Officials at the Arkansas Public Employees Retirement System estimate the system could lose about $30 million to $40 million a year as a result of a bill that would require the state treasurer and public entities to divest certain investments with financial services providers on a list maintained by the state treasurer due to use of environmental, social justice or governance-related metrics.
Officials at the Arkansas Teacher Retirement System estimate the system could lose $7 million a year in what they describe as a conservative estimate as a result of the legislation.
The bill is House Bill 1307 by Rep. Jeff Wardlaw, R-Hermitage, which cleared the House in a 79-12 vote Feb. 16.
Wardlaw told a House committee last month the bill is aimed at making sure the state doesn't put its funds into companies that discriminate against the firearms, ammunition and fossil fuel industries, and the bill would exempt "indirect holdings" to minimize the financial impact on the state government's retirement systems.
The bill has been amended once in the Senate and is in the Senate State Agencies and Governmental Affairs Committee.
Wardlaw said Monday he doesn't buy the state retirement systems' estimates of his bill's potential losses to state government's retirement systems. He maintained the retirement systems indicated the impact of the bill would be minimal before the bill cleared the House.
"It is kind of crazy that they came up with these estimates," he said in an interview.
"I can't wait to call them out on it."
But Amy Fecher, executive director of the Arkansas Public Employees Retirement System, said Monday "These are the first numbers we have provided.
"At present, we have no exact determination of what entities will be excluded from investments, so it is a very difficult calculation, " she said in a written statement. "We have been working with our consultants comparing what other states have excluded, to get our estimates of the impact to the system's trust fund and our members."
Clint Rhoden, executive director of the Arkansas Teacher Retirement System, said Monday the teacher retirement system's investment consultant Aon Hewitt Investment Consulting developed the estimated loss of $7 million a year to the system from the bill after Sen. Jimmy Hickey, R-Texarkana, requested estimates from the state government's retirement systems.
He said it's his duty to inform senators about the potential impact of the bill to the system, which has total investments valued at $20.3 billion.
Fecher said in an email dated Feb. 22 to Hickey that "[i]n response to your request for state retirement systems to provide an estimated loss with the current version of HB1307, we estimate approximately $30-$40 million per year."
"In round numbers, APERS is 85% direct investments and 15% indirect investments," she said in the email obtained by the Arkansas Democrat-Gazette through a public records request under the Arkansas Freedom of Information Act.
"Our Chief Investment Officer put together the attached table [that] shows a range of 10-70 basis points in losses. Our best estimate is that it will be somewhere in the 30-40 basis points," Fecher said of the public employees retirement system with investments of about $10.5 billion. Thirty to 40 basis points is equal to 0.3% to 0.4%.
Rhoden said in an email dated Feb. 22 to Hickey that on "a conservative basis, it is estimated that ATRS could experience a cost of 10 basis points to the annual return of investments if HB1307 is enacted."
Ten basis points is equal to 0.1%.
"This would be due to divestment mandates and lack of access to competitive financial services placed on direct investments made by the system," Rhoden wrote in the email obtained by the Arkansas Democrat-Gazette under the Arkansas Freedom of Information Act.
"Currently, ATRS has about $7 billion in direct investments. Therefore, the potential cost could be about $7 million per year," Rhoden said.
"If this starts us down a slippery slope to also include indirect investments, this estimate would be substantially higher," he said.
Fecher said Monday the public employees retirement system has a larger estimate of the potential impact of the bill than the teacher retirement system because the public employees retirement system's investment portfolio has a larger share of direct investments.
Rhoden said in an email dated Feb. 26 to Sen. Ricky Hill, R-Cabot, who is HB1307's Senate sponsor, and Wardlaw that he believes the bill is not needed in order to cause the teacher retirement system to do the right thing.
"The ATRS Board, for years, has instructed the investment consultants to not use factors related to environmental, social justice and governance (ESG) as the basis for an investment recommendation," he wrote in an email obtained under under the Arkansas Freedom of Information Act. "The Board follows current Arkansas law to make investments following the 'prudent investor' rule, the requirement for diversification, and to make investments solely on a risk/reward analysis as a fiduciary to the members of ATRS."
The system's annual investment returns are often ranked in the top 10% of all national public pension systems due to the adherence to these sound investment policies and "I would hate to see the annual returns reduced by passage of this bill that includes the retirement systems of Arkansas," Rhoden said.
The retirement systems are already required by Arkansas law to make investments based solely on financial factors, and including the teacher retirement system in this bill is not necessary and puts the retirement benefits of 130,000 members and their families at risk, Rhoden said.
"Please consider amending HB1307 to add an exemption for the Arkansas retirement systems" to mirror West Virginia's bill and "[t]hen we could deal with ESG investing issues, like proxy voting, specifically for the Arkansas retirement systems in a separate bill," he said in his email to Hill and Wardlaw.
West Virginia has a bill that could be used as a model, Rhoden said, but Hill said Monday he doesn't plan to amend the bill in order to exempt state government's retirement systems.
Robyn Smith, executive secretary of the Arkansas State Highway Employees Retirement System, said in an email dated Feb. 22 to Hickey that in "consultation with the other State Systems and review of what has resulted in other states, our conservative estimate of losses could range anywhere from 10 basis points or $20.1 million over 15 years to 70 basis points which would be about $140.6 million over 15 years."
Smith said Monday the highway employees retirement system's investments are valued at about $1.5 billion.
David Clark, executive director of the Local Police and Fire Retirement System, said in an email dated Feb. 22 to Hickey that "a conservative estimate for LOPFI is a potential cost of $1 million/a year."
Clark said Monday the system's investments are valued at about $2.5 billion.
Under the amended version of HB1307, an ESG oversight committee would be created to determine a list of financial service providers that discriminate against energy, fossil fuel, firearms or ammunition companies or otherwise refuse to deal based on environmental, social justice, and other governance-related factors.
The committee would comprise four citizens of the state with the governor, attorney general, House speaker and Senate president pro tempore each appointing one citizen and the state treasurer or his designee under the bill.
The state treasurer would be required to maintain a list of financial service providers as determined by the ESG oversight committee on the state treasurer's website under the bill. In determining whether to list a financial services provider on the list, the state treasurer, under the direction of the attorney general, would be required to consider and may rely upon specified information under the bill.
The state treasurer would be required under the bill to divest the state of all direct or indirect holdings with a financial services provider included on the list published on the state treasurer's website, and a public entity would be required to divest itself of all direct or indirect holdings with a financial services provider included on the list published on the state treasurer's website.