increase the five-year vesting period to 10 years for non-vested and newly hired members.
• Change the compound, 3% cost-of-living adjustment to a simple cost-of-living adjustment based on the lower of the consumer price index or 3% for the retirement benefits of all non-vested and newly hired members.
Chris Villines, executive director of the Association of Arkansas Counties, told the system's trustees that about 18,000 county employees are in the public employees retirement system, so "it is undoubtedly the most valuable benefit that we offer to employees within county government."
"Unfortunately, we are woefully underpaid in county government. That's a systematic and long-term problem," he said. "This benefit helps us attract and retain good quality employees."
Villines said that "in general, county officials and employees have a hard time with any changes to the COLA," which is the 3%, compound cost-of-living adjustment for retired members.
"That seems to be something that is heavily relied upon when people join the system, when they get vested in the system, when they start targeting retirement dates, and when they get close to retirement a lot of decisions are made based on that COLA and in retirement especially," he said.
Mark Hayes, executive director of the Arkansas Municipal League, told the trustees that he's concerned that "anybody who is vested or on the DROP [deferred retirement option plan] or actually retired and if there are deep or even frankly any substantial cut to benefits, there is a pretty substantial body out there across the country that says those folks would have a property right ... and the result would be litigation that would be both time-consuming and expensive."