The Arkansas State Employees Association's executive director has suggested several options for the trustees for the Arkansas Public Employees Retirement System to consider pursuing in the 2021 regular session.
The system's trustees decided Wednesday that they want more time to review their actuaries' projections about their options and hear from other groups before they decide what system-improving bills they want state lawmakers to consider in the legislative session that begins in January.
The trustees said they hope to make their final decisions in June and possibly in July before the Legislature's public retirement committee meets in town-hall meetings with members in August and September.
John Bridges, executive director of the 13,000-member state employees association, said the group suggests that the trustees consider proposals to:
• Increase the rate charged to system members from 5% to 6% of a salary for newly hired employees.
• Increase the current five-year vesting period to 10 years for newly hired employees.
• Base the final average salary used in calculating retirement benefits on an employee's five highest-paid years rather than the three highest-paid years without changing any current employees' calculation.
"If the trustees renew efforts to raise the contribution rate for existing employees from 5 % to 6 % of salary, we asked that you consider phasing in the increase over 4 years to ease the burden on employees, many of whom are in low-paying jobs," Bridges said in his letter to the trustees that they reviewed Wednesday.
He said the association recognizes that it is in the best interest of its members that the retirement system remain strong, particularly in light of the recent volatility in the financial markets, and "we appreciate your thoughtful stewardship as fiduciaries of the system.
"New employees will have the opportunity to decide whether a new retirement structure suits their needs, but retired and vested employees have already acted in reliance on the benefits in effect," Bridges wrote. "For this reason, we strongly oppose any changes to the benefits or structure that state retirees currently receive or to the benefit formula that will be applicable to employees who are vested in their retirement benefits."
Duncan Baird, the system's executive director, said he assumes, based on the letter, that the association would oppose changing the compounded 3% cost-of-living adjustment paid to retirees each year.
The trustees' options include seeking a change in state law to authorize a simple 3% cost-of-living adjustment or a cost-of-living adjustment that would be the lesser of a compounded 3% adjustment or the consumer price index.
Trustee Jason Brady, a chief deputy treasurer for state Treasurer Dennis Milligan, said he wants Baird to inform Bridges that the system's investment return is about minus 3% so far in fiscal 2020, and that's "far short of our 7.15% target range." The fiscal year ends June 30.
"So as you visit with him, I would love for you to have a conversation about his perspective on that [cost-of-living adjustment] in times when we hit economic downturns," he said. "I understand sitting on this board for the treasurer and other boards that we are asked not to just to look at today, or tomorrow or next year, but 10 and 20 years down the road.
"But we do know the current market conditions will have an impact on our returns for the next four or five years as we smooth this out," Brady said.
Trustee Andrea Lea, who is the state auditor, said earlier in the trustees' meeting, "I wonder if some of these people realize that all of us are eating from the same cookie.
"Every board member is a member of the APERS, so as we are making the decisions, they affect us personally as well," she said. She said the trustees need to consider changes to the system in light of this latest stock market downturn because "we want a strong program 10, 20, 30 years from now."
Trustee Dale Douthit asked the system's actuaries to determine the impact on the system if:
• The rate charged to system members is raised to 6.5% of salary over two years.
• The vesting period for non-vested system members is raised to 10 years.
• The benefits for newly hired members are based on their six highest-paid years.
Board chairwoman Candace Franks said she wants to hear comments from each of the associations that represent various parts of the retirement system during the trustees' June meeting about the options.
In the 2019 regular session, most of the trustees' proposals aimed at reducing the system's unfunded liabilities failed to clear the Legislature's public retirement committee.
Baird said the system's investments were valued at about $8.6 billion earlier this week, compared with $9.15 billion at the start of fiscal 2020 on July 1.
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 house.
The system charges state and local governments 15.32% of their annual payrolls, while most employees pay 5% of their salaries.
State and local governments paid $293.5 million into the system in fiscal 2019, while employee members paid $68.2 million, according to a system report.
As of June 30, the system had 45,965 working members with an average salary of $39,212 a year, and 38,543 retirees and beneficiaries with annual retirement benefits of $609.1 million (or an average of $15,803 a year), according to system actuary Gabriel, Roeder, Smith & Co.
On another matter, Baird told trustees that he heard concerns from several lawmakers on the Legislative Council's Review Subcommittee last week about the trustees rehiring New York-based Labaton Sucharow as a securities monitoring firm.
The system is the lead plaintiff in a lawsuit filed by Labaton Sucharow in London against TESCO in the United Kingdom, according to a report to trustees.
System Chief Legal Counsel Laura Gilson said the case has been going on for a few years, and "it's not typical lead plaintiff status like we have here in the United States, so there is lot less action for us that's required by our agency."
Labaton Sucharow represented the Arkansas Teacher Retirement System in a class-action lawsuit in federal court in Massachusetts against financial-services provider State Street. The lawsuit resulted in a $300 million settlement and an initial award of $75 million in attorney's fees that was reduced by a judge to $60 million in February. A dispute that arose afterward involved a $4.1 million referral fee paid to Texas attorney Damon Chargois.
On Wednesday, Trustee Larry Walther asked Baird "about what we ought to be doing with regard to Labaton."
"We had an objective scoring criteria based on the requirements of the [request for qualifications]," Baird said, and the trustees decided to hire all 18 firms that met the minimum requirements after discussions at multiple meetings.
"I think there were some [lawmakers] that recognize that each of these firms is different. They may each bring something different and valuable to the table," Baird said. "We want to do really the minimal amount [of litigation] necessary in order to meet our fiduciary responsibilities, and I did say it was likely that some -- if not a majority of the firms -- will not be utilized over a given period of time simply because we haven't done that much litigation at APERS."
Walther said he hopes system officials ask the trustees for input before entering into litigation.
Metro on 05/21/2020