The Arkansas Public Employees Retirement System's investments dropped in value by about $442 million to $10.24 billion in the quarter that ended Sept. 30, an investment consultant told the system's board of trustees on Wednesday.
The system's investment return last quarter was minus 3.41%, and 92% of similar-sized public retirement systems posted a better investment return, said Brianne Weymouth of the system's investment consultant Callan LLC.
John Jackson of Callan said stock market, bond and real estate investments were all down last quarter.
The system's investment return has averaged 6.69% a year during the past 10 years and 7.22% a year during the past 20 years to rank at about the median of similar-sized public retirement systems, Callan reported. The system's target investment return is 7.15% a year.
Carlos Borromeo, the system's deputy director of investments and finance, said the system's investments were valued at about $10.22 billion as of Oct. 31.
On Wednesday, the system's trustees voted to charge state and local governments in the system 15.32% of employee payroll in fiscal 2026 which starts July 1, 2025, and ends June 30, 2026. That's what the system currently charges the system's employers.
In other action, the trustees authorized system Executive Director Amy Fecher to explore the possibility of the system purchasing a building for system offices instead of continuing to lease space in a downtown Little Rock building. The board also approved the hiring of a domestic stock investment manager and the investment of $50 million in a fund heavily invested in student housing.
According to Callan LLC, the system's domestic stock market investments dropped in value last quarter from $4.12 billion to $3.87 billion and recorded an investment return of minus 4.01%, while the system's international stock market investments declined from $2.75 billion to $2.62 billion and posted an investment return of minus 4.71%.
The system's domestic bond investments dipped from $1.88 billion to $1.83 billion and recorded an investment return of minus 2.67%, Callan LLC reported.
Callan reported that the system's real asset investments slipped in value last quarter from $1.48 billion to $1.44 billion and posted an investment return of minus 1.50% The system's real asset investments include real estate, real estate investment trusts, farmland, and timber.
But the system's hedge fund investments increased in value last quarter from $219.3 million to $223.6 million and recorded an investment return of 2.22%, according to Callan.
The trustees' vote on Wednesday to keep the rate charged to state and local governments at 15.32% of employee payroll in fiscal year 2026 came after the trustees in September voted to a set a minimum rate of 15.32%.
Charging state and local governments 15.32% of employee payroll in fiscal year 2026 is prudent, said Mita Drazilov of the system actuary, Gabriel, Roeder Smith & Co.
In fiscal 2023 that ended June 30, employers contributed $340.1 million to the system and the system's working members contributed $93 million, according to a system report.
In fiscal 2023, the system's working members who contribute to the system paid 5.25% of their pay into the system. In fiscal 2024 that started July 1, they will be paying 5.5%. That rate will increase 0.25 % each fiscal year until it reaches 7% of salary under state law.
As of June 30, the system had 43,352 working members with an average salary of $48,724 a year, according to Gabriel, Roeder, Smith & Co. That's up from 42,771 working members with an average annual salary of $45,020 a year earlier.
The system had 42,276 retired members, including deferred retirement plan participants, with total annual benefits of $703.5 million, or an average of about $16,640 a year, as of June 30, the actuary reported. That's up from 41,390 retired members with total annual benefits of $671.2 million, or an average of $16,216 a year, as of June 30, 2022.
There are 1,473 deferred retirement plan members with a total payroll of $103 million, or an average of $69,925 a year, according to the firm.
Gabriel, Roeder, Smith & Co. said the system's unfunded liabilities total $2.43 billion, based on the system's actuarial accrued liabilities totaling $13.07 billion and the funding value of the system's assets totaling $10.64 billion as of June 30. The system's unfunded liabilities are the amount by which the system's liabilities outdistanced its assets.
The projected payoff period for most of the system's unfunded liabilities is 17 years, and the projected payoff period for the rest of the unfunded liabilities is 20 years, the actuary reported. Actuaries often compare the projected payoff period for a retirement system's unfunded liabilities to a mortgage on the house.
On Wednesday, the system's trustees voted to invest $50 million in the Harrison Street Fund IX.
The Harrison Street Fund IX will be heavily invested in student housing, particularly at the University of Arkansas, Fayetteville, Borromeo said. The system is currently invested in the Harrison Street Fund VIII, which also is invested in student housing.
The trustees also voted to approve hiring William Blair & Co. LLC of Chicago as a domestic equity large cap growth manager for the system.
Borromeo said the system's staff interviewed officials for William Blair & Co., J.P. Morgan Asset Management and T. Rowe Price Associates after Callan narrowed a field of 175 investment managers to six, and the system's staff whittled the field down to three.
Afterward, Fecher said William Blair & Company LLC will invest about $400 million for the system.
In a voice vote with no audible dissent, the trustees voted to authorize Fecher to review purchasing a building in which to locate the system's offices rather than continuing to rent space in the Union Plaza building in downtown Little Rock.
She said several of the system's managers told her after she became executive director in July 2022 that "they felt like the money that we spend on our rent every year was rather high, and there might be better options, so what I challenged everyone to do is do a cost analysis."
Fecher said the system's current lease expires on June 30, and the system occupies three floors in the Union Plaza building. The system sold the building in 2008, she said.
The system has spent more than $11 million on the building lease and parking expenses since 2008, she said.
"If we spent approximately $3.5 million, it is going to take about five years to get to that break even point," Fecher said based on a cost analysis of the system purchasing a building. "If we were to spend $5 million, you are looking at about eight years. Then, we went up to $7 million, which comes to about 14 years."
System officials have a fiduciary duty to try to make the best investments that they can and the wisest decisions on how the system is spending its money and to always follow the prudent investment rule, Fecher said.
"Right now, we are in a buyer's market, and there are some things that might be available" that would be a better option than continuing to rent space, she said.
Fecher said she has not looked at any properties yet to purchase for the system.
"I wanted to be very transparent and make it known to everyone on the board before I went out and talked to any real estate companies," she said.