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State pension holdings gain $2.6B in year

Return of 31.49% ranked in U.S.’ top 9%, board told by Michael R. Wickline | August 19, 2021 at 6:55 a.m.
State budget administrator Duncan Baird is shown in this 2013 file photo.

Buoyed by robust stock markets, the Arkansas Public Employees Retirement System’s investments gained $2.6 billion in value in the fiscal year that ended June 30 to reach $11.6 billion, the system’s investment consultant reported Wednesday.

The system’s investment return in fiscal 2021 was 31.49% to rank among the top 9% of the nation’s public pension systems, investment consultant Callan said in a written report to the system’s board of trustees. The target return is 7.15% a year.

The return over the past 10 fiscal years has averaged 9.63% a year to rank in the top 16% of the nation’s public pension systems, Callan said in its report.

The system had “really a strong performance for the fiscal year,” said Brianne Weymouth, a senior vice president for Callan.

Afterward, system Executive Director Duncan Baird said investments were valued at about $11.65 billion as of Tuesday.

The system is state government’s second-largest such agency, behind only the Arkansas Teacher Retirement System.

[Graphic not appearing above? Click here » arkansasonline.com/819state11B/]

Teacher Retirement System Executive Director Clint Rhoden told some state lawmakers Aug. 12 that preliminary figures show that system’s investment return was about 30% in fiscal 2021, though the final figures won’t be available until October. The teacher retirement system’s investments were valued at about $21 billion as of Tuesday, Rhoden said Wednesday.

EMPLOYER RATE

During its meeting Wednesday, the Public Employees Retirement System’s board of trustees voted to tentatively keep the current 15.32% of payroll rate that will be charged to state and local governments in fiscal 2024, which starts July 1, 2023. The trustees’ final vote on that rate will be made at their Nov. 17 meeting.

Trustee Gary Carnahan of Hot Springs said he wants the system to stick with its existing employer rate, rather than reducing the rate for fiscal 2024, in part because “we aren’t sure exactly what’s going on with the economy.” The board of trustees wants to reduce the system’s unfunded liabilities and the projected period for paying off the unfunded liabilities, he said.

“I think we are going in the right direction,” Carnahan said.

The system’s actuary phases in the recognition of investment gains and losses over a four-year period in an attempt to stabilize the employer rate charged to state and local governments.

As of June 30, unfunded liabilities totaled $1.93 billion, with a projected pay-off period of 16 years, said David Hoffman of the system actuary Gabriel, Roeder, Smith & Co.

By comparison, a year ago, the unfunded liabilities totaled $2.42 billion with a projected payoff period of 23 years, Gabriel reported then.

Unfunded liabilities are the amount by which a system’s liabilities outstrip an actuarial value of its assets. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.

The system could reduce the rate charged to employers from 15.32% of employee payroll to 13.77%, starting July 1, 2023, but that would mean the projected payoff period for unfunded liabilities would drop from 23 years to 22 years rather than to 16 years, Hoffman said.

FISCAL 2021

In fiscal 2021, state and local governments paid $306.5 million into the system, an increase of $7 million over the previous fiscal year, and system members contributed $75 million, an increase of $3.5 million over the previous year, Baird said.

The system paid $608.2 million in retirement benefits in fiscal 2021, a $20 million increase over fiscal 2020, he said.

Net investment income totaled $2.6 billion in fiscal 2021, according to a system report.

As of June 30, the system included 42,669 working members with an average salary of $41,759 a year and 40,762 retired members, including deferred retirement plan members, with total benefits of $658.8 million a year, or about $16,162 a year, Gabriel, Roeder, Smith reported. There are 1,447 deferred retirement plan members with a total payroll of $92 million, or about $63,579 a year.

According to Callan’s report, investment performance in fiscal 2021 included: A 43.65% return on domestic stock market investments to ended up valued at $4.94 billion on June 30.

A 41.35% return on international stock market investments to reach $3.04 billion.

A 4.32% return on bond investments to total $1.71 billion.

A 17.26% return on diversified strategies investments to reach $519.1 million.

A 18.52% return on real assets — real estate, timber and energy investments — to ended up valued at $1.3 billion.

INVESTMENT MANAGERS

The board on Wednesday also decided to interview four real estate investment managers and two farmland investment managers at a future meeting.

The real estate investment managers work for the Carlyle Property Investors Fund, Clarion Lion Industrial Trust, the Principal Enhanced Property Fund and Prologis U.S. Logistics Fund. The system aims to invest $250 million in so-called core plus real estate through this search.

The farmland investment managers are from the International Farming Corporation Core Farmland Fund and Prudential Agricultural Investments Fund. The system aims to invest about $85 million in farmland over the next several years through this search.

NEW MEMBERS

Wednesday’s meeting was the first meeting for three newly appointed trustees.

They are retired Bureau of Legislative Research assistant director of research Richard Wilson, retired Arkansas Game and Fish Commission law enforcement corporal Gary Wallace and retired Alma Police Chief Russell White, who is now police chief and airport security coordinator at the Northwest Arkansas National Airport.

Senate President Pro Tempore Jimmy Hickey, R-Texarkana, said he appointed Wilson and Wallace to the board.

House Speaker Matthew Shepherd, R-El Dorado, appointed White to the board Aug. 6, said House spokeswoman Cecillea Pond-Mayo.

Act 686 of 2021 — sponsored by Rep. Les Warren, R-Hot Springs — expanded the board of trustees from nine to 13 members, with the House speaker and Senate president pro tempore each appointing two retired system members. One of the two appointees for each legislative leader is required to be a retired law enforcement officer who is not in the Arkansas State Police Retirement System.

Under state law, the governor also appoints three state employees and three non-state employees to the board, which also includes the state auditor, state treasurer and secretary of the Department of Finance and Administration. (The governor appoints the finance department secretary to that Cabinet post.) Act 311 of 2017 limited the board of trustees to two retired members, one representing state employees and the other representing local government employees.

Under Act 686, no more than one of the three non-state employee trustees and no more than one of the three state employee trustees appointed by the governor must be a retired system member. The three non-state employee trustees also will include at least one currently elected county judge and at least one mayor under Act 686.

On Wednesday, the system’s board re-elected retired state Bank Commissioner Candace Franks as its chairman and Department of Finance and Administration Secretary Larry Walther as its vice chairman.

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