Jan. 23, 2023
Rep Warren: Chair calls this meeting to order. I see a quorum. Good morning, everyone. It’s good to have everybody here for our first Retirement Committee meeting. Look forward to working with everybody. I’m Les Warren. I’m going to be the House Chair. Glad to have my Co-Chair here with me. Would you like to say anything?
Sen Payton: Thank you, Representative Warren. I appreciate everybody getting here early and being able to introduce their selves, and I look forward to getting to know you better and to learning what I can about retirement, but just happy to be here and appreciate everybody showing up early this morning. Thank you.
Rep Warren: All right. This is our organizational meeting. We’ve got a few things planned so that we are all basically on the same page. We’ve got some new members, so I think some of the things that we’re going to discuss this morning will be very beneficial. And for those of us who’ve been on it before, it’d be good reminders of what we do. So at this point, like to introduce our two Vice-Chairs, and I don’t see Greg here yet, so maybe he’ll be here in a few minutes. On the House side, Representative Mark Perry. Good to have you as Vice-Chair. Appreciate you being here and serving. On the Senate side, it’s going to be Greg Leding, and Greg’s been on the committee before as well. So we’ve got a couple of good Vice-Chairs here.
Rep Warren: So all right. So we’re going to move on to the second item. So every meeting that we have, we’re going to have to have at least 11 members here. So I know that this is a Monday morning meeting, and sometimes you have to come on Sunday night in order to be here. So appreciate the extra effort, but we need members here, at least 11 in order to get started with the meeting. Let’s go on. And just for the benefit, since we’ve got new members, let’s start down here. Senator Tucker, if you’d introduce yourself, and we’ll get everybody to know each other real quick here.
Sen Tucker: Thank you, Mr. Chair. Clarke Tucker, representing Senate District 14 here in Little Rock. We’re in District 14 right now. So welcome, everyone, to District 14.
Rep Warren: Go ahead.
Sen Hammer: Good morning. Kim Hammer, state senator serving District 16, Saline County, West Pulaski County. Former Senate Chair of this committee. Thank you.
Sen Davis: Thank you. Breanne Davis. I serve Pope County, most of Conway County, and the city of Dardanelle.
Rep Warren: All right. Senator Hickey?
Sen Hickey: Jimmy Hickey, Southwest Arkansas. Thank you.
Rep Warren: Senator Chesterfield?
Sen Chesterfield: Linda Chesterfield, Senate District 12. I represent portions of Little Rock, North Little Rock, Maumelle, Sherwood, Jacksonville, Wrightsville, and the unincorporated areas in between. It is good to be here this morning, and it’s always a joy to serve on this committee.
Rep Warren: You got that speech down, Senator Chesterfield. All right. All right. Representative Perry?
Rep Perry: Thank you, Mr. Chairman. Mark Perry, District 66, which is Jacksonville going back towards Jefferson County.
Rep Warren: Representative Fite?
Rep C Fite: Good morning. I’m Charlene Fite, representing portions of Washington and Crawford County.
Rep Warren: All right. Representative Maddox?
Rep Maddox: Good morning. Representative John Maddox, District 86, and that is Polk, Montgomery, and a portion of Howard County.
Rep Warren: Representative Rye?
Rep Rye: Yes. Thank you, Mr. Chairman. Representative Johnny Rye. Represent district number 36, which is a portion of Poinsett County and a portion of Craighead County, and glad to be here with you all for a very important meeting.
Rep Warren: Representative Collins?
Rep Collins: Andrew Collins, representing District 73 right here in Little Rock, from Riverdale out to Pinnacle.
Rep Warren: Representative McGrew? I’m sorry, Representative McCullough. [laughter] I couldn’t see you there.
Rep McCullough: Sorry, yeah. Tippi McCullough, representative District 74 here in Little Rock. You’re also sitting in it. Downtown up through the middle, almost 430.
Rep Warren: All right. Now Representative McGrew.
Rep McGrew: Thank you, Chairman. Representative McGrew, District 85, which is part of Hot Springs, Hot Springs Village, and Western Garland County.
Rep Warren: All right. Representative Walker?
Rep Walker: Steven Walker, District 27, Izard County all the way to Newton County.
Rep Warren: Okay. And then Representative Andrews.
Rep Andrews: Thank you, Mr. Chair. Representative Wade Andrews. I represent District 98. It’s most Ouachita County, the north end of Columbia County, the very southern portion Nevada County, and the northeast corner of Lafayette County.
Rep Warren: All right. Thank you. Appreciate all of you introducing yourselves. I want to introduce our staff to you. To my left is Blake Gilliam, our committee analyst. Also happens to be a Hot Springs guy that I’ve known for a long time. Destiny Davis is back here. She’s going to be our committee assistant. And then several of you have probably worked with Laura Reynolds. She’s our committee attorney. Is Laura here?
BLR Staff: No.
Rep Warren: Okay. So Laura has been great to work with. She replaced Jennifer Lewough and has done a great job, so you’ll enjoy getting to know her.
Rep Warren: All right. For the House side, each view has an alternate. They can only act when you’re out. If you’re not going to be here, you need to make sure that your alternate knows that you’ll be out so that they can be in place so that we have enough for our meetings.
Rep Warren: So all right. Our Retirement Committee will meet at 8:30 on Mondays here in MAC A when we get rolling. Right now, this is just an organizational meeting. But when we get rolling, we’ll probably move it back to 8:00 so that we can get more done. I know I’ve announced this in the House, and I think Senator Payton has introduced it in the Senate, but the last day to file a retirement bill is this coming Friday, the 27th. So if you have anything on retirement, it needs to be filed this Friday. And then I will get with Senator Payton and we’ll figure out a photo time in the next couple of weeks for our committee. We’ll announce that at our next meeting.
Rep Warren: So the process for our agenda. Agendas are prepared two days before each committee meeting, so basically anything that we need done has to be turned in by Thursday for our Monday meeting. Legislators who have bills on the agenda will be sent a sponsor notification and their actuarial cost study the day before the committee meeting, and basically everything in here has an actuarial study to it. And we’re going to get to a couple of motions here in a minute, but when Senator Payton and I get a bill, we’ll have the ability to go on and send it for a study.
BLR Staff: And I’ll try to get that sent out two days in advance.
Rep Warren: Say that again?
BLR Staff: I’ll try to get the study and the sponsored notification to them by Thursday.
Rep Warren: Blake’s going to try to get that out two days in advance. So bills listed on today’s agenda are in the order referred to the committee. Probably what we did last session worked really well. We’re going to try to do all the bills from each retirement plan. LOPFI, ASHERS, Teachers, and APERS. Group them together so that we get all of one done, and then open it up to individual bills. So that worked real well, so that’s probably the path we’ll take again.
Rep Warren: So at this time, I want to go over the motions that we need. I need a motion to give the Co-Chairs the authority to place shell bills under the deferred section until amended. Once amended bills can be placed on agenda as ready for action or send to the actuary.
Sen Payton: So moved.
Rep Warren: All right. I have a motion. Any discussion? I’m sorry, second. Johnny? All right.
Rep Rye: I just want to say second.
Rep Warren: You did. I gotcha. Okay. All right. So any discussion? All those in favor, say aye. All those against, say nay. All right. The motion is approved. All right. The second one, I need a motion to give Co-Chairs the authority to immediately send all bills requiring actuarial study to the committee actuary once the bill– so moved? [laughter] Okay. I got a motion, do I have a second?
Sen Payton: Second.
Rep Warren: All right. Any discussion? All those in favor, say aye. Any opposed, say nay. All right. The motion carries. Motion number three, I need a motion to give Co-Chairs the authority to send amended bills to the committee actuary if the amendment requires an additional actuarial study.
Sen Payton: So moved.
Rep Warren: So moved? All right. I need a second. All right. Okay. Any discussion? All in favor, say aye. Any opposed, nay. All right. Motion carries. Okay. A bill that increases the multiplier, changes terms, or allowing the purchase of credited service, shortening investing periods, or shortening the years of service required for standard retirement without penalty or which would establish a new or expanded public retirement programs requires a two-thirds vote of the committee, which that would be 14 votes. All other bills require simple majority of 11 votes. Okay. Is there any discussion on any of that? Okay. Yes, ma’am. You’re recognized, Senator Chester.
Sen Chesterfield: Thank you. The votes are of the whole body, not the quorum. Is that correct?
Rep Warren: Will you say that again, please?
Sen Chesterfield: Those two-thirds votes have to be of the total body, right? The total committee?
Rep Warren: Yes, ma’am. Our committee. Yes, ma’am.
Sen Chesterfield: Okay. It’s not of the quorum.
BLR Staff: That’s correct.
Rep Warren: That’s correct.
Sen Chesterfield: Thank you.
Rep Warren: All right. Any other questions? And I apologize. I referred to you as Senator Chester. I left off the field, so Senator Chesterfield. My apologies. [laughter]
Rep Warren: Yeah. Excuse us for a second.
Rep Warren: Okay. At this time, we’re going to basically combine B and C. We’re going to ask our directors from our retirement plans in our actuary to please come forward to the table. They’re going to have a brief presentation for us. And for our new members, let me just say that I remember my first time. This is my fourth time on Retirement, and I remember coming to this committee and people would refer to ATRS or ASHERS or LOPFI, and I’m like, “What in the–?” I was just trying to figure out what they were, they’re acronyms for each of the retirement systems. These are our executive directors of each of the plans, and so what I’ve asked them to do today is to introduce themselves. Give you a brief introduction. The gentleman in the middle is Jody Carrero, who is our actuary for this committee. Any actuarial studies to be done are done by him. He’s done a great job for us. He’s great to work with. We have Clint Rhoden on the far right, who’s with Teachers; Amy Fecher, who is with APERS; Robyn Smith, who is with the Highway Department; and then David Clark, who’s with LOPFI. So I’m going to turn it over to you guys for your presentation, and thank you for being here this morning. I love working with you guys and look forward to a good year this year.
Carreiro: All right. Good morning, everyone. I’m Jody Carrero and I’ll let everybody else talk, but a lot of what we need to do today is to cover things. As Representative Warren mentioned, my firm is the actuarial firm that’s hired by the Bureau of Legislative Research and then we work primarily for this committee, and our job is to provide you the actuarial cost studies that go with each one. And I’ve got a sample, I think, that’s in the packet that we’ll talk about that in just a minute and let you see what that actually looks like. So what we want to do as a group then is to do a couple of things. Everybody will have an opportunity to preview and give you a little overview of their system. I’m going to overview a lot of the terminology that we’ll use as we talk about bills and talk about the cost and all of that. And one thing I always have to kind of point out is evidently, we’ll hit several numbers as we go through here and just to point out that the fire and police, LOPFI, and the local fire and police plans are calendar year, but all the other systems are June 30 plan year. So sometimes there’s a little difference and we’ll kind of point that out.
Rep Warren: Hey, Jody.
Carreiro: Yes, sir.
Rep Warren: If you would, as each of you speak, if you have a handout, would you refer that at the beginning of your talk so that the members can get that handout handy?
Carreiro: Yes, sir.
Rep Warren: So that they’re on the same page with you. Thank you.
Carreiro: Yes, sir. Thank you.
Rep Warren: Sorry to interrupt.
Carreiro: And yes, there should be a handout of the presentation that’s on your screen of mine, which is two slides per page, and starts with the page we looked at a moment ago. But I want to turn back and let the directors again tell you and tell you who it is that’s in their plan. As Representative Warren says, there’s a bit of alphabet soup here with all the different initials and all of that, and it’s important I know for you to know and make sure you understand who’s covered by what plan because sometimes there’s references to this group, and that group may be in more than one plan. And so I want you to know that and let each of them tell you who they are real quick. Clint, let’s start on that end. No, just a hello and who you represent, who your plan has in it.
Rhoden ATRS: Yes. Clint Rhoden, Executive Director of the Arkansas Teacher Retirement System. So the Teacher Retirement System covers essentially what I like to call– I mean, all educators in Arkansas. So it’s not just the teachers. It is also the support personnel and the administration staff that make that up.
Fecher APERS: Good morning. Amy Fecher with APERS. Our system actually covers three plans, which we’ll get into in my presentation. But it’s public employees, the state police, and the judicial system.
Smith ASHERS: My name is Robyn Smith. I represent ASHERS, which is the Arkansas State Highway Employees Retirement System. It is the single employer benefit plan for the Arkansas Department of Transportation.
Clark LOPFI: I’m David Clark, the executive director of the Local Police & Fire Retirement System, or LOPFI, and also the executive director of the Fire and Police Pension Review Board, or PRB. Both entities cover police officers and firefighters.
Carreiro: So I wanted to do that– just to come back as a group then and say all of these groups have a lot of employees in different places, and this slide summarizes that as of the most recent evaluation date. And the bottom line here– you see that there’s counted people in different categories, but the bottom line is that there’s over 282,000 Arkansans, active or retiree, that directly benefit for these plans. I guess put that another way, there’s 1 in 9 adults in Arkansas that directly benefit from one of these plans. So clearly the work that you’re doing in this committee is important, and we want to do everything we can to provide you what you need. 109,000 of that 282, 38% of those are folks that are receiving benefits, and it’s pretty significant. For example, Teachers is going to pay over $1.3 billion to retired members this year. APERS is going to pay nearly $700 million to retired members this year. So that’s just two of them. But in total, all the systems are going to pay over $2.3 billion and 90, 95 percent of that is back to Arkansans all over the state of Arkansas. So pretty important. Has a pretty wide-ranging effect, and I know you knew that. Our plans that we have here that were.
Carreiro: discussing today are predominantly defined benefit plans. That’s plans that define the benefit, not just define the amount of money that’s going in. Arkansas doesn’t use the defined contribution plans like profit sharing, 401k, salary deferral things for the primary benefit. It is used for some secondary benefits. This slide just kind of summarizes real briefly some of the differences between defined benefit and defined contribution. Defined benefit on the right-hand side of that, the employer contributes. There is some employee contributions in most all the plans. The trustees then choose how to invest the total fund as opposed to in a defined contribution like 457 or a 401k, or whatever, where the employee kind of chooses where their investment is. The benefit for a defined benefit, as I mentioned, is the definition of the benefit. Whereas for a defined contribution, the benefits defined by how much that bucket of money accumulates to. The final payout is based on where the market is at the time, and many of you have known that from other personal experience. So where our defined benefit plans, the benefit is, is pretty much guaranteed to the members. So in addition, we do have some defined contribution pieces. Almost all of these employees have at their disposal, 457 or 403b salary deferral type plans, that they can use. And in particular, state employees. It was in 2013 that it was changed so that the state employees had to contribute a little bit to start out with. They automatically were enrolled in the Diamond Plan.
Carreiro: One big point I want to make sure that we stop on just for a second today, is the fact that all the money from these different plans when they go into the plan, they go into a trust. And that trust is, in a sense, is no longer Arkansas’s money. It’s not the employees’ money. It is money that is set aside to pay benefits. And everything kind of circles around that. And since it is a trust, and it has the legal definitions of that and all, there are certain fiduciary duties that go along with that. And this next slide is probably a 30 minute presentation. I’m going to do it in two, okay? But the fiduciary duties that go along with that is all based on that fact that it is money that’s set aside for a special purpose. And that starts with a duty of loyalty, or you may hear us say exclusive benefit. The benefits can only be used to– the money can only be used to pay benefits for the participants of the plan. And so there is a duty of loyalty that’s there. There’s a duty of impartiality that there’s fair administration of the benefits. There’s a duty of prudence that they use the skill and care of a prudent person. You may hear the prudent man term a time or two as we go along. But there’s also a duty to manage the cost, and all the systems do a good job trying to keep all the costs down because the money’s for the ultimate beneficiaries. It’s not to spend those costs. And then finally, a duty to comply with the laws of the state and laws of the federal as they apply to these state plans.
Carreiro: So every actuary has to say, here’s the basic pension formula. And it’s because it’s true. And every time that, whether it is a defined benefit or a defined contribution, here’s the bottom line. The contributions that are put in, plus the investment income that’s earned on that, is what provides the benefits and has to pay the expenses. And you’ll see more of this, and in the back of the presentation notes, not part of what we’re going to talk about today, there’s more about how that that all fits together. But those contributions and investments then have to provide the benefits. So we have to figure out how do we determine the right contribution. And that’s a lot of what we talk about is what is the correct contribution to keep the systems well-funded? So that brings us to kind of a section of code that kind of guides all of that when it comes to talking about what the contribution should be, and that’s 242701, which is just the basic financial objective that applies to everyone. And it’s worth stopping and reading, and it’s to establish and receive contributions that expressed as a percentage of active member payroll, remain approximately level from generation to generation of state citizens. So if I say generational equity, sometimes, that’s why. We try to keep things– they all try to keep things as level from today’s citizens as it is for the next group of citizens. And that contribution, therefore, that we try to calculate, then has to be sufficient to cover, and this is in that same section, sufficient to cover the cost of the current benefit commitments. So people are working right now. They’re due a benefit, so we need to save something for that, plus a level payment over a reasonable number of years to pay any unfunded commitments. And we’ll talk about those terms in the next couple of minutes.
Carreiro: So very important, and that guideline, or that guidance, drives a lot of the discussion here. So I’ll come back to that. Okay. So in determining the contribution or determining what’s there, we have to make certain actuarial assumptions and do that. And so one of those kind of rhetorical questions I always ask is, do the methods or assumptions that we use in making our calculations ultimately determine the cost of the pension plan? And sadly, I don’t determine anything, because no, the assumptions whatever happens happens. The assumptions that we make are just a guidepost to try to get us to that point. But the assumptions don’t change what the cost of the plan is. The way people retire, when they die, all of those things is what determines the cost of the pension plan. But do those assumptions and methods really matter? And absolutely, they matter. Because going back to that financial guidance that we have, we want to keep things as level from generation to generation. We want to allocate those costs in the right way. And so the assumptions do matter. So it matters how we get there. Here’s some of the assumptions that are made. And just a quick thing, we won’t talk about all of this, but just a couple of things. One that gets talked about a lot is the discount rate that’s assumed. And all of them are just a little bit different, but they’re pretty close.
Carreiro: But when the discount rate goes up– so if I’m assuming a 7% discount rate and that discount rate goes up to 7 and a quarter percent, that means plan cost, or the calculated cost, would go down. And so every assumption has some different variability. Another important thing that we’ve seen happen in our lifetimes is that how long people live has changed. And that’s a good thing. People live longer now than they did 30 years ago. And several years longer on average. But when life expectancy -and that’s down there toward the bottom of that list – when life expectancy goes up and people live longer, that means the cost of the plan goes up. So there’s some things we don’t have control over. Long-term life expectancy has increased. And so some of the plan costs over the years have increased to reflect that as those assumptions try to reflect that. So that’s some of the ups and downs of that. Okay. Here’s a few of those terms. Now, one of the things that I believe we have in the packet is a list, a kind of a glossary of some of the terms. And several of them are mentioned in this presentation, but hopefully we have that glossary and if the chairs see fit, we’ll just have that in your packet every time so that you can refer to it.
Rep Warren: If you look in your green folders, it is clipped in on the very back on the right side.
Carreiro: So as I said, if the chairs see fit, that’ll be in your folder every time so you’ll have it to refer to if you need to, because there are several important terms here. And we’ll cover a few of those real quickly here. I’ll often refer to present value of benefits or present value of future benefits. And first thing the actuary has to do is determine this present value of benefits. And that’s putting a single number onto all the many things that may happen. And we do that by saying here’s the types of benefits that could occur, and then here’s the probability, and the probability that someone will make it to retirement, that someone will leave before retirement, someone will become disabled, all the things that can happen. All of those have a benefit that go along with them. And there’s a probability that’s part of the assumption that those different benefits would happen. So an actuary will take all the benefits, here’s the probability of those benefits. And then we discount all of that to whatever date we’re measuring to get a single number to do that. And to kind of put that in pictures, the purpose of a retirement plan is to collect a pile of money that gets paid out over the retirement. So I have my stack of coins here, right in the middle is the retirement age that’s expected. So during the working years, we need to accumulate the right stack of coins at retirement age, and then during retirement, then we pay that out to the beneficiaries of the plant. So everything kind of flows in that fashion. So the present value is at what point? So beyond that, we’ll say an actuarial accrued liability. Sometimes you’ll see AL or AAL for a crude liability. That is just an allocation of the present value to a point in time while we’re accumulating assets, what should our target be? I’m halfway through my career, what should my target liability be so that I have the right stack of coins in the middle? And so we have methods to do that.
Carreiro: So going back to our pictorial example there, I have a point in time, how many coins should I have stacked up? That’s the accrued actuarial liability. So that liability for someone who’s retired then, it grows until you get to retirement. And then as someone’s retired, we have that stack of money, which then goes down, and so at some point after retirement, we calculate a present value, and that’s the target of how much money we think is the best fit for the amount of money that’s needed to pay all the benefits. Okay, the other thing that we determine during for working years is called normal cost. And if you remember back in the slide of our financial objectives, that is to fully cover the cost of the benefit commitments made during a year. And that’s what normal cost is. That’s the actuarial term that we use to say how many new coins do we need to add to the stack? Going back to our picture, how many new coins do we need to add this year so that our stack is going to get to the right height at the retirement age? All right? And then, once we calculate all these accrued liabilities for actives and retired, and all the different groups, and add all that together, we then can get a picture of where we are. So what do we compare that to? Well, every system has a market value of assets, what you can look up that their assets are worth on a day. But what we use to do this is what’s called an actuarial value of assets. It’s also referred to as a smooth value or a funding value. And all that is is that the gains that are above or below the assumed rate, then are smoothed in over 4 or 5 years, so with the effect is supposed to be that that idea that contributions remain as level as possible for each group of citizens.
Carreiro: So that helps smooth that out because as we’ve seen, the last two years, June 30, 2021, the market was about as high as it’s ever been. In June of 2022, the markets had as big of a drop as it’s had in quite some time. So those two things then get smoothed out a little bit so that the contributions don’t spike or drop because of one good year or one bad year. So the unfunded actuarial liability or the UAAL– I’ll try to always spell things out, but I won’t promise. You have this terrible need to try to abbreviate things. We all do. But that’s what it is. It’s an unfunded actuarial accrued liability. And that is just all of those accrued liabilities that we’ve calculated minus that actuarial value of assets, and that part’s unfunded. It’s kind of an unfortunate term, I think, because it sounds like that’s a terrible bad thing to have unfunded. That’s a payable. We need to find a way to make that go away. And yes, we do need to have a way to fund that, but it’s not like a payable that’s due today. It’s something that’s due over the lifetime, working life of a person. And so, the unfunded accrued liability then, that’s what we have to pay off over a reasonable period to be part of that funding target that we talked about.
Carreiro: So as these guys in the next couple of minutes give you some of the numbers that are associated with the different systems, how do we know if that is if they are well-funded or not well-funded and are they are where they need to be? And there’s several things that we can look at. And we often use a house example, and you’ve probably heard that before, but here’s kind of how that goes. Our house is our accrued liabilities, and then every year there’s some new addition, something new that has to be done, something that has to be repaired. And we’ll make that the little yellow extra part. So the house then we have our equity in our house, and we have a mortgage for the most part. And the equity would be the actuarial value of assets that we’re using. And then the mortgage would be the unfunded. Now, it’s not a bad thing to have a mortgage. It’s a bad thing if you can’t pay the mortgage, right? So our addition is the normal cost or whatever gets added on. So how do we know if our house is well funded? And this is the reason it’s a pretty good example. Because how do we know if our own home is well funded? Well, we know that we have to have a reasonable amount of equity in our house. If we’re 85, we don’t need to have a 30-year mortgage, right? We need a reasonable amount of equity funding our house. And we need to be able to have enough monthly income to contribute to pay the mortgage and any of those additions, which goes right back to our definition. We need contributions that will pay at least the normal cost plus a reasonable payoff of the unfunded actuarial accrued liability.
Carreiro: So here’s all of that in words. A healthy contribution rate policy, and all the systems have one that’ll pay a normal cost and will pay off the unfunded. Current law implies that about 30 years is the max that you can do, but all the systems have built in over the years that they’re bringing that down, which is a good thing for lots of reasons. Another 30-minute lecture we’re not going to do today, but all of those are down to about 18 to 20 years for a funding policy. So that’s what the actuarial contribution rate is. I’m going to do one more slide here, and I’m going to refer to you, and then we’ll switch and let them say what they need to say. But I want to refer you to why I’m here, why we do what we do for the committee. So if we go back to our example, our stack of coins, and we are going along, and we have an accrued liability. Now, a change is proposed. And in my example, the change that’s proposed here is to shorten the retirement age, all right? This is all based on that retirement age right there in the middle. So I’m going to shorten the retirement age or retirement eligibility in some form or fashion. So I now have a new blue, a new blue retirement age. So what does that do to my stack of coins? All right, watch closely. PowerPoint magic here. My stack of coins is raised because I’m going to have to pay more benefits. And it’s scooted to the left. You see that? So my new retirement age has changed the shape of the liabilities of the plan a little bit by making me need to accumulate more and I
Carreiro: I have to accumulate it faster. And what that turns out to be is the taller stack of coins means I have to accumulate faster. And it moved that, which is a change in the actual accrued liability. So for example, in your packet again, you have a letter from me from the last session. I don’t know where it is in the packet, but in your packet, you have a letter from me that– is it in there? Yeah.
Rep Warren: Committee, yeah, you got a bill, and then right with it is a green actuarial study.
Carreiro: All right. So that’s how you’ll see that when we start dealing with bills, is that you’ll have the bill and you’ll have an actuarial study from me. Many times you’ll also have an actuarial study from the systems. They all have actuaries. So the system’s actuary may also have provided you with a study that that has. So, and they like to put ours on green paper so that it stands out. Trust me, it ain’t easy being green. [laughter] Okay, good. Somebody’s old enough to have watched the Muppet movie. So on that green piece of paper there, you see what we did on that particular bill. I think it was Senate Bill 105 is the one that I did from last time. And that shows you an introductory part where I say here when we read this, this is what this is going to do to the system. And then we’ll have often some commentary there, and then we’ll show you, here’s what the systems– If I had a nickel for every time I heard that. I didn’t understand that. Story of my life right there. No, it’s all right. It gave me a chance to make a joke. Okay. The bill then will say, here’s where the system currently is, normal costs, accrued liability, payoff, and here’s the contribution rate. And then here’s what this particular bill does. And the example that I gave you also that it was part of several bills that made a change in the cost. And so we’ll also show you here’s what’s already happened, or here’s what is happening at the same time. They can change the cost. So you have that type of an idea. That particular one did not have other considerations, but I almost always have an other considerations section. And that’s where we’ll share what we know about. Is this going to change behavior, typically? Is this going to be something that will has some effect on federal law or maybe it has a connection to other law that we know about. We’re certainly not attorneys, but in dealing with retirement plans for this many years, we have seen a lot of that stuff. So we’ll add that. So that’s what our reports to you will look like. So you can watch for those. Okay, I’m going to stop and I know you’ll have some questions in a minute and we’ll be able to address all of those, but I’m going to let the directors give you just some high points about each of their systems. I started on the left last time. So maybe I’ll start on the right this time.
Rep Warren: Hey, Jody.
Carreiro: Yes, sir.
Rep Warren: While you’ve got that slide up. I know that the six of us have had a lot of visits because we’ve had some issues. But where you’ve got the blue arrow on that slide. I mean, basically, that’s what you would have had a few years down the road is that being at that point. So basically, you’ve got a couple of options there. You’re saying that now you’re going to basically– you’ve got a couple of options. Either you’re going to have to figure out a way to get the investment returns to improve that much to get the assets you need at an earlier time or you’re going to increase your unfunded liability. That’s basically your two options. And if you try to go with a more aggressive investment strategy to increase it, you naturally take on more risk.
Carreiro: Take on more risk. Yes, sir.
Rep Warren: So, and guys I’m saying that because we had some discussions, but every time you change one component of a retirement plan, it requires a greater amount of return, assets to be able to fund that plan throughout its life. So that’s why I just want to point that out that we’ve got the responsibility as a committee to make sure that we are making sure that this plan is there for the entire life of every retiree that we get in the plan. So I just think that slide is very good and thank you for showing that.
Carreiro: Yes, sir. And well, as I said, unless there’s another question at this point, I’m going to let the directors do that. Oh, Senator Chesterfield, okay.
Rep Warren: Senator Chesterfield, you’re recognized.
Sen Chesterfield: Thank you, Mr. Chair. Let me see if I can do this in language that I understand. I get it. We have had a reduction in return because of the state of the economy as we know it today. Is that going to translate into any increased amounts at the employer and the employee are going to have to pay going forward? Do we anticipate that?
Carreiro: Let me give you an unqualified, it depends.
Sen Chesterfield: Thank you, Jody. You’re so clear.
Carreiro: Yeah. No, seriously, well, it does. Part of what I talked about a minute ago about– and I’m talking generally. I’m not speaking for any of the systems. They may want to add to this, but in general, all of the systems use some form of a smoothing method. So they are smoothing the losses that occurred when you close the books on June 30, 2022. They are smoothing that in over the next few years. They’re also still in the process of smoothing in a tremendous gain the year before. In statistical terms, those were outlying. Both of those were outliers. They were on the far end of the scale on both sides. So I have a big positive number I’m smoothing in, and now I’ve got a big negative number I’m smoothing in. And this is why I said it depends. It’s not going to have a significant change in the next three valuations. But if we don’t see the market come back and start producing again in the fourth valuation, this one goes away, but this big negative is still here.
Sen Chesterfield: Okay, I see. Okay.
Carreiro: And then that’s when we may see some pressure on that. And everybody’s monitoring that very closely because that’s going to be the question. Is the market going to turn around before the smoothing period end?
Sen Chesterfield: And so if I were to visit with people like me who are a part of retirement systems. And I need to say that because I think we’re supposed to clearly disclose where we are. As a member of the retirement system, I don’t have to look at an increase at this point in the percentage amount that I’m paying. And the employee doesn’t have to look at it right now. We need to monitor it over the next two to three valuations to determine if in order to make sure that the system is sound, then we would have to make this adjustment. Did I get that right?
Carreiro: Yes, ma’am.
Sen Chesterfield: Okay, thank you.
Carreiro: That is right.
Rep Warren: Any other questions at this point? All right, Representative Collins, you’re recognized.
Rep Collins: And I’m sorry if this is getting too into the weeds, I know we need to move on. But it raised a question for me. Do you all smooth that smoothing? I mean, you said you would be dropping a big positive year down the road and have that big negative there. Do you account for that at all? Or is that just kind of where we are? We’ve got four years, and that’s what we stick with.
Carreiro: I mean, the smoothing method is not built into law. It is part of the decision that the system makes in consultation with our actuary. Here’s what we can do to try to keep the contribution rate from bouncing around so much. I mean, it’s accounted for from the standpoint that all the systems I know have had this discussion and when we get to that point, if there’s not some positive market work happen by then, we know that there could be an increase like this. I don’t think that anyone took any actions as of June 30, 2022, except possibly looking at possibility of extending that amortization period a little bit, but that’s kind of the short version. Did I answer?
Rep Collins: Yeah, it sounds like we pretty much just take the data we’ve got and apply it to the formula we’ve gotten unless we don’t.
Rep Collins: Thanks.
Rep Warren: Representative McGrew, if you’ll hit your button again, I’ll recognize you. Hit it again. You’re recognized, Representative McGrew.
Rep McGrew: Thank you, Chairman. And thank you for the presentation. A very good presentation. I’m new on the committee. Just a quick question on the unfunded portion over the last three to five years. Is that growing or shrinking?
Carreiro: In general, and each of them are going to give you some numbers from their standpoint, and they’ll tell you a little bit more, but in general, from all together, it has shrunk until we had this really bad market year. The last three years had been good to the retirement plans as far– in very general terms had been pretty good to the retirement plans as far as experience and as far as some changes as they made last time and those things. So they have improved and now they’re having to deal with the drop in the market in 6/30/22.
Rep McGrew: Thank you.
Rep Warren: All right. Representative Payton, you’re recognized. I’m sorry. Senator Payton.
Sen Payton: Thank you, Mr. Chair. My question is about wage growth and the effect it has on the retirement plan. Can you just give us a highlight on how wage growth affects it?
Carreiro: Right. And that was one of– let’s see how talented I am here. Not very. Here we go. That was one of the things that I think I had on my list. Salary increases or wage growth. As the third line down, as wage growth increases, that will push cost up. I can tell you that prior to the things that have happened in the last year, wage growth has probably lagged the assumptions a little bit before this most recent year. And this most recent year in general again, not speaking in particular here, but in general, wage growth has been a little more than what the assumption has been. So that’s an area that we got to keep our eyes on because all of these formulas are basically final average salary, times a multiplier, times years of service. So that final average salary goes up when wage growth goes up. So if it goes up more than assumed, then that’s going to do that. It also has other effects, but on the contribution rate. But yes, sir, wage growth will have an effect. And that again is something that is being monitored right now by all the systems.
Sen Payton: Thank you.
Rep Warren: Representative Rye, you’re recognized.
Rep Rye: Yes, sir. Thank you, Mr. Chair. Let me ask you this. As wages do increase, probably in the short run, it’s probably going to help you a whole lot. But at the end of the line, when these folks actually come back and retire, it’s probably going to put a little bit of stress on that portion, wouldn’t you think?
Carreiro: Yes, sir. It will accumulate contributions a little faster right now. But then as people retire, they’re going to retire with a little bit bigger benefit. You’re right. And so it’s not something that immediately helps or hurts. It kind of adds a little bit of help, but then it increases a little bit of hurt when people retire. That’s right.
Rep Warren: Any other questions? All right, Jody, if you’d continue with your presentation.
Carreiro: Okay, I’m going to pass on to the other folks. I started on the left before, so to be fair, I’ll start on the right. And I think Mr. Clark just has a handout to point out, but I’ll turn the mic to him.
Clark LOPFI: All right, thanks, Jody. That’s correct. I have a two-page handout. At the top, it shows on page one lobby benefit recipients as of January 1, 2023 payroll.
Rep Warren: His handout that has a picture of the state with numbers on it.
Clark LOPFI: Thank you, Mr. Chairman. Again, David Clark with LOPFI and PRB. On the handout, you’ll see that there was for January, 8,749 people that included folks across all 75 counties that receive benefits in the amount of just over $14 million. On the second page, this is where we really get into the meat of what I want to share with you today is that the metrics for a couple of data points here for years, rather, is that in addition to the benefit recipients that I just mentioned, there were nearly 13,300 active police officers and firefighters across 770 LOPFI covered police and fire departments. Now that active member population is made up of two different groups, about 6900 people are in paid status. Those are the career folks. And then another 6300 are in volunteer status. I kind of think of the rural volunteer departments around the state. Now, across those two groups, there is right at 900 people that are using a simultaneous service credit provision that’s in law. What that allows is for a person to be enrolled at a paid department and at a volunteer department at the same time and accrue LOPFI service credit at both departments. So a person that does that over 5 consecutive years at the end of the 5th year, they will have a total of 10 years of LOPFI service credit, 5 years of paid, 5 years of volunteer and of course, the benefits calculated under the two formulas for paid and volunteer service. But the point being is that that structure is intended to encourage volunteerism at the departments that are in the rural areas because that seems to be a really difficult area for people to attract firefighters and some of the small police departments as well. But then it also helps the members achieve their retirement goals sooner because they reach eligibility a little bit earlier. Now, LOPFI operates on a calendar year just like the cities and towns do. So for the 2022 calendar year, the system paid out a $185 million in benefit payments, of which about 92% went to Arkansas residents. So as the slides that Jody had earlier show you, the dollars really do help in the local economies. And that’s LOPFI’s contribution to the local economies as most recent, as I said, was about a $185 million. Now, from an actuarial perspective, at the end of December 31, 2021, LOPFI was 82% funded until we folded in new actuarial assumptions that, again, Jody just referenced to better recognize what’s anticipated over the next few years, a lower assumed rate of return, the fact that the people are living longer, that 82% number decreased to 79%, which is where the system is presently at. Now, the amortization of the liabilities for paid service is covered over 15.9 years for paid service and 15.2 years for volunteer service. While the system could use a 30-year amortization, the board of trustees has worked diligently to lower that amortization to something that’s more reasonable in their perspective, which we do agree of course, and then also working towards paying off the unfunded liabilities in total, removing the system back to a fully-funded state. So the board is working on this, it takes years though for a retirement system to change the direction and actually achieve its ultimate goals. But we are on track to accomplish that goal. Then the market value of assets was at $3.23 billion at the end of 2021, LOPFI is still closing out the 2022 calendar year, so the actual market value that will be put on the books has not yet been determined. However, that number has dropped back below $3 billion, again, due to the fact of the markets from 2022. Now, for this session, just two concluding comments is that LOPFI has one request, House Bill 1111 by Chairman Warren and thankfully Senator Hammer agreed to sponsor on the Senate side. And that is to align Arkansas code with a recent federal change in the age for required minimum distributions. So we’re not adding costs to the system. We’re just simply aligning Arkansas code with federal code. And then for the PRB, we also have one request. That’s House Bill 1110, also by Chairman Warren. And that is to amend premium tax sections of code. There’s two sections that need to have mapping language that is no longer needed, have that language struck. So again, no cost. These are technical changes in just their totality. So our purpose is to, again, avoid costs. But go ahead and tighten up the benefit structure where we need to. So Mr. Chairman, those are my prepared comments. I’m certainly available for questions at the appropriate time.
Rep Warren: We do have one question. Senator Tucker, you’re recognized.
Sen Tucker: Thank you, Mr. Chair. I apologize if Jody covered this. This is kind of more of a general question than specific for LOPFI, but I see that you’re 79% funded and I hear you say you were 82% a year ago. And I’m just curious, what’s a healthy mark for that? That sounds pretty good to me. I know you’re never going to get to 100. But what are y’all shooting for?
Unknown: Well, we are shooting for a fully-funded state back to 100%. That will obviously take time. Now, there has been some schools of thought. Let Jody jump in here in a moment that you need to be 80% funded.
Clark LOPFI: I and the board of trustees feel that the 80% number should be a 100% because it’s not as though once you’re fully funded that all costs go away. You still have the normal costs that Jody talked about before. So there’s always going to be costs in the system, but once you get to that point where you’re fully funded, then it helps take pressure off of employer contribution costs moving forward.
Carreiro: And that’s correct. I think all the systems’ goal is to be fully funded. So the goal is fully funded or maybe even just a little above. But the reality is is that a lot of people have used that 80% benchmark to say we’re headed in the right direction. And that is true to some extent. It’s kind of like the reason I use the house example, it’s kind of like that.
Sen Tucker: My house ain’t fully funded, so.
Carreiro: Right. My house ain’t fully funded either. [laughter] And it’s okay for my house not to be fully funded as long as my income will make house payments. And that’s part of the thing. Do you want to be– which plan’s better, the plan that’s 80% funded and on a 10-year amortization schedule or the house that’s 90% funded, but their amortization is a 90-year loan. Which one is better funded? Well, probably the 80% funded one is. So 80% is a number that’s been there, but it doesn’t speak by itself. It has to be in concert with something else.
Sen Tucker: Thank you.
Rep Warren: All right. Thank you, David. And we’re going to move on to Robyn Smith with ASHERS.
Smith ASHERS: Good morning, chairman, members of the committee. Thank you so much for allowing us to speak with you today. As he said, my name is Robyn Smith, and I’m the ASHERS executive secretary. Before we get started, I would like to draw your attention to the booklet in front of you. This handout gives you a brief overview of our system and the benefits that ASHERS provides. Within the narrative, we’ve listed our proposed legislation, which is comprised of some technical corrections to align the code with the department’s new organizational structure as well as the system’s current policies and procedures. Inside the front cover, you will find my contact information should you have questions or concerns that you would like to discuss at a later date. And if you’ll turn to the appendix portion of your booklet, pages 8 through 13, I’ve included the slides that will be on the screen today.
Smith ASHERS: The Arkansas State Highway Employee Retirement system or ASHERS was established in 1949 and is the defined benefit plan of the Arkansas Department of Transportation. It’s managed by seven trustees, and if you look at Appendix A beginning on page 8, I’ve included a brief bio of each of my board members. ASHERS is a mature system– next slide. On June 30, there was 3,562 active employees in comparison to 3,586 individuals receiving a benefit. As you can see in fiscal year 2022, ASHERS did reach a crossing point of active employees to retirees. During the last three sessions, Asher’s has worked with this committee to make changes which have strengthened the sustainability of the system. I’d like to take a few moments and share the journey of where we were and where we are now. Back around 2014, 2015, it was a time we were 91% funded and our funding period was 23 years. After our experience study, the actuary recommended that ASHERS update our mortality tables. At that time, the actuarial industry was very focused on that particular assumption and the impact it had on pension plans. Also, the newer mortality tables more closely reflected ASHERS demographic makeup as well as the expected life expectancy of the current workforce. Once we updated those tables, our funding percentage began dropping incrementally on an annual basis, and our funding period immediately doubled to over 48 years. It became clear our funding was not adequate. So the board looked for ways to address that issue.
Smith ASHERS: If you look at Appendix C, I’ve listed all the legislation that we’ve passed in the last three sessions. I’m just going to hit a couple of the highlights. In 2017, the COLA was reduced from a flat 3% compound to a COLA capped at 3%. But based on the CPI-W, that’s the Consumer Price Index for Urban Wage Earners and Clerical Workers, it tied it to inflation. Then in 2019, the employer contribution rate was increased by 2%; the employee contribution rate was increased by 1%. In 2021, we did several little tweaks to benefits and contribution policy. Of significance was we changed the benefit calculation to be based upon the high five year average salary rather than the high three year average salary. As you can tell by that list, the ASHERS board has made a concerted effort to find solutions that share the burden with all stakeholders of the system. For example, the COLA revision affected current retirees. The contribution increase impacted both active employees and the Arkansas Department of Transportation. All interested parties were asked to endure a little pain in order to ensure that the system is healthy in the long run. So I thought today would be a good opportunity to review how those changes are reflected in the current standing of the system and also show how outside forces also have an impact on those metrics.
Smith ASHERS: If you look at Appendix D, the blue and orange bars represent contribution levels. The blue is for the employee; the orange is for the employer. The bold line at the top of the graph marks the level of contributions necessary to reach that 30 year amortization. That’s the benchmark set forth in the Arkansas code. As you can see, in 2014 there was a wide gap between the contribution funding level and that line. Then in 2018, you see the dip where we adjusted the COLA, and over the next few years the graph follows the increase in contributions which are reflected by the extension of the orange and blue bars. Then in fiscal year 2021, the culmination of those legislative changes in conjunction with a high investment return year of almost 30% had a dramatic effect on our system’s bottom line. Our funding percentage went up over 6%, our unfunded liabilities decreased about a $109 million, and our funding period or that time needed to pay off that unfunded dropped from 39 and a half years down to 12 and a half years.
Smith ASHERS: So let’s take a look at that last bar on the graph, fiscal year 2022. It’s a slightly different story. Simply put, along with rising inflation, it was a tough year in the market. And at June 30, ASHERS’ rate of return was a negative 9.47. You can see from that uptick in the black line that those factors impacted ASHERS. Our unfunded liabilities increased close to $55 million, and that funding period bounced back up to 18.1 years. But as you look at this graph, the takeaway is not that ASHERS had a low return year resulting in the funding period bouncing back up. There’s going to be low years in the market. The takeaway is that ASHERS has made the necessary changes which resulted in contributions for fiscal years 2021 and 2022 extending above that 30 year amortization line. That is significant because even when experiencing one of the worst market years, our contribution policy withstood the storm. And at the end of the year, ASHERS funding period still remained below that 30 year benchmark.
Smith ASHERS: If you’ll look at Appendix E in closing, that’s the map of ASHERS’ economic impact on the state of Arkansas. We do recognize and appreciate that the system is a cost to the state. However, it also serves as a recruitment and retention tool for quality state employees, as well as supports the Arkansas economy by providing spending power to our retirees in all 75 counties. Thank you for your attention. And I look forward to working with you this session.
Rep Warren: We have any questions for Robyn? Okay, Senator Hickey, you’re recognized.
Sen Hickey: Yes, ma’am. Just one question as LOPFI did, what percent fully funded are you? Do I take that to be 82?
Smith ASHERS: A little bit over 86 right now.
Sen Hickey: 86. Okay. Tell me how you’re getting there because you said 18 years. How are you in the 86, because you sort of–?
Carreiro: Well, okay. Yeah, she kicked that one off. The 86 kind of represents how big the mortgage is. And the 18 years is how quickly we’re paying it off. So the contribution policy that they now have will pay off the mortgage a little faster. So if all the assumptions were met, then they would pay off a little faster.
Sen Hickey: Fair enough. So we got basically 14%– 14% of what’s your total? I’m just trying to calculate this in dollar amounts.
Smith ASHERS: Of the contributions?
Sen Hickey: No, of your total plan.
Carreiro: Oh, so what’s the unfunded, in other words?
Sen Hickey: No. What I’m trying to get at is if we were fully funded, and I think LOPFI, unless my calculations were wrong– if you need 21% of your total plan, he needs another $690 million. If somebody dropped $690 million in there today, you’d be fully funded, round numbers. I’m just doing quick math here. So with you–
Smith ASHERS: It’s about 200–
Sen Hickey: –you would need 14% of your total plan.
Smith ASHERS: It’s about $250 million, if I recall correctly, is what our unfundeds were at 230.
Sen Hickey: Okay. All right. That’s what I was after. Thank you, ma’am.
Rep Warren: Any other questions of Robyn? Okay, thanks, Robyn. And we’ll just move on down the road to Miss Amy Fecher. Amy, it’s yours.
Fecher APERS: Thank you, Mr. Chair and committee members. Amy Fecher, Executive Director at APERS. So we have three systems is one of the things I want to get across to you all. We have the Arkansas Public Employees Retirement System or APERS. You can see it was created in 1957. It covers all state employees, county employees, some of the municipalities, some of the nonteaching school employees, district judges, and legislators. So it is your legislative retirement plan. We also have the Arkansas State Police Retirement Plan or ASPRS, which was created in 1951, we do the administration for this plan. And then also, the Arkansas Judicial Retirement System, AJRS, was established in 1953. So all three plans have different laws, different plan benefits, and different administration. Some like to say we do three times the work of the other retirement systems.
Carreiro: Your employees, that is.
Fecher APERS: Yeah. We are a defined benefit plan as the others have been talking about, which means you know when you’re hired what your benefit is going to be at the end of retirement based on a formula. This is different than a lot of private defined contribution plans, which is dependent on what you contribute is what you’re going to get at the end, and it depends on the fluctuation of the market. So the benefit plans are designed to attract and retain employees. You can see at the bottom of the page, the multiplier is the years of service, or the final average contribution, I should say, is your years of service multiplier times your final average salary is going to equal your benefit. The APERS board of trustees, we are governed by the three boards. So our APERS board has a 13-member board of trustees, some of them are ex officio, like our state treasurer, auditor, and the secretary of DFA. We have state employees and retired employees appointed by the governor. We also have appointments by the pro tem and the speaker. The ASPRS board of trustees is governed by a 7-member board of trustees, and it has two different plans, a tier one and a tier two, which is just a difference in the benefit package. So you can see how they are appointed, some by the governor, and some are elected by the state police employees. Then we have our judicial board, which is a 5-member board of trustees. They also have two plans at tier one and tier two. And their five members are appointed by the judicial council.
Fecher APERS: The financial condition of APERS, as you can see, for the three plans we have the 84% funding value for APERS, 81% for ASPRS, and 93% for AJRS. So the systems are all funded by the employee contribution, the employer contributions, and the investment returns. You can see the pension systems at a glance, just the number of active members, the deferred vested members, which are those that are not active currently but will receive a retirement in the future, those in the drop plans, the number of retirees, and the total for all three systems. So we are covering just over 100,000 members in the three plans.
Fecher APERS: And then the last slide is also something that you have as a handout just so you could see it a little bit better. It’s still very small print. But this shows the economic impact in your district and statewide of the money coming out into your counties and into your districts by the payouts. Just to close, I’ll just say that our legislative package just basically for APERS and for state police is mostly technical corrections and some things to clarify survivor benefits. And on AJRS, there is some on the contributions if a judge serves after age 70 retirement age. And with that, I’m happy to take any questions. And thank you for your time.
Rep Warren: Any questions for Amy? Senator Hickey, you’re recognized.
Sen Hickey: And this may be something that I would like to just have from all of them, the exact numbers. And if you don’t know this sitting there, as far as the dollar amount – I know we always talk these percentages – have you calculated what it would take for you to fully fund across all three?
Fecher APERS: So my chief–
Sen Hickey: Not percentages.
Fecher APERS: –investment officer is telling me $2 billion, right at $2 billion.
Sen Hickey: Thank you.
Rep Warren: Any other questions? Okay. Let’s move on to Clint Rhoden with Teacher Retirement.
Rhoden ATRS: All right. Is that close enough? Good. Can you hear me? Okay. All right, good deal. Yes. Thank you, Chairman. Thank you, committee. Clint Rhoden with the Arkansas Teacher Retirement System. Going last, I will try to be a little bit faster through my slides. [laughter] So here we go. So first slide and this is the cover page of the handout. It’s just the ATRS big logo. Okay. Let’s see. All right. So slide one, we have is essentially our member data. And I’ll just point out that we have 75,000, roughly, active members that are actively contributing into the system. That is helping us fund benefits for over pretty much 55,000 retirees in the state, and as we’ve said before, the total payroll out that we pay out will be $1.3 billion this year. Let’s move on to the next slide. This is the economic impact map for the Teacher Retirement System. This shows a breakout of that $1.3 billion that will get paid out by a county. And this does represent roughly 90% of the retirees do live inside of Arkansas. So that is a pretty big impact that goes in there. And added comments that I like to throw in when you’re looking at this map, this is money flowing into your counties’ economies by individuals that have a defined benefit plan for a lifetime. In other words, they don’t have to wonder if they’re going to have enough for the rest of their life. And therefore, they’re a little bit more freely to spend it as opposed if you had a if you had a 401(k) defined contribution plan, you might be likely to– “Well, I don’t know what I’m going to die, so I’m going to hang on to that retirement savings and maybe not spend it into the economy.” Defined benefit plans typically flow into your economy a lot more freely than defined contributions.
Rhoden ATRS: So with that, we’ll move on to the next slide. So every year we receive roughly half of what we need in order to make that $1.3 billion payroll. So $647 million of it come from contributions from active members like myself and then the employers that employ those active members. And I won’t go into any of the details. This is a breakdown of how that’s made up. But I’ll go ahead and go to the next slide from there. Speaking of a lifetime benefit, this is a slide that just kind of shows what longevity means. Jody mentioned it. It’s always going up. But this is one of the favorite slides when I go and talk to retired teachers, is I point out that we have over 1,000 members, 1,075 members that are aged 90 to 99. And of course, most of those individuals are female. And then of course, the 100 years or older, we have 28 of them. And you see 26 of them are female, but there’s two guys hanging in there over 100. [laughter] So good for them. And our oldest member in our system is.
Rhoden ATRS: 105 years old. All right. So next slide. To the numbers, ATRS is 82% funded as of June 30th, 2022, and that’s over a 26-year amortization period. So that’s the two numbers– as Jody said, you really need to look at those numbers together, so. And for the actuarial value of the assets, it’s essentially $20.3 billion at the end of June. And that is really close to what our market value is this year of $20.1 billion. The next slide, this is a graphical representation of essentially the question that Senator Hickey has asked all of the system, but this is the history of it. So if you go all the way to the end, you can roughly see the gap between our funded assets, which is the green bar, or the bottom bar, versus the accrued liability, which is the top bar. And there’s a difference of about $4 billion there. And it has essentially been anywhere from three to four billion dollars every since the global financial crisis in 2008. Walking down this slide a little bit more, it wasn’t quite as big between the dot-com crash and the global financial crisis. We were actually making some progress during that time. But the goal, of course, is to get to the pre-dot-com crash era where the green line and the red line are very close together. And that represents close to 100% funded, if not in the high 90s.
Rhoden ATRS: All right. The next slide, I have– I put together when I started this– I kept getting the question with the markets the way they do, how in the world do you sleep? So I kind of had to figure that out for myself. And once I realized that this red line, that’s essentially the money that we pay out every single year to our retirees, it has grown over the last – what do I have here? – 40 years from close to the zero line up to the $1.3 billion that it is now. But the most striking thing to me that this graph is, it’s a relatively flat line. It has an increase, but it is not a really steep increase. And the blue line represents the income that the system gets, in other words, contributions and our return on investments. It’s the C-plus high that Jody showed us a while ago. And of course, the red line is the other side of that, benefits plus expenses. Anytime the blue line is over the red line, it’s a good year because that means we’re going to accumulate and grow our assets. And the steepness of the assets, which is that green bar there, is really kind of the best indication that we’re in good shape. Obviously, we have an unfunded liability of anywhere from three to four billion dollars. But the assets are growing at a much steeper rate than we pay out benefits every year. And this gives me comfort as an administrator, and I hope it gives our members and you all the same level of comfort, as well.
Rhoden ATRS: The last slide, I put this together as a representation of this– ATRS and all their defined benefit plans here are long-term investors. So one particular year, like last year, the 32% gain, yippee, but that’s not anything that’s spectacular because you really have to look at the big picture and the long-term average. And the same as this year, we had a negative 5% or so. It averages out. And this is essentially a geometric average for the last 30 years walking all the way back to the 70s. So you can see here in the 1990s, 1991, the 30-year average crossed the 8-year or the 8% return. That’s that horizontal bar that goes across the middle, the orangish bar. That’s an 8% return. So ATRS has had a 30-year average above the 8% return mark. And it peaked, obviously, somewhere around the dot-com era, dipped down due to the dot-com crash, rebuilt. And then it has been a kind of a steady decrease from the global financial crisis to where we are today. But it is still above an 8% return for a 30-year average. So that concludes my comments. I’ll be glad to take any questions.
Rep Warren: Any questions for Clint? Okay. Representative Rye, you’re recognized.
Rep Rye: Yes, sir. Could I ask you this? On page 9, right above the 3.20, that figure is going down on that chart. Do you see that changing in the near future to go back upward?
Rhoden ATRS: What’s the 3.0 you’re talking about?
Rep Rye: Okay. Well, just the red line. Is that–
Rhoden ATRS: Yeah, yeah.
Rep Rye: –820, yes, sir. But the blue line, it shows a tilt there in 2019. But actually, in 2022, it looks like that we’re on a downward slide. Do you see that changing?
Rhoden ATRS: Yeah. I mean, we hope that we’ll at least level out, trend upward, again. That sharp little spike there at the very end is, obviously, the result that a 32% regain had in one year and then the correction from that. So that’s the little hump there at the end that you see.
Rep Warren: Senator Leding, you’re recognized.
Sen Leding: Clint, we talked about this a little bit last week, but maybe you can expand a little bit on it here. Obviously, part of the health of the system has to do with the number of people who are paying into it. I’m wondering if you can tell us what might happen to the system if a significant chunk– if we saw a significant number of teachers leave the system, leave the profession?
Rhoden ATRS: Okay. I will give you a general answer, and then I’ll probably pitch this over to Jody to give a little bit more detail. But in general, that is one of the metrics. Active participants paying contributions into the system, that increases, that generally would have an increase. But at the same– the inverse is also true. If we lose a number of active participants, it can have a cost on the system. And I’ll let Jody add any additional comments.
Carreiro: Right. And Clint gave you kind of the numbers of how much employee contributions. And as he pointed out, only about half of what has to be paid out is covered by employer and employee contributions coming in, which is okay, because it’s a mature system. But if you be dramatic, say half of the current active members were not there so that those contributions were not there, then all of a sudden he’s in a much tougher place because if active people go away, retired people don’t go away. They’re going to keep living, and old teachers never die. They just keep drawing benefits. So it is a significant thing. And I think Clint’s next-to-the-last slide kind of gives you that. In the long run, his red and blue– the thing is, you don’t want to be in a spot where you’re depending on your investment income to pay benefits. You want to be dependent on more than just investment income.
Rep Warren: All right. Next, Representative Maddox, you’re recognized.
Rep Maddox: Thank you, Mr. Chair. So I appreciate this slide about the returns. And I apologize. This is for the other systems if it’s already in here. I’d like to see that information for annual performance for all the systems and kind of compare it to the market. If someone could get that to us or to me, I’d really like to see that. I appreciate this, but. And it may already be in here, but I’d like to see it in a little more clear way if we could get that. So thank you.
Rep Warren: All right. And Senator Tucker, you’re recognized.
Sen Tucker: Thank you, Mr. Chair. I understand this is probably a difficult question to answer. For example, my mother-in-law was a teacher for 17 years, and now she’s been in administration for more than 20. So she’s been in two roles. But my question is whether y’all can– and if you can, whether you have divided the average benefit up by position. I see that the total average benefit per month is about $2,000. My question is, can you have it or do you have it where the average benefit for an administrator is X, and for a teacher is Y, and for custodian is Z, and so on and so forth?
Rhoden ATRS: Yes, Senator. Certainly, we could break that out further for you. I’ll be glad to do that. Yeah. The actuaries actually do break out those three populations when they’re doing their analysis. So yeah, we can do that.
Sen Tucker: That’d be great. Thank you very much.
Rep Warren: With the information that Representative Maddox requested, if you’ll get that to Blake, then he’ll circulate it to everyone. I’m sorry.
BLR Staff: Can you just ask for [crosstalk]
Rep Warren: Yes. And the information, just go through Blake so that we all get it. Any other questions? Okay. Thank you, guys, so much for your presentation. Looking forward to working with you. Y’all do a great job. I appreciate what you do. And I know it’ll be a good session with you guys, so. A couple of things. Reminder. Friday, final day to file bills. I don’t know if he’s still in here. Is Jake Bleed still in here?
Rep Warren: Oh, there he is. I want you guys to know as Retirement Committee members, we get asked questions about benefits because it’s retired people. This guy did an incredible job helping answer question after question with people that called me as Chair of Retirement. He has taken another position, but he was an incredible asset for me. I understand that right now Lauren Ballard is filling in. So Lauren, if you want to step over where we can see you, so. But I just wanted to say a special thank you to you, Jake, for everything that you did to help during a very difficult transition. Lauren, watch out. [laughter] You’re the new target, so. But thank you both for being here. Glad to have my former fellow Rep Ken Bragg here with the Governor’s Office. Thank you for your presence today. And I see Secretary Walther has already headed out, but glad to have you guys. Are there any other comments for the good of the committee? All right. If not, we are adjourned.