The Arkansas Teacher Retirement System's investments dropped in value by $1.4 billion last fiscal year to $19.7 billion amid declining stock and bond markets, an investment consultant told the system's board of trustees Monday.
The system's investment return in fiscal 2022 was -3.9% and ranked in the top 21% of the nation's large public pension systems, said Katie Comstock of the system's investment consultant Aon Hewitt Investment Consulting.
The system's diversified investment portfolio helped "buffer the pain" of the system's losses in stock and bond investments, she said, and the system benefited in February from a large securities litigation settlement in fiscal 2022.
Earlier this year, the system netted $507.4 million out of a $642.8 million settlement of a lawsuit filed in July 2020 in federal court in New York seeking to recover losses that the system claimed it incurred as a result of negligence and breaches of fiduciary and contractual duties by Allianz Global Investors U.S., LLC and related defendants.
The Arkansas Teacher Retirement System is state government's largest retirement system with more than $19 billion in investments and more than 100,000 working and retired members.
P.J. Kelly of Aon Hewitt Investment Consulting reminded the system's trustees that the system had its best investment performance ever in fiscal 2021 that ended June 30, 2021. Amid a stock market boom, the system's investments gained $4.5 billion in value in fiscal 2021 to $21.1 billion, and earned an investment return of 31.9% in fiscal 2021 to rank among the top 5% of the nation's large public pension systems.
Comstock said the system's investments have performed strongly compared to those of their peers over various time periods.
The system's investment return has averaged 7.7% a year over the past three years, 8% a year over the past five years, and 9.3% a year over the past 10 years, Aon Hewitt Investment Consulting said in a written report to the board. The system's average investment return of 9.3% a year over the past 10 years ranks among the top 6% of large public pension systems, Comstock said.
The system's target investment return is 7.25% a year, after the trustees voted to reduce it from 7.5% a year in November.
Comstock said the system's investments gained about $240 million in value during the first two months of fiscal 2023, which started July 1, to reach $19.9 billion at the end of August. The investment markets are very volatile, she said.
After the trustees' meeting, system Deputy Director Rod Graves said the system's investments are currently valued at about $19.6 billion.
FISCAL 2023 DETAILS
According to the Aon Investment Consulting, the value of the system's various investments and their respective investment returns at the end of fiscal 2022 on June 30, 2022, included:
• $10.1 billion in stock market investments with an investment return of -13.4%.
• $2.9 billion in bond investments with an investment return of -7.5%.
• $3 billion in private equity investments with an investment return of 16.6%.
• $1.4 billion in real estate investments with an investment return of 21.7%.
• $920 million in opportunistic and alternative investments with an investment return of 0.2%.
• $376 million in infrastructure investments with an investment return of 16.3%.
• $329 million in timber investments with an investment return of 13.2%.
• $237 million in agriculture investments with an investment return of 12.8%.
Trustee Jason Brady said the system's diversified investment portfolio with investments in assets such as private equity and real estate "is saving us now."
"It is a bloody nose," he said.
Trustee Jeff Stubblefield of Charleston advised fellow trustees that "the big thing is don't panic."
"I understand it isn't the greatest report," he said, referring to the system's investment performance in fiscal 2023.
Stubblefield said the system's investment losses were a lot worse amid the 2008 recession, and the system stuck with its investment strategies at that time and its investments bounced back.
In fiscal 2009 that ended June 30, 2009, the system's investments fell in value by $2 billion to $8.8 billion and the system's investment return was -18%, then-system Executive Director George Hopkins reported in August of 2009.
The trustees will receive the system's actuarial report for June 30, 2022, during their meeting Dec. 5, system Director Clint Rhoden said Monday after the trustees' meeting.
As of June 30, 2021, the system's unfunded liabilities totaled $4.6 billion with a projected payoff period of about 32 years, according to system actuary Gabriel, Roeder, Smith & Co. Unfunded liabilities are the amount by which the system's liabilities outstrip an actuarial value of the system's assets.
Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.
The actuary phases in recognition of investment gains and losses over a four-year period for actuarial purposes in an attempt to stabilize the rate charged to system employers.
As of June 30, 2021, the system had 66,663 working members not on the deferred retirement plan with an average age of 44.2 years, average service of 10.5 years and average salary of $42,901 a year, according to Gabriel. The system also had 3,465 working deferred retirement members with an average salary of $65,732 a year.
The system's trustees voted Monday to pay 3% interest on deferred retirement accounts for fiscal 2023.
The system had 51,405 retired members receiving an average retirement benefit of $24,175 a year as of June 30, 2021, Gabriel reported.
In February, the system's trustees voted to increase the employer contribution rate from 14.75% to 15% of payroll and increase the rate charged to employees who pay into the system from 6.75% to 7% of their salary, starting July 1 of this year.
In fiscal 2022, employers paid $477.9 million into the system at a rate of 14.75% of employee payroll, while working members contributed $181.8 million at a rate of 6.75% of their salaries, Rhoden said.
In 2017, the trustees implemented several measures to raise money and cut costs over several years in response to the system reducing its target return from 8% to 7.5% a year at that time. In fiscal 2019, the employer contribution rate was 14% of payroll and the rate charged to members who pay into the system was 6% of salary. The rate increases approved in February are the final ones from the 2017 plan to raise the rates by 0.25% a year over four years.
In other action Monday, the system's trustees voted to authorize up to $60 million in new private equity investments.
They voted to approve an investment of up to $30 million in New York-based JF Lehman & Co.'s JFL Equity Investors VI. JF Lehman & Co., is targeting a capital commitment of $1.6 billion for the fund with a cap of $1.8 billion for the fund, according to the system's private equity investment consultant Franklin Park.
The fund will make control investments in lower middle-market defense, aerospace, maritime and environmental/infrastructure services companies in the United States and the United Kingdom, Franklin Park reported. The fund will primarily target corporate divestitures and acquisitions of founder-owned companies with a particular focus on suppliers to agencies of the U.S. government and commercial markets.
The trustees also voted to approve an investment of up to $30 million in the New York-based Greenbriar Equity Group's Greenbriar Equity Fund VI.
The Greenbriar Equity Group is targeting capital commitments of $2.75 billion with an estimated cap of $3.25 billion for the fund, according to Franklin Park.
The fund is being formed to make investments in advanced manufacturing and business services companies across logistics, aerospace and defense and transportation sub-sectors in the United States, Franklin Park reported. The fund will primarily make control investments, but may occasionally make minority investments.