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7.5% return is goal for Arkansas Teacher Retirement System

The Arkansas Teacher Retirement System's trustees voted Monday to implement several measures to raise money and cut costs over seven years in response to reducing the system's projected annual investment return from 8 percent to 7.5 percent a year.

Officials of the system actuary Gabriel, Roeder, Smith & Co. of Southfield, Mich., urged the trustees to cut the system's annual projected investment return, saying the median projected return for public pension plans across the nation is now 7.5 percent a year. Cutting the projection is appropriate and conservative, but "we are not cutting our aspiration," said P.J. Kelly of the system's investment consultant, Aon Hewitt Investment Consulting of Chicago.

The system's annual average return has been 8.5 percent since 1986.

Reducing the projected return by 0.5 percent means that state government's largest retirement system will expect roughly $80 million a year in reduced earnings and require the system to raise more money and save money to make up for reduced expectations, said system director George Hopkins.

The trustees also voted to approve a new mortality table that also was adopted by many pension plans across the nation and projects that system members will live longer. That also will require the system to raise more money and cut costs, by another roughly $15 million to $20 million a year, Hopkins said.

The system's investments are valued at about $16.5 billion. The system has more than 100,000 working and retired members. The system included 68,368 working members with an average annual salary of $37,325, and 43,095 retired members with average annual benefits of $22,833 a year as of June 30, 2016, according to Gabriel.

Hopkins said staff members have worked for more than a year to develop the changes adopted by the trustees to "bring us back to where we need to be" and to keep the system's projected pay-back period for its unfunded liabilities at about 30 years. As of June 30, 2016, unfunded liabilities totaled $3.57 billion with a projected pay-off period of 29 years, according to Gabriel, Roeder, Smith & Co. Unfunded liabilities are the amount by which liabilities outstrip assets. Gabriel will release the system's actuarial report for June 30, 2017, in December.

The changes approved by the trustees Monday "represent the best that we could for our members ... and many of these changes are over a year and a half away," Hopkins told the trustees. "If the Legislature thinks that some of these things shouldn't be done, maybe they will come up with an alternative" to consider in the 2019 regular session.

Trustees voted to increase the rate charged to system employers from 14 percent to 14.25 percent of their employee payrolls in fiscal 2020, which starts July 1, 2019, and then 0.25 percent in each of the next three fiscal years until it reaches 15 percent in fiscal 2023.

Hopkins said the employer rate hasn't changed in 12 years. Each 0.25 percent increase would increase employer costs by about $7 million a year. In fiscal 2017, employers paid $414.5 million into the system.

The trustees also voted to increase the rate charged to each system member who pays into the system from 6 percent of the member's salary to 6.25 percent in fiscal 2020 and then by 0.25 percent for each of the next three fiscal years until it reaches 7 percent in fiscal 2023.

Hopkins noted that the member rate hasn't been increased in 43 years. He said a 0.25 percent increase would raise the members' contributions by about $5.5 million a year. Members contributed $132.1 million to the system in fiscal 2017. About two-thirds of the system's working members pay into the system.

The trustees also voted to reduce the multiplier used in calculating retirement benefits for system members who don't pay into the system, from 1.39 percent to 1.25 percent for fiscal 2020.

The lower multiplier for members who don't pay into the system brings that rate in close parity to the increased contribution rate for members who do make contributions, according to the system.

Actuary Judith Kermans of Gabriel, Roeder, Smith & Co. said the changes to benefits and the increased member contribution rates exceeded any increased revenue from the employer contribution rate increase.

The trustees also voted to begin calculating the average salary of system members used in determining retirement benefits based on their five highest-paid years rather than their three highest-paid years, starting July 1, 2018.

Under this plan, the final average salary calculation of active members using the three-highest paid years of service through fiscal 2018 will be grandfathered in, to ensure the member's final average salary is whichever is highest -- based on three years or five years.

The trustees also voted to no longer grant cost-of-living increases to retirees based on their $75 a month stipend, starting in fiscal 2019.

The system also will reduce the monthly stipend to $50, starting in fiscal 2020.

About 41,000 of 45,000 members receive the stipend, according to the system. To ensure that no retiree would see an actual dollar amount reduction in the monthly benefit after the stipend is cut to $50, "essentially the annual COLA would backfill the implementation of the stipend reduction over more than one fiscal year for any member with a base monthly benefit of less than $833," according to the system's staff report.

Trustees also voted to cut the multiplier used in calculating benefits for members during their first 10 years of service, starting in fiscal 2019. The multiplier for members who pay into the system would be cut from 2.15 percent to 1.75 percent during their first 10 years of service, but their multiplier for that period would be increased 2.15 percent if they stay in the system beyond 10 years.

After the trustees met, Rep. Doug House, R-North Little Rock, who attended the meeting, said the changes adopted by the board don't "go near far enough.

"It is a start," said House, who is a co-chairman of the Legislature's Joint Committee on Public Retirement and Social Security Programs. There are a lot of ways to solve these problems such as changing the retirees' annual 3 percent cost-of-living increase, he said.

"There is a feud in the actuary world going on right now. Some say you should use a 2 percent assumed rate of return based on treasury notes. Others say you ought to be use 8 or 10 percent based on past practice," he said.

"I think 5 and 6 percent is the right [projected rate of return] for all of our retirement systems. I know that is going to cause the employer contribution rate to shoot through the sky, but I think it is better to tell the people that the debt is owed rather than to cover it up and pretend it is not there, and that's what this does," House said.

Jeff Stubblefield of Charleston, chairman of the system's board of trustees, said, "I appreciate him recognizing the work we have done, and I'm sure there is a lot of differing viewpoints there.

"We'll continue to work through it, and we are going to base our work on our experts and our consultants and meet the standard of what is required by these actuarial standards boards and accounting groups," Stubblefield said.

A Section on 11/14/2017



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