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Fire, police pension fund gains $116.3M

State system’s quarterly return in top 9% by Michael R. Wickline | June 13, 2021 at 4:04 a.m.
Larry Middleton, executive vice president for Stephens Inc., is shown in this November 2019 file photo. (Arkansas Democrat-Gazette file photo)

The Arkansas Local Police and Fire Retirement System's investments increased in value by $116.3 million last quarter to $2.88 billion, an investment consultant said.

The system's investment return in the quarter that ended March 31 is 4.21% to rank in the top 9% of public pension systems, said Larry Middleton, executive vice president for Stephens Inc.

"It is really nice to have this recent performance," he told the system's trustees Thursday.

"We look forward to providing some numbers through the end of June that I think are going to be comparable" to the report for the last quarter, Middleton said.

As of March 31, the system's investments included $1.8 billion in the stock market, $701 million in bonds and $315 million in alternative investments ranging from private equity to infrastructure investments.

Afterward, Middleton said that since March 31, the system's investments totaled $2.99 billion in value as of the close of business Wednesday night.

The system's return for the year that ended March 31 is 35.24% to rank in the top 41% of public pension systems, and the average return over the past five years is 10.74% a year to rank in the top 24% of public pension systems, Middleton said.

The system's target rate of return is 7.5% a year, and that is outside the range that its actuary considers reasonable, said Heidi Barry of the actuary, Gabriel, Roeder, Smith & Co.

In March 2020, the system's trustees decided to stick with a projected annual investment return of 7.5%, after Gabriel had suggested reducing the targeted return to between 6.25% and 7%.

The Arkansas Local Police and Fire Retirement System includes more than 20,000 working and retired members.

Their employers contributed $133.2 million to the system in calendar year 2020 and members paid $26.5 million; the system paid out $156 million in benefits, according to a report to the system's board of trustees.

Roughly 40% of the employers' contributions are covered by a state insurance premium tax, system Executive Director David Clark said.

DISABILITY CASES

Clark said Act 722 of 2021 grants the system's board of trustees authority to implement an additional charge or "disability load" to employers with excess cases of disability, starting Jan. 1, 2022.

"In practical terms, there are two reasons adding a disability load to any employer contribution rate will not occur for several years," he wrote in a memo to the system's board of trustees.

"First, if the disability experience materially improves because of changes brought forward by the Disability Advisory Committee and approved by the Board, a disability load may not be needed," Clark said. "Second, a disability load should be prospective -- initially based on disability experience over the five calendar years of January 1, 2021, through December 31, 2025."

Employers have been provided guidance for best practices for hiring and retention, and the system has implemented improved processes for disability applicants, while also amending the duty disability benefit designations, Clark said.

"It makes sense to allow time for these measures to yield their results," he wrote in his memo. "It would be at that point the Board could determine if specific employers have disability experience that outpaces other employers and, therefore, supports a disability load."

The expected number of disability incidences in the system is about 20 a year, but the system is currently observing about 30 incidences per year, Gabriel said.

MEMBER NUMBERS

As of Dec. 31, 2020, the system included 6,916 working paid members with an average age of 38.9 years, average service of 12.2 years and average salary of $54,890 a year as well as 7,508 working volunteer members with an average age of 41.8 years and average service of 10.7 years, Gabriel reported. The system also had 8,438 vested members who have terminated their employment.

Gabriel said the system had 7,322 retirees and survivors with an average monthly benefit of $1,163 as of Dec. 31, 2020, which is an average annual benefit of $13,956.

As of Dec. 31, 2020, the system and local plans consolidated into it had $3.57 billion in liabilities and $2.63 billion in assets. That left the system with $935 million in unfunded liabilities.

If the system had a target investment return of 7% a year rather than 7.5%, the projected period for paying back the system's unfunded liabilities for paid service would be 24 years rather than 13.8 years, and the projected period for paying back unfunded liabilities for volunteer service would be 22 years rather than 13.1 years, both as of Dec. 31, 2020, Barry said.

Actuaries often compare the unfunded liabilities to a mortgage on a house.

OTHER MATTERS

The trustees voted to grant Clark a 2.5% career service award.

The career service award works the same for all staff members and is available to those who have already reached the top of their salary range, Clark said.

The career service award is a one-time gross payment effective with the anniversary date of hire, assuming a favorable annual performance review occurred, and "the one-time gross amount for me will be $4,895.52 and will occur with the second payroll cycle in July," he said. "Since it is a one-time payment, the annual pay, which is $195,821, will not change."

Staff members who have not reached the top of their pay ranges are eligible for a merit increase that ranges from 2% to 4%, based on receiving a favorable annual performance review, he said. "Whether it is a merit increase or career service award, the criteria is the same for all eight staff members of the retirement system -- what were the results of the annual performance review?"

Arkansas Legislative Audit will conduct a full audit of the system after the Legislative Joint Auditing Committee on June 4 approved a request for the audit from state Sen. Bob Ballinger, R-Ozark.

"This is an important entity that receives tax dollars, but has little to no legislative oversight," Ballinger wrote in a letter dated March 29 to the audit committee co-chairmen, Sen. Ronald Caldwell, R-Wynne, and Rep. Richard Womack, R-Arkadelphia.

Asked about the audit, Clark said in a written statement, "we will certainly respond to their inquiries and help move the process along."

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